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 October 31, 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 of incorporation) (I.R.S. employer
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
REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE DECEMBER 9, 1998
_____ ________________
<S> <C>
Common stock, par value $.10 per share 28,548,550
</TABLE>
<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)
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
________________ ________________
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 38,133 $ 162,283
Merchandise inventories 602,881 385,580
Income taxes receivable and
deferred income taxes 11,624 11,291
Prepaid expenses and other 16,212 14,029
__________ _________
Total current assets 668,850 573,183
__________ _________
PROPERTY AND EQUIPMENT, AT COST 372,841 331,755
Less accumulated depreciation (167,144) (138,719)
__________ _________
205,697 193,036
__________ _________
COSTS IN EXCESS OF NET ASSETS OF
ACQUIRED OPERATIONS, NET 133,925 136,827
DEFERRED INCOME TAXES 2,695 2,695
OTHER ASSETS 2,983 2,753
__________ _________
139,603 142,275
__________ _________
$1,014,150 $ 908,494
__________ _________
__________ _________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 157,210 $ 109,456
Accrued liabilities and other 126,685 105,036
__________ _________
Total current liabilities 283,895 214,492
__________ _________
BANK DEBT 30,100 -
SENIOR NOTES 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES 96,940 96,940
OTHER LONG-TERM LIABILITIES 27,886 30,151
__________ _________
Total long-term liabilities 279,926 252,091
__________ _________
563,821 466,583
__________ _________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, 28,536,591 shares
outstanding 2,968 2,903
Additional paid-in capital 367,144 350,977
Retained earnings 100,589 88,031
Treasury stock, at cost (20,372) -
__________ _________
Total stockholders' equity 450,329 441,911
__________ _________
$1,014,150 $ 908,494
__________ _________
__________ _________
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
____________________________
October 31, November 1,
1998 1997
___________ ___________
<S> <C> <C>
NET SALES $382,841 $350,070
Cost of sales and occupancy expense 254,080 237,528
________ ________
GROSS PROFIT 128,761 112,542
Selling, general and administrative
expense 108,928 98,956
Store pre-opening costs 2,688 643
________ ________
OPERATING INCOME 17,145 12,943
Interest expense 5,601 5,936
Other income, net (160) (126)
________ ________
INCOME BEFORE INCOME TAXES 11,704 7,133
Provision for income taxes 4,448 2,711
________ ________
NET INCOME $ 7,256 $ 4,422
________ ________
________ ________
EARNINGS PER COMMON SHARE:
Basic $0.25 $0.16
Diluted $0.24 $0.15
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
____________________________
October 31, November 1,
1998 1997
___________ ___________
<S> <C> <C>
NET SALES $1,032,782 $949,426
Cost of sales and occupancy expense 694,279 648,654
__________ ________
GROSS PROFIT 338,503 300,772
Selling, general and administrative
expense 296,431 276,233
Store pre-opening costs 6,759 797
__________ ________
OPERATING INCOME 35,313 23,742
Interest expense 16,884 17,380
Other income, net (3,170) (1,214)
__________ ________
INCOME BEFORE INCOME TAXES 21,599 7,576
Provision for income taxes 8,208 2,879
__________ ________
NET INCOME $ 13,391 $ 4,697
__________ ________
__________ ________
EARNINGS PER COMMON SHARE:
Basic $0.45 $0.18
Diluted $0.43 $0.17
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
_________________________
October 31, November 1,
1998 1997
___________ ___________
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,391 $ 4,697
Adjustments:
Depreciation 32,231 30,663
Amortization 3,211 3,173
Other 799 1,402
Change in assets and liabilities:
Merchandise inventories (217,301) (138,547)
Prepaid expenses and other (2,183) (5,469)
Deferred income taxes and other (1,298) 6,327
Accounts payable 47,754 49,322
Accrued liabilities and other 23,020 1,120
________ ________
Net change in assets and liabilities (150,008) (87,247)
________ ________
Net cash used in operating activities (100,376) (47,312)
________ ________
INVESTING ACTIVITIES:
Additions to property and equipment (61,628) (27,380)
