<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE SEPTEMBER 8, 1999
- --------------------------------------------- ---------------------------------------------
<S> <C>
Common Stock, par value $.10 per share 29,092,585
</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>
JULY 31, JANUARY 30,
1999 1999
------------ ---------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents............................................................ $ 32,408 $ 96,124
Merchandise inventories......................................................... 580,195 501,239
Income taxes receivable and deferred income taxes............................... 11,506 9,654
Prepaid expenses and other...................................................... 17,111 14,911
------------ ---------------
Total current assets.......................................................... 641,220 621,928
------------ ---------------
PROPERTY AND EQUIPMENT, AT COST................................................... 423,373 381,289
Less accumulated depreciation................................................... (196,956) (171,829)
------------ ---------------
226,417 209,460
------------ ---------------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET......................... 126,611 128,488
OTHER ASSETS...................................................................... 2,734 2,774
------------ ---------------
129,345 131,262
------------ ---------------
Total assets...................................................................... $ 996,982 $ 962,650
------------ ---------------
------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 146,843 $ 106,173
Income taxes payable............................................................ -- 12,623
Accrued liabilities and other................................................... 109,858 111,905
------------ ---------------
Total current liabilities..................................................... 256,701 230,701
------------ ---------------
SENIOR NOTES...................................................................... 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES.................................................... 96,940 96,940
DEFERRED INCOME TAXES............................................................. 2,642 2,642
OTHER LONG-TERM LIABILITIES....................................................... 20,750 26,388
------------ ---------------
Total long-term liabilities................................................... 245,332 250,970
------------ ---------------
502,033 481,671
------------ ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, 30,146,397 shares issued.......................................... 3,015 2,971
Additional paid-in capital...................................................... 375,906 367,308
Retained earnings............................................................... 136,400 131,072
Treasury stock, at cost, 1,145,000 shares....................................... (20,372) (20,372)
------------ ---------------
Total stockholders' equity.................................................... 494,949 480,979
------------ ---------------
Total liabilities and stockholders' equity........................................ $ 996,982 $ 962,650
------------ ---------------
------------ ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------
JULY 31, AUGUST 1,
1999 1998
------------ -------------
<S> <C> <C>
NET SALES........................................................................... $ 359,124 $ 314,171
Cost of sales and occupancy expense................................................. 244,859 215,325
------------ -------------
GROSS PROFIT........................................................................ 114,265 98,846
Selling, general and administrative expense......................................... 104,425 90,942
Store pre-opening costs............................................................. 3,214 2,283
------------ -------------
OPERATING INCOME.................................................................... 6,626 5,621
Interest expense.................................................................... 5,449 5,580
Other (income) and expense, net..................................................... (368) (982)
Litigation settlement............................................................... 1,500 --
------------ -------------
INCOME BEFORE INCOME TAXES.......................................................... 45 1,023
Provision for income taxes.......................................................... 17 389
------------ -------------
NET INCOME.......................................................................... $ 28 $ 634
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Basic............................................................................. $ 0.00 $ 0.02
Diluted........................................................................... $ 0.00 $ 0.02
</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>
SIX MONTHS ENDED
---------------------------
JULY 31, AUGUST 1,
1999 1998
------------ -------------
<S> <C> <C>
NET SALES........................................................................... $ 747,668 $ 649,941
Cost of sales and occupancy expense................................................. 507,406 440,199
------------ -------------
GROSS PROFIT........................................................................ 240,262 209,742
Selling, general and administrative expense......................................... 215,308 187,503
Store pre-opening costs............................................................. 5,477 4,071
------------ -------------
OPERATING INCOME.................................................................... 19,477 18,168
Interest expense.................................................................... 10,887 11,283
Other (income) and expense, net..................................................... (1,331) (3,010)
Litigation settlement............................................................... 1,500 --
------------ -------------
INCOME BEFORE INCOME TAXES.......................................................... 8,421 9,895
Provision for income taxes.......................................................... 3,200 3,760
------------ -------------
NET INCOME.......................................................................... $ 5,221 $ 6,135
------------ -------------
------------ -------------
EARNINGS PER COMMON SHARE:
Basic............................................................................. $ 0.18 $ 0.21
Diluted........................................................................... $ 0.17 $ 0.20
