EXHIBIT 13
FINANCIAL HIGHLIGHTS
FISCAL YEAR
---------------------------------------------------------------
1993 1992 1991 1990(1) 1989
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AND STORE DATA)
Results of Operations:
Net sales..................................... $ 619,688 $ 493,159 $ 410,899 $ 362,028 $ 289,754
Operating income.............................. 41,356 34,263 25,643 20,694 14,900
Income before extraordinary item.............. 26,287 20,378 10,739 5,855 13
Earnings per share............................ 1.52 1.21 .87 .57 .00
Stores Open at End of Period.................... 220 168 140 137 122
Balance Sheet Data:
Currents assets............................... $ 291,012 $ 170,021 $ 125,873 $ 84,572 $ 92,133
Total assets.................................. 397,830 322,099 180,913 144,238 150,817
Working capital............................... 181,816 104,462 74,786 44,080 58,680
Long-term debt................................ 97,750 97,750 -- 52,983 73,168
Total liabilities............................. 212,415 166,822 54,614 97,623 110,440
Shareholders' equity.......................... 185,415 155,277 126,299 46,615 40,377
<FN>
- - ------------------------
(1) Fiscal 1990 was a 53-week fiscal year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
In fiscal years 1991, 1992 and 1993, the Company added 4, 28 and 54 stores,
respectively. During these periods, the Company obtained a substantial portion
of its sales increases from stores added during, or subsequent to, the prior
comparable period and thus not yet included in comparable store sales
comparisons. During these periods, sales from these newer stores accounted for
approximately 55%, 56% and 88%, respectively, of aggregate sales increases. The
Company intends to add approximately 70 to 75 stores in fiscal 1994, of which
nine stores have been opened and 25 stores have been added through acquisitions.
In fiscal 1994 and beyond, sales increases from newly opened and acquired stores
will depend in part on the availability of suitable store sites, the rate of
development of new stores, the availability of suitable acquisition candidates,
and the Company's ability to hire and train qualified managers.
RESULTS OF OPERATIONS
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Income represents. This table should be read in
conjunction with the following discussion and with the Company's Consolidated
Financial Statements, including the related notes.
FISCAL YEAR
--------------------------------
1993 1992 1991
-------- -------- --------
Net sales....................................................................... 100.0% 100.0% 100.0%
-------- -------- --------
Cost of sales and occupancy expense............................................. 65.2 65.6 66.8
Selling, general and administrative expense..................................... 28.1 27.5 27.0
-------- -------- --------
Operating income................................................................ 6.7 6.9 6.2
Interest expense................................................................ 1.0 0.0 1.7
Other (income) and expense, net................................................. (1.2) 0.1 0.2
-------- -------- --------
Income before income taxes and extraordinary item............................... 6.9 6.8 4.3
Provision for income taxes...................................................... 2.7 2.7 1.7
-------- -------- --------
Income before extraordinary item................................................ 4.2 4.1 2.6
Extraordinary item.............................................................. 0.0 0.0 0.9
-------- -------- --------
Net income...................................................................... 4.2% 4.1% 1.7%
-------- -------- --------
-------- -------- --------
In the discussion below, all percentages given for expense items are
calculated as a percentage of sales for the applicable year.
FOR FISCAL 1993 COMPARED TO FISCAL 1992
Net sales in the fiscal year ended January 30, 1994 ("1993"), increased
$126.5 million, or 26%, over the fiscal year ended January 31, 1993 ("1992").
The results for 1993 included sales of 54 stores added during the year. During
1993, sales of the newer stores (not included in comparable store sales)
accounted for $111.3 million of the increase. Comparable store sales increased
three percent in 1993 compared to the prior year.
Cost of sales and occupancy expense for 1993 decreased by 0.4% compared to
1992 due primarily to increases in sales of higher margin custom framing and
floral services, an improvement in the gross margin achieved on seasonal
merchandise sales, greater margin contributions from new stores, and
20
an increase in volume discounts from vendors. This improvement in gross margin
was partially offset by an increase in occupancy expenses driven by the
Company's shift to new stores with higher average selling square footage than
existing stores, coupled with the Company's expansion into states with higher
occupancy costs such as New York, Ohio, Minnesota and Michigan.
Selling, general and administrative expense increased by 0.6% in 1993 from
1992. The increase was due to expenses associated with the Company's new store
opening program and additional payroll attributed to the increase in custom
framing and floral services, offset in part by a decrease in general and
administrative expenditures, as a percentage of sales, which were spread over a
larger revenue base in 1993.