Net proceeds from sales of property
and equipment 19,228 1,623
Net proceeds from sales of investments - 3,386
________ ________
Net cash used in investing activities (42,400) (22,371)
________ ________
FINANCING ACTIVITIES:
Net borrowings under bank credit facilities 30,100 -
Payment of other long-term liabilities (3,953) (3,331)
Acquisition of treasury stock (20,372) -
Proceeds from stock options exercised 6,763 59,484
Proceeds from issuance of common stock
and other 6,088 2,550
________ ________
Net cash provided by financing
activities 18,626 58,703
________ ________
NET DECREASE IN CASH AND EQUIVALENTS (124,150) (10,980)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 162,283 59,069
________ ________
CASH AND EQUIVALENTS AT END OF PERIOD $ 38,133 $ 48,089
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended October 31, 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
three and nine months ended October 31, 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. These interim
financial statements should be read in conjunction with 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 nine
months ended October 31, 1998 included additions to property and equipment
through capital lease obligations of $2,721,000 related to the acquisition of
new computer equipment.
NOTE C - DEBT
In August 1998, the Company entered into a new unsecured revolving credit
agreement with BankBoston, N.A. and other lending institutions (the "Credit
Agreement") providing for a revolving loan of $100 million which may be
increased to $125 million pursuant to certain terms and conditions as set
forth in the Credit Agreement. Borrowings available under the Credit
Agreement are reduced by the aggregate amount of letters of credit
outstanding. The interest rate on the Credit Agreement is generally (a) the
higher of (i) an annual rate of interest announced from time to time by
BankBoston, N.A. or (ii) one-half of one percent (1/2%) above the Federal Funds
Effective Rate or (b) the Eurodollar Rate as defined by the Credit Agreement.
The Company is required to pay a commitment fee of up to .3% per annum on the
unused portion of the revolving line of credit. The Credit Agreement
provides certain annual restrictions on the aggregate amount of capital
expenditures, restricts the payment of dividends and requires the Company to
maintain compliance with various financial ratios. The Credit Agreement
expires in August 2001.
NOTE D - 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
6
<PAGE>
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. A settlement agreement has been reached by the
parties and the Company's portion of the settlement amount was fully covered
by insurance.
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 is not expected to have a material
adverse effect on the Company's financial position or results of operations.
NOTE E - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
_______________________ _______________________
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
___________ ___________ ___________ ___________
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 7,256 $ 4,422 $13,391 $ 4,697
_______ _______ _______ _______
_______ _______ _______ _______
Denominator:
Denominator for basic
earnings per share-weighted
average shares 29,402 28,423 29,442 26,651
Effect of dilutive securities:
Employee stock options 1,202 1,726 1,654 1,320
_______ _______ _______ _______
Denominator for diluted
earnings per share-adjusted
weighted average shares 30,604 30,149 31,096 27,971
_______ _______ _______ _______
_______ _______ _______ _______
Basic earnings per common
share $0.25 $0.16 $0.45 $0.18
_____ _____ _____ _____
_____ _____ _____ _____
Diluted earnings per common
share $0.24 $0.15 $0.43 $0.17
_____ _____ _____ _____
_____ _____ _____ _____
</TABLE>
The convertible subordinated notes were not included in the diluted
earnings per common share calculations because they were antidilutive for the
periods presented. The convertible subordinated notes could potentially affect
diluted earnings per common share in the future.
7
<PAGE>
NOTE F - STORE PRE-OPENING COSTS
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING THE
COSTS OF START-UP ACTIVITIES ("SOP 98-5"), 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.
