-----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, GJhdwT1UPEJOqEYwofoP8kWVk9IDqLgKYjDMfWVIE+lPO6dwRF3ceks2eDTiwx6D BDMh4CZjiokNxANI0XrrSQ== 0000740670-97-000009.txt : 19971217 0000740670-97-000009.hdr.sgml : 19971217 ACCESSION NUMBER: 0000740670-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971101 FILED AS OF DATE: 19971216 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: 97738951 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 November 1, 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 December 10, 1997 _____ ________________________ Common stock, par value $.10 per share 28,872,120 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 November 1, February 1, 1997 1997 ___________ ___________ Current assets: Cash and equivalents $ 48,089 $ 59,069 Merchandise inventories 489,755 351,208 Income taxes receivable and deferred income taxes 6,178 15,207 Prepaid expenses and other 17,528 12,059 ________ ________ Total current assets 561,550 437,543 ________ ________ Property and equipment, at cost 319,416 294,022 Less accumulated depreciation (132,346) (104,943) ________ ________ 187,070 189,079 ________ ________ Costs in excess of net assets of acquired operations, net 137,795 140,697 Deferred income taxes 19,141 10,550 Other assets 3,320 6,566 ________ ________ 160,256 157,813 ________ ________ $908,876 $784,435 ________ ________ ________ ________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $154,288 $104,966 Accrued liabilities and other 94,659 92,765 ________ ________ Total current liabilities 248,947 197,731 ________ ________ Senior notes 125,000 125,000 Convertible subordinated notes 96,940 96,940 Other long-term liabilities 29,510 31,962 ________ ________ Total long-term liabilities 251,450 253,902 ________ ________ 500,397 451,633 ________ ________ Commitments and contingencies Shareholders' equity: Common stock, 28,746,454 shares outstanding 2,875 2,369 Additional paid-in capital 342,452 271,405 Retained earnings 63,152 59,028 ________ ________ Total shareholders' equity 408,479 332,802 ________ ________ $908,876 $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 __________________________ November 1, October 27, 1997 1996 ___________ ___________ Net sales $350,070 $322,221 Cost of sales and occupancy expense 237,528 259,928 Selling, general and administrative expense 99,599 99,912 ________ _________ Operating income (loss) 12,943 (37,619) Interest expense 5,936 6,502 Other (income) and expense, net (126) 1 ________ _________ Income (loss) before income taxes 7,133 (44,122) Provision (benefit) for income taxes 2,711 (9,892) ________ ________ Net income (loss) $ 4,422 $(34,230) ________ ________ ________ ________ Earnings (loss) per common and common equivalent share $ .15 $(1.45) ______ ______ ______ ______ Weighted average common and common equivalent shares outstanding 30,285 23,553 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Nine Months Ended ___________________________ November 1, October 27, 1997 1996 ___________ ___________ Net sales $949,426 $884,572 Cost of sales and occupancy expense 648,654 649,569 Selling, general and administrative expense 277,030 272,863 ________ ________ Operating income (loss) 23,742 (37,860) Interest expense 17,380 15,036 Other income, net (1,214) (372) ________ ________ Income (loss) before income taxes 7,576 (52,524) Provision (benefit) for income taxes 2,879 (13,086) ________ ________ Net income (loss) $ 4,697 $(39,438) ________ ________ ________ ________ Earnings (loss) per common and common equivalent share $ .17 $(1.71) ______ ______ ______ ______ Weighted average common and common equivalent shares outstanding 28,072 23,039 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended ________________________ November 1, October 27, 1997 1996 ___________ ___________ Operating activities: Net income (loss) $ 4,697 $(39,438) Adjustments: Depreciation 30,663 27,173 Amortization 3,173 3,143 Other 1,402 676 Change in assets and liabilities: Merchandise inventories (138,547) (104,981) Prepaid expenses and other (5,469) (3,450) Deferred income taxes and other 6,327 (14,224) Accounts payable 49,322 54,958 Accrued liabilities and other 1,120 1,249 ________ ________ Net change in assets and liabilities (87,247) (66,448) ________ ________ Net cash used in operating activities (47,312) (74,894) ________ ________ Investing activities: Additions to property and equipment (27,380) (23,823) Net proceeds from sales of property and equipment 1,623 - Net proceeds from sales of investments 3,386 1,122 ________ ________ Net cash used in investing activities (22,371) (22,701) ________ ________ Financing activities: Net repayments under bank credit facilities - (47,600) Payment of other long-term liabilities (3,331) (938) Proceeds from issuance of senior notes - 120,542 Proceeds from issuance of common stock and other 62,034 25,356 ________ ________ Net cash provided by financing activities 58,703 97,360 ________ ________ Net decrease in cash and equivalents (10,980) (235) Cash and equivalents at beginning of year 59,069 2,870 ________ ________ Cash and equivalents at end