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 August 2, 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 September 10, 1997
_____ ________________________
Common stock, par value $.10 per share 28,467,802
<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)
<TABLE>
<CAPTION>
ASSETS
August 2, February 1,
1997 1997
_________ ___________
<S> <C> <C>
Current assets:
Cash and equivalents $ 35,507 $ 59,069
Merchandise inventories 420,822 351,208
Income taxes receivable and
deferred income taxes 5,881 15,207
Prepaid expenses and other 14,716 12,059
________ ________
Total current assets 476,926 437,543
________ ________
Property and equipment, at cost 308,349 294,022
Less accumulated depreciation (122,664) (104,943)
________ ________
185,685 189,079
________ ________
Costs in excess of net assets of
acquired operations, net 138,762 140,697
Deferred income taxes 19,247 10,550
Other assets 3,272 6,566
________ ________
161,281 157,813
________ ________
$823,892 $784,435
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,731 $104,966
Accrued liabilities and other 83,533 92,765
________ ________
Total current liabilities 181,264 197,731
________ ________
Senior notes 125,000 125,000
Convertible subordinated notes 96,940 96,940
Other long-term liabilities 31,276 31,962
________ ________
Total long-term liabilities 253,216 253,902
________ ________
434,480 451,633
________ ________
Commitments and contingencies
Shareholders' equity:
Common stock, 27,954,811 shares
outstanding 2,795 2,369
Additional paid-in capital 327,603 271,405
Retained earnings 59,014 59,028
________ ________
Total shareholders' equity 389,412 332,802
________ ________
$823,892 $784,435
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
_________________________
August 2, July 28,
1997 1996
_________ ________
<S> <C> <C>
Net sales $278,038 $260,476
Cost of sales and occupancy expense 190,998 184,574
Selling, general and administrative
expense 85,547 83,981
________ ________
Operating income (loss) 1,493 (8,079)
Interest expense 5,702 4,824
Other expense and (income), net 461 (106)
________ ________
Loss before income taxes (4,670) (12,797)
Income tax benefit (1,775) (4,864)
________ ________
Net loss $ (2,895) $ (7,933)
________ ________
________ ________
Loss per common share $(.11) $(.34)
_____ _____
_____ _____
Weighted average common shares
outstanding 26,299 23,532
______ ______
______ ______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
______________________
August 2, July 28,
1997 1996
_________ ________
<S> <C> <C>
Net sales $599,356 $562,351
Cost of sales and occupancy expense 411,126 389,641
Selling, general and administrative
expense 177,431 172,951
________ ________
Operating income (loss) 10,799 (241)
Interest expense 11,444 8,534
Other income, net (1,088) (373)
________ ________
Income (loss) before income taxes 443 (8,402)
Provision (benefit) for income taxes 168 (3,194)
________ ________
Net income (loss) $ 275 $ (5,208)
________ ________
________ ________
Earnings (loss) per common and
common equivalent share $ .01 $(.23)
_____ _____
_____ _____
Weighted average common and common
equivalent shares outstanding 26,301 22,782
______ ______
______ ______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
_______________________
August 2, July 28,
1997 1996
_________ ________
<S> <C> <C>
Operating activities:
Net income $ 275 $ (5,208)
Adjustments:
Depreciation 20,178 15,881
Amortization 2,114 2,087
Other 802 362
Change in assets and liabilities:
Merchandise inventories (69,614) (52,689)
Prepaid expenses and other (2,657) (3,247)
Deferred income taxes and other 4,897 (3,175)
Accounts payable (7,235) 1,002
Accrued liabilities and other (9,573) (9,637)
________ ________
Net change in assets and liabilities (84,182) (67,746)
________ ________
Net cash used in operating activities (60,813) (54,624)
________ ________
Investing activities:
Additions to property and equipment (15,836) (16,817)
Net proceeds from sales of property
and equipment 1,594 -
Net proceeds from sales of investments 3,386 -
________ ________
Net cash used in investing activities (10,856) (16,817)
________ ________
Financing activities:
Net borrowings under bank credit facilities - (68,200)
Payment of other long-term liabilities (2,065) (551)
Proceeds from issuance of senior notes - 120,542
Proceeds from issuance of common stock and other 50,172 25,345
________ ________
Net cash provided by financing activities 48,107 77,136
________ ________
Net (decrease) increase in cash and equivalents (23,562) 5,695
Cash and equivalents at beginning of year 59,069 2,870
________ ________
Cash and equivalents at end of period $ 35,507 $ 8,565
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended August 2, 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 six months ended August 2, 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 six months ended August
2, 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 six months
ended August 2, 1997 included additions to property and equipment through
capital lease obligations of $3,230,000 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 parties' negotiation of definitive documentation
evidencing the settlement and the Court's approval of the fairness of the
settlement terms. If the settlement is not documented and approved, the
lawsuit will proceed.
