<PAGE>
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 July 31, 1994
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)
5931 Campus Circle Drive, Irving, Texas 75063
P.O. Box 619566, DFW, Texas 75261-9566
(Address of principal executive offices including zip code)
(214) 714-7000
(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 3 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 September 13, 1994
Common stock, par value $.10 per share 21,205,034
<Page)
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
<TABLE>
<CAPTION>
July 31, January 30,
1994 1994
-------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 9,724 $ 867
Marketable securities 19,776 67,956
Merchandise inventories 305,577 206,185
Deferred income taxes 22,752 2,952
Prepaid expenses and other 13,617 13,052
-------- --------
Total current assets 371,446 291,012
-------- --------
Property and equipment, at cost 170,256 119,555
Less accumulated depreciation (51,461) (43,683)
-------- --------
118,795 75,872
Costs in excess of net assets of
acquired operations, net 101,506 23,503
Other assets 6,017 7,443
-------- --------
107,523 30,946
-------- --------
$597,764 $397,830
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,276 $ 42,309
Bank debt 34,200 13,000
Income taxes payable - 7,866
Accrued liabilities and other 70,093 46,021
-------- --------
Total current liabilities 172,569 109,196
Convertible subordinated notes 96,950 97,750
Deferred income taxes and other 7,431 5,469
Total long-term liabilities 104,381 103,219
-------- --------
276,950 212,415
Commitments and contingencies
Shareholders' equity:
Common stock, 21,103,694
shares outstanding 2,110 1,670
Additional paid-in capital 238,871 107,168
Retained earnings 79,833 76,577
-------- --------
Total shareholders' equity 320,814 185,415
-------- --------
$597,764 $397,830
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Income
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------
July 31, August 1,
1994 1993
-------- --------
<S> <C> <C>
Net sales $174,204 $115,414
Cost of sales and occupancy expense 111,237 74,150
Selling, general and administrative expense 52,817 35,508
Store closing and conversion costs <F1> 7,074 -
-------- --------
Operating income 3,076 5,756
Interest expense 2,358 1,591
Other income, net (450) (1,746)
-------- --------
Income before income taxes 1,168 5,911
Provision for income taxes 455 2,276
-------- --------
Net income $ 713 $ 3,635
======== ========
Earnings per common and common
equivalent share $.04 $.21
==== ====
Weighted average common and common
equivalent shares 18,845 17,145
</TABLE>
<F1> $4,385 net of tax, or $.23 per share.
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Income
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 31, August 1,
1994 1993
-------- --------
<S> <C> <C>
Net sales $334,002 $228,375
Cost of sales and occupancy expense 214,748 147,429
Selling, general and administrative expense 100,033 69,228
Store closing and conversion costs <F2> 7,074 -
-------- --------
Operating income 12,147 11,718
Interest expense 4,384 3,113
Other income, net (1,481) (3,481)
-------- --------
Income before income taxes 9,244 12,086
Provision for income taxes 3,564 4,653
-------- --------
Net income $ 5,680 $ 7,433
======== ========
Earnings per common and common
equivalent share $.31 $.43
==== ====
Weighted average common and common
equivalent shares 18,315 17,138
</TABLE>
<F2> $4,385 net of tax, or $.24 per share.
See accompanying notes to consolidated financial statements.<PAGE>
<PAGE>
MICHAELS STORES, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 31, August 1,
1994 1993
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 5,680 $ 7,433
Depreciation and amortization 8,056 5,796
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (51,408) (55,885)
Prepaid expenses and other assets (2,017) (5,679)
Accounts payable 2,381 21,279
Income taxes payable (8,363) (3,565)
Accrued and other liabilities (5,896) 5,677
-------- ---------
Net change in assets and liabilities (65,303) (38,173)
-------- ---------
Net cash used in operating activities (51,567) (24,944)
-------- ---------
Investing activities:
Additions to property and equipment (31,268) (19,338)
Net proceeds from sales of marketable
securities 46,183 -
Acquisitions and other (48,820) (1,322)
-------- ---------
Net cash used in investing activities (33,905) (20,660)
-------- ---------
Financing activities:
Net borrowings under bank credit facilities 20,700 5,000
Proceeds from issuance of common stock and other 73,629 1,290
-------- ---------
Net cash provided by financing activities 94,329 6,290
-------- ---------
Net increase (decrease) in cash and equivalents 8,857 (39,314)
Cash and equivalents at beginning of year 867 42,075
-------- ---------
Cash and equivalents at end of period $ 9,724 $ 2,761
======== =========
Cash payments for:
Interest $ 3,498 $ 2,282
Income taxes 14,399 7,605
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
Notes to Consolidated Financial Statements
For the Three Months and Six Months ended July 31, 1994
(Unaudited)
Note A
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 30, 1994) 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
months and six months ended July 31, 1994. 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 months and six months ended
July 31, 1994 are not indicative of the results to be expected for the entire
year.