Interest expense for 1993 was $6.4 million compared to $0.3 million in 1992.
The increase was due primarily to the issuance of convertible subordinated debt
in January 1993.
Other income (net of other expense) was $7.7 million in 1993 compared to
other expense of $0.5 million in 1992, as the Company earned substantial
interest, dividends and capital gains on its investment portfolio during 1993.
Due to planned expansion activity, the average investment portfolio is expected
to decrease during 1994, resulting in less investment income.
The effective tax rate was reduced to 38.4% in 1993 from 39.1% in 1992
primarily due to the Company's investments in tax-advantaged securities.
FOR FISCAL 1992 COMPARED TO FISCAL 1991
Net sales in 1992 increased $82.3 million, or 20%, over the fiscal year
ended February 2, 1992 ("1991"). The results for 1992 included sales of 28
stores added during the year. During 1992, sales of the newer stores (not
included in comparable store sales) accounted for $45.7 million of the increase.
Comparable store sales increased approximately seven percent in 1992 compared to
the prior year. The Company attributed the increase in comparable store sales
primarily to increased advertising and increased sales of Halloween, Fall and
Christmas merchandise.
Cost of sales and occupancy expense for 1992 decreased by 1.2% compared to
1991 due primarily to lower distribution costs, more favorable purchase prices
from vendors and continuing efforts to improve inventory management and control.
Selling, general and administrative expense increased by 0.5% in 1992 from
1991. The increase was primarily attributable to a more extensive advertising
program, particularly in certain markets in which new stores were opened.
Another factor contributing to the increase was the pre-opening expenses for the
24 stores opened during 1992, compared to pre-opening expenses for only four
stores for the prior year. These increases were offset in part by a decrease in
general and administrative expenditures, as a percentage of sales, which were
spread over a larger revenue base in 1992.
Interest expense for 1992 was $0.3 million compared to $7.0 million in 1991.
The decrease resulted from the retirement of all long-term borrowings at the end
of 1991.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company added 54 new stores during 1993. Expenditures for property and
equipment amounted to approximately $46.8 million during 1993; such expenditures
related primarily to the 54 new store openings, and, to a lesser extent, the
remodeling, expansion and relocation of certain existing stores.
The Company plans to add approximately 70 to 75 stores in fiscal 1994,
including Craft and Floral Warehouse ("CFW") stores, additional stores in
Canada, and stores acquired through acquisitions. The Company anticipates the
costs of adding stores (excluding CFW stores) to be approximately $300,000 to
$400,000 per store, which includes furniture, fixtures, equipment, and
pre-opening expenses. Leasehold improvement costs tend to vary among locations.
The inventory investment associated with the typical new store will range from
approximately $400,000 to $600,000 depending on the store size, operating
format, and date opened; however, due to the Company's typical payment terms and
inventory turnover, the Company's vendors, in effect, finance a significant
component of this initial inventory investment. The Company also expects to
spend approximately $10 million on store renovation, the development of new
point-of-sale and merchandising systems, and the expansion of distribution
facilities in fiscal 1994.
The Company currently has a $50 million line of credit (which expires on
April 30, 1994), and is negotiating with its principal lender on a new $100
million line of credit to replace the current line.
As of January 30, 1994, the Company had working capital of $181.8 million,
compared to $104.5 million at January 31, 1993. Working capital at March 27,
1994 was $181.7 million. Management believes that the Company has sufficient
working capital (including marketable and other securities of approximately $68
million), cash flow from operating activities, and access to credit to sustain
current growth plans.
OTHER MATTERS
The Company's business is seasonal in nature with higher store sales in the
third and fourth quarters. Historically, the fourth quarter, which includes the
Christmas selling season, has accounted for approximately 35% of the Company's
sales and approximately 50% of its operating income.
Management considers the effect of inflation on 1993 results and its
projected effect on fiscal 1994 financial results to be nominal.