of period $ 48,089 $ 2,635 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Nine Months Ended November 1, 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 nine months ended November 1, 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 nine months ended November 1, 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 nine months ended November 1, 1997 included additions to property and equipment through capital lease obligations of $3,292,000 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 Court's approval of the fairness of the settlement terms. The Court has scheduled a hearing on December 22, 1997 to consider the fairness of the settlement. If the settlement is not 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. On October 30, 1997, the California Supreme Court sustained the appellate court ruling and remanded 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 Nine Months Ended _______________________ _______________________ November 1, October 27, November 1, October 27, 1997 1996 1997 1996 ___________ ___________ ___________ ___________ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and occupancy expense 67.9 80.7 68.3 73.4 Selling, general and administrative expense 28.4 31.0 29.2 30.9 _____ _____ _____ ______ Operating income (loss) 3.7 (11.7) 2.5 (4.3) Interest expense 1.7 2.0 1.8 1.7 Other income, net 0.0 0.0 (0.1) (0.1) _____ _____ _____ ______ Income (loss) before income taxes 2.0 (13.7) 0.8 (5.9) Provision (benefit) for income taxes 0.7 (3.1) 0.3 (1.4) _____ _____ _____ ______ Net income (loss) 1.3% (10.6)% 0.5% (4.5)% _____ _____ _____ ______ _____ _____ _____ ______
Three months ended November 1, 1997 compared to the ___________________________________________________ three months ended October 27, 1996 ___________________________________ Net sales in the third quarter of fiscal 1997 increased $27.9 million, or 9%, over the third quarter of fiscal 1996. The results for the third quarter of fiscal 1997 included sales from 10 new Michaels stores that were opened during the twelve month period ended November 1, 1997. During the third quarter, sales at the new stores (net of 9 closures) accounted for an increase of $3.5 million. Same-store sales increased 9% in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996, which contributed $24.4 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 obtaining improved information from the new point-of-sale (POS) item sales history database. Utilizing a "could-have-sold" process, the Company planned the current year's order quantities by analyzing the prior year's POS item sales history and item out-of-stock positions. In addition, the Company held grand re-openings during the third quarter in seven major markets in which the majority of the completed store relocations and remodels were located. Cost of sales and occupancy expense, as a percentage of net sales, for the third quarter of fiscal 1997 decreased by 12.8% compared to the third quarter of fiscal 1996. This decrease was primarily due to the $47.7 million of unusual costs and expenses recorded in the third quarter of fiscal 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 fiscal 1997 was unchanged from the prior year at 67.9%. An improved leveraging of fixed occupancy costs and improved gross margins, which management attributes to decreasing the dependency on advertising to fuel sales growth and fewer seasonal clearance markdowns, was offset by higher distribution costs, which increased due to the Company's increased utilization of the upgraded warehouse network. Selling, general and administrative expense, as a percentage of net sales, decreased by 2.6% in the third quarter of fiscal 1997 compared to the third quarter of 1996. This decrease included $3.1 million of unusual costs and expenses related primarily to an extended sidewalk sale starting on Labor Day recorded in the third quarter of fiscal 1996. In addition, the Company saved $1.5 million in advertising costs versus last year, and showed improved expense leverage in store labor and all other categories of store operating expenses. Nine months ended November 1, 1997 compared to the __________________________________________________ nine months ended October 27, 1996 __________________________________ Net sales in the first nine months of fiscal 1997 increased $64.9 million, or 7%, over the first nine months of fiscal 1996. The results for the first nine months of fiscal 1997 included sales from 10 new Michaels stores that were opened during the twelve month period ended November 1, 1997. During the first nine months, sales at the new stores (net of 9 closures) accounted for an increase of $11.3 million. Same-store sales increased 6% in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996, which contributed $53.6 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 obtaining improved information from the new POS item sales history database. The POS item information and "could-have-sold" ordering process has provided for 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 nine months of fiscal 1997 decreased by 5.1% compared to the