Note B
In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"),
a chain of nine arts and crafts stores operating primarily in the Seattle
market, for 280,000 shares of Michaels common stock in a transaction
accounted for as a pooling-of-interests. In April 1994, the Company acquired
the affiliated arts and crafts store chains of Oregon Craft & Floral Supply
Co. ("OCF"), with eight stores located primarily in the Portland, Oregon
area, and H&H Craft & Floral Supply Co. ("H&H"), with eight stores located in
southern California, for a total of 455,000 shares of Michaels common stock
in a transaction accounted for as a purchase. This transaction resulted in
the Company recording an addition to goodwill in the amount of $22.7 million.
Note C
Effective July 10, 1994, Michaels acquired Leewards Creative Crafts, Inc.
("Leewards"), an arts and crafts retailer with 98 stores located primarily in
the midwestern and northeastern United States. The acquisition consideration
consisted of $7.9 million in cash and 1,257,279 shares of Michaels common
stock valued at $39.9 million. Upon consummation of the Leewards
acquisition, Michaels also repaid $39.6 million of Leewards' indebtedness.
The transaction was accounted for as a purchase; accordingly, the purchase
price has been preliminarily allocated to assets and liabilities based on
estimated values as of the acquisition date. The cost in excess of the
estimated fair value of net assets acquired was recorded as goodwill in the
amount of $57.9 million, which will be amortized on a straight-line basis
over a period of 40 years. The results of operations since the acquisition
date are included in the accompanying consolidated financial statements.
<PAGE>
The following pro forma combined net sales, net income and earnings per share
data summarize the results of operations for the six months ended July 31,
1994 and August 1, 1993 as if Leewards had been acquired as of the beginning
of fiscal 1993.
<TABLE>
<CAPTION>
Pro Forma
-----------------------------
Six Months Ended
-----------------------------
July 31, 1994 August 1, 1993
------------- --------------
<S> <C> <C>
Net sales $396,355 $286,378
======== ========
Net income $ 6,716 $ 5,559
======== ========
Earnings per share $.35 $.30
==== ====
</TABLE>
The pro forma combined financial results do not purport to represent the
results of operations which would have occurred had such transactions been
consummated at the beginning of the period indicated or the Company's results
of operations for any future period. Anticipated operational efficiencies
from the integration of the acquisition are not reflected in the above pro
forma data.
The above pro forma data include adjustments to: eliminate net sales and
related expenses of overlapping Leewards stores that will be closed;
eliminate the duplicate occupancy costs of Leewards' distribution center and
duplicate purchasing costs; amortize goodwill; expense pre-opening costs in
the year incurred; reduce interest expense to Michaels' average borrowing
rate; and reflect the tax effects of the above adjustments. The pro forma
data for the six-month period ended July 31, 1994 exclude a $7.1 million
charge ($4.4 million after tax or $.24 per share) for closure or relocation
of approximately ten Michaels stores that compete with certain acquired
locations, and conversion and training costs associated with the Leewards
acquisition.
The above pro forma data do not include THSI, OCF or H&H prior to their
respective acquisition dates in February 1994 and April 1994, since the
acquisitions are not considered material, individually or in the aggregate,
to the operating results of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
The Company acquired 123 stores and opened 29 stores during the first six
months of fiscal 1994. Capital expenditures for these stores, and, to a
lesser extent, the remodeling and expansion of existing stores, the expansion
of two distribution facilities, and system enhancements, amounted to $31.3
million in the first six months of fiscal 1994. The Company expects capital
expenditures during the remainder of fiscal 1994 to be at least $36 million,
relating primarily to the opening of new stores during the third quarter.
In July 1994, the Company paid $7.9 million in cash as part of the total
consideration provided to acquire Leewards, and repaid $39.6 million of
Leewards' outstanding debt.
Also in July 1994, the Company completed a public offering of 2,353,432
shares of Michaels common stock. The $72.9 million of net proceeds from the
sale were used to reduce outstanding bank debt.
