<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<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 28, 2000
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
------------------------
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1943604
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
</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>
<CAPTION>
SHARES OUTSTANDING AS OF
TITLE DECEMBER 8, 2000
----- ------------------------
<S> <C>
Common Stock, par value $.10 per share 32,504,444
</TABLE>
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--------------------------------------------------------------------------------
<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 28, JANUARY 29,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 24,079 $ 77,398
Merchandise inventories................................... 760,230 615,065
Prepaid expenses and other................................ 22,659 19,026
Deferred income taxes and income taxes receivable......... 12,153 11,498
---------- ----------
Total current assets.................................... 819,121 722,987
---------- ----------
PROPERTY AND EQUIPMENT, AT COST............................. 519,276 455,285
Less accumulated depreciation............................... (249,599) (209,552)
---------- ----------
269,677 245,733
---------- ----------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET... 122,198 124,766
OTHER ASSETS................................................ 5,663 3,217
---------- ----------
127,861 127,983
---------- ----------
Total assets................................................ $1,216,659 $1,096,703
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 190,065 $ 124,828
Accrued liabilities and other............................. 152,584 136,375
Borrowings under the Credit Agreement..................... 10,200 --
Income taxes payable...................................... 3,352 9,773
---------- ----------
Total current liabilities............................... 356,201 270,976
---------- ----------
SENIOR NOTES................................................ 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES.............................. -- 96,940
DEFERRED INCOME TAXES....................................... 17,990 17,990
OTHER LONG-TERM LIABILITIES................................. 21,788 18,999
---------- ----------
Total long-term liabilities............................. 164,778 258,929
---------- ----------
520,979 529,905
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 150,000,000 shares
authorized; 34,058,598 and 31,573,113 shares issued,
respectively............................................ 3,406 3,157
Additional paid-in capital................................ 468,254 401,414
Retained earnings......................................... 224,020 194,138
Treasury stock, at cost, no shares and 1,509,000 shares,
respectively............................................ -- (31,911)
---------- ----------
Total stockholders' equity.............................. 695,680 566,798
---------- ----------
Total liabilities and stockholders' equity.................. $1,216,659 $1,096,703
========== ==========
</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 28, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES................................................... $526,504 $463,034
Cost of sales and occupancy expense......................... 344,831 307,270
-------- --------
GROSS PROFIT................................................ 181,673 155,764
Selling, general and administrative expense................. 148,258 129,099
Store pre-opening costs..................................... 3,643 4,076
-------- --------
OPERATING INCOME............................................ 29,772 22,589
Interest expense............................................ 3,794 5,891
Other (income) and expense, net............................. (622) (134)
-------- --------
INCOME BEFORE INCOME TAXES.................................. 26,600 16,832
Provision for income taxes.................................. 10,640 6,396
-------- --------
NET INCOME.................................................. $ 15,960 $ 10,436
======== ========
EARNINGS PER COMMON SHARE:
Basic..................................................... $ 0.45 $ 0.36
======== ========
Diluted................................................... $ 0.44 $ 0.34
======== ========
</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 28, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES................................................... $1,437,444 $1,210,702
Cost of sales and occupancy expense......................... 951,946 814,676
---------- ----------
GROSS PROFIT................................................ 485,498 396,026
Selling, general and administrative expense................. 412,987 344,407
Store pre-opening costs..................................... 8,591 9,553
---------- ----------
OPERATING INCOME............................................ 63,920 42,066
Interest expense............................................ 14,172 16,778
Other (income) and expense, net............................. (2,458) (1,465)
Litigation settlement....................................... -- 1,500
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 52,206 25,253
Provision for income taxes.................................. 20,883 9,596
---------- ----------
