-----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, Lb5aTLoSKvQnKkNSiOBu7cvynOu6Ty7PS00t4QpGWji3JE6lyl4yhlDCD4cLkUhx UWG9L0fBfKFVABcLZeOzUw== 0000740670-96-000010.txt : 19961212 0000740670-96-000010.hdr.sgml : 19961212 ACCESSION NUMBER: 0000740670-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961027 FILED AS OF DATE: 19961211 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: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11822 FILM NUMBER: 96679082 BUSINESS ADDRESS: STREET 1: 5931 CAMPUS CIRCLE DR 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 27, 1996 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 Title of December 10, 1996 _____ _____________________ Common stock, par value $.10 per share 23,560,592 __________ 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 October 27, January 28, 1996 1996 ___________ ___________ Current assets: Cash and equivalents $ 2,635 $ 2,870 Merchandise inventories 471,083 366,102 Income taxes receivable and deferred income taxes 48,925 35,177 Prepaid expenses and other 15,594 12,143 ________ ________ Total current assets 538,237 416,292 ________ ________ Property and equipment, at cost 298,567 255,386 Less accumulated depreciation (108,829) (82,157) ________ ________ 189,738 173,229 Costs in excess of net assets of acquired operations, net 141,018 143,721 Other assets 6,604 6,538 ________ ________ 147,622 150,259 ________ ________ $875,597 $739,780 ________ ________ ________ ________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $153,757 $ 98,799 Bank debt 39,600 - Accrued liabilities and other 96,371 88,510 ________ ________ Total current liabilities 289,728 187,309 ________ ________ Bank debt - 87,200 Convertible subordinated notes 96,940 96,940 Senior notes 125,000 - Deferred income taxes and other 41,538 32,378 ________ ________ Total long-term liabilities 263,478 216,518 ________ ________ 553,206 403,827 ________ ________ Commitments and contingencies Shareholders' equity: Common stock, 23,560,592 shares outstanding 2,356 2,150 Additional paid-in capital 268,793 243,325 Retained earnings 51,242 90,478 ________ ________ Total shareholders' equity 322,391 335,953 ________ ________ $875,597 $739,780 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. Consolidated Statements of Operations (In thousands except per share data) (Unaudited)
Three Months Ended __________________________ October 27, October 29, 1996 1995 ___________ ___________ Net sales $322,221 $312,696 Cost of sales and occupancy expense 259,928 208,736 Selling, general and administrative expense 99,912 91,039 ________ ________ Operating (loss) income (37,619) 12,921 Interest expense 6,502 4,899 Other expense, net 1 440 ________ ________ (Loss) income before income taxes (44,122) 7,582 (Benefit) provision for income taxes (9,892) 4,576 ________ ________ Net (loss) income $(34,230) $ 3,006 ________ ________ ________ ________ (Loss) earnings per common and common equivalent share $(1.45) $.14 ______ ____ ______ ____ Weighted average common and common equivalent shares outstanding 23,553 21,337 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. Consolidated Statements of Operations (In thousands except per share data) (Unaudited)
Nine Months Ended ___________________________ October 27, October 29, 1996 1995 ___________ ___________ Net sales $884,572 $838,153 Cost of sales and occupancy expense 649,569 610,912 Selling, general and administrative expense 272,863 253,873 ________ ________ Operating loss (37,860) (26,632) Interest expense 15,036 12,777 Other (income) expense, net (372) 1,707 ________ _________ Loss before income taxes (52,524) (41,116) Income tax benefit (13,086) (18,555) ________ _________ Net loss $(39,438) $(22,561) ________ ________ ________ ________ Loss per common share $(1.71) $(1.06) ______ ______ ______ ______ Weighted average common shares outstanding 23,039 21,312 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended ________________________ October 27, October 29, 1996 1995 ___________ ___________ Operating activities: Net loss $(39,438) $(22,561) Adjustments: Depreciation and amortization 30,316 23,735 Amortization of deferred debt issue costs 676 - Change in assets and liabilities excluding the effects of acquisitions: Merchandise inventories (104,981) (73,998) Prepaid expenses and other assets (4,232) (4,661) Deferred income taxes and other (11,781) (18,775) Accounts payable 54,958 26,078 Accrued liabilities and other 1,249 (5,923) ________ ________ Net change in assets and liabilities (64,787) (77,279) ________ ________ Net cash used in operating activities (73,233) (76,105) ________ ________ Investing activities: Additions to property and equipment (23,823) (49,715) Net proceeds from sales of property and equipment - 1,791 Net proceeds from sales of marketable securities and other investments 1,122 17,991 Acquisitions and other - (24,683) ________ ________ Net cash used in investing activities (22,701) (54,616) ________ ________ Financing activities: Net borrowings (repayments) under bank credit facilities (47,600) 131,600 Proceeds from issuance of senior notes 120,542 - Proceeds from issuance of common stock and other 22,757 899 ________ ________ Net cash provided by financing activities 95,699 132,499 Net increase (decrease) in cash and equivalents (235) 1,778 Cash and equivalents at beginning of year 2,870 1,907 ________ ________ Cash and equivalents at end of period $ 2,635 $ 3,685 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. Notes to Consolidated Financial Statements For the Three and Nine Months Ended October 