8
<PAGE>
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 Income. This table
should be read in conjunction with the following discussion and with the
Company's Consolidated Financial Statements, including the related notes.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
_______________________ _______________________
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales and
occupancy expense 66.4 67.9 67.2 68.3
_____ _____ _____ _____
Gross margin 33.6 32.1 32.8 31.7
Selling, general and
administrative expense 28.4 28.2 28.7 29.1
Store pre-opening costs 0.7 0.2 0.7 0.1
_____ _____ _____ _____
Operating income 4.5 3.7 3.4 2.5
Interest expense 1.5 1.7 1.6 1.8
Other income, net (0.1) (0.0) (0.3) (0.1)
_____ _____ _____ _____
Income before income
taxes 3.1 2.0 2.1 0.8
Provision for income
taxes 1.2 0.7 0.8 0.3
_____ _____ _____ _____
Net income 1.9% 1.3% 1.3% 0.5%
_____ _____ _____ _____
_____ _____ _____ _____
</TABLE>
In the discussion below, all percentages provided for certain items are
calculated as a percentage of net sales.
9
<PAGE>
QUARTER ENDED OCTOBER 31, 1998 COMPARED TO THE
QUARTER ENDED NOVEMBER 1, 1997
Net sales in the third quarter of fiscal 1998 increased $32.8 million, or
9%, over the third quarter of fiscal 1997. The results for the third quarter
of fiscal 1998 included sales from 48 Michaels and 6 Aaron Brothers stores that
were opened during the 12-month period ended October 31, 1998. During the third
quarter, sales at the new stores (net of 2 closures) accounted for an increase
of $28.6 million. Same-store sales increased 1% in the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997, which contributed $4.2
million to the net sales increase. The sales increases were driven by increases
in the Company's core categories of art supplies, general crafts, and Fall and
Halloween seasonal merchandise. The rate of same-store sales increases has
declined from prior quarters and is attributed to a softening in consumer
demand. Management believes that this softening in consumer demand will
continue and will result in a slight decrease in same-store sales in the fourth
quarter of fiscal 1998.
Cost of sales and occupancy expense, as a percentage of net sales,
decreased by 1.5% in the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997. This decrease was primarily attributable to improved
gross margins from reduced promotional markdowns, partially offset by higher
occupancy expense, as a percentage of net sales, including additional reserves
for store closures established in the third quarter of fiscal 1998. As a result
of these factors, gross margin increased to 33.6% compared to 32.1% in the prior
year.
Selling, general and administrative expense, as a percentage of net sales,
increased by 0.2% in the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997. This increase was due to increased store labor expense
and costs relating to a corporate-wide store manager's meeting, partially offset
by reduced advertising expense, as a percentage of net sales.
Store pre-opening costs, as a percentage of net sales, increased by 0.5%
in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997
as the Company adopted a change in accounting rules requiring that store
pre-opening costs be expensed as incurred. For the full year, store pre-opening
costs are expected to increase by 0.3% in fiscal 1998 compared to the prior
year, as the Company will have opened or relocated 64 Michaels and 12 Aaron
Brothers stores in the current year compared to 23 Michaels and 4 Aaron Brothers
stores in the prior year. See Note F in the Notes to Consolidated Financial
Statements.
10
<PAGE>
NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE
NINE MONTHS ENDED NOVEMBER 1, 1997
Net sales in the first nine months of fiscal 1998 increased $83.4 million,
or 9%, over the first nine months of fiscal 1997. The results for the first
nine months of fiscal 1998 included sales from 48 Michaels and 6 Aaron Brothers
stores that were opened during the 12-month period ended October 31, 1998.
During the first nine months, sales of the new stores (net of 11 closures)
accounted for an increase of $54.4 million. Same-store sales increased 3% in
the first nine months of fiscal 1998 compared to the first nine months of fiscal
1997, which contributed $29.0 million to the net sales increase. The
improvement in same-store sales performance was due to a strong performance in
the Company's core categories of art supplies, general crafts, ribbon,
needlecrafts and hobbies. The rate of same-store sales increases has declined
from prior quarters and is attributed to a softening in consumer demand.
