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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 1, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
________________________ TO ________________________
COMMISSION FILE NUMBER 0-11822
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MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1943604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5931 CAMPUS CIRCLE DRIVE, IRVING, TEXAS 75063
P.O. BOX 619566, DFW, TEXAS 75261-9566
(Address of principal executive offices including zip code)
(214) 714-7000
(Registrant's telephone number, including area code)
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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 issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as of June 14, 1994
17,492,733
TITLE
Common stock, par value $.10 per share
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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)
(UNAUDITED)
ASSETS
MAY 1, JANUARY 30,
1994 1994
-------- -----------
Current assets:
Cash and equivalents...................................... $ 2,867 $ 867
Marketable and other securities........................... 67,734 67,956
Merchandise inventories................................... 230,406 206,185
Prepaid expenses and other................................ 21,971 16,004
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Total current assets.................................... 322,978 291,012
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Property and equipment, at cost............................. 136,415 119,555
Less accumulated depreciation............................. (48,575) (43,683)
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87,840 75,872
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Costs in excess of net assets of acquired operations, net... 43,954 23,503
Other assets................................................ 8,347 7,443
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52,301 30,946
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$463,119 $ 397,830
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 47,741 $ 42,309
Short-term bank debt...................................... 56,000 13,000
Income taxes payable...................................... 4,252 7,866
Accrued liabilities and other............................. 45,259 46,021
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Total current liabilities............................... 153,252 109,196
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Convertible subordinated notes.............................. 97,750 97,750
Deferred income taxes and other............................. 5,521 5,469
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Total long-term liabilities............................. 103,271 103,219
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256,523 212,415
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Commitments and contingencies
Shareholders' equity:
Common stock, 17,462,331 shares outstanding............... 1,746 1,670
Additional paid-in capital................................ 126,126 107,168
Retained earnings......................................... 78,724 76,577
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Total shareholders' equity.............................. 206,596 185,415
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$463,119 $ 397,830
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See accompanying notes to consolidated financial statements.
1
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED
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MAY 1, MAY 2,
1994 1993
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Net sales............................................................................... $ 159,798 $ 112,961
Cost of sales and occupancy expense..................................................... 103,511 73,279
Selling, general and administrative expense............................................. 47,216 33,720
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Operating income........................................................................ 9,071 5,962
Interest expense........................................................................ 2,026 1,522
Other income, net....................................................................... (1,031) (1,735)
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Income before income taxes.............................................................. 8,076 6,175
Provision for income taxes.............................................................. 3,109 2,377
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Net income.............................................................................. $ 4,967 $ 3,798
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Earnings per common and common equivalent share......................................... $ .28 $ .22
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Weighted average common and common equivalent shares outstanding........................ 17,856 17,130
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See accompanying notes to consolidated financial statements.
2
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
QUARTER ENDED
------------------------
MAY 1, MAY 2,
1994 1993
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Operating activities:
Net income............................................................................ $ 4,967 $ 3,798
Adjustments:
Depreciation and amortization....................................................... 3,767 2,839
Change in assets and liabilities excluding the effects of acquisitions:
Merchandise inventories........................................................... (18,562) (17,325)
Prepaid expenses and other assets................................................. (2,994) (2,296)
Accounts payable.................................................................. (771) 2,261
Income taxes payable.............................................................. (4,111) (1,843)
Accrued and other liabilities..................................................... (6,435) (4,431)
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Net change in assets and liabilities............................................ (32,873) (23,634)
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Net cash used in operating activities........................................... (24,139) (16,997)
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Investing activities:
Additions to property and equipment................................................. (14,178) (8,173)
Purchases of marketable and other securities........................................ (5,046) --
Proceeds from sales of marketable and other securities.............................. 1,865 --
Acquisitions and other.............................................................. (217) --
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Net cash used in investing activities............................................. (17,576) (8,173)
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Financing activities:
Net borrowings under bank credit facilities........................................... 42,500 --
Proceeds from issuance of common stock and other...................................... 1,215 (16)
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Net cash provided by financing activities......................................... 43,715 (16)
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Net increase (decrease) in cash and equivalents......................................... 2,000 (25,186)
Cash and equivalents at beginning of year............................................... 867 42,075
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Cash and equivalents at end of quarter.................................................. $ 2,867 $ 16,889
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Cash payments for:
Interest.............................................................................. $ 293 $ 24
Income taxes.......................................................................... 7,220 4,221
See accompanying notes to consolidated financial statements.