See Notes to Consolidated Financial Statements regarding Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
22
MICHAELS STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
ASSETS
Current assets:
Cash and equivalents......................................................... $ 867 $ 42,075
Marketable and other securities.............................................. 67,956 --
Merchandise inventories...................................................... 206,185 118,300
Prepaid expenses and other................................................... 16,004 9,646
--------------- ---------------
Total current assets..................................................... 291,012 170,021
--------------- ---------------
Property and equipment, at cost................................................ 119,555 73,255
Less accumulated depreciation................................................ (43,683) (32,740)
--------------- ---------------
75,872 40,515
--------------- ---------------
Costs in excess of net assets of acquired operations, net...................... 23,503 24,223
Long-term investment portfolio................................................. -- 81,633
Other assets................................................................... 7,443 5,707
--------------- ---------------
30,946 111,563
--------------- ---------------
$ 397,830 $ 322,099
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 42,309 $ 30,764
Short-term bank debt......................................................... 13,000 --
Income taxes payable......................................................... 7,866 4,562
Accrued liabilities and other................................................ 46,021 30,233
--------------- ---------------
Total current liabilities................................................ 109,196 65,559
--------------- ---------------
Convertible subordinated notes................................................. 97,750 97,750
Deferred income taxes and other................................................ 5,469 3,513
--------------- ---------------
Total long-term liabilities.............................................. 103,219 101,263
--------------- ---------------
212,415 166,822
--------------- ---------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value, 2,000,000 shares authorized, none issued.... -- --
Common stock, $.10 par value, 50,000,000 shares authorized, 16,697,357 issued
and outstanding (16,474,330 in fiscal 1992)................................. 1,670 1,647
Additional paid-in capital................................................... 107,168 103,340
Retained earnings............................................................ 76,577 50,290
--------------- ---------------
Total shareholders' equity............................................... 185,415 155,277
--------------- ---------------
$ 397,830 $ 322,099
--------------- ---------------
--------------- ---------------
See accompanying notes to consolidated financial statements.
23
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEAR
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Net sales.................................................................. $ 619,688 $ 493,159 $ 410,899
----------- ----------- -----------
Cost of sales and occupancy expense........................................ 403,869 323,577 274,375
Selling, general and administrative expense................................ 174,463 135,319 110,881
----------- ----------- -----------
Operating income........................................................... 41,356 34,263 25,643
Interest expense........................................................... 6,378 263 6,971
Other (income) and expense,net............................................. (7,666) 538 913
----------- ----------- -----------
Income before income taxes and extraordinary item.......................... 42,644 33,462 17,759
Provision for income taxes................................................. 16,357 13,084 7,020
----------- ----------- -----------
Income before extraordinary item........................................... 26,287 20,378 10,739
Extraordinary item -- early redemption of debt, net of income tax of
$2,335.................................................................... -- -- 3,843
----------- ----------- -----------
Net income................................................................. $ 26,287 $ 20,378 $ 6,896
----------- ----------- -----------
----------- ----------- -----------
Earnings per common and common equivalent share:
Income before extraordinary item........................................... $ 1.53 $ 1.22 $ .90
Net income................................................................. 1.53 1.22 .58
Earnings per common share -- assuming full dilution:
Income before extraordinary item........................................... 1.52 1.21 .87
Net income................................................................. 1.52 1.21 .56
Weighted average common and common equivalent shares outstanding........... 17,231 16,692 11,883
Weighted average shares outstanding assuming full dilution................. 19,809 16,853 12,411
See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 30, 1994
(IN THOUSANDS EXCEPT SHARE DATA)
NUMBER ADDITIONAL
OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
------------- ----------- ----------- --------- ----------- -----------
Balance at February 3, 1991............ 9,859,050 $ 989 $ 22,695 $ 23,016 $ (85) $ 46,615
Exercise of stock options and
warrants, and issuance of shares in
an exchange offer and under the
401(k) plan......................... 1,749,706 172 11,332 -- 85 11,589
Proceeds from stock offering......... 3,450,000 345 60,854 -- -- 61,199
Net income........................... -- -- -- 6,896 -- 6,896
------------- ----------- ----------- --------- --- -----------
Balance at February 2, 1992............ 15,058,756 1,506 94,881 29,912 -- 126,299
Exercise of stock options and
warrants............................ 1,300,191 129 6,643 -- -- 6,772
Issuance of shares in an
acquisition......................... 115,383 12 1,816 -- -- 1,828
Net income........................... -- -- -- 20,378 -- 20,378
------------- ----------- ----------- --------- --- -----------
Balance at January 31, 1993............ 16,474,330 1,647 103,340 50,290 -- 155,277
Exercise of stock options............ 223,027 23 3,828 -- -- 3,851
Net income........................... -- -- -- 26,287 -- 26,287
------------- ----------- ----------- --------- --- -----------
Balance at January 30, 1994............ 16,697,357 $ 1,670 $ 107,168 $ 76,577 $ -- $ 185,415
------------- ----------- ----------- --------- --- -----------
------------- ----------- ----------- --------- --- -----------
See accompanying notes to consolidated financial statements.