Management believes that this softening in consumer demand will continue and
will result in a slight decrease in same-store sales in the fourth quarter of
fiscal 1998, but will remain up for the full year.
Cost of sales and occupancy expense, as a percentage of net sales,
decreased by 1.1% in the first nine months of fiscal 1998 compared to the first
nine months of fiscal 1997. This decrease was principally due to improved gross
margins, reduced remodel expenses, and an improved leveraging of fixed occupancy
costs. As a result of these factors, gross margin increased to 32.8% compared
to 31.7% in the prior year.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.4% in the first nine months of fiscal 1998 compared to the first
nine months of fiscal 1997. This decrease was due to reduced legal and
professional fees, and to improved expense leverage in store labor and all other
categories of store operating expenses.
Store pre-opening costs, as a percentage of net sales, increased by 0.6%
in the first nine months of fiscal 1998 compared to the first nine months of
fiscal 1997 as the Company adopted a change in accounting rules requiring that
store pre-opening costs be expensed as incurred. For the full year, store
pre-opening costs are expected to increase by 0.3% in fiscal 1998 compared to
the prior year, as the Company will have opened or relocated 64 Michaels and 12
Aaron Brothers stores in the current year compared to 23 Michaels and 4 Aaron
Brothers stores in the prior year. See Note F in the Notes to Consolidated
Financial Statements.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operating activities during the first nine months of
fiscal 1998 was $100.4 million compared to $47.3 million of cash flow used in
operating activities during the first nine 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 12%
to $1,172,000 at October 31, 1998 compared to $1,047,000 at November 1, 1997 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
11,000 in fiscal 1998, and as the store in-stock position of best selling
merchandise has been improved.
The Company opened 48 Michaels and 3 Aaron Brothers stores and relocated
14 Michaels and 5 Aaron Brothers stores during the first nine months of fiscal
1998. Capital expenditures for the newly opened stores amounted to
approximately $30.8 million. Additional capital expenditures of approximately
$30.8 million during the first nine months of fiscal 1998 related primarily to
existing stores, to interim construction costs for the relocation of the
Company's California distribution center, and for various systems enhancements.
The Company completed two sale/leaseback transactions for the California
distribution facility and a portion of its equipment during the second quarter
of fiscal 1998 with gross proceeds amounting to $19.0 million. The Company
expects additional capital expenditures during the remainder of fiscal 1998 to
total approximately $18 to $23 million, relating primarily to costs for new
stores, store relocations and remodeling, merchandising and other information
systems and various other projects.
In October 1998, the Company repurchased 1,145,000 shares of its Common
Stock for an aggregate purchase price of $20.4 million and placed the shares in
treasury.
At October 31, 1998, the Company had working capital of $385.0 million
compared to $358.7 million at January 31, 1998. In August 1998, the Company
entered into a new unsecured revolving credit agreement with BankBoston, N.A.
and other lending institutions (the "Credit Agreement") providing for a
revolving loan of $100 million which may be increased to $125 million pursuant
to certain terms and conditions as set forth in the Credit Agreement.
Borrowings under the Credit Agreement were $30.1 million at October 31, 1998,
and there were no borrowings outstanding under the Company's prior credit
agreement at any time during fiscal 1997 or fiscal 1998. Borrowings available
under the Credit Agreement are reduced by the aggregate amount of letters of
credit outstanding. The interest rate on the Credit Agreement is generally (a)
the higher of (i) an annual rate of interest announced from time to time by
BankBoston, N.A. or (ii) one-half of one percent (1/2%) above the Federal Funds
Effective Rate or (b) the Eurodollar Rate as defined by the Credit Agreement.
The Company is required to pay a commitment fee of up to .3% per annum on the
unused portion of the revolving line of credit. The Credit Agreement provides
certain annual restrictions on the aggregate amount of capital expenditures,
restricts the payment of dividends and requires the Company to maintain
compliance with various financial ratios. The Credit Agreement expires in
August 2001. Management believes that the Company's available cash, funds
generated by operating activities, funds available under the Credit Agreement
and lease financing, 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.