<PAGE>
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. The California Supreme Court
granted review on December 23, 1996. Oral arguments were held before the
Court on September 9, 1997, but a ruling has not yet been issued. Should the
California Supreme 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, 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.
<PAGE>
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:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Six Months Ended
___________________ __________________
August 2, July 28, August 2, July 28,
1997 1996 1997 1996
_________ ________ _________ ________
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense 68.7 70.9 68.6 69.3
Selling, general and
administrative expense 30.8 32.2 29.6 30.7
_____ _____ _____ _____
Operating income (loss) 0.5 (3.1) 1.8 (0.0)
Interest expense 2.0 1.9 1.9 1.5
Other expense and (income),
net 0.2 (0.1) (0.2) (0.0)
_____ _____ _____ _____
(Loss) income before
income taxes (1.7) (4.9) 0.1 (1.5)
(Benefit) provision for
income taxes (0.7) (1.9) 0.0 (0.6)
_____ _____ _____ _____
Net (loss) income (1.0)% (3.0)% 0.1% (0.9)%
_____ _____ _____ _____
_____ _____ _____ _____
</TABLE>
<PAGE>
Three months ended August 2, 1997 compared to the
_________________________________________________
three months ended July 28, 1996
________________________________
Net sales in the second quarter of fiscal 1997 increased $17.6 million, or
7%, over the second quarter of fiscal 1996. The results for the second
quarter of fiscal 1997 included sales from 9 new Michaels stores that were
opened during the twelve month period ended August 2, 1997. During the
second quarter, sales of the new stores (net of 9 closures) accounted for an
increase of $3.1 million. Same-store sales increased 6% in the second
quarter of fiscal 1997 compared to the second quarter of fiscal 1996, which
contributed $14.5 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 improved in-stock positions in top selling and hot items.
Cost of sales and occupancy expense, as a percentage of net sales, for the
second quarter of fiscal 1997 decreased by 2.2% compared to the second
quarter 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. The decrease was partially offset by
higher distribution costs, which increased due to the Company's investment
last year in an upgraded warehouse network and related systems. As the
Company improves its utilization of the upgraded warehouse network, the
return on this investment should yield improved gross margins.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 1.4% in the second quarter of fiscal 1997 compared to the second
quarter of 1996. The Company saved $2.9 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.
<PAGE>
Six months ended August 2, 1997 compared to the
_______________________________________________
six months ended July 28, 1996
______________________________
Net sales in the first six months of fiscal 1997 increased $37.0 million, or
7%, over the first six months of fiscal 1996. The results for the first six
months of fiscal 1997 included sales from 9 new Michaels stores that were
opened during the twelve month period ended August 2, 1997. During the first
six months, sales of the new stores (net of 9 closures) accounted for an
increase of $7.8 million. Same-store sales increased 5% in the first six
months of fiscal 1997 compared to the first six months of fiscal 1996, which
contributed $29.2 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 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 six months of fiscal 1997 decreased by 0.7% compared to the first six
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. The decrease was partially offset by
higher occupancy costs and higher distribution costs. The increase in
occupancy costs is primarily attributable to rent reserves established for
the Company's 1997 store relocation program and rent increases incurred in
connection with the 1996 relocation and expansion program. Distribution
costs increased due to the Company's investment last year in an upgraded
warehouse network and related systems.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 1.1% in the first six months of fiscal 1997 compared to the
first six months of fiscal 1996. The Company saved $6.9 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.