NET INCOME.................................................. $ 31,323 $ 15,657
========== ==========
EARNINGS PER COMMON SHARE:
Basic..................................................... $ 0.94 $ 0.54
========== ==========
Diluted................................................... $ 0.90 $ 0.52
========== ==========
</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 28, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 31,323 $ 15,657
Adjustments:
Depreciation............................................ 45,450 38,672
Amortization............................................ 3,085 3,129
Other................................................... 874 700
Change in assets and liabilities, excluding
acquisitions:
Merchandise inventories............................... (144,139) (174,654)
Prepaid expenses and other............................ (3,633) (4,702)
Deferred income taxes and other....................... 245 (3,311)
Accounts payable...................................... 65,237 72,276
Income taxes payable.................................. 3,416 (4,526)
Accrued liabilities and other......................... 19,337 19,638
--------- ---------
Net change in assets and liabilities................ (59,537) (95,279)
--------- ---------
Net cash provided by (used in) operating
activities........................................ 21,195 (37,121)
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment....................... (68,185) (69,121)
Net proceeds from sales of property and equipment......... 108 94
Acquisitions.............................................. (2,182) --
--------- ---------
Net cash used in investing activities............... (70,259) (69,027)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings under the Credit Agreement................. 10,200 28,300
Payment of other long-term liabilities.................... (4,341) (4,440)
Redemption of convertible subordinated notes.............. (4,206) --
Acquisition of treasury stock............................. (95,575) (11,539)
Proceeds from stock options exercised..................... 89,027 19,316
Proceeds from issuance of common stock and other.......... 640 (14)
--------- ---------
Net cash (used in) provided by financing
activities........................................ (4,255) 31,623
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS........................ (53,319) (74,525)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 77,398 96,124
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 24,079 $ 21,599
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended October 28, 2000
(Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 29, 2000) 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 28, 2000 are
not indicative of the results to be expected for the entire year. 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 fiscal year ended January 29, 2000.
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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income...................................... $15,960 $10,436 $31,323 $15,657
======= ======= ======= =======
DENOMINATOR:
Denominator for basic earnings per
share-weighted average shares................. 35,673 29,183 33,435 28,838
Effect of dilutive securities:
Employee stock options........................ 810 1,750 1,304 1,368
------- ------- ------- -------
Denominator for diluted earnings per
share-weighted average shares adjusted for
dilutive securities........................... 36,483 30,933 34,739 30,206
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE................... $ 0.45 $ 0.36 $ 0.94 $ 0.54
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE................. $ 0.44 $ 0.34 $ 0.90 $ 0.52
======= ======= ======= =======
</TABLE>
The Company's purchase and subsequent retirement of 2,907,700 shares of its
common stock ("Common Stock") in the third quarter of fiscal 2000 reduced the
number of weighted average shares outstanding by 1,012,351 shares for the third
quarter of fiscal 2000 and 337,450 shares for the first nine months of fiscal
2000.
6
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended October 28, 2000
(Unaudited)
NOTE C--REDEMPTION OF THE CONVERTIBLE SUBORDINATED NOTES
On June 9, 2000, the Company called for the redemption on June 29, 2000 of
the convertible subordinated notes due January 15, 2003 (the "Securities"). The
aggregate principal amount of the Securities outstanding was $96,935,000. The
holders had the option to convert their Securities into shares of Common Stock
prior to 5:00 p.m., Eastern Time, on June 22, 2000, at a price of $38.00 per
share. Alternatively, holders could have their Securities redeemed on June 29,
2000 at a total redemption price of $1,051.25 per $1,000 principal amount of
Securities, including a premium for early redemption and accrued interest.
As a result, the majority of the Securities were surrendered by the
June 22, 2000 conversion date and were converted into 2,445,565 shares of Common
Stock. The remaining Securities were redeemed at a total redemption price of
$4,206,051 on June 29, 2000. The loss from the redemption was not material.
NOTE D--LEGAL PROCEEDINGS
On May 2, 2000, Taiyeb Raniwala, a former assistant manager of the Company,
filed a purported class action complaint (the "Raniwala Complaint") against the
Company, on behalf of the Company's former and current assistant store managers.
