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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-11822
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MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1943604
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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>
<S> <C>
SHARES OUTSTANDING AS OF
TITLE DECEMBER 8, 1999
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Common Stock, par value $.10 per share 30,914,045
</TABLE>
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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 30, 1999 JANUARY 30, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 21,599 $ 96,124
Merchandise inventories................................... 675,893 501,239
Income taxes receivable and deferred income taxes......... 10,051 9,654
Prepaid expenses and other................................ 19,613 14,911
---------- ---------
Total current assets.................................... 727,156 621,928
---------- ---------
PROPERTY AND EQUIPMENT, AT COST............................. 451,061 381,289
Less accumulated depreciation............................. (210,585) (171,829)
---------- ---------
240,476 209,460
---------- ---------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET... 125,705 128,488
OTHER ASSETS................................................ 3,062 2,774
---------- ---------
128,767 131,262
---------- ---------
Total assets................................................ $1,096,399 $ 962,650
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 178,449 $ 106,173
Bank line of credit....................................... 28,300 --
Income taxes payable...................................... 2,888 12,623
Accrued liabilities and other............................. 132,140 111,905
---------- ---------
Total current liabilities............................... 341,777 230,701
---------- ---------
SENIOR NOTES................................................ 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES.............................. 96,940 96,940
DEFERRED INCOME TAXES....................................... 2,642 2,642
OTHER LONG-TERM LIABILITIES................................. 19,945 26,388
---------- ---------
Total long-term liabilities............................. 244,527 250,970
---------- ---------
586,304 481,671
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, 30,853,412 shares issued (29,706,760 shares
issued at January 30, 1999)............................. 3,085 2,971
Additional paid-in capital................................ 391,705 367,308
Retained earnings......................................... 147,216 131,072
Treasury stock, at cost, 1,509,000 shares (1,145,000
shares at January 30, 1999)............................. (31,911) (20,372)
---------- ---------
Total stockholders' equity.............................. 510,095 480,979
---------- ---------
Total liabilities and stockholders' equity.................. $1,096,399 $ 962,650
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
----------------- -----------------
<S> <C> <C>
NET SALES................................................... $463,034 $382,841
Cost of sales and occupancy expense......................... 307,270 254,080
-------- --------
GROSS PROFIT................................................ 155,764 128,761
Selling, general and administrative expense................. 129,099 108,928
Store pre-opening costs..................................... 4,076 2,688
-------- --------
OPERATING INCOME............................................ 22,589 17,145
Interest expense............................................ 5,891 5,601
Other (income) and expense, net............................. (134) (160)
-------- --------
INCOME BEFORE INCOME TAXES.................................. 16,832 11,704
Provision for income taxes.................................. 6,396 4,448
-------- --------
NET INCOME.................................................. $ 10,436 $ 7,256
======== ========
EARNINGS PER COMMON SHARE:
Basic..................................................... $ 0.36 $ 0.25
Diluted................................................... $ 0.34 $ 0.24
</TABLE>
See accompanying notes to consolidated financial statements.
2
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MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
----------------- -----------------
<S> <C> <C>
NET SALES................................................... $1,210,702 $1,032,782
Cost of sales and occupancy expense......................... 814,676 694,279
---------- ----------
GROSS PROFIT................................................ 396,026 338,503
Selling, general and administrative expense................. 344,407 296,431
Store pre-opening costs..................................... 9,553 6,759
---------- ----------
OPERATING INCOME............................................ 42,066 35,313
Interest expense............................................ 16,778 16,884
Other (income) and expense, net............................. (1,465) (3,170)
Litigation settlement....................................... 1,500 --
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 25,253 21,599
Provision for income taxes.................................. 9,596 8,208
---------- ----------
NET INCOME.................................................. $ 15,657 $ 13,391
========== ==========
EARNINGS PER COMMON SHARE:
Basic..................................................... $ 0.54 $ 0.45
Diluted................................................... $ 0.52 $ 0.43
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 15,657 $ 13,391
Adjustments:
Depreciation............................................ 38,672 32,231
Amortization............................................ 3,129 3,211