<PAGE>
Liquidity and Capital Resources
_______________________________
Cash flow from operations of negative $60.8 million was generated during the
first six months of fiscal 1997 compared to negative $54.6 million of cash
flow from operations generated during the first six 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 remained basically constant at $904,000 at August 2, 1997
compared to $902,000 last year. Borrowings outstanding under the Company's
bank credit agreement ("Credit Agreement"), which expires in June 1999, were
$19.0 million at the end of the second quarter of fiscal 1996 and there were
no borrowings outstanding at August 2, 1997.
The Company opened four Michaels stores and closed eight during the first six
months of fiscal 1997. Capital expenditures for the newly opened stores
amounted to approximately $1.5 million. Additional capital expenditures of
approximately $14.3 million during the first six months related primarily to
the relocation or remodeling of approximately 30 existing stores, and for
various systems enhancements. The Company expects capital expenditures
during the remainder of fiscal 1997 to total approximately $18 to $20
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
during the remainder of fiscal 1997 of up to $12 million for the relocation
in 1998 of one of its distribution centers.
At August 2, 1997, the Company had working capital of $295.7 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.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings, see Note D to "Notes to
Consolidated Financial Statements," which description is incorporated
herein by this reference.
Item 4. Submission of matters to a vote of Security Holders.
The 1997 annual meeting of shareholders of the Company was held on June
6, 1997. The following items of business were presented to the
shareholders:
Election of Directors
_____________________
The three directors were elected as proposed in the Proxy Statement
dated April 30, 1997 under the caption titled "Election of Directors" as
follows:
<TABLE>
<CAPTION>
Total Vote
Total Vote for Withheld From
Name Each Director Each Director
____ ______________ _____________
<S> <C> <C>
Sam Wyly 22,220,485 1,385,265
Michael C. French 22,218,925 1,386,825
Donald R. Miller, Jr. 22,218,725 1,387,025
</TABLE>
Approval of the 1997 Employees Stock Purchase Plan
__________________________________________________
The 1997 Employees Stock Purchase Plan as proposed in the Proxy
Statement dated April 30, 1997 under the caption titled "Approval of the
1997 Employees Stock Purchase Plan" was approved (For-17,910,992;
Against-1,301,374; Abstain-471,046; Broker Non-Vote 3,922,338).
Approval of the 1997 Stock Option Plan
______________________________________
The 1997 Stock Option Plan as proposed in the Proxy Statement dated
April 30, 1997 under the caption titled "Approval of the 1997 Stock
Option Plan" was approved (For-10,374,842; Against-7,243,530;
Abstain-2,313,865; Broker Non-Vote 3,673,513).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common Share for the Six Months
Ended August 2, 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.
<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/ Bryan M. DeCordova
_______________________
Bryan M. DeCordova
Executive Vice President -
Chief Financial Officer
(Principal Financial Officer)
Dated: September 16, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
11 Computation of Earnings Per Common
Share for the Six Months Ended
August 2, 1997.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Six Months Ended August 2, 1997
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
_____________________
Total Fully
Outstanding Primary Diluted
___________ __________ __________
<S> <C> <C> <C>
Outstanding at beginning
of year 23,690,926 23,690,926 23,690,926
Shares issued during
period 4,263,885 2,073,080 2,073,080
__________ __________
Weighted average common
shares outstanding 25,764,006 25,764,006
Net shares to be issued upon
exercise of dilutive stock
options after applying treasury
stock method 421,135 537,174
__________ __________ __________
Total outstanding common shares 27,954,811 26,185,141 26,301,180
__________ __________ __________
__________ __________ __________
Earnings per common and
common equivalent share $.01 $.01
____ ____
____ ____
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 35,507
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 420,822
<CURRENT-ASSETS> 476,926
<PP&E> 308,349
<DEPRECIATION> 122,664
<TOTAL-ASSETS> 823,892
<CURRENT-LIABILITIES> 181,264
<BONDS> 221,940
0
0
<COMMON> 2,795
<OTHER-SE> 386,617
<TOTAL-LIABILITY-AND-EQUITY> 823,892
<SALES> 599,356
<TOTAL-REVENUES> 599,356
<CGS> 411,126
<TOTAL-COSTS> 588,557
<OTHER-EXPENSES> (1,088)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,444
<INCOME-PRETAX> 443
<INCOME-TAX> 168
<INCOME-CONTINUING> 275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 275
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