24
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR
--------------------------------------
1993 1992 1991
------------ ------------ ----------
Operating activities:
Income before extraordinary item....................................... $ 26,287 $ 20,378 $ 10,739
Adjustments:
Depreciation and amortization........................................ 12,490 10,160 9,228
Other................................................................ (3,537) 466 270
Change in assets and liabilities excluding the effects of
acquisitions:
Merchandise inventories............................................ (87,885) (27,354) (10,019)
Prepaid expenses and other......................................... (6,358) (451) (1,699)
Other assets....................................................... (2,640) (354) (459)
Accounts payable................................................... 11,545 10,474 4,731
Income taxes payable............................................... 3,304 294 1,541
Accrued liabilities and other...................................... 15,830 3,032 5,181
Deferred income taxes and other.................................... 2,029 164 (556)
------------ ------------ ----------
Net change in assets and liabilities............................. (64,175) (14,195) (1,280)
------------ ------------ ----------
Net cash provided by (used in) operating activities.............. (28,935) 16,809 18,957
------------ ------------ ----------
Investing activities:
Additions to property and equipment.................................... (46,816) (19,796) (5,505)
Purchases of marketable and other securities and long-term
investments........................................................... (166,171) (81,633) --
Proceeds from sales of marketable and other securities and long-term
investments........................................................... 183,978 -- --
Acquisitions and other................................................. -- (1,853) --
------------ ------------ ----------
Net cash used in investing activities............................ (29,009) (103,282) (5,505)
------------ ------------ ----------
Financing activities:
Borrowings under bank credit facilities................................ 119,000 -- 57,300
Payments under bank credit facilities.................................. (106,000) -- (67,800)
Net proceeds from issuance of long-term debt........................... -- 94,636 --
Redemption of senior subordinated notes................................ -- -- (47,099)
Payment of other long-term liabilities................................. (115) (216) (196)
Proceeds from issuance of common stock................................. 3,851 6,772 71,591
------------ ------------ ----------
Net cash provided by financing activities........................ 16,736 101,192 13,796
------------ ------------ ----------
Net increase (decrease) in cash and equivalents.......................... (41,208) 14,719 27,248
Cash and equivalents at beginning of year................................ 42,075 27,356 108
------------ ------------ ----------
Cash and equivalents at end of year...................................... $ 867 $ 42,075 $ 27,356
------------ ------------ ----------
------------ ------------ ----------
Cash payments for:
Interest............................................................... $ 5,034 $ 222 $ 6,851
Income taxes........................................................... 11,620 8,087 4,863
See accompanying notes to consolidated financial statements.
25
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Michaels Stores, Inc. (the "Company") owns and operates a chain of specialty
retail stores. The Company reports on a 52/53-week fiscal year which ends on the
Sunday closest to January 31; thus, fiscal 1993 ("1993"), fiscal 1992 ("1992"),
and fiscal 1991 ("1991") ended on January 30, 1994, January 31, 1993, and
February 2, 1992, respectively.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
CASH AND EQUIVALENTS
Cash and equivalents are generally comprised of highly liquid instruments
with original maturities of three months or less. Cash equivalents are carried
at cost which approximates market value.
MERCHANDISE INVENTORIES
Store merchandise inventories are valued at the lower of average cost
(determined by a retail method) or market. Distribution center inventories are
valued at the lower of cost (determined by the first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS
Costs in excess of net assets of acquired operations are being amortized
over 40 years on a straight-line basis. Accumulated amortization was $5,182,000
and $4,462,000 as of the end of 1993 and 1992, respectively.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed in the fiscal year in which the store
opens. In 1993, 1992 and 1991, the Company incurred $4,893,000, $2,377,000 and
$195,000, respectively, of store pre-opening costs.
EARNINGS PER SHARE
Earnings per share data are based on the weighted average number of shares
outstanding, including common stock equivalents and other dilutive securities.
The assumed conversion of the convertible subordinated notes was dilutive for
the fourth quarter and full year of 1993 and was therefore included in the
calculation of fully diluted earnings per share data for those periods.
DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1993 1992
----------- ---------
(IN THOUSANDS)
Property and equipment:
Land and buildings......................................................... $ 7,500 $ --
Fixtures and equipment..................................................... 87,443 60,013
Leasehold improvements..................................................... 24,612 13,242
----------- ---------
$ 119,555 $ 73,255
----------- ---------
----------- ---------
Accrued liabilities and other:
Salaries, bonuses and other payroll-related costs.......................... $ 13,498 $ 12,721
Rent....................................................................... 7,138 5,943
Taxes, other than income and payroll....................................... 9,337 5,252
Other...................................................................... 16,048 6,317
----------- ---------
$ 46,021 $ 30,233
----------- ---------
----------- ---------
26
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBORDINATED DEBT
In January 1993 the Company issued $97.75 million of convertible
subordinated notes ("Notes") due January 15, 2003. Interest, payable on January
15 and July 15, is computed at the rate of 4 3/4% from the date of issuance to
January 15, 1996, and at 6 3/4% thereafter. Interest expense is accrued by the
Company based on an effective interest rate of 6.38% (including amortization of
deferred issuance costs) over the full term of the Notes. The Notes are
redeemable at the option of the Company on or after January 24, 1996 at
redemption prices ranging from 104.14% to 100%. The Notes are convertible into
the Company's common stock at any time, at a conversion price of $38 per share.
A total of 2,572,368 shares of common stock are reserved for conversion. The
Notes are not entitled to any sinking fund. The fair value, based on dealer
quotes, of the Notes as of January 30, 1994 and January 31, 1993 was $105.6
million and $102.6 million, respectively.
EXTRAORDINARY ITEM
In January 1992 the Company called for redemption all outstanding 12 3/4%
Senior Subordinated Notes.
INCOME TAXES
Effective February 1, 1993, the Company changed its method of accounting for
income taxes as required by SFAS No. 109, "Accounting for Income Taxes." Prior
years' financial statements have not been restated and the cumulative effect of
adoption in 1993 had no material impact.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax liabilities and assets as of January 30, 1994 are as follows
(amounts in thousands):
Deferred tax liabilities:
Tax over book depreciation/amortization...................................................... $ 3,981
Other-net.................................................................................... 937
---------
Total deferred tax liabilities................................................................. 4,918
---------
Deferred tax assets:
Tax inventory in excess of book inventory.................................................... 1,121
Accrued expenses not deductible until paid................................................... 2,385
Other-net.................................................................................... 987
---------
Total deferred tax assets...................................................................... 4,493
---------
Net deferred tax liabilities................................................................... $ 425
---------
---------
LIABILITY
METHOD DEFERRED METHOD
----------- ----------------------
1993 1992 1991
----------- ----------- ---------
(IN THOUSANDS)
Income tax provision:
Current................................................................. $ 16,210 $ 13,219 $ 8,594
Deferred................................................................ 147 (135) (1,574)
----------- ----------- ---------
$ 16,357 $ 13,084 $ 7,020
----------- ----------- ---------
----------- ----------- ---------
Deferred income tax benefit:
Tax depreciation greater (less) than book depreciation.................. $ 55 $ (448)
Tax inventory less (greater) than book inventory........................ 95 (558)
Accrued expenses not deductible until paid and other.................... (285) (568)
----------- ---------
$ (135) $ (1,574)
----------- ---------
----------- ---------
Reconciliation of income tax provision to statutory rate:
Income tax expense at statutory rate.................................... $ 14,925 $ 11,377 $ 6,038
State income taxes, net of federal income tax benefit................... 1,275 1,347 545
Amortization of intangibles and other................................... 157 360 437
----------- ----------- ---------
$ 16,357 $ 13,084 $ 7,020
----------- ----------- ---------
----------- ----------- ---------
27
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company operates stores and uses distribution and office facilities and
equipment leased under noncancellable operating leases, the majority of which
provide for renewal options. Future minimum rentals for all noncancellable
operating leases as of January 30, 1994 are as follows:
FISCAL YEAR RENT
- - ---------------------------------------- ----------------
(IN THOUSANDS)
1994.................................... $ 38,664
1995.................................... 38,212
1996.................................... 34,415
1997.................................... 28,503
1998.................................... 23,667
1999 and thereafter..................... 67,300
----------------
$ 230,761
----------------
----------------
Rental expense applicable to operating leases was $33,551,000, $26,188,000
and $24,445,000 in 1993, 1992 and 1991, respectively.
CONTINGENCIES
Management of the Company believes that any uninsured losses related to
various lawsuits or claims pending against the Company will be immaterial;
accordingly, no provision has been recorded in the financial statements.
STOCK OPTIONS
All full-time employees are eligible to participate in the Michaels Stores,
Inc. Key Employee Stock Compensation Program (the "Program"), as amended, under
which 3,000,000 shares of common stock have been authorized for issuance.