first nine months of fiscal 1996. The first nine months of fiscal 1996 included $47.7 million of unusual costs and expenses recorded in the third quarter of fiscal 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 first nine months of fiscal 1997 decreased by 0.5% compared to the first nine 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 and fewer seasonal clearance markdowns in the third quarter of fiscal 1997. The decrease was partially offset by higher distribution costs, which increased due to the Company's increased utilization of the upgraded warehouse network. Selling, general and administrative expense, as a percentage of net sales, decreased by 1.7% in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. This decrease included $3.1 million of unusual costs and expenses related primarily to an extended sidewalk sale starting on Labor Day recorded in the third quarter of fiscal 1996. In addition, the Company saved $8.4 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 $47.3 million was generated during the first nine months of fiscal 1997 compared to negative $74.9 million of cash flow from operations generated during the first nine 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 increased 4% to $1,047,000 at November 1, 1997 compared to $1,009,000 last year reflecting higher levels of basic stock merchandise purchased to improve the Company's in-stock position. Borrowings outstanding under the Company's bank credit agreement ("Credit Agreement"), which expires in June 1999, were $39.6 million at the end of the third quarter of fiscal 1996 and there were no borrowings outstanding at November 1, 1997. The Company opened nine Michaels stores and closed eight during the first nine months of fiscal 1997. Capital expenditures for the newly opened stores amounted to approximately $2.3 million. Additional capital expenditures of approximately $25.1 million during the first nine months related primarily to the relocation or remodeling of approximately 37 existing stores, and for interim construction costs for the relocation in 1998 of one of its distribution centers and various systems enhancements. The Company expects capital expenditures during the remainder of fiscal 1997 to total approximately $12 to $14 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 and additional equipment costs during the remainder of fiscal 1997 and in fiscal 1998 of an additional $21 million for the relocation in 1998 of one of its distribution centers. The Company is presently negotiating a sale/leaseback transaction with respect to this distribution facility to be effected when the facility is completed. However, no definitive agreement has been reached. At November 1, 1997, the Company had working capital of $312.6 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 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11.1 - Computation of Earnings Per Common Share for the Three Months Ended November 1, 1997. Exhibit 11.2 - Computation of Earnings Per Common Share for the Nine Months Ended November 1, 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. 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 16, 1997 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 11.1 Computation of Earnings Per Common Share for the Three Months Ended November 1, 1997. 11.2 Computation of Earnings Per Common Share for the Nine Months Ended November 1, 1997. 27 Financial Data Schedule EXHIBIT 11.1 MICHAELS STORES, INC. Computation of Earnings Per Common Share Three Months Ended November 1, 1997 (Unaudited)
Weighted Average Outstanding Equivalent Shares _____________________ Total Fully Outstanding Primary Diluted ___________ __________ __________ Outstanding at beginning of quarter 27,954,811 27,954,811 27,954,811 Shares issued during period 791,643 468,602 468,602 __________ __________ Weighted average common shares outstanding 28,423,413 28,423,413 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 1,727,743 1,861,836 __________ __________ __________ Total outstanding common shares 28,746,454 30,151,156 30,285,249 __________ __________ __________ __________ __________ __________ Earnings per common and common equivalent share $.15 $.15 ____ ____ ____ ____
EXHIBIT 11.2 MICHAELS STORES, INC. Computation of Earnings Per Common Share Nine Months Ended November 1, 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 5,055,528 2,959,604 2,959,604 __________ __________ Weighted average common shares outstanding 26,650,530 26,650,530 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 1,281,834 1,421,770 __________ __________ __________ Total outstanding common shares 28,746,454 27,932,364 28,072,300 __________ __________ __________ __________ __________ __________ Earnings per common and common equivalent share $.17 $.17 ____ ____ ____ ____
EX-27 2
5 0000740670 MICHAELS STORES, INC. 1000 9-MOS JAN-31-1998 NOV-01-1997 48,089 0 0 0 489,755 561,550 319,416 132,346 908,876 248,947 221,940 0 0 2,875 405,604 908,876 949,426 949,426 648,654 925,684 (1,214) 0 17,380 7,576 2,879 4,697 0 0 0 4,697 .17 .17
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