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
JULY 31, AUGUST 1,
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................ $ 5,221 $ 6,135
Adjustments:
Depreciation.................................................................... 25,235 21,064
Amortization.................................................................... 2,081 2,141
Other........................................................................... 462 558
Change in assets and liabilities:
Merchandise inventories....................................................... (78,956) (168,271)
Prepaid expenses and other.................................................... (2,200) (5,175)
Deferred income taxes and other............................................... (2,973) (500)
Accounts payable.............................................................. 40,670 40,299
Income taxes payable.......................................................... (12,623) 5,358
Accrued liabilities and other................................................. (2,640) (8,653)
------------ -------------
Net change in assets and liabilities........................................ (58,722) (136,942)
------------ -------------
Net cash used in operating activities....................................... (25,723) (107,044)
------------ -------------
INVESTING ACTIVITIES:
Additions to property and equipment............................................... (41,843) (41,510)
Net proceeds from sales of property and equipment................................. 85 19,155
------------ -------------
Net cash used in investing activities....................................... (41,758) (22,355)
------------ -------------
FINANCING ACTIVITIES:
Payment of other long-term liabilities.......................................... (2,934) (2,555)
Proceeds from stock options exercised........................................... 6,759 6,461
Proceeds from issuance of common stock and other................................ (60) 6,128
------------ -------------
Net cash provided by financing activities................................... 3,765 10,034
------------ -------------
NET DECREASE IN CASH AND EQUIVALENTS................................................ (63,716) (119,365)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR........................................... 96,124 162,283
------------ -------------
CASH AND EQUIVALENTS AT END OF PERIOD............................................... $ 32,408 $ 42,918
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended July 31, 1999
(Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 30, 1999) 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 six months ended July 31, 1999 are not
indicative of the results to be expected for the entire year. Certain fiscal
1998 amounts have been reclassified to conform to the fiscal 1999 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 30, 1999.
NOTE B--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JULY 31, 1999 AUGUST 1, 1998 JULY 31, 1999 AUGUST 1, 1998
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE DATA)
NUMERATOR:
Net income............................................ $ 28 $ 634 $ 5,221 $ 6,135
------ ------ ------ ------
------ ------ ------ ------
DENOMINATOR:
Denominator for basic earnings per share-weighted
average shares.................................... 28,748 29,602 28,666 29,462
Effect of dilutive securities:
Employee stock options.............................. 1,699 1,806 1,177 1,880
------ ------ ------ ------
Denominator for diluted earnings per share-weighted
average shares adjusted for dilutive securities..... 30,447 31,408 29,843 31,342
------ ------ ------ ------
------ ------ ------ ------
BASIC EARNINGS PER COMMON SHARE....................... $ 0.00 $ 0.02 $ 0.18 $ 0.21
------ ------ ------ ------
------ ------ ------ ------
DILUTED EARNINGS PER COMMON SHARE..................... $ 0.00 $ 0.02 $ 0.17 $ 0.20
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 OUR ABILITY TO ADDRESS THE YEAR 2000
ISSUE, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING EFFORTS AND
OTHER RISKS DETAILED IN OUR SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of
each line item of our Consolidated Statements of Income. This table should be
read in conjunction with the following discussion and with our Consolidated
Financial Statements, including the related notes.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JULY 31, 1999 AUGUST 1, 1998 JULY 31, 1999 AUGUST 1, 1998
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
NET SALES............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy expense................... 68.2 68.5 67.9 67.7
------ ------ ------ ------
GROSS MARGIN.......................................... 31.8 31.5 32.1 32.3
Selling, general and administrative expense........... 29.1 29.0 28.8 28.9
Store pre-opening costs............................... 0.9 0.7 0.7 0.6
------ ------ ------ ------
OPERATING INCOME...................................... 1.8 1.8 2.6 2.8
Interest expense...................................... 1.5 1.8 1.5 1.7
Other (income) and expense, net....................... (0.1) (0.3) (0.2) (0.4)
Litigation settlement................................. 0.4 0.0 0.2 0.0
------ ------ ------ ------
INCOME BEFORE INCOME TAXES............................ 0.0 0.3 1.1 1.5
Provision for income taxes............................ 0.0 0.1 0.4 0.6
------ ------ ------ ------
NET INCOME............................................ 0.0% 0.2% 0.7% 0.9%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
QUARTER ENDED JULY 31, 1999 COMPARED TO THE QUARTER ENDED AUGUST 1, 1998
Net sales in the second quarter of fiscal 1999 increased $44.9 million, or
14%, over the second quarter of fiscal 1998. The results for the second quarter
of fiscal 1999 included sales from 63 Michaels and 8 Aaron Brothers stores that
were opened during the 12-month period ended July 31, 1999, more than offsetting
lost sales from 7 Michaels and 1 Aaron Brothers store closures. During the
second quarter, sales at the new stores (net of closures) accounted for an
increase of $31.7 million. Same-store sales increased 4% in the second quarter
of fiscal 1999 compared to the second quarter of fiscal 1998, which contributed
$13.2 million to the net sales increase. The improvement in same-store sales was
due to a strong performance in our core categories of framing, general crafts,
art supplies, floral, ribbon and books, more than offsetting the performance in
apparel crafts, needlecrafts and party. Going forward, we expect to achieve
same-store sales increases for the remainder of fiscal 1999, taken as a whole.