12
<PAGE>
IMPACT OF THE YEAR 2000
The Company is highly dependent on proper functioning of its internal
information systems for purposes of tracking inventory and sales information and
on its vendors' systems for purposes of assuring accurate and timely deliveries
of goods to the Company's distribution centers and stores. Because the Company
has invested substantial amounts of money and effort in updating its internal
systems in recent years, it believes such systems are already substantially
advanced in Year 2000 compliance.
The Company has implemented a comprehensive plan designed to make its
operations more fully Year 2000 compliant. The Company is utilizing both
internal and external resources to complete its Year 2000 initiatives. The
Company has established a corporate project office, which reports to an
executive management team, to oversee, monitor and coordinate the Company-wide
Year 2000 efforts. An experienced, nationally-known consulting firm has been
engaged to provide objective project management and technical expertise to
assist internal resources in the completion of the Year 2000 project. The
Company's plan focuses on three areas-information systems, business management
and vendor relations-and generally covers four stages, including (i) inventory,
(ii) assessment, (iii) remediation and (iv) testing and certification. The
remediation and testing and certification stages do not apply to the vendor
relations area, with respect to which the Company will rely on assurances from
vendors and contingency plans.
The information systems area includes the Company's proprietary and third
party application systems and related hardware, software and data and telephone
networks. The Company's computer, data and voice infrastructure, which supports
merchandise procurement and distribution, inventory control and point-of-sale
information systems, is primarily serviced by a third party. The inventory and
assessment phases of the Year 2000 compliance plan are completed in the
information systems area. Approximately 52% of the Company's application
systems are presently believed to be Year 2000 compliant. Remediation or
replacement of the majority of the Company's remaining systems is in process,
with substantial completion anticipated by mid-1999. The testing and
certification stage for these areas is targeted to be largely completed by the
end of third quarter 1999. Management believes that the Company is on schedule
to complete year 2000 compliance plans with respect to its information systems.
The business management area includes equipment and systems, such as
elevators and security systems, that contain embedded computer technology. The
Company's assessment of these systems has begun and is scheduled to be completed
by January 31, 1999. Based on such assessment and assurances from third
parties, the Company believes these systems present little Year 2000 exposure
or risk.
The Company has surveyed its "mission critical" merchandise and service
vendors to determine their Year 2000 status and has either obtained or is
negotiating to obtain appropriate assurances from these vendors. In addition,
the Company is conducting more detailed assessments of the progress of its
electronic data interchange trading partners. In fiscal year 1997, the
Company's top ten vendors accounted for approximately 17% of total purchases,
with no single merchandise vendor accounting for more than 4% of total
purchases. The Company expects to complete its assessment phase with respect
to vendors' systems by January 31, 1999.
13
<PAGE>
The Company is developing contingency plans, such as alternative sourcing,
and identifying what actions would need to be taken if a critical system or
service provider were not Year 2000 compliant. The Company expects these plans
to be finalized by mid-1999. Currently, the Company does not expect substantial
increases in inventory will be required as a contingency measure. The Company
has begun, but not yet completed, a comprehensive analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by the Company and certain third parties to complete
efforts to achieve Year 2000 compliance on a timely basis. A contingency plan
has not been developed for dealing with the most reasonably likely worst case
scenario, and such scenario has not yet been clearly identified. The Company
currently plans to complete such analysis and contingency planning by mid-1999.
Despite the Company's significant efforts to make its systems and
facilities Year 2000 compliant, the ability of third party service providers,
vendors and certain other third parties, including governmental entities and
utility companies, to be Year 2000 compliant is beyond the Company's control.
Accordingly, the Company can give no assurances that the systems of other
parties on which the Company's systems or operations rely will be timely
converted or compatible with the Company's systems. The failure of these
entities to comply on a timely basis could have a material adverse effect on the
Company.
At the present time, however, the Company does not expect Year 2000 issues
to materially affect its products, services, competitive position, or financial
performance or condition.
