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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 April 28, 1996
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
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1943604
(State or other jurisdiction (I.R.S. Employer
of
incorporation or Identification Number)
organization)
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
TITLE JUNE 7, 1996
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Common stock, par value $.10 per share 23,524,310
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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
APRIL 28, JANUARY 28,
1996 1996
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Current assets:
Cash and equivalents.................................................................. $ 7,910 $ 2,870
Merchandise inventories............................................................... 377,137 366,102
Income taxes receivable and deferred income taxes..................................... 32,959 35,177
Prepaid expenses and other............................................................ 11,417 12,143
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Total current assets................................................................ 429,423 416,292
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Property and equipment, at cost......................................................... 268,130 255,386
Less accumulated depreciation......................................................... (90,000) (82,157)
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178,130 173,229
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Costs in excess of net assets of acquired operations, net............................... 142,950 143,721
Other assets............................................................................ 6,699 6,538
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149,649 150,259
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$ 757,202 $ 739,780
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 104,694 $ 98,799
Accrued liabilities and other......................................................... 80,801 88,510
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Total current liabilities........................................................... 185,495 187,309
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Bank debt............................................................................... 73,500 87,200
Convertible subordinated notes.......................................................... 96,940 96,940
Other long-term liabilities............................................................. 37,363 32,378
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Total long-term liabilities......................................................... 207,803 216,518
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393,298 403,827
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Commitments and contingencies
Shareholders' equity:
Common stock, 23,506,960 shares outstanding........................................... 2,351 2,150
Additional paid-in capital............................................................ 268,136 243,325
Retained earnings..................................................................... 93,417 90,478
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Total shareholders' equity.......................................................... 363,904 335,953
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$ 757,202 $ 739,780
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See accompanying notes to consolidated financial statements.
2
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED
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APRIL 28, APRIL 30,
1996 1995
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Net sales............................................................................... $ 301,875 $ 265,547
Cost of sales and occupancy expense..................................................... 205,067 172,043
Selling, general and administrative expense............................................. 88,970 78,084
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Operating income........................................................................ 7,838 15,420
Interest expense........................................................................ 3,710 3,341
Other income, net....................................................................... (267) (209)
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Income before income taxes.............................................................. 4,395 12,288
Provision for income taxes.............................................................. 1,670 4,731
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Net income.............................................................................. $ 2,725 $ 7,557
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Earnings per common and common equivalent share......................................... $ .12 $ .35
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Weighted average common and common equivalent shares outstanding........................ 22,459 21,845
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See accompanying notes to consolidated financial statements.
3
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
QUARTER ENDED
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APRIL 28, APRIL 30,
1996 1995
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Operating activities:
Net income............................................................................. $ 2,725 $ 7,557
Adjustments:
Depreciation and amortization........................................................ 8,809 7,561
Other................................................................................ 149 --
Change in assets and liabilities excluding the effects of acquisitions:
Merchandise inventories............................................................ (11,035) (24,935)
Prepaid expenses and other......................................................... 727 (1,773)
Deferred income taxes and other.................................................... 3,628 4,381
Accounts payable................................................................... 5,895 (36,866)
Accrued liabilities and other...................................................... (9,304) (9,525)
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Net change in assets and liabilities............................................. (10,089) (68,718)
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Net cash provided by (used in) operating activities.............................. 1,594 (53,600)
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Investing activities:
Additions to property and equipment.................................................... (7,779) (11,934)
Net proceeds from sales of property and equipment...................................... -- 1,791
Acquisitions and other................................................................. -- (24,684)
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Net cash used in investing activities............................................ (7,779) (34,827)
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Financing activities:
Net borrowings (repayments) under bank credit facilities............................... (13,700) 87,900
Proceeds from issuance of common stock and other....................................... 24,925 456
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Net cash provided by financing activities........................................ 11,225 88,356
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Net increase (decrease) in cash and equivalents.......................................... 5,040 (71)
Cash and equivalents at beginning of year................................................ 2,870 1,907
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Cash and equivalents at end of period.................................................... $ 7,910 $ 1,836
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See accompanying notes to consolidated financial statements.
4
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 28, 1996
(UNAUDITED)
NOTE A
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of January 28, 1996) 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 April
28, 1996. 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 April 28, 1996 are not indicative of the results to be
expected for the entire year.
NOTE B
Indebtedness outstanding under the Company's bank credit agreement, as
amended (the "Credit Agreement") at the end of the first quarter of fiscal 1996
was $73.5 million versus $87.2 million at the end of the fiscal year ended
January 28, 1996. Amounts outstanding under the Credit Agreement, for which the
carrying cost is at fair value, bear interest at a Eurodollar rate plus a
premium and/or at the prime rate (a blended rate of 7.16% at April 28, 1996).
The Company is in compliance with all covenants in the Credit Agreement as of
April 28, 1996.
NOTE C
Investing and financing activities not affecting cash in the three months
ended April 28, 1996 included additions to property and equipment through
capital lease obligations of $4,515,000 related to the acquisition of new
computer equipment.