3
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 1, 1994
(UNAUDITED)
NOTE A
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 30, 1994) and, in the opinion of
management, reflect all adjustments that are necessary for a fair presentation
of financial position and results of operations for the three months ended May
1, 1994. All of such adjustments are of a normal and recurring nature. Because
of the seasonal nature of the Company's business, the results of operations for
the three months ended May 1, 1994 are not indicative of the results to be
expected for the entire year.
NOTE B
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company adopted the provisions of the new
standard for investments held as of or acquired after January 31, 1994.
Marketable equity and debt securities subject to the new standard have been
classified as available-for-sale. In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. The adoption did not have a material effect on the Company's
financial position.
NOTE C
On February 23, 1994, the Company acquired Treasure House Stores, Inc.
("THSI"), which operates a chain of nine arts and crafts stores in Washington
and Oregon and holds 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 acquisition has
been accounted for as a pooling-of-interests, and was not material to sales, net
income or financial position of any previous year. Accordingly, the Company's
financial statements have not been restated. However, the Company's opening
balance of retained earnings at January 31, 1994 does reflect the accumulated
deficit of THSI in the amount of $2.2 million.
In April 1994, the Company acquired the affiliated arts and crafts store
chains of Oregon Craft & Floral Supply Co. with eight stores located primarily
in the Portland, Oregon area, and H&H Craft & Floral Supply Co., with eight
stores located in Southern California, for a total of 455,000 shares of Michaels
Common Stock valued at $18.5 million. The transaction was accounted for as a
purchase; accordingly, the purchase price was allocated to assets and
liabilities based on preliminary estimated fair values as of the acquisition
date. The excess of the consideration paid over the estimated fair value of
assets acquired in the amount of $22.7 million has been recorded as goodwill and
will be amortized on a straight line basis over a period of 40 years. The
acquisition was not material to sales or net income for the current quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired 25 stores and opened 14 stores during the first quarter
of fiscal 1994. Capital expenditures for these stores, and, to a lesser extent,
the remodeling and expansion of existing stores, the expansion of two
distribution facilities, and system enhancements, amounted to $14.2 million in
the first quarter of fiscal 1994. The Company expects capital expenditures
during the remainder of fiscal 1994 to be at least $42 million, relating
primarily to the opening of new stores during the second and third quarters. In
addition to the stores being acquired through the acquisition of Leewards
Creative Crafts, Inc. ("Leewards") as described below, the Company anticipates
opening approximately 41 additional new stores in 1994.
4
In May 1994, Michaels announced that it had signed a definitive merger
agreement for the acquisition of Leewards, an Illinois-based arts and crafts
retailer with approximately 100 stores located primarily in the midwestern and
northeastern United States. The aggregate merger consideration, which is (i)
subject to certain downward adjustments and (ii) payable, in part, in cash in
lieu of shares with respect to certain shares of preferred stock and with
respect to the net value of outstanding options to purchase Leewards common
stock, is expected to consist of approximately $12.8 million in cash and
approximately 1,272,000 shares of Michaels Common Stock (assuming that the
market price of Michaels Common Stock is $39.50 at closing). The purchase
transaction is expected to close on or before July 31, 1994. Also in May, the
Company filed a registration statement with respect to an additional
underwritten offering of shares of the Company's Common Stock in the United
States and internationally. The merger agreement provides that if the net
proceeds per share in the Common Stock offering exceed $39.00, the total number
of shares issued in connection with the merger will be reduced by 25% of the
number of shares offered by the Company in the Common Stock offering (excluding
the over-allotment option), but not to exceed 500,000 shares of Common Stock
(the "Reduced Share Amount"). In lieu thereof, cash equal to the net proceeds
per share received in the Common Stock offering times the Reduced Share Amount
will be distributed to the Leewards shareholders. Upon consummation of the
Leewards acquisition, Michaels will also repay the indebtedness under Leewards'
bank credit facility and subordinated notes, expected to total approximately $50
million at closing. The balance will be used to fund planned new store
expansion, working capital requirements, future acquisition opportunities and
for other general corporate purposes. If the Leewards acquisition is not
consummated, all proceeds will be used to fund planned new store expansion,
working capital requirements, future acquisition opportunities, and for other
general corporate purchases.