The Raniwala Complaint was filed in the Alameda County Superior Court and
alleges the Company violated certain California laws by erroneously treating its
assistant store managers as "exempt" employees who are not entitled to overtime
compensation. The Raniwala Complaint seeks back wages, interest, penalties and
attorneys' fees. A hearing for class certification is currently scheduled for
June 29, 2001, and a trial is tentatively scheduled for February 25, 2002. The
case is in the early phase of discovery. Although the Company believes it has
certain meritorious defenses and intends to defend this lawsuit vigorously,
there can be no assurance that it will be successful in such defense or that
there will not be a materially adverse impact on the future operating results by
the final resolution of the lawsuit.
On April 14, 1999, Suzanne Collins, a former assistant manager of the
Company's subsidiary, Aaron Brothers, Inc. ("Aaron Brothers"), filed a class
action complaint (the "Collins Complaint") against Aaron Brothers on behalf of
Aaron Brothers' former store managers, assistant store managers and
managers-in-training. The Collins Complaint was filed in Los Angeles County
Superior Court and alleges that Aaron Brothers violated certain California laws
by erroneously treating its store managers, assistant store managers and
managers-in-training as "exempt" employees who are not entitled to overtime
compensation. The Collins Complaint seeks back wages, interest, penalties and
attorneys' fees. A hearing for class certification is currently scheduled for
March 22, 2001. A trial date has not yet been scheduled. The case is currently
in the discovery phase. Although Aaron Brothers believes it has certain
meritorious defenses and intends to defend this lawsuit vigorously, there can be
no assurance that it will be successful in such defense or that there will not
be a materially adverse impact on the future operating results by the final
resolution of the lawsuit.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the litigation described above,
is uncertain, and there can be no assurance that future costs of such litigation
would not be material to the Company's financial position or results of
operations.
7
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the Nine Months Ended October 28, 2000
(Unaudited)
NOTE E--NEW ACCOUNTING PRONOUNCEMENTS
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which is effective for fiscal years beginning after December 15,
1999. SAB No. 101 provides guidance on the recognition, presentation, and
disclosures of revenue in the financial statements. Implementation of SAB
No. 101 will result in a change in the Company's revenue recognition policy with
respect to the sale of custom frames. Historically, the Company has recognized
revenue for the sale of custom frames at the time the customer orders the frame.
The Company will begin recognizing the sale of custom frames at the time the
frame is picked up by the customer. The change in the Company's revenue
recognition policy for the sale of custom frames will be reported as a
cumulative effect of a change in accounting principle in the Company's
Statements of Income included in its Annual Report on Form 10-K for the fiscal
year ended February 3, 2001. The Company does not believe that the change in the
revenue recognition policy for custom frame orders will have a material impact
on its future operating results.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
accounting treatment for certain types of hedging activities. In July 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which
postponed the effective date of SFAS No. 133 for one year. The Company will
adopt the requirements of SFAS No. 133 in its fiscal year beginning February 4,
2001. The Company currently believes the adoption of SFAS No. 133 will have no
material impact on its operating results or financial position.
8
<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, 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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy expense................... 65.5 66.3 66.2 67.3
----- ----- ----- -----
GROSS PROFIT.......................................... 34.5 33.7 33.8 32.7
Selling, general and administrative expense........... 28.2 27.9 28.7 28.4
Store pre-opening costs............................... 0.7 0.9 0.7 0.8
----- ----- ----- -----
OPERATING INCOME...................................... 5.6 4.9 4.4 3.5
Interest expense...................................... 0.7 1.3 1.0 1.4
Other (income) and expense, net....................... (0.1) (0.0) (0.2) (0.1)
Litigation settlement................................. -- -- -- 0.1
----- ----- ----- -----
INCOME BEFORE INCOME TAXES............................ 5.0 3.6 3.6 2.1
Provision for income taxes............................ 2.0 1.3 1.4 0.8
----- ----- ----- -----
NET INCOME............................................ 3.0% 2.3% 2.2% 1.3%
===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 28, 2000, COMPARED WITH THE QUARTER ENDED OCTOBER 30, 1999
Net sales for the three months ended October 28, 2000 increased
$63.5 million, or 14%, over the three months ended October 30, 1999. At the end
of the third quarter of fiscal 2000, we operated 622 Michaels and 113 Aaron
Brothers stores. The results for the third quarter of fiscal 2000 included sales
from 67 Michaels and 24 Aaron Brothers stores that were opened and a wholesale
operation that was acquired during the 12-month period ended October 28, 2000,
more than offsetting lost sales from 7 Michaels and no Aaron Brothers store
closures. Sales at the new stores (net of closures) and the acquired wholesale
operation during the third quarter of fiscal 2000 accounted for $51.6 million of
the increase in net sales. Same-store sales increased 3% in the third quarter of
fiscal 2000 compared to the third quarter of fiscal 1999, which contributed
$11.9 million to the net sales increase. The improvement in same-store sales was
due to a strong performance in our core categories of ribbon, general crafts,
art supplies, seasonal and framing. Going forward, we expect to achieve
same-store sales increases for the remainder of fiscal 2000, taken as a whole.