27, 1996 (Unaudited) Note A ______ The accompanying consolidated financial statements are unaudited (except for the Consolidated Balance Sheet as of January 28, 1996) 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 nine months ended October 27, 1996. All of such adjustments are of a normal and recurring nature. Because of the seasonal nature of the Company's business and the unusual costs and expenses incurred in the third quarter of fiscal 1996, the results of operations for the three and nine months ended October 27, 1996 are not indicative of the results to be expected for the entire year. Note B ______ Indebtedness outstanding under the Company's bank credit agreement, as amended (the "Credit Agreement") at the end of the third quarter of fiscal 1996 was $39.6 million versus $87.2 million at the end of the fiscal year ended January 28, 1996. Amounts outstanding under the Credit Agreement, for which the carrying cost is at fair value, bear interest at a Eurodollar rate plus a premium and/or at the prime rate (a blended rate of 6.98% at October 27, 1996). Due to the operating loss incurred in the third quarter of 1996, the Company is not in compliance with a fixed-charges coverage ratio covenant contained in both the Credit Agreement and an operating lease (the "Leasing Facility") relating to two distribution facilities. The banks under the Credit Agreement and the Leasing Facility have waived the non-compliance through February 1, 1997. Due to the significance of the third quarter operating loss, the Company does not believe that it can come into compliance with its current financial covenants by the end of the fourth quarter of 1996 and, therefore, intends to negotiate waivers under or amendments to the Credit Agreement and the Leasing Facility, or replacement facilities, as necessary. Under the Leasing Facility, without the waiver or amendment described above, lease obligations of approximately $28 million could be accelerated, in which case the Company anticipates that it would refinance the two distribution facilities. Consistent with the requirement in the Credit Agreement for an annual 30-day "clean down," the Company repaid all indebtedness under the Credit Agreement on December 5, 1996 and has no further borrowing availability under the Credit Agreement. Management believes, however, that it will have sufficient liquidity through cash generated from operations, together with waivers under or amendments to the Credit Agreement and the Leasing Facility, or replacements for those facilities, to meet its liquidity requirements for 1997. Note C ______ Investing and financing activities not affecting cash in the nine months ended October 27, 1996 included additions to property and equipment through capital lease obligations of $18.1 million related to the acquisition of new computer equipment. Note D ______ Effective January 29, 1996 the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In the third quarter of 1996, the Company wrote down approximately $1.2 million of leasehold improvements in four stores to be closed in the first quarter of 1997 and three other stores. Note E ______ 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 all periods presented and was therefore not included in the calculation of fully diluted earnings per share data for any of the periods. Note F ______ 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 allege 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 plaintiffs seek on behalf of the purported class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. In response to motions filed by the Company and the individual defendants, the Court dismissed certain portions of the complaint and permitted the plaintiffs to proceed with discovery. The Company believes that it has meritorious defenses to this action and intends to defend itself vigorously. 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 that the plaintiffs' pleadings did not state a cause of action against the Company upon which relief could be granted. However, such 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 or about November 1, 1996 the Company filed its petition for review with the California Supreme Court requesting a review of the appellate decision. Should that 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, would not have a material adverse impact on the Company's financial position; however, the ultimate outcome is uncertain and there can be no assurance that future costs would not be material to results of operations of the Company for a particular future period. 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, crafts and decorative items industry, related inventory risks due to shifts in customer demand, the effect of economic conditions, difficulties with respect to new technologies, the impact of competitors' locations and pricing, supply constraints or difficulties, and the results of financing efforts. During the first nine months of fiscal 1996, the Company has focused on certain projects to improve store operations including the implementation of a standardized merchandising and operating format. In connection with these projects, the Company has relaid substantially all stores with new planograms and completed the installation of POS systems throughout the chain. This temporary shift in focus diverted store labor from more traditional selling activities. During this transition period, advertising was reduced from prior-year levels. Comparable store sales during the first nine months of fiscal 1996 were negatively affected and compared unfavorably