The Company currently has a bank credit agreement (Credit Agreement) which
includes an unsecured line of credit and provides for the issuance of letters of
credit. The total principal amount available under the Credit Agreement is $100
million minus the sum amount of outstanding letters of credit. Borrowings under
the Credit Agreement, which expires July 31, 1994, bear interest at the prime
rate or at other alternative rates. As of May 1, 1994, the Company had $40.3
million in available unused capacity under the Credit Agreement. The Company is
currently negotiating a three-year $150 million revolving credit facility to
replace the existing one.
Subsequent to May 1, 1994, the Company has sold its interest in all limited
partnerships (with a carrying value of $20.8 million) and certain marketable
securities, and the proceeds are being used to reduce short-term bank debt.
At May 1, 1994 the Company had working capital of $169.7 million, compared
to $181.8 million at January 30, 1994. Management believes that the Company has
sufficient working capital and access to credit to sustain current growth plans.
5
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 financial
statements, including the notes:
FOR THE
QUARTER ENDED
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MAY 1, MAY 2,
1994 1993
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Net sales......................................................... 100.0% 100.0%
Cost of sales and occupancy expense............................... 64.8 64.9
Selling, general and administrative expense....................... 29.5 29.8
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Operating income.................................................. 5.7 5.3
Interest expense.................................................. 1.3 1.3
Other income, net................................................. (0.6) (1.5)
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Income before income taxes........................................ 5.0 5.5
Provision for income taxes........................................ 1.9 2.1
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Net income........................................................ 3.1% 3.4%
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THREE MONTHS ENDED MAY 1, 1994 COMPARED TO THE
THREE MONTHS ENDED MAY 2, 1993
Net sales for the three months ended May 1, 1994, increased $46.8 million or
41%, compared to the same period of the prior year. The results for the first
quarter of fiscal 1994 included sales of 64 stores that were added during the
previous twelve months, 9 of which were acquired and 14 of which were opened
during the first quarter of this year. In the first quarter of fiscal 1994,
sales of newer stores (not included in comparable store sales) accounted for
$35.1 million of the increase. Comparable store sales increased 10% over the
first quarter of last year.
Cost of sales and occupancy expense decreased by 0.1%, as a percentage of
sales, for the first quarter of fiscal 1994 compared to the same period of the
prior year, primarily due to increases in volume discounts from vendors.
Selling, general and administrative expense decreased by 0.3%, as a
percentage of sales, in the first quarter of fiscal 1994 compared to the same
period of the prior year. The decrease was due primarily to lower general and
administrative expenditures being spread over a larger revenue base in the
current period.
The increase in interest expense for the first quarter of fiscal 1994 to
$2.0 million from $1.5 million for the same period a year ago was due primarily
to interest expense incurred on short-term bank borrowings. This year's decrease
in other income was due principally to a decline in the average investment
portfolio this year compared to the prior year period.
Earnings for the 1994 first quarter included one-time transaction costs,
severance costs and duplicate pre-merger general and administrative costs
associated with the acquisition of Treasure House during the quarter, which was
accounted for as a pooling of interests and, accordingly, had its sales and
earnings included in the Company's results as of the beginning of the quarter.
Without these one-time costs totaling $0.02 per share, earnings per share would
have been $0.30 for the quarter, an increase of 36% over the year earlier
period.
6
MICHAELS STORES, INC.
FORM 10-Q
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 24, 1994. The
following are the results of certain matters voted upon at the meeting:
(a) Proposal to adopt the Company's 1994 Non-Statutory Stock Option Plan
providing for a maximum aggregate number of shares of Common Stock of
1,000,000 available for issuance from time to time pursuant to such plan.
For: 9,247,893
Against: 2,638,476
Abstain: 58,739
(b) Election of three directors to the board.