Our ability to continue to generate same-store sales increases is dependent, in
part, on our ability to continue to maintain 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.
9
<PAGE>
Cost of sales and occupancy expense, as a percentage of net sales, for the
third quarter of fiscal 2000 was 65.5%, a decrease of 0.8% compared to the third
quarter of fiscal 1999. This decrease was primarily attributable to improved
initial markup on inventories and improvements from our promotional strategy
resulting in a decrease in promotional markdowns, partially offset by higher
occupancy costs associated with new and relocated stores.
Selling, general and administrative expense, as a percentage of net sales,
increased by 0.3% in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999. This increase resulted principally from expenses
associated with our supply chain initiative and increased store payroll and
related expenses, as a percentage of net sales, partially offset by improved
expense leverage in advertising expenses.
Store pre-opening costs, as a percentage of net sales, decreased by 0.2% in
the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999,
as we opened, acquired or relocated 33 Michaels and 11 Aaron Brothers stores in
the third quarter of fiscal 2000 compared to 37 Michaels and 10 Aaron Brothers
stores in the third quarter of fiscal 1999.
Operating income, as a percentage of net sales, increased by 0.7% in the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. This
improvement represents a 32% increase in operating income over the third quarter
of fiscal 1999, on a 14% increase in net sales during the same period, to
$29.8 million for the third quarter of fiscal 2000 compared to $22.6 million for
the third quarter of fiscal 1999.
Interest expense (net of interest income), as a percentage of net sales,
decreased by 0.6% in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999. This decrease resulted from a leveraging of interest
expense on expanded sales and the conversion and redemption of the convertible
subordinated notes in June 2000.
The effective tax rate for the third quarter of fiscal 2000 was 40% compared
with 38% in the third quarter of fiscal 1999 due to the Company's reduction in
the valuation allowance for net operating losses utilized in fiscal 1999.
NINE MONTHS ENDED OCTOBER 28, 2000, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 30, 1999
Net sales for the nine months ended October 28, 2000 increased
$226.7 million, or 19%, over the nine months ended October 30, 1999. At the end
of the first nine months of fiscal 2000, we operated 622 Michaels and 113 Aaron
Brothers stores. The results for the first nine months of fiscal 2000 included
sales from 67 Michaels and 24 Aaron Brothers stores that were opened and a
wholesale operation that was acquired during the 12-month period ended
October 28, 2000, more than offsetting lost sales from 7 Michaels and no Aaron
Brothers store closures. Sales at the new stores (net of closures) and the
acquired wholesale operation during the first nine months of fiscal 2000
accounted for $160.7 million of the increase in net sales. Same-store sales
increased 6% in the first nine months of fiscal 2000 compared to the first nine
months of fiscal 1999, which contributed $66.0 million to the net sales
increase. The improvement in same-store sales was due to a strong performance in
our core categories of ribbon, general crafts, art supplies, seasonal and
framing.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first nine months of fiscal 2000 was 66.2%, a decrease of 1.1% compared to the
first nine months of fiscal 1999. This decrease was primarily attributable to
improved initial markup on inventories and improvements from our promotional
strategy resulting in a decrease in promotional markdowns, partially offset by
higher occupancy costs associated with new and relocated stores.