to the first nine months of fiscal 1995 (a period including promotional activity that contributed to a 4% comparable store sales increase). While the favorable effects of the Company's initiatives to improve profitability are not expected to become apparent in the Company's operating results until the last quarter of fiscal 1996 and beyond, the Company expects positive cash flow from operations in fiscal 1996. Liquidity and Capital Resources _______________________________ Cash flow from operations of negative $73.2 million was absorbed during the first nine months of fiscal 1996 compared to negative $76.1 million of cash flow from operations absorbed during the first nine months of fiscal 1995. Indebtedness outstanding under the Company's bank credit agreement (the "Credit Agreement") at the end of the third quarter of fiscal 1996 was $39.6 million versus $172.7 million at the end of the third quarter of fiscal 1995, reflecting the $25 million of proceeds from the April 1996 Private Placement (defined below) and the $120.5 million of net proceeds from the offering of the Notes (defined below), partially offset by property and equipment additions and an increase in inventory primarily attributable to new store additions. As of December 5, 1996 no indebtedness was outstanding under the Credit Agreement. At October 27, 1996, the Company had working capital of $248.5 million compared to $229.0 million at January 28, 1996. Due to the operating loss incurred in the third quarter of 1996, the Company is not in compliance with a fixed-charges coverage ratio covenant contained in both the Credit Agreement and an operating lease (the "Leasing Facility") relating to two distribution facilities. The banks under the Credit Agreement and the Leasing Facility have waived the non-compliance through February 1, 1997 and provided, with respect to the Credit Agreement, the availability of up to $15 million of additional borrowings through November 30, 1996. Consistent with the requirement in the Credit Agreement for an annual 30-day "Clean down," the Company repaid all indebtedness under the Credit Agreement on December 5, 1996 and has no further borrowing availability under the Credit Agreement. Due to the significance of the third quarter operating loss, the Company does not believe that it can come into compliance with its current financial covenants by the end of the fourth quarter of 1996 and, therefore, intends to negotiate waivers under or amendments to the Credit Agreement and the Leasing Facility, or replacement facilities, as necessary to provide liquidity required to finance seasonal working capital requirements. Under the Leasing Facility, without the waiver or amendment described above, lease obligations of approximately $28 million could be accelerated, in which case the Company anticipates that it would refinance the two distribution facilities. Management believes, however, that it will have sufficient liquidity through cash generated from operations, together with waivers under or amendments to the Credit Agreement and the Leasing Facility, or replacements for those facilities, to meet its liquidity requirements for the remainder of fiscal 1996 and for 1997. In April 1996 the Company completed a private placement of 2,000,000 shares of the Company's Common Stock at a price of $12.50 per share (the "Private Placement"). The Common Stock was sold through three private transactions with separate entities owned by independent trusts of which family members of Sam Wyly and Charles J. Wyly, Jr., Chairman and Vice Chairman of the Company, respectively, are beneficiaries. The shares of Common Stock sold in the Private Placement are subject to certain restrictions on future transfer. In addition, the Company will be required to register the shares issued in the Private Placement pursuant to the Securities Act of 1933, as amended, upon demand by the holders of the shares after one year from the date of purchase. In June 1996 the Company completed a public offering of $125 million of Senior Notes due 2006 (the "Notes"). The Company used the full amount of the net proceeds from the sale of the Notes to reduce indebtedness under the Credit Agreement. The Company opened 12 Michaels stores and 2 Aaron Brothers stores during the first nine months of fiscal 1996. Capital expenditures related to these stores amounted to approximately $2.0 million. Additional capital expenditures of approximately $21.8 million during the first nine months related primarily to the expansion, relocation or remodeling of 28 existing stores, the relocation of a distribution center and the corporate offices, and various systems enhancements not funded through the Company's capital lease facility with IBM Credit Corporation. The Company expects capital expenditures during the remainder of fiscal 1996 to total approximately $9.0 million, relating primarily to costs for store relocations and remodeling and for additional systems enhancements. 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 Three Months Ended Nine Months Ended _______________________ _______________________ October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ___________ ___________ ___________ ___________ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and occupancy expense 80.7 66.8 73.4 72.9 Selling, general and administrative expense 31.0 29.1 30.9 30.3 _____ _____ _____ _____ Operating (loss) income (11.7) 4.1 (4.3) (3.2) Interest expense 2.0 1.6 1.7 1.5 Other (income) and expense, net 0.0 0.1 (0.1) 0.2 _____ _____ _____ _____ (Loss) income before income taxes (13.7) 2.4 (5.9) (4.9) (Benefit) provision for income taxes (3.1) 1.4 (1.4) (2.2) _____ _____ _____ _____ Net (loss) income (10.6)% 1.0% (4.5)% (2.7)% _____ _____ _____ _____ _____ _____ _____ _____