At July 31, 1994 the Company had working capital of $198.9 million, compared
to $181.8 million at January 30, 1994. The Company currently has a bank
credit agreement ("Credit Agreement") which includes an unsecured line of
credit and provides for the issuance of letters of credit. Borrowings under
the Credit Agreement, which expires June 16, 1997, are limited to the lesser
of $150 million or the Company's borrowing base (as defined in the Credit
Agreement), in either case minus the aggregate amount of letters of credit.
As of July 31, 1994, the Company had $81.7 million in available unused credit
capacity under the Credit Agreement. Management believes that the Company
has sufficient working capital, cash flow from operating activities, and
available unused credit capacity to sustain current growth plans.
<PAGE>
Results of Operations
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Income represents. This table should be read in
conjunction with the following discussion and with the Company's financial
statements, including the notes:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Six Months Ended
------------------- -------------------
July 31, August 1, July 31, August 1,
1994 1993 1994 1993
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 63.8 64.2 64.3 64.6
Selling, general and
administrative expense 30.3 30.8 30.0 30.3
Store closing and conversion
costs 4.1 - 2.1 -
----- ----- ----- -----
Operating income 1.8 5.0 3.6 5.1
Interest expense 1.4 1.4 1.3 1.3
Other income, net (.3) (1.5) (.5) (1.5)
----- ----- ----- -----
Income before income taxes .7 5.1 2.8 5.3
Provision for income taxes .3 2.0 1.1 2.0
----- ----- ----- -----
Net income .4% 3.1% 1.7% 3.3%
===== ===== ===== =====
</TABLE>
<PAGE>
Three months ended July 31, 1994 compared to the
three months ended August 1, 1993
Net sales for the three months ended July 31, 1994, increased $58.8 million
or 51%, compared to the same period of the prior year. The results for the
second quarter of fiscal 1994 included sales of 176 stores (net of two
closures) that were added during the previous twelve months, 13 of which were
added during the second quarter of fiscal 1994, 98 Leewards stores (sales
from which are included from July 10, 1994), and 16 stores acquired at the
beginning of the quarter. In the second quarter of fiscal 1994, sales of
newer stores (not included in comparable store sales) accounted for $53.7
million of the increase. Comparable store sales increased 7% over the second
quarter of last year.
Cost of sales and occupancy expense decreased by 0.4%, as a percentage of
sales, for the second quarter of fiscal 1994 compared to the same period of
the prior year. The improvement was primarily due to increases in sales of
higher margin products and services, and lower product costs (including
volume discounts) from vendors, partially offset by an increase in occupancy
expenses.
Selling, general and administrative expense decreased by 0.5%, as a
percentage of sales, in the second quarter of fiscal 1994 compared to the
same period of the prior year. The decrease was due primarily to lower
corporate and administrative expenses, as a percentage of sales, which were
spread over a larger revenue base in the current period.
The $7.1 million ($4.4 million net of tax, or $.23 per share) of store
closure and conversion costs includes a charge for estimated net costs for
closure or relocation of approximately ten Michaels stores that compete with
certain acquired locations, as well as certain conversion and training costs
related to the recently acquired Leewards stores.
The increase in interest expense for the second quarter of fiscal 1994 to
$2.4 million from $1.6 million for the same period a year ago was due
primarily to interest expense incurred on bank borrowings. This year's
decrease in other income was due principally to a decline in the average
investment portfolio this year compared to the prior year period.
The Company's effective tax rate increased due to the effect of additional
amortization of goodwill, which is not deductible for tax purposes, related
primarily to the Company's recent acquisitions.
<PAGE>
Six months ended July 31, 1994 compared to the
six months ended August 1, 1993
Net sales for the six months ended July 31, 1994, increased $105.6 million or
46% over the same period of the prior year. The results for the first six
months of fiscal 1994 included sales of 176 stores (net of two closures) that
were added during the previous twelve months, 27 of which were added during
the first six months of this year, 98 Leewards stores (sales from which are
included from July 10, 1994), and 25 stores acquired earlier in fiscal 1994.
In the first six months of fiscal 1994, sales of newer stores (not included
in comparable store sales) accounted for $88.8 million of the increase.
Comparable store sales increased 9% over the same period of last year.
Cost of sales and occupancy expense decreased by 0.3%, as a percentage of
sales, for the first six months of fiscal 1994 compared to the same period of
the prior year. The improvement was primarily due to increases in sales of
higher margin products and services, and lower product costs (including
volume discounts) from vendors, partially offset by an increase in occupancy
expenses.