Selling, general and administrative expense, as a percentage of net sales,
increased by 0.3% in the first nine months of fiscal 2000 compared to the first
nine months of fiscal 1999. This increase resulted principally from expenses
associated with our supply chain initiative and increased store payroll and
10
<PAGE>
related expenses, as a percentage of net sales, partially offset by improved
expense leverage in advertising, depreciation and amortization expenses.
Store pre-opening costs, as a percentage of net sales, decreased by 0.1% in
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999, as we opened, acquired or relocated 82 Michaels and 21 Aaron Brothers
stores in the first nine months of fiscal 2000 compared to 92 Michaels and
15 Aaron Brothers stores in the first nine months of fiscal 1999.
Operating income, as a percentage of net sales, increased by 0.9% in the
first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. This improvement represents a 52% increase in operating income over the
first nine months of fiscal 1999, on a 19% increase in net sales during the same
period, to $63.9 million for the first nine months of fiscal 2000 compared to
$42.1 million for the first nine months of fiscal 1999.
Interest expense (net of interest income), as a percentage of net sales,
decreased by 0.5% in the first nine months of fiscal 2000 compared to the first
nine months of fiscal 1999. This decrease resulted from a leveraging of interest
expense on expanded sales and the conversion and redemption of the convertible
subordinated notes in June 2000.
The effective tax rate for the first nine months of fiscal 2000 was 40%
compared with 38% in the first nine months of fiscal 1999 due to the Company's
reduction in the valuation allowance for net operating losses utilized in fiscal
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities during the first nine months of
fiscal 2000 was $21.2 million, compared with cash flow used in operating
activities of $37.1 million during the first nine months of fiscal 1999. This
improvement of $58.3 million was principally due to increased net income and
lower purchases of merchandise inventories for the first nine months of fiscal
2000 compared with the first nine months of fiscal 1999. Inventories per
Michaels store of $1,169,000 at October 28, 2000 increased slightly from
$1,164,000 at October 30, 1999. Our plans are to continue to refine our basic
inventory levels carried in our distribution centers and stores. By year-end, we
believe our per store inventories will be approximately 5% below fiscal
1999 year-end levels.
We opened 64 Michaels and 18 Aaron Brothers stores and relocated
17 Michaels and 3 Aaron Brothers stores during the first nine months of fiscal
2000. Capital expenditures for the newly opened stores amounted to approximately
$45.8 million. Additional capital expenditures of approximately $22.4 million
during the first nine months of fiscal 2000 related primarily to existing stores
and various information systems enhancements. We expect additional capital
expenditures during the remainder of fiscal 2000 to total approximately
$58.8 million, primarily related to costs for new stores, store relocations and
remodeling, distribution facilities, information systems, and various other
projects.
In fiscal 1998, we repurchased and placed in treasury 1,145,000 shares of
our common stock ("Common Stock") for an aggregate purchase price of
$20.4 million. Pursuant to a plan approved by the Board of Directors in
July 1999 to repurchase up to 5,000,000 shares of Common Stock, in fiscal 1999,
we repurchased and placed in treasury 364,000 shares of Common Stock for an
aggregate purchase price of $11.5 million. In the first quarter of fiscal 2000,
we retired all of the Common Stock held in treasury. Subsequent to the first
quarter of fiscal 2000, through December 8, 2000, we repurchased
4,477,700 shares of Common Stock pursuant to the 1999 repurchase plan for an
aggregate purchase price of $134.9 million (average of $30.14 per share), of
which 3,772,700 shares have been retired.