NOMINEES FOR WITHHELD
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Sam Wyly.................................................. 13,748,413 62,557
Michael C. French......................................... 13,748,418 62,552
Donald R. Miller, Jr...................................... 13,749,162 61,808
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 -- Agreement and Plan of Merger dated as of May 10, 1994 among Michaels Stores, Inc.,
LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(2)
2.2 -- First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among
Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts,
Inc.(1)
2.3 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores,
Inc., Treasure House Stores, Inc. and the stockholders of Treasure House Stores,
Inc.(3)
2.4 -- Amendment No. 1 to Stock Purchase Agreement.(3)
2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores,
Inc. and the other parties listed therein.(2)
2.6 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 3, 1994, among
Michaels Stores, Inc. and the other parties listed therein.(2)
4.1 -- Bylaws of the Registrant, as amended and restated.(4)
4.2 -- Restated Certificate of Incorporation of the Registrant.(5)
4.3 -- Form of Common Stock Certificate.(4)
4.4 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels
Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant.(6)
4.5 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984
between The First Dallas Group, Ltd. and Michaels Stores, Inc.(6)
4.6 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984
between First Dallas Investments -- Michaels I, Ltd. and Michaels Stores, Inc.(6)
4.7 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985
between First Dallas Investments -- Michaels I, Ltd., The First Dallas Group, Ltd.,
Sam Wyly, Charles J. Wyly, Jr. and Michaels Stores, Inc.(7)
4.8 -- Amendment to Common Stock and Warrant Agreement dated September 1, 1992 between
Michaels Stores, Inc. and the other parties listed therein.(5)
7
4.9 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and
NationsBank of Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up
Convertible Subordinated Note included therein.(6)
10.1 -- Asset Purchase and Territorial Development Agreement dated March 25, 1983 among
Dupey Enterprises, Inc., Dupey Management Corporation, Michael and Patricia Dupey
Family Trust, Mike Dupey and Patty Dupey.(8)
10.2 -- Amendment to Asset Purchase and Territorial Development Agreement dated March 30,
1985.(6)
10.3 -- Release and Settlement Agreement dated February 15, 1988 between Dupey Management
Corporation, Michael J. Dupey, Patricia Dupey, Michaels Stores, Inc. and B.B.
Tuley.(4)
10.4 -- Michaels Stores, Inc. Employees 401(k) Plan.(4)
10.5 -- Michaels Stores, Inc. Employees 401(k) Trust.(9)
10.6 -- Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and
directors of the Registrant.(6)
10.7 -- Form of Employment Agreement between Michaels Stores, Inc. and certain directors
of the Registrant.(10)
10.8 -- Form of Consulting Agreement between Michaels Stores, Inc. and certain directors
of the Registrant.(10)
10.9 -- Form of Employment Agreement between Michaels Stores, Inc. and certain key
executives of the Registrant.(10)
10.10 -- Michaels Stores, Inc. Employees Stock Purchase Plan.(11)
10.11 -- Michaels Stores, Inc. Key Employee Stock Compensation Program, as amended
effective February 25, 1992.(5)
10.12 -- Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan dated August 1,
1992.(5)
10.13 -- Form of Non-Statutory Stock Option Agreement covering options granted to certain
directors and consultants of the Company other than pursuant to the Michaels
Stores, Inc. Key Employee Stock Compensation Program and the Michaels Stores, Inc.
1992 Non-Statutory Stock Option Plan.(6)
10.14 -- Credit Agreement dated June 24, 1993, between Michaels Stores, Inc. and
NationsBank of Texas, N.A. (the "Credit Agreement").(12)
10.15 -- Amendment to Credit Agreement dated as of December 31, 1993.(4)
10.16 -- Amendment to Credit Agreement dated as of March 31, 1994.(4)
10.17 -- Credit Agreement dated April 29, 1994, between Michaels Stores, Inc. and
NationsBank of Texas, N.A.(4)
11 -- Computation of Earnings Per Common Share.(1)
<FN>
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(1) Filed herewith.
(2) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-53639) and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-3 (No. 33-52311) and incorporated herein by reference.
(4) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1994 and incorporated herein by
reference.
(5) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-54726) and incorporated herein by reference.
(6) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1993 and incorporated herein by
reference.
8
(7) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-9456) and incorporated herein by reference.
(8) Previously filed as an Exhibit to the Peoples Restaurants, Inc.
Registration Statement on Form S-1 (No. 2-85737) and incorporated herein by
reference.
(9) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-11985) and incorporated herein by reference.
(10) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 29, 1989 and incorporated herein by
reference.
(11) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended February 2, 1992 and incorporated herein by
reference.
(12) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended August 1, 1993 and incorporated herein by
reference.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on May 23, 1994, describing
the Merger Agreement with Leewards Creative Crafts, Inc. and the transactions
contemplated thereby.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAELS STORES, INC.
By: /s/ R. DON MORRIS
-----------------------------------
R. Don Morris
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Dated: June 15, 1994
10
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
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2.2 First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels
Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc.
11 Computation of Earnings Per Common Share for the three months ended May 1, 1994.