Three months ended October 27, 1996 compared to the ___________________________________________________ three months ended October 29, 1995 ___________________________________ Net sales for the third quarter of fiscal 1996 increased $9.5 million or 3%, over the third quarter of fiscal 1995. The results for the third quarter of fiscal 1996 included sales from 16 Michaels stores (net of one closure) that were opened during the twelve month period ended October 27, 1996. Comparable store sales declined 2 percent in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995. The third quarter of fiscal 1996 includes $9.6 million of sales attributable to an extended sidewalk sale starting on Labor Day partially offset by lost sales from the cancellation of an advertising circular during the store reset process. Cost of sales and occupancy expense, as a percentage of net sales, for the third quarter of fiscal 1996 was 80.7%, an increase of 13.9% compared to the third quarter of fiscal 1995 due primarily to $47.7 million of unusual costs and expenses recorded in the third quarter of 1996 to cover losses on an extended sidewalk sale starting on Labor Day, markdowns on discontinued home decor and other merchandise and reserves for the closure of four unproductive stores and the write-down of leasehold improvements in three others. Adjusting for the 1996 unusual items, cost of sales and occupancy expense for the third quarter of 1996 was 67.9%, an increase of 1.1% compared to the prior year, due primarily to the negative effect of fixed occupancy and distribution costs on a lower sales base caused by the same-store sales decline as well as the addition of 16 more Michaels stores since the third quarter of fiscal 1995 (which have a relatively low sales base available to absorb fixed occupancy expenses). Selling, general and administrative expense, as a percentage of net sales, was 31.0% in the third quarter of fiscal 1996, an increase of 1.9% compared to the third quarter of fiscal 1995 due primarily to increased depreciation from the new POS system and increased store labor involved in resetting the stores as well as $3.1 million of unusual costs and expenses related primarily to an extended sidewalk sale starting on Labor Day and certain other unusual costs and expenses. In summary, the $37.6 million operating loss for the third quarter of 1996 reflects $41.2 million of unusual items ($50.8 million of unusual costs and expenses net of $9.6 million in sales) including: a $20 million loss resulting from an extended sidewalk sale starting on Labor Day which was conducted to sell off merchandise that was eliminated following the store resets; markdown reserves of $15 million primarily related to the Company's strategic decision to exit the home decor line and certain other discontinued merchandise; and reserves of $4 million for the closure of four unproductive stores and the write-down of leasehold improvements in three others. Interest expense, as a percentage of net sales, was 2.0% for the three months ended October 27, 1996, an increase of 0.4% compared to the prior year primarily due to the higher interest rate on the Notes compared to the short term bank borrowings in the prior year. Interest expense, in comparison to the prior year, will continue to be higher due to the higher rate of the Notes for the remainder of the year. The effective tax rate of 22.4% for the third quarter of fiscal 1996 is lower than our overall estimate of a 38% tax rate for the first six months due to the size of the loss and our inability to fully carryback the tax loss to prior years. The 60.4% effective tax rate in the third quarter of fiscal 1995 was due to a change at that time in the Company's estimated annual effective tax rate, due, in part, to lower earnings expectations for fiscal 1995. Nine months ended October 27, 1996 compared to the __________________________________________________ nine months ended October 29, 1995 __________________________________ Net sales in the first nine months of fiscal 1996 increased $46.4 million, or 6%, over the first nine months of fiscal 1995. The results for the first nine months of fiscal 1996 included sales from 16 Michaels stores (net of one closure) that were opened during the twelve month period ended October 27, 1996 and 70 Aaron Brothers stores that were acquired or opened since April 1995. Comparable store sales declined 3 percent in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995. Net sales in the first nine months of 1996 include $9.6 million of sales attributable to an extended sidewalk sale starting on Labor Day partially offset by lost sales from the cancellation of an advertising circular during the store reset process. Cost of sales and occupancy expense, as a percentage of net sales, for the first nine months of fiscal 1996 was 73.4%, an increase of 0.5% compared to the first nine months of fiscal 1995. The first nine months of fiscal 1996 included $47.7 million of unusual costs and expenses recorded in the third quarter of 1996 to cover losses on an extended sidewalk sale starting on Labor Day, markdowns on discontinued home decor and other merchandise and reserves for the closure of four unproductive stores and the write-down of leasehold improvements in three others while the first nine months of fiscal 1995 include a $57.5 million charge to cover unusual costs and