11
<PAGE>
On June 9, 2000, the Company called for the redemption on June 29, 2000 of
the convertible subordinated notes due January 15, 2003 (the "Securities"). The
aggregate principal amount of the Securities outstanding was $96,935,000. The
holders had the option to convert their Securities into shares of Common Stock
by June 22, 2000, at a price of $38.00 per share. Alternatively, holders could
have their Securities redeemed on June 29, 2000 at a total redemption price of
$1,051.25 per $1,000 principal amount of Securities, including a premium for
early redemption and accrued interest. The majority of the Securities were
surrendered by the June 22, 2000 conversion date and converted into
2,445,565 shares of Common Stock. The remaining Securities were redeemed at a
total redemption price of $4.2 million on June 29, 2000. The loss from the
redemption was not material.
In the first nine months of fiscal 2000, proceeds from the exercise of
employee stock options covering 4,436,268 shares of Common Stock amounted to
$89.0 million.
At October 28, 2000, we had working capital of $462.9 million, compared to
$452.0 million at January 29, 2000. We currently have a bank credit facility
(the "Credit Agreement") providing for an unsecured revolving line of credit of
$100 million, which may be increased to $125 million under specific conditions.
Borrowings outstanding under the Credit Agreement were $10.2 million as of
October 28, 2000 and $28.3 million as of October 30, 1999. We believe that our
available cash, funds generated by operating activities, funds available under
our Credit Agreement, and proceeds from the exercise of stock options will be
sufficient to fund anticipated capital expenditures and working capital
requirements.
12
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 2, 2000, Taiyeb Raniwala, a former assistant manager of the Company,
filed a purported class action complaint (the "Raniwala Complaint") against the
Company, on behalf of the Company's former and current assistant store managers.
The Raniwala Complaint was filed in the Alameda County Superior Court and
alleges the Company violated certain California laws by erroneously treating its
assistant store managers as "exempt" employees who are not entitled to overtime
compensation. The Raniwala Complaint seeks back wages, interest, penalties and
attorneys' fees. A hearing for class certification is currently scheduled for
June 29, 2001, and a trial is tentatively scheduled for February 25, 2002. The
case is in the early phase of discovery. Although the Company believes it has
certain meritorious defenses and intends to defend this lawsuit vigorously,
there can be no assurance that it will be successful in such defense or that
there will not be a materially adverse impact on the future operating results by
the final resolution of the lawsuit.
On April 14, 1999, Suzanne Collins, a former assistant manager of the
Company's subsidiary, Aaron Brothers, Inc. ("Aaron Brothers"), filed a class
action complaint (the "Collins Complaint") against Aaron Brothers on behalf of
Aaron Brothers' former store managers, assistant store managers and
managers-in-training. The Collins Complaint was filed in Los Angeles County
Superior Court and alleges that Aaron Brothers violated certain California laws
by erroneously treating its store managers, assistant store managers and
managers-in-training as "exempt" employees who are not entitled to overtime
compensation. The Collins Complaint seeks back wages, interest, penalties and
attorneys' fees. A hearing for class certification is currently scheduled for
March 22, 2001. A trial date has not yet been scheduled. The case is currently
in the discovery phase. Although Aaron Brothers believes it has certain
meritorious defenses and intends to defend this lawsuit vigorously, there can be
no assurance that it will be successful in such defense or that there will not
be a materially adverse impact on the future operating results by the final
resolution of the lawsuit.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the litigation described above,
is uncertain, and there can be no assurance that future costs of such litigation
would not be material to the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2000 Annual Meeting of Stockholders of the Company was held on
September 13, 2000. 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
August 11, 2000 under the caption titled "Proposal No. 1: Election of Two
Directors" as follows:
<TABLE>
<CAPTION>
TOTAL VOTE
TOTAL VOTE FOR WITHHELD
EACH FROM EACH BROKER
NAME DIRECTOR DIRECTOR ABSTENTIONS NON-VOTES
---- -------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Sam Wyly.......................................... 31,328,255 907,346 -- --
Richard C. Marcus................................. 31,871,678 363,923 -- --
</TABLE>
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Bylaws of the Registrant, as amended and restated.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October 28,
2000.
14
<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 12, 2000
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------ ----
<C> <S> <C>
3.1 Bylaws of the Registrant, as amended and restated.
27 Financial Data Schedule
</TABLE>
16
