-----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, AUNT4rxY89SpSQ6Dq+tDwkx/cgQphnfesYbO+fqKze7EO8zx4JnOu4sQAgb3gqD0 jJFyBm6tZG38VPYaO6//fg== 0000740670-98-000004.txt : 19980617 0000740670-98-000004.hdr.sgml : 19980617 ACCESSION NUMBER: 0000740670-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980502 FILED AS OF DATE: 19980616 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: 98649081 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 May 2, 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 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 June 10, 1998 _____ _____________ Common stock, par value $.10 per share 29,589,819 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)
May 2, 1998 January 31, 1998 ___________ ________________ ASSETS Current assets: Cash and equivalents $ 140,456 $ 162,283 Merchandise inventories 448,922 385,580 Income taxes receivable and deferred income taxes 11,521 11,291 Prepaid expenses and other 13,814 14,029 _________ _________ Total current assets 614,713 573,183 _________ _________ Property and equipment, at cost 351,327 331,755 Less accumulated depreciation (147,472) (138,719) _________ _________ 203,855 193,036 _________ _________ Costs in excess of net assets of acquired operations, net 135,860 136,827 Deferred income taxes 3,833 2,695 Other assets 2,642 2,753 _________ _________ 142,335 142,275 _________ _________ $ 960,903 $ 908,494 _________ _________ _________ _________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 148,481 $ 109,456 Accrued liabilities and other 99,499 105,036 _________ _________ Total current liabilities 247,980 214,492 _________ _________ Senior notes 125,000 125,000 Convertible subordinated notes 96,940 96,940 Other long-term liabilities 29,605 30,151 _________ _________ Total long-term liabilities 251,545 252,091 _________ _________ 499,525 466,583 _________ _________ Commitments and contingencies Stockholders' equity: Common stock, 29,561,142 shares outstanding 2,956 2,903 Additional paid-in capital 364,642 350,977 Retained earnings 93,780 88,031 _________ _________ Total stockholders' equity 461,378 441,911 _________ _________ $ 960,903 $ 908,494 _________ _________ _________ _________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Quarter Ended _________________________ May 2, May 3, 1998 1997 ________ ________ Net sales $335,770 $321,318 Cost of sales and occupancy expense 224,874 220,128 Selling, general and administrative expense 96,561 91,884 Store pre-opening costs 1,788 - ________ ________ Operating income 12,547 9,306 Interest expense 5,703 5,742 Other income, net (2,028) (1,549) ________ ________ Income before income taxes 8,872 5,113 Provision for income taxes 3,371 1,943 ________ ________ Net income $ 5,501 $ 3,170 ________ ________ ________ ________ Earnings per common share: Basic $0.19 $0.13 Diluted $0.18 $0.12 Common shares used in per share calculations: Basic 29,321 25,229 Diluted 31,277 26,186
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Quarter Ended ____________________ May 2, May 3, 1998 1997 ________ ________ Operating activities: Net income $ 5,501 $ 3,170 Adjustments: Depreciation 10,350 9,945 Amortization 1,070 1,056 Other 278 (60) Change in assets and liabilities: Merchandise inventories (63,342) (19,473) Prepaid expenses and other 215 (1,245) Deferred income taxes and other 424 285 Accounts payable 39,025 10,151 Accrued liabilities and other (6,201) (6,546) ________ ________ Net change in assets and liabilities (29,879) (16,828) ________ ________ Net cash used in operating activities (12,680) (2,717) ________ ________ Investing activities: Additions to property and equipment (19,040) (5,427) Net proceeds from sales of property and equipment 117 - Net proceeds from sales of investments - 3,386 ________ ________ Net cash used in investing activities (18,923) (2,041) ________ ________ Financing activities: Payment of other long-term liabilities (1,200) (996) Proceeds from stock options exercised 4,813 23,994 Proceeds from issuance of common stock and other 6,163 - ________ ________ Net cash provided by financing activities 9,776 22,998 ________ ________ Net (decrease) increase in cash and equivalents (21,827) 18,240 Cash and equivalents at beginning of period 162,283 59,069 ________ ________ Cash and equivalents at end of period $140,456 $ 77,309 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Quarter Ended May 2, 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 quarter ended May 2, 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. For further information, refer to 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 three months ended May 2, 1998 included additions to property and equipment through capital lease obligations of $2,026,000 related to the acquisition of new computer equipment. Note C - 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 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, and discovery is proceeding. 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 D - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per common share:
Quarter Ended _____________________ May 2, May 3, 1998 1997 ______ ______ (In thousands except per share amounts) Numerator: Net income $ 5,501 $ 3,170 _______ _______ _______ _______ Denominator: Denominator for basic earnings per share-weighted average shares 29,321 25,229 Effect of dilutive securities: Employee stock options 1,956 957 _______ _______ Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions 31,277 26,186 _______ _______ _______ _______ Basic earnings per common share $0.19 $0.13 _____ _____ _____ _____ Diluted earnings per common share $0.18 $0.12 _____ _____ _____ _____