Selling, general and administrative expense decreased by 0.3%, as a
percentage of sales, for the first six months of fiscal 1994 compared to the
same period of the prior year. The decrease was due primarily to lower
corporate and administrative expenses, as a percentage of sales, which were
spread over a larger revenue base in the current period.
The $7.1 million ($4.4 million net of tax, or $.24 per share) of store
closure and conversion costs includes a charge for estimated net costs for
closure or relocation of approximately ten Michaels stores that compete with
certain acquired locations, as well as certain conversion and training costs
related to the recently acquired Leewards stores.
Interest expense for the first six months of fiscal 1994 increased to $4.4
million from $3.1 million for the same period a year ago. The increase was
due primarily to interest expense incurred on bank borrowings. This year's
decrease in other income was due principally to a decline in the average
investment portfolio this year compared to the prior year period.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - Other Information
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 July 31, 1994.
Exhibit 11.2 - Computation of Earnings Per Common Share for the six
months ended July 31, 1994.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on May 23, 1994 and included
unaudited combined pro forma financial statements of the Company and Leewards
for the years ended January 30, 1994 and January 31, 1993 and historical
financial statements of Leewards for the same periods.
A report on Form 8-K/A (Amendment No. 1) was filed by the Company on June 21,
1994 and included audited financial statements of Leewards for the years
ended January 30, 1994 and January 31, 1993 and unaudited financial
statements for the quarters ended May 1, 1994 and May 2, 1993.
A report on Form 8-K/A (Amendment No. 2) was filed by the Company on June 30,
1994 and included unaudited Pro Forma Combined Statements of Income for the
Company and Leewards for the year ended January 30, 1994 and quarter ended
May 1, 1994, an unaudited Pro Forma Combined Balance Sheet at May 1, 1994 and
historical comparative Balance Sheets of Leewards at January 31, 1993,
January 30, 1994 and May 1, 1994.
A report on Form 8-K/A (Amendment No. 3) was filed by the Company on July 14,
1994 and included unaudited Pro Forma Combined Statements of Income for the
Company and Leewards for the year ended January 30, 1994 and quarter ended
May 1, 1994, an unaudited Pro Forma Combined Balance Sheet at May 1, 1994 and
historical comparative Balance Sheets of Leewards at January 31, 1993,
January 30, 1994 and May 1, 1994.
<PAGE>
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: September 14, 1994
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
11.1 Computation of Earnings Per Common
Share for the three months ended
July 31, 1994.
11.2 Computation of Earnings Per Common
Share for the six months ended
July 31, 1994.
<PAGE>
EXHIBIT 11.1
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended July 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
-------------------------
Total Fully
Outstanding Primary Diluted
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning
of quarter 17,462,331 17,462,331 17,462,331
Shares issued during quarter 3,641,363 657,511 657,511
---------- ----------
Weighted average outstanding
shares 18,119,842 18,119,842
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 724,877 724,888
---------- ---------- ----------
Total outstanding shares 21,103,694 18,844,719 18,844,730
========== ========== ==========
Earnings per common and
common equivalent share $.04 $.04
==== ====
</TABLE>
<PAGE>
EXHIBIT 11.2
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Six Months Ended July 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
-----------------------
Total Fully
Outstanding Primary Diluted
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at January 31, 1994 16,697,357 16,697,357 16,697,357
Shares issued during period 4,406,337 862,003 862,003
---------- ----------
Weighted average outstanding
shares 17,559,360 17,559,360
Common Equivalent Shares:
Dilutive shares attributable
to stock options (computed
by the treasury stock
method) 756,121 756,356
---------- ---------- ----------
Total outstanding shares 21,103,694 18,315,481 18,315,716
========== ========== ==========
Earnings per common and
common equivalent share $.31 $.31
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-END> JUL-31-1994
<CASH> 9,724
<SECURITIES> 19,776
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 305,577
<CURRENT-ASSETS> 371,446
<PP&E> 170,256
<DEPRECIATION> 51,461
<TOTAL-ASSETS> 597,764
<CURRENT-LIABILITIES> 172,569
<BONDS> 0
<COMMON> 2,110
0
0
<OTHER-SE> 318,704
<TOTAL-LIABILITY-AND-EQUITY> 597,764
<SALES> 174,204
<TOTAL-REVENUES> 174,204
<CGS> 111,237
<TOTAL-COSTS> 59,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,908
<INCOME-PRETAX> 1,168
<INCOME-TAX> 455
<INCOME-CONTINUING> 713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 713
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