Other................................................... 700 799
Change in assets and liabilities:
Merchandise inventories............................... (174,654) (217,301)
Prepaid expenses and other............................ (4,702) (2,183)
Deferred income taxes and other....................... (3,311) (1,298)
Accounts payable...................................... 72,276 47,754
Income taxes payable.................................. (4,526) 9,444
Accrued liabilities and other......................... 19,638 13,576
--------- ---------
Net change in assets and liabilities................ (95,279) (150,008)
--------- ---------
Net cash used in operating activities............... (37,121) (100,376)
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment....................... (69,121) (61,628)
Net proceeds from sales of property and equipment......... 94 19,228
--------- ---------
Net cash used in investing activities............... (69,027) (42,400)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under bank credit facilities............... 28,300 30,100
Payment of other long-term liabilities.................... (4,440) (3,953)
Acquisition of treasury stock............................. (11,539) (20,372)
Proceeds from stock options exercised..................... 19,316 6,763
Proceeds from issuance of common stock and other.......... (14) 6,088
--------- ---------
Net cash provided by financing activities........... 31,623 18,626
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS........................ (74,525) (124,150)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR................... 96,124 162,283
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 21,599 $ 38,133
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended October 30, 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 nine months ended October 30, 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 NINE MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998
----------------- ----------------- ----------------- -----------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income....................... $10,436 $7,256 $15,657 $13,391
======= ====== ======= =======
DENOMINATOR:
Denominator for basic earnings
per share-weighted average
shares......................... 29,183 29,402 28,838 29,442
Effect of dilutive securities:
Employee stock options......... 1,750 1,202 1,368 1,654
------- ------ ------- -------
Denominator for diluted earnings
per share-weighted average
shares adjusted for dilutive
securities..................... 30,933 30,604 30,206 31,096
======= ====== ======= =======
BASIC EARNINGS PER COMMON SHARE.... $ 0.36 $ 0.25 $ 0.54 $ 0.45
======= ====== ======= =======
DILUTED EARNINGS PER COMMON
SHARE............................ $ 0.34 $ 0.24 $ 0.52 $ 0.43
======= ====== ======= =======
</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 NINE MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES.......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy
expense.......................... 66.3 66.4 67.3 67.2
----- ----- ----- -----
GROSS MARGIN....................... 33.7 33.6 32.7 32.8
Selling, general and administrative
expense.......................... 27.9 28.4 28.4 28.7
Store pre-opening costs............ 0.9 0.7 0.8 0.7
----- ----- ----- -----
OPERATING INCOME................... 4.9 4.5 3.5 3.4
Interest expense................... 1.3 1.5 1.4 1.6
Other (income) and expense, net.... 0.0 (0.1) (0.1) (0.3)
Litigation settlement.............. 0.0 0.0 0.1 0.0
----- ----- ----- -----
INCOME BEFORE INCOME TAXES......... 3.6 3.1 2.1 2.1
Provision for income taxes......... 1.3 1.2 0.8 0.8
----- ----- ----- -----
NET INCOME......................... 2.3% 1.9% 1.3% 1.3%
===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 30, 1999 COMPARED TO THE QUARTER ENDED OCTOBER 31, 1998
Net sales in the third quarter of fiscal 1999 increased $80.2 million, or
21%, over the third quarter of fiscal 1998. At the end of the third quarter of
fiscal 1999, we operated 561 Michaels and 89 Aaron Brothers stores. The results
for the third quarter of fiscal 1999 included sales from 68 Michaels and 13
Aaron Brothers stores that were opened during the 12-month period ended
October 30, 1999, more than offsetting lost sales from 7 Michaels and 1 Aaron
Brothers store closures. Sales at the new stores (net of closures) during the
third quarter of fiscal 1999 accounted for $51.5 million of the increase in net
sales. Same-store sales increased 8% in the third quarter of fiscal 1999
compared to the third quarter of fiscal 1998, which contributed $28.7 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, apparel crafts and ribbon as well as substantial increases in the
Christmas and fall seasonal product categories, more than offsetting the
performance in needlecrafts, hobbies and Halloween product categories. 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.
6
<PAGE>
Cost of sales and occupancy expense, as a percentage of net sales, for the
third quarter of fiscal 1999 was 66.3%, a decrease of 0.1% compared to the third
quarter of fiscal 1998. This decrease was primarily attributable to improved
initial markup on inventories and higher contributions from our custom framing
manufacturing division, partially offset by larger investments in information
system infrastructure and higher occupancy costs associated with new and
relocated stores.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.5% in the third quarter of fiscal 1999 compared to the third
quarter of fiscal 1998. This decrease resulted from improved expense leverage in
store payroll and related expenses and general corporate expenses, partially
offset by an increase in advertising (due principally to the greater number of
store openings) and higher bank fees associated with an increase in the
percentage of sales via credit card.