expenses associated with the SKU reduction program taken in the second quarter of 1995. Adjusting for both of these unusual items, cost of sales and occupancy expense for the first nine months of 1996 was 68.8%, an increase of 2.8% compared to the prior year, which management believes was due primarily to increases in promotional markdowns and increased distribution and occupancy costs. Distribution costs, as a percentage of net sales, increased primarily due to less efficient utilization of shipping capacity. Management believes that transportation costs will be more effectively leveraged in the future as the Company is in the process of moving a greater percentage of the Company's merchandise inventories into its regional distribution centers in order to reduce more expensive direct-to-store shipments. The increase in occupancy costs, as a percentage of net sales, resulted from a high proportion of newer stores having a relatively low sales base available to absorb fixed occupancy costs. Selling, general and administrative expense, as a percentage of net sales, was 30.9% in the first nine months of fiscal 1996 and increased by 0.6% compared to the first nine months of 1995. The first nine months of fiscal 1996 included $3.1 million of unusual costs and expenses related primarily to an extended sidewalk sale starting on Labor Day and certain other unusual costs and expenses while the first nine months of fiscal 1995 includes a charge taken to cover certain retirement costs of the Company's former President and Chief Operating Officer and costs related to the SKU reduction program. Adjusting for both of these charges, selling, general and administrative costs for the first nine months of fiscal 1996 was 30.8%, an increase of 1.1% over the prior year due primarily to increased depreciation from the new POS system and increased store labor included in resetting the stores, offset in part by reductions in pre-opening and other store selling costs. In summary, the $37.9 million operating loss for the first nine months of 1996 reflects $41.2 million of unusual items in the third quarter of 1996 ($50.8 million of unusual costs and expenses net of $9.6 million sales) including: a $20 million loss resulting from an extended sidewalk sale starting on Labor Day which was conducted to sell off merchandise that was eliminated following the store resets; markdown reserves of $15 million primarily related to the Company's strategic decision to exit the home decor line and certain other discontinued merchandise; and reserves of $4 million for the closure of four unproductive stores and the write-down of leasehold improvements in three others. Interest expense, as a percentage of net sales, was 1.7% for the nine months ended October 27, 1996, an increase of 0.2% compared to the prior year primarily due to the higher interest rate on the Notes compared to the short-term bank borrowings in the prior year. Interest expense, in comparison to the prior year, will continue to be higher due to the higher rate of the Notes for the remainder of the year. For the nine months ended October 27, 1996, the Company's effective tax rate shifted to a 24.9% benefit rate from a 45.1% benefit rate in the prior year due to the size of the loss in fiscal 1996 and our inability to fully carryback the tax loss to prior years. MICHAELS STORES, INC. FORM 10-Q Part II - OTHER INFORMATION Item 1. Legal Proceedings Information with respect to legal proceedings is set forth in "Part I - Financial Information, Notes to Consolidated Financial Statements, Note F," which is hereby incorporated by reference herein. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 3.1 - Bylaws of the Registrant, as amended and restated. (1) Exhibit 3.2 - Restated Certificate of Incorporation of the Registrant. (2) Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K During the quarter the following reports were filed: (i) Form 8-K, dated June 20, 1996, reporting Items 5 and 7, and filing Second Amended and Restated Credit Agreement among Michaels Stores, Inc., NationsBank of Texas, N.A. as Administrative Lender, Bank of America Illinois as Co-Agent and the Lenders specified therein. (ii) Form 8-K, dated September 30, 1996, reporting Items 5 and 7, and filing Michaels Stores, Inc. Employees 401(k) Plan (As Amended and Restated Effective February 1, 1994), Michaels Stores, Inc. Employees 401(k) Plan (As Amended and Restated Effective October 1, 1996), and Michaels stores, Inc. Employees 401(k) Trust. __________________ (1) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1995 and incorporated herein by reference. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. 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/ R. Don Morris __________________ R. Don Morris Executive Vice President and Chief Financial Officer (Principal Financial Officer) Dated: December 11, 1996 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 3.1 Bylaws of the Registrant, as amended and restated. (1) 3.2 Restated Certificate of Incorporation of the Registrant. (2) 27 Financial Date Schedule. ________________________ (1) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1995 and incorporated herein by reference. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. EX-27 2
5 0000740670 MICHAELS STORES, INC. 1000 9-MOS FEB-2-1997 OCT-27-1996 2,635 0 0 0 471,083 538,237 298,567 108,829 875,597 289,728 221,940 0 0 2,356 320,035 875,597 884,572 884,572 649,569 922,432 (372) 0 15,036 (52,524) (13,086) (39,438) 0 0 0 (39,438) (1.71) (1.71)
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