Our ability to generate same-store sales increases is dependent, in part, on our
ability to continue to improve store in-stock positions on the top-selling
items, to properly allocate seasonal merchandise to the stores based upon
anticipated sales trends utilizing POS rate of sale information, and the success
of our sales promotion efforts.
Cost of sales and occupancy expense, as a percentage of net sales, for the
second quarter of fiscal 1999 was 68.2%, a decrease of 0.3% compared to the
second quarter of fiscal 1998. This decrease was primarily
6
<PAGE>
attributable to improved initial markup on inventories, partially offset by
larger investments in information system infrastructure and higher occupancy
costs associated with new stores.
Selling, general and administrative expense, as a percentage of net sales,
increased by 0.1% in the second quarter of fiscal 1999 compared to the second
quarter of fiscal 1998. This increase resulted from higher bank fees associated
with credit card sales, and higher equipment leasing costs from last year's
rollout of the in-store computer processors, partially offset by improved
expense leverage in advertising.
Store pre-opening costs, as a percentage of net sales, increased by 0.2% in
the second quarter of fiscal 1999 compared to the second quarter of fiscal 1998,
as we opened or relocated 29 Michaels and 2 Aaron Brothers stores compared to 21
Michaels and 3 Aaron Brothers stores in the prior year.
Operating income, as a percentage of net sales, was unchanged compared to
the prior year at 1.8% of net sales.
Interest expense (net of interest income), as a percentage of net sales, was
unchanged compared to the prior year. The lower invested cash balances in the
second quarter of fiscal 1999 compared to the second quarter of fiscal 1998, was
offset by the leveraging of interest expense on expanded sales.
On August 5, 1999, we reached an agreement to settle certain outstanding
litigation. Although the settlement is still subject to court approval, we
believe that it is probable that the agreement will be approved by the court
and, accordingly, we recorded a $1.5 million charge in the second quarter to
reflect the terms of the agreement. Including the litigation settlement charge,
net income in the second quarter of fiscal 1999 was $28,000, or $0.00 per share.
Excluding the litigation settlement charge, net income for the second quarter
increased 51% from the prior year to $958,000 compared to $634,000 in fiscal
1998, and diluted earnings per share was $0.03 per share compared to $0.02 per
share in the prior year.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO THE SIX MONTHS ENDED AUGUST 1, 1998
Net sales in the first six months of fiscal 1999 increased $97.7 million, or
15%, over the first six months of fiscal 1998. The results for the first six
months of fiscal 1999 included sales from 63 Michaels and 8 Aaron Brothers
stores that were opened during the 12-month period ended July 31, 1999, more
than offsetting lost sales from 7 Michaels and 1 Aaron Brothers store closures.
During the first six months, sales at the new stores (net of closures) accounted
for an increase of $69.6 million. Same-store sales increased 4% in the first six
months of fiscal 1999 compared to the first six months of fiscal 1998, which
contributed $28.1 million to the net sales increase. The improvement in
same-store sales was due to a strong performance in our core categories of
framing, general crafts, art supplies, floral, ribbon and books, more than
offsetting the performance in apparel crafts, needlecrafts and party. Going
forward, we expect to achieve same-store sales increases for the remainder of
fiscal 1999, taken as a whole. Our ability to generate same-store sales
increases is dependent, in part, on our ability to continue to improve store in-
stock positions on the top-selling items, to properly allocate seasonal
merchandise to the stores based upon anticipated sales trends utilizing POS rate
of sale information, and the success of our sales promotion efforts.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first six months of fiscal 1999 was 67.9%, an increase of 0.2% compared to the
first six months of fiscal 1998. This increase was primarily attributable to
larger investments in information system infrastructure and higher occupancy
costs associated with new stores, partially offset by improved initial markup on
inventories.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.1% in the first six months of fiscal 1999 compared to the first
six months of fiscal 1998. This decrease resulted from higher bank fees
associated with credit card sales, and higher equipment leasing costs from last
year's rollout of the in-store computer processors, more than offset by improved
expense leverage in advertising.