NOTE D
Effective January 29, 1996 the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
did not have a material effect on the financial condition or results of
operations of the Company.
NOTE E
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 anti-dilutive
for both periods presented and was therefore not included in the calculation of
fully diluted earnings per share data for either period.
NOTE F
In August 1995, two lawsuits were filed by certain security holders against
the Company and certain present and former officers and directors seeking class
action status on behalf of purchasers of the Company's Common Stock between
February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege
that misstatements and omission by defendants relating to projected and
historical operating results, inventory and other matters involving future plans
resulted in an inflation of the prices of the Company's Common Stock. The
plaintiffs seek on behalf of the purported class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas consolidated
the two lawsuits on November 16, 1995. The Company and the individual defendants
have filed a motion to dismiss the consolidated, amended complaint. The court
has not yet ruled on this motion. Discovery related to both class certification
issues and the merits of the plaintiffs' claims has been stayed pending
resolution of the defendants' motion to dismiss. The Company believes the claims
are without merit and intends to vigorously defend this action.
5
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 28, 1996
(UNAUDITED)
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 security holder litigation
described above, would not have a material adverse impact on the Company's
financial position. However, there can be no assurance that future costs would
not be material to results of operations of the Company for a particular future
period. In addition, the Company's estimates of future costs are subject to
change as events evolve and additional information becomes available during the
course of litigation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Certain statements contained in this section 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, crafts and
decorative items industry, related inventory risks due to shifts in customer
demand, the effect of economic conditions, the impact of competitors' locations
and pricing, the availability of acceptable real estate locations for new
stores, difficulties with respect to new technologies such as point-of-sale
systems, supply constraints or difficulties, and the results of financing
efforts.
During the first six months of fiscal 1996, the Company is focusing on
certain projects to improve store operations with the implementation of a
standardized operating format. This temporary shift in focus will divert store
labor from more traditional selling activities. Consequently, comparable store
sales growth during the first six months of fiscal 1996 is expected to be
negatively affected and compare unfavorably to the first six months of fiscal
1995 (a period including promotional activity that contributed to a 9%
comparable store sales increase). However, despite the comparable store sales
decline in the first quarter of fiscal 1996 and additional comparable store
sales declines which the Company expects to occur in some individual months
during the remainder of the year, the Company expects to achieve comparable
store sales increases for fiscal 1996 taken as a whole as the benefits from the
standardization program and other initiatives are realized.
The Company expects that operating results will continue to be negatively
impacted by several factors in the second quarter of fiscal 1996. In connection
with the reduction in merchandise assortment, the Company is relaying all stores
with new planograms. As a result of the relaying of the stores, together with
the accelerated rollout of the POS system, the Company expects to experience
disruption in its stores and increased labor costs. Further, it is expected that
the reduced inventory assortment in the Michaels stores will not attain optimal
presentation and in-stock position until September 1996, the date by which the
Company expects substantially all of the planograms to have been reset to a
chainwide format. While the favorable effects of the Company's initiatives to
improve profitability will not become apparent in the Company's operating
results until the second half of fiscal 1996, the Company expects cash flow from
operations to be favorably affected throughout the year and to be higher in
fiscal 1996 than in recent years.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $1.6 million was generated during the first
quarter of fiscal 1996 compared to negative $53.6 million of cash flow from
operations generated during the first quarter of fiscal 1995. This was achieved
primarily through an improvement in inventory management which resulted in a
reduction in total inventories of 7% and in inventories per Michaels store of
19% compared to the end of the first quarter of fiscal 1995. Indebtedness
outstanding under the Company's bank credit agreement (as amended, the "Credit
Agreement") at the end of the first quarter of fiscal 1996 was $73.5 million
versus $129.0 million at the end of the first quarter of fiscal 1995, reflecting
both the reduced level of inventories and the $25 million of proceeds from the
April 1996 Private Placement (defined below). Amounts outstanding under the
Credit Agreement, for which the carrying cost is at fair value, bear interest at
a Eurodollar rate plus a premium and/or at the prime rate (a blended rate of
7.16% at April 28, 1996). The Company is in compliance with all covenants in the
Credit Agreement as of April 28, 1996.
In April 1996 the Company completed a private placement of 2,000,000 shares
of the Company's Common Stock at a price of $12.50 per share (the "Private
Placement"). The Common Stock was sold through three private transactions with
separate entities owned by independent trusts of which family members of Sam
Wyly and Charles J. Wyly, Jr. are beneficiaries. The shares of Common Stock sold
in the Private Placement are subject to certain restrictions on future transfer.
In addition, the
7
Company will be required to register the shares issued in the Private Placement
pursuant to the Securities Act of 1933, as amended, upon demand by the holder of
the shares after one year from the date of purchase.