Selected employees and key advisors, including directors, of the Company may
participate in the 1992 Non-Statutory Stock Option Plan of Michaels Stores, Inc.
(the "Plan") under which 3,000,000 shares of common stock have been authorized
for issuance. In addition, stock options have been granted to certain directors
and key advisors other than pursuant to the Program or the Plan. The exercise
price of all options granted was the fair market value on the date of grant.
EXERCISE PRICE
SHARES PER SHARE
---------- --------------
Exercised during 1991............................. 733,865 $3
Exercised during 1992............................. 1,307,838 $3 to $15 1/4
Exercised during 1993............................. 223,027 $3 to $27
Outstanding at January 30, 1994................... 2,409,763 $3 to $32 1/8
Exercisable at January 30, 1994................... 628,888 $3 to $32 1/8
MARKETABLE AND OTHER SECURITIES
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities of both domestic and foreign issuers including preferred
stock, corporate bonds, mutual funds and government debt instruments, which may
include both investment grade and non-investment grade securities. The Company
limits its credit exposure to any one entity. Net realized gains, dividend
income, and interest income for 1993 were $4.1 million, $4.0 million, and $1.5
million, respectively.
Maverick Capital Ltd. ("Maverick"), an investment management company,
provides investment management services for the Company. Maverick is owned and
managed by a group of individuals, five of whom are directors of the Company.
The Company has invested $15 million (fair market value of approximately $16.3
million at January 30, 1994) in an investment partnership managed by Maverick.
The Company has the right to withdraw all or part of its investment at the end
of any calendar quarter. The Company records gains and losses on its investment
when realized by the partnership.
Maverick also manages the Company's investments in marketable securities.
The aggregate fair value of marketable securities as of January 30, 1994 was
approximately $55.7 million and was estimated based on quoted market prices or
dealer quotes as of the last trading day of the fiscal year.
The Company believes that the fees and allocations under the investment
management and partnership agreements are comparable to those that would be
charged to the Company by unaffiliated third parties for comparable
arrangements. Fees of $436,000 were paid to Maverick during 1993, pursuant to
these agreements.
28
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At January 31, 1993, securities that the Company intended to hold for more
than one year were classified as long-term investments and were carried at cost.
The fair value of the long-term portfolio was $81.9 million, and was estimated
based on quoted market prices or dealer quotes.
Marketable securities held by the Company at January 30, 1994 will be
classified as available-for-sale securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which the Company will adopt
in the first quarter of 1994. The adoption will not have a material effect on
the Company's financial position.
SUBSEQUENT EVENT
On February 23, 1994, the Company purchased Treasure House Stores, Inc.
("THSI"), which operated a chain of nine arts and crafts stores in Washington
and Oregon and held leases on two additional stores to be opened in 1994. A
total of 280,000 shares of Michaels common stock were issued in exchange for
100% of the issued and outstanding common stock of THSI. The purchase
transaction will be accounted for as a pooling-of-interests, and will not be
material to sales, net income or financial position for all years presented.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Michaels Stores, Inc.
We have audited the accompanying consolidated balance sheets of Michaels
Stores, Inc. as of January 30, 1994 and January 31, 1993, and the related
consolidated statements of income, cash flows, and shareholders' equity for each
of the three years in the period ended January 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michaels
Stores, Inc. at January 30, 1994 and January 31, 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
January 30, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG
Dallas, Texas
February 28, 1994
29
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL 1993:
Net sales..................................................... $ 112,961 $ 115,414 $ 155,750 $ 235,563
Cost of sales and occupancy expense........................... 73,279 74,150 101,588 154,852
Operating income.............................................. 5,962 5,756 7,819 21,819
Net income.................................................... 3,798 3,635 4,852 14,002
Fully-diluted earnings per common share....................... $ .22 $ .21 $ .28 $ .75
Weighted average shares outstanding assuming full dilution.... 17,130 17,145 17,287 19,932
FISCAL 1992:
Net sales..................................................... $ 94,351 $ 93,408 $ 123,349 $ 182,051
Cost of sales and occupancy expense........................... 61,741 61,161 80,831 119,844
Operating income.............................................. 5,038 4,601 6,300 18,324
Net income.................................................... 3,045 2,643 3,605 11,085
Fully-diluted earnings per common share....................... $ .18 $ .16 $ .21 $ .64
Weighted average common and common equivalent shares
outstanding.................................................. 16,630 16,691 17,101 17,201
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