7
<PAGE>
Store pre-opening costs, as a percentage of net sales, increased by 0.1% in
the first six months of fiscal 1999 compared to the first six months of fiscal
1998, as we opened or relocated 55 Michaels and 5 Aaron Brothers stores compared
to 35 Michaels and 5 Aaron Brothers stores in the prior year.
Operating income, as a percentage of net sales, decreased by 0.2% in the
first six months of fiscal 1999 compared to the first six months of fiscal 1998.
Interest expense (net of interest income), as a percentage of net sales, was
unchanged compared to the prior year. The lower invested cash balances in the
first six months of fiscal 1999 compared to the first six months of fiscal 1998,
was offset by the leveraging of interest expense on expanded sales.
On August 5, 1999, we reached an agreement to settle certain outstanding
litigation. Although the settlement is still subject to court approval, we
believe that it is probable that the agreement will be approved by the court
and, accordingly, we recorded a $1.5 million charge in the second quarter to
reflect the terms of the agreement. Including the litigation settlement charge,
net income in the first six months of fiscal 1999 was $5.2 million, or $0.17 per
share. Excluding the litigation settlement charge, net income in the first six
months of fiscal 1999 increased slightly from the prior year to $6.2 million
compared to $6.1 million in the first six months of fiscal 1998, and diluted
earnings per share was $0.21 per share compared to $0.20 per share in the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operating activities during the first six months of fiscal
1999 was $25.7 million as compared to $107.0 million of cash flow used in
operating activities during the first six months of fiscal 1998. These results
are indicative of our plan to improve inventory control and reduce average store
inventories in fiscal 1999. Inventories per Michaels store at July 31, 1999
decreased 6% from the prior year, and going forward we expect to maintain or
slightly improve this level of reduction in our average inventory levels through
the end of the third quarter and fiscal year-end 1999.
We opened 41 Michaels and 4 Aaron Brothers stores and relocated 14 Michaels
and 1 Aaron Brothers stores during the first six months of fiscal 1999. In March
1999 we acquired leases for 16 stores (13 included in the 41 Michaels stores
noted above), formerly operated by MJDesigns, Inc. ("MJDesigns"). Capital
expenditures for the newly opened stores and the MJDesigns leases amounted to
approximately $30.5 million. Additional capital expenditures of approximately
$11.3 million during the first six months of fiscal 1999 related primarily to
existing stores and for various information systems enhancements. We expect
additional capital expenditures during the remainder of fiscal 1999 to total
approximately $57.7 million, related primarily to costs for new stores, store
relocations and remodeling, information systems, and various other projects.
We believe that our available cash, funds generated by operating activities,
funds available under a bank credit agreement, lease financing and proceeds from
the sale of stock should be sufficient to finance continuing operations and
sustain current growth plans. We believe that we can finance annual store
expansion at a rate of 15% from internally generated cash flow.
At July 31, 1999, we had working capital of $384.5 million, compared to
$391.2 million at January 30, 1999. We currently have a bank credit agreement
providing for an unsecured revolving line of credit of $100 million, which may
be increased to $125 million under specific conditions. There were no borrowings
outstanding under the current bank credit agreement during the first six months
of fiscal 1999 or under the previous revolving line of credit at any time during
the first six months of 1998.
IMPACT OF THE YEAR 2000
We are highly dependent on our internal information systems for tracking
inventory and sales information and on our vendors' systems for assuring
accurate and timely deliveries of goods to our distribution centers and stores.
Because we have invested substantial amounts of money and effort in
8
<PAGE>
updating internal systems in recent years, we believe such systems are already
substantially Year 2000 compliant.
We have implemented a comprehensive plan designed to make our operations
fully Year 2000 compliant, utilizing both internal and external resources. A
corporate project office has been established to oversee, monitor and coordinate
the Company-wide Year 2000 efforts. An experienced consulting firm has been
engaged to provide objective project management and technical expertise to
assist us in the completion of the project.
Our information systems include proprietary and third party application
systems and related hardware, software and data and telephone networks.
Approximately 85% of our application systems are presently believed to be Year
2000 compliant. Remediation or replacement of the remaining systems is in
process, with completion anticipated by the end of the third quarter of 1999.