The convertible subordinated notes were not included in the diluted earnings per common share calculation because they were antidilutive for the periods presented. The convertible subordinated notes could potentially affect diluted earnings per common share in the future. Note E - Store Pre-Opening Costs In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"), Reporting the Costs of Start-Up Activities, 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. 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 Operations. 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 _____________________ May 2, May 3, 1998 1997 ______ ______ Net sales 100.0% 100.0% Cost of sales and occupancy expense 67.0 68.5 Selling, general and administrative expense 28.8 28.6 Store pre-opening costs 0.5 - _____ _____ Operating income 3.7 2.9 Interest expense 1.7 1.8 Other income, net (0.6) (0.5) _____ _____ Income before income taxes 2.6 1.6 Provision for income taxes 1.0 0.6 _____ _____ Net income 1.6% 1.0% _____ _____ _____ _____
In the discussion below, all percentages given for expense items are calculated as a percentage of net sales. Quarter ended May 2, 1998 compared to the quarter ended May 3, 1997 Net sales in the first quarter of fiscal 1998 increased $14.5 million, or 5%, over the first quarter of fiscal 1997. The results for the first quarter of fiscal 1998 included sales from 17 Michaels and 3 Aaron Brothers stores that were opened during the 12-month period ended May 2, 1998. During the first quarter, sales at the new stores (net of 11 closures) accounted for an increase of $8.1 million. Same-store sales increased 2% in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997, which contributed $6.4 million to the net sales increase. The improvement in same-store sales performance was lower than expected, which we believe was the result of new advertising concepts tested in the months of March and April which were not as effective as previous advertising methods. By utilizing the information provided by our point-of-sale system to continue to improve our store in-stock position in top-selling items, properly allocating seasonal merchandise to the stores based upon anticipated sales trends, and returning to our previous advertising strategy, we expect an improvement in same-store sales increases. Cost of sales and occupancy expense, as a percentage of net sales, for the first quarter of fiscal 1998 was 67.0%, a decrease of 1.5% compared to the first quarter of fiscal 1997. Significant merchandise gross margin improvements were primarily attributable to better initial markup on beginning-of-year inventories. Occupancy expense decreased, as a percentage of net sales, principally due to a charge taken in the first quarter of fiscal 1997 to establish rent reserves for the Company's 1997 store relocation program. Selling, general and administrative expense, as a percentage of net sales, increased by 0.2% in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. This increase was due to increased advertising expense as a percentage of net sales, driven principally by increased grand openings and higher costs associated with changes in format and distribution methods, offset in part by improved expense leverage in depreciation and administrative expenses. Store pre-opening costs of $1.8 million, or 0.5% as a percentage of net sales, were recognized in the first quarter of fiscal 1998 as the Company adopted a change in accounting rules requiring that store pre-opening costs be expensed as incurred. See Note E in the notes to consolidated financial statements. Liquidity and Capital Resources Cash flow used by operating activities during the first three months of fiscal 1998 was $12.7 million compared to $2.7 million of cash flow used by operating activities during the first three 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 17% to $925,000 at May 2, 1998 compared to $793,000 last year 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 10,000 in fiscal 1998, increases in inventory at the distribution centers caused by the purchase of additional basic merchandise to support the transition to the new California facility, and to an earlier receipt of basic fall product compared to the previous year. The Company opened 11 Michaels stores and relocated 3 Michaels stores during the first three months of fiscal 1998. Capital expenditures for the newly opened stores amounted to approximately $9.1 million. Additional capital expenditures of approximately $9.9 million during the first three months of fiscal 1998 related primarily to existing stores, and for interim construction costs for the relocation in the second quarter of fiscal 1998 of the Company's California distribution center and various systems enhancements. The Company has negotiated a sale/leaseback transaction for the California distribution facility and the transaction is scheduled to close on June 20, 1998 with gross proceeds to be received by the Company amounting to $13.0 million. The Company expects additional capital expenditures during the remainder of fiscal 1998 to total approximately $60 to $65 million (net of the sale/leaseback transaction), relating primarily to costs for new stores, store relocations and remodeling, merchandising and other information systems and various other projects. At May 2, 1998, the Company had working capital of $366.7 million compared to $358.7 million at January 31, 1998. The Company currently has a bank credit agreement which provides for an unsecured revolving line of credit of up to $100 million. There were no borrowings outstanding on the revolving line of credit at any time during fiscal 1997 or the first quarter of fiscal 1998. Management believes that the Company's available cash, funds generated by operating activities, funds available under the bank credit agreement, IBM capital lease financing and proceeds from the sale of stock through the stock purchase plan, 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. MICHAELS STORES, INC. FORM 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings _________________________ For a description of legal proceedings, see Note C 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 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: June 16, 1998 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 27 Financial Data Schedule EX-27 2
5 0000740670 MICHAELS STORES, INC. 1000 3-MOS JAN-30-1999 MAY-02-1998 140,456 0 0 0 448,922 614,713 351,327 147,472 960,903 247,980 221,940 0 0 2,956 458,422 960,903 335,770 335,770 224,874 323,223 (2,028) 0 5,703 8,872 3,371 5,501 0 0 0 5,501 .19 .18
-----END PRIVACY-ENHANCED MESSAGE-----