Total external costs related to the Year 2000 effort (exclusive of the
costs of planned development of new systems) are estimated to be approximately
$2 million, of which approximately $700,000 has been incurred by the Company
through November 1998. In addition, the Company has accelerated the planned
development of new information systems with improved business functionality to
replace systems that were not Year 2000 compliant. The cost of these new
information systems will approximate $4.7 million, of which approximately
$300,000 has been incurred by the Company prior to the date of this report. The
Company's Year 2000 costs, including the acceleration of development of new
systems already planned, have been, and are expected to be, funded with cash
flow from operations. The Company does not separately track internal direct
costs associated with the utilization of its officers and employees in its Year
2000 compliance efforts.
The foregoing statements as to cost and timetables relating to the Year
2000 effort are forward looking and are made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. They are
based on the Company's best estimates, which may be updated as additional
information becomes available. The Company's forward looking statements are
also based on assumptions about many important factors, including the technical
skills of employees and independent contractors, the representations and
preparedness of third parties, the ability of vendors to deliver merchandise or
perform services required by the Company and the collateral effects of the Year
2000 issues on the Company's business partners and customers. While the Company
believes its assumptions are reasonable, it cautions that it is impossible to
predict the impact of certain factors that could cause actual costs or
timetables to differ materially from those expected.
14
<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 1998 annual meeting of shareholders of the Company was held on
September 22, 1998. 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
August 12, 1998 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>
Charles J. Wyly, Jr. 24,859,861 1,115,720
Richard E. Hanlon 24,860,351 1,115,230
Kelly Elliott 24,855,045 1,120,536
</TABLE>
Approval of the Amendment to the Company's Restated
___________________________________________________
Certificate of Incorporation
____________________________
The Amendment to the Company's Restated Certificate of Incorporation as
proposed in the Proxy Statement dated August 12, 1998 under the caption
titled "Certificate Amendment" was approved (For-17,111,340; Against-
8,812,305; Abstain-51,936; Broker Non-Vote-0-).
ITEM 5. OTHER INFORMATION
The 1999 Annual Meeting of Stockholders (the "1999 Annual Meeting") is
scheduled to be held on Thursday, June 17, 1999. In order to be considered for
inclusion in the proxy statement for the 1999 Annual Meeting, stockholder
proposals must be in writing and received by February 28, 1999. For a
stockholder proposal which is not submitted for inclusion in such proxy
statement to be considered at the 1999 Annual Meeting, notice of such
stockholder proposal must be submitted by March 15, 1999. The stockholder
proposals should be submitted to Michaels Stores, Inc., P.O. Box 619566, DFW,
Texas 75261-9566, Attention: Secretary.
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.
15
<PAGE>
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 15, 1998
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<C> <S> <C>
27 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> AUG-02-1998 FEB-01-1998
<PERIOD-END> OCT-31-1998 OCT-31-1998
<CASH> 38,133 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 602,881 0
<CURRENT-ASSETS> 668,850 0
<PP&E> 372,841 0
<DEPRECIATION> 167,144 0
<TOTAL-ASSETS> 1,014,150 0
<CURRENT-LIABILITIES> 283,895 0
<BONDS> 221,940 0
0 0
0 0
<COMMON> 2,968 0
<OTHER-SE> 447,361 0
<TOTAL-LIABILITY-AND-EQUITY> 1,014,150 0
<SALES> 382,841 1,032,782
<TOTAL-REVENUES> 382,841 1,032,782
<CGS> 254,080 694,279
<TOTAL-COSTS> 365,696 997,469
<OTHER-EXPENSES> (160) (3,170)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,601 16,884
<INCOME-PRETAX> 11,704 21,599
<INCOME-TAX> 4,448 8,208
<INCOME-CONTINUING> 7,256 13,391
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,256 13,391
<EPS-PRIMARY> .25 .45
<EPS-DILUTED> .24 .43
</TABLE>