The testing and certification stage for these areas is also targeted to be
largely completed by the end of the third quarter of 1999. We believe that we
are on schedule to complete Year 2000 compliance plans with respect to our
information systems.
We completed the assessment of our business equipment and systems, such as
elevators and security systems, which contain embedded computer technology.
Based on our assessment and assurances from third parties, we believe these
systems present little Year 2000 exposure or risk.
We have obtained appropriate assurances from our "mission critical"
merchandise and service vendors that they are Year 2000 compliant. We have
identified alternative merchandise and service sources for "non-critical"
vendors who do not expect to be Year 2000 compliant. In fiscal 1998, our top ten
vendors accounted for approximately 21% of total purchases, with no single
merchandise vendor accounting for more than 4.5% of total purchases; thus, we do
not believe any single vendor poses a significant risk.
We have developed contingency plans, such as alternative sourcing, and
identified what actions would need to be taken if critical systems or service
providers are not Year 2000 compliant. We do not expect that substantial
increases in inventory will be required as a contingency measure. We
substantially completed a comprehensive analysis of the operational problems and
costs (including loss of revenues) that would be reasonably likely to result
from our failure or the failure of certain third parties to complete efforts to
achieve Year 2000 compliance on a timely basis. We believe problems and costs
will not be material. A contingency plan has been substantially developed for
dealing with the most reasonably likely worst-case scenario.
Despite significant efforts to make our 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 our control. Accordingly, we can give no
assurances that the systems of other parties on which our systems or operations
rely will be timely converted or compatible with our systems. The failure of
these entities to comply on a timely basis could have a material adverse effect.
At the present time, however, we do not expect Year 2000 issues to materially
affect our products, services, competitive position, or financial performance or
condition.
Total external non-capitalizable costs related to the Year 2000 effort
(exclusive of the costs of planned development of new systems) are estimated to
be approximately $2.6 million, of which approximately $2.3 million has been
incurred through July 1999. In addition, we have 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 $4.5 million, of which approximately $4.0
million has been incurred through July 1999. Our 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 operating activities. We do not
separately track internal direct costs associated with the utilization of our
officers and employees in Year 2000 compliance efforts. No significant
information system projects have been deferred because of the Year 2000 effort.
9
<PAGE>
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 our best estimates, which may be updated as additional information
becomes available. 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 us
and the collateral effects of the Year 2000 issues on our business partners and
customers. While we believe our assumptions are reasonable, we caution that it
is impossible to predict the impact of certain factors that could cause actual
costs or timetables to differ materially from those expected.
10
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MICHAELS STORES, INC.
FORM 10-Q
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1999 Annual Meeting of Stockholders of the Company was held on June 17,
1999. The following item of business was presented to the Stockholders:
ELECTION OF DIRECTORS
The two directors were elected as proposed in the Proxy Statement dated May
10, 1999 under the caption titled "Proposal for Election of Directors" as
follows:
<TABLE>
<CAPTION>
TOTAL VOTE TOTAL VOTE
FOR WITHHELD
NAME EACH DIRECTOR FROM EACH DIRECTOR
- ---------------------------------------------------------- ------------- ------------------
<S> <C> <C>
F. Jay Taylor............................................. 26,559,213 642,762
Evan A. Wyly.............................................. 26,558,009 643,966
</TABLE>
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 during the quarter ended July 31, 1999.
11
<PAGE>
MICHAELS STORES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 14, 1999
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------------- ------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND SIX
MONTHS ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> MAY-02-1999 JAN-31-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 32,408 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 580,195 0
<CURRENT-ASSETS> 641,220 0
<PP&E> 423,373 0
<DEPRECIATION> 196,956 0
<TOTAL-ASSETS> 996,982 0
<CURRENT-LIABILITIES> 256,701 0
<BONDS> 221,940 0
0 0
0 0
<COMMON> 3,015 0
<OTHER-SE> 491,934 0
<TOTAL-LIABILITY-AND-EQUITY> 996,982 0
<SALES> 359,124 747,668
<TOTAL-REVENUES> 359,124 747,668
<CGS> 244,859 507,406
<TOTAL-COSTS> 352,498 728,191
<OTHER-EXPENSES> 1,132 169
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,449 10,887
<INCOME-PRETAX> 45 8,421
<INCOME-TAX> 17 3,200
<INCOME-CONTINUING> 28 5,221
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 28 5,221
<EPS-BASIC> 0.00 0.18
<EPS-DILUTED> 0.00 0.17
</TABLE>