The Company has filed a registration statement with the Securities and
Exchange Commission relating to the proposed issuance of $125 million of Senior
Notes due 2006 (the "Notes"). The Company plans to use up to the full amount of
the net proceeds from the sale of the Notes to reduce indebtedness under the
Credit Agreement. The balance, if any, will be applied to scheduled store
renovations and new stores planned for fiscal 1996 and for general corporate
purposes.
The offering of the Notes is part of a broader refinancing plan (the
"Refinancing") designed to increase the Company's financial flexibility by
diversifying its sources of capital and extending the maturities of its
currently outstanding debt, thereby reducing the Company's reliance on bank debt
to fund its longer term capital requirements. The sources of capital for the
Refinancing include the offering of the Notes and the Private Placement. The
Company has had negotiations with the administrative lender under the Credit
Agreement to reduce the amount of the facility from a maximum of $200 million to
a maximum of $100 million and to modify certain covenants. Following the
Refinancing, the Company expects to use the borrowings available under the
modified Credit Agreement primarily to finance seasonal working capital
requirements.
The Company opened five Michaels stores during the first three months of
fiscal 1996. Capital expenditures for these stores amounted to approximately
$1.2 million. Additional capital expenditures of approximately $6.6 million
during the quarter related primarily to the expansion, relocation or remodelling
of six existing stores, and for various systems enhancements not funded through
the Company's capital lease facility with IBM Credit Corporation. The Company
expects capital expenditures during the remainder of fiscal 1996 to total
approximately $30 million, relating primarily to costs for store relocations and
remodeling, the relocation of a distribution center and the corporate offices,
and for additional systems enhancements.
At April 28, 1996, the Company had working capital of $243.9 million
compared to $229.0 million at January 28, 1996. At that same date, the Company
had $109.2 million in available unused credit capacity under the Credit
Agreement. Management believes that the Company has sufficient working capital,
cash flow from operating activities, capital lease financing, and available
unused credit capacity to sustain current growth plans. The successful
completion of the offering of the Notes is not necessary for the Company to
sustain its current growth plans.
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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APRIL 28, APRIL 30,
1996 1995
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Net sales......................................................................... 100.0% 100.0%
Cost of sales and occupancy expense............................................... 67.9 64.8
Selling, general and administrative expense....................................... 29.5 29.4
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Operating income.................................................................. 2.6 5.8
Interest expense.................................................................. 1.2 1.3
Other income, net................................................................. (0.1) (0.1)
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Income before income taxes........................................................ 1.5 4.6
Provision for income taxes........................................................ 0.6 1.8
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Net income........................................................................ 0.9% 2.8%
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8
THREE MONTHS ENDED APRIL 28, 1996 COMPARED TO THE
THREE MONTHS ENDED APRIL 30, 1995
Net sales in the first quarter of fiscal 1996 increased $36.3 million, or
14%, over the first quarter of fiscal 1995. The results for the first quarter of
fiscal 1996 included sales from 51 Michaels stores (net of 3 closures) that were
opened during the twelve month period ended April 28, 1996 and 68 Aaron Brothers
stores that were acquired during the first quarter of fiscal 1995. During the
first quarter, sales of the new and acquired stores accounted for an increase of
$41.1 million. Comparable store sales declined one percent in the first quarter
of fiscal 1996 compared to the first quarter of fiscal 1995.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first quarter of fiscal 1996 increased by 3.1% compared to the first quarter of
fiscal 1995 which management believes was due primarily to promotional markdowns
of spring, Easter and wearable art merchandise and increased distribution and
occupancy costs. Promotional markdowns were required largely due to overbuying
of seasonal merchandise in fiscal 1995 prior to the Company's decision to slow
down its store expansion program. Distribution costs as a percentage of net
sales increased primarily due to less efficient utilization of shipping
capacity. Management believes that transportation costs will be more effectively
leveraged in the future as the Company moves a greater percentage of the
Company's merchandise inventories into its regional distribution centers in
order to reduce direct-to-store shipments. The increase in occupancy costs
resulted from a high proportion of newer stores having a relatively low sales
base available to absorb fixed occupancy costs.
Selling, general and administrative expense, as a percentage of net sales,
increased by 0.1% in the first quarter of fiscal 1996 compared to the first
quarter of 1995.
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MICHAELS STORES, INC.
FORM 10-Q
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 4 -- First Amended and Restated Credit Agreement dated as of June
18, 1994 among Michaels Stores, Inc., Nationsbank of Texas, N.A. and the other
lenders signatory thereto.
Exhibit 11 -- Computation of Earnings Per Common Share for the Three Months
Ended April 28, 1996.
Exhibit 27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the period covered
by this report.
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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
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R. Don Morris
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
Dated: June 10, 1996
11
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
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4 -- First Amended and Restated Credit Agreement dated as of June 18, 1994 among Michaels Stores,
Inc., Nationsbank of Texas, N.A. and the other lenders signatory thereto.
11 -- Computation of Earnings Per Common Share for the Three Months Ended April 28, 1996.
27 -- Financial Data Schedule