Store pre-opening costs, as a percentage of net sales, increased by 0.2% in
the third quarter of fiscal 1999 compared to the third quarter of fiscal 1998,
as we opened or relocated 37 Michaels and 10 Aaron Brothers stores in the third
quarter of fiscal 1999 compared to 27 Michaels and 3 Aaron Brothers stores in
the same period of the prior fiscal year.
Operating income, as a percentage of net sales, increased by 0.4% in the
third quarter of fiscal 1999 compared to the same period of the prior fiscal
year. This improvement represented a 32% increase over the prior year, on a 21%
increase in net sales, to $22.6 million for the third quarter of fiscal 1999
compared to $17.1 million for the third quarter of fiscal 1998.
Interest expense (net of interest income), as a percentage of net sales,
decreased by 0.2% in the third quarter of fiscal 1999 compared to the same
period of the prior fiscal year. This decrease resulted from a leveraging of
interest expense on expanded sales, partially offset by lower invested cash
balances in the third quarter of fiscal 1999 compared to the third quarter of
fiscal 1998.
NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
OCTOBER 31, 1998
Net sales in the first nine months of fiscal 1999 increased $177.9 million,
or 17%, over the first nine months of fiscal 1998. The results for the first
nine months of fiscal 1999 included sales from 68 Michaels and 13 Aaron Brothers
stores that were opened during the 12-month period ended October 30, 1999, more
than offsetting lost sales from 7 Michaels and 1 Aaron Brothers store closures.
Sales at the new stores (net of closures) during the first nine months of fiscal
1999 accounted for $121.1 million of the increase in net sales. Same-store sales
increased 6% in the first nine months of fiscal 1999 compared to the first nine
months of fiscal 1998, which contributed $56.8 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,
home decor and books as well as substantial increases in the seasonal product
categories. 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 nine months of fiscal 1999 was 67.3%, an increase of 0.1% compared to the
first nine months of fiscal 1998. This increase was primarily attributable to
larger investments in information system infrastructure and higher occupancy
costs associated with new and relocated stores, partially offset by improved
initial markup on inventories and higher contributions from our custom framing
manufacturing division.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.3% in the first nine months of fiscal 1999 compared to the first
nine months of fiscal 1998. This decrease resulted from improved expense
leverage in store payroll and related expenses, partially offset by higher bank
fees associated with an increase in the percentage of sales via credit card.
7
<PAGE>
Store pre-opening costs, as a percentage of net sales, increased by 0.1% in
the first nine months of fiscal 1999 compared to the first nine months of fiscal
1998, as we opened or relocated 92 Michaels and 15 Aaron Brothers stores
compared to 62 Michaels and 8 Aaron Brothers stores in the same period of the
prior fiscal year.
Operating income, as a percentage of net sales, increased by 0.1% in the
first nine months of fiscal 1999 compared to the first nine months of fiscal
1998. This improvement represented a 19% increase over the same period of the
prior fiscal year, on a 17% increase in net sales, to $42.1 million compared to
$35.3 million in the same period of the prior fiscal year.
Interest expense (net of interest income), as a percentage of net sales,
decreased by 0.1% for the first nine months of fiscal 1999 compared to the first
nine months of fiscal 1998. This decrease resulted from a leveraging of interest
expense on expanded sales, partially offset by lower invested cash balances in
the first nine months of fiscal 1999 compared to the first nine months of fiscal
1998.
On August 5, 1999, we reached an agreement to settle certain outstanding
litigation and, accordingly, we recorded a $1.5 million charge in the second
quarter to reflect the terms of the agreement. The court approved the settlement
on October 19, 1999. Including the litigation settlement charge, net income in
the first nine months of fiscal 1999 was $15.7 million, or $0.52 per share.
Excluding the litigation settlement charge, net income in the first nine months
of fiscal 1999 increased 24% from the prior year to $16.6 million compared to
$13.4 million in the first nine months of fiscal 1998, and diluted earnings per
share was $0.55 per share compared to $0.43 per share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operating activities during the first nine months of
fiscal 1999 was $37.1 million as compared to $100.4 million of cash flow used in
operating activities during the first nine months of fiscal 1998. These results
are indicative of our plan to improve inventory control and reduce average per
store inventories in fiscal 1999. Our inventories have increased 35% since
January 30, 1999, primarily because of the addition of 66 Michaels and 11 Aaron
Brothers stores during the first nine months of fiscal 1999. Inventories per
Michaels store at October 30, 1999 decreased 1% from October 31, 1998. The 1%
decrease in the average inventory per store is less than the 6% reduction
reported at the end of the second quarter due to increased investments over the
prior year in seasonal product. We consider the additional seasonal product to
be a key driver in achieving same-store sales increases in the third and fourth
quarters. Going forward, our plans are to have a decrease of 5% or more in our
fiscal year-end 1999 inventory levels per store.
We opened 66 Michaels and 11 Aaron Brothers stores and relocated 26 Michaels
and 4 Aaron Brothers stores during the first nine months of fiscal 1999. In
March 1999 we acquired leases for 16 stores (15 included in the 66 Michaels
stores noted above), formerly operated by MJDesigns, Inc. ("MJDesigns"). Capital
expenditures for the newly opened stores and the MJDesigns leases amounted to
approximately $48.7 million. Additional capital expenditures of approximately
$20.4 million during the first nine 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 $25 million, related primarily to costs for new stores, store
relocations and remodeling, information systems, and various other projects.
In the third quarter of fiscal 1999, pursuant to a stock repurchase program
approved by the Board of Directors in July 1999 to acquire up to 5 million
shares of our Common Stock, we repurchased 364,000 shares for an aggregate
purchase price of $11.5 million and placed the shares in treasury.
In the first nine months of fiscal 1999, proceeds from the exercise of
employee stock options covering 1,143,821 shares of our Common Stock amounted to
$19.3 million.
8
<PAGE>
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 October 30, 1999, we had working capital of $385.4 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. Borrowings under the
bank credit agreement were $28.3 million at October 30, 1999 compared to
$30.1 million at October 31, 1998.
IMPACT OF THE YEAR 2000
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 was established to oversee, monitor and coordinate the
Company-wide Year 2000 efforts. An experienced consulting firm was engaged to
provide objective project management and technical expertise to assist us in the
completion of the project.
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.
Our information systems include proprietary and third party application systems
and related hardware, software and data and telephone networks. We believe that
our internal information systems are Year 2000 compliant in all material
respects.
We have 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 presently believe that the most reasonably likely worst case scenario
concerning the Year 2000 is that some merchandise vendors and service providers
will not be Year 2000 compliant and will be unable to deliver merchandise and
services in a timely manner. We believe that our geographically dispersed retail
stores, distribution centers and large supplier base will significantly mitigate
any adverse impact from suppliers' delays or failures, but that we remain
vulnerable to (i) delays in deliveries by some suppliers, (ii) disruption of the
components of our supply and distribution chain, including ports, trucking and
air freight services, and (iii) local or regional facilities shutdown as a
result of problems with infrastructure such as power, water and sewer service.
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 did not build up substantial increases
in inventory as a contingency measure. We have 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 achieve Year 2000 compliance on a timely basis. We believe that
such problems and costs will not be material.
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
9
<PAGE>
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) were
approximately $2.8 million in fiscal 1998 and the first nine months of fiscal
1999. In addition, we accelerated the planned development of new information
systems with improved business functionality to replace systems that were not
Year 2000 compliant. These new information systems were implemented in the third
quarter of fiscal 1999. The cost of these new information systems was
approximately $4.8 million. All of these costs have been 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.
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.
10
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
PART II--OTHER INFORMATION
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 October 30, 1999.
11
<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.
<TABLE>
<S> <C> <C>
MICHAELS STORES, INC.
By: /s/ BRYAN M. DECORDOVA
-----------------------------------------
Bryan M. DeCordova
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Dated: December 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 NINE
MONTHS ENDED OCTOBER 30, 1999
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> AUG-01-1999 JAN-31-1999
<PERIOD-END> OCT-30-1999 OCT-30-1999
<CASH> 21,599 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 675,893 0
<CURRENT-ASSETS> 727,156 0
<PP&E> 451,061 0
<DEPRECIATION> 210,585 0
<TOTAL-ASSETS> 1,096,399 0
<CURRENT-LIABILITIES> 341,777 0
<BONDS> 221,940 0
0 0
0 0
<COMMON> 3,085 0
<OTHER-SE> 507,010 0
<TOTAL-LIABILITY-AND-EQUITY> 1,096,399 0
<SALES> 463,034 1,210,702
<TOTAL-REVENUES> 463,034 1,210,702
<CGS> 307,270 814,676
<TOTAL-COSTS> 440,445 1,168,636
<OTHER-EXPENSES> (134) 35
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,891 16,778
<INCOME-PRETAX> 16,832 25,253
<INCOME-TAX> 6,396 9,596
<INCOME-CONTINUING> 10,436 15,657
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,436 15,657
<EPS-BASIC> 0.36 0.54
<EPS-DILUTED> 0.34 0.52
</TABLE>
