<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 16, 1994
-----------------
Michaels Stores, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1943604
-------------------- ------------------ --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5931 Campus Circle Drive, Irving, Texas, 75063
P.O. Box 619566, DFW, Texas 75261-9566
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (214) 580-8242
----------------
<PAGE>
ITEM 5. OTHER EVENTS.
LEEWARDS CREATIVE CRAFTS, INC. ACQUISITION
On May 10, 1994, Michaels Stores, Inc. ("Michaels" or the "Company")
announced that it had signed a definitive merger agreement (the "Agreement and
Plan of Merger") for the acquisition (the "Leewards Acquisition") of Leewards
Creative Crafts, Inc. ("Leewards"), an Illinois-based arts and crafts retailer
with approximately 100 stores located primarily in the midwestern and
northeastern United States (the "Merger"). Following the Leewards Acquisition,
the Company expects to close approximately 20 Leewards stores and four Company
stores due to overlapping locations.
The Agreement and Plan of Merger provides for an aggregate merger
consideration not to exceed 1,550,000 shares of the Michaels common stock, par
value $.10 per share ("Michaels Common Stock"). The aggregate consideration is
(i) subject to certain downward adjustments and (ii) payable, in part, in cash
in lieu of shares with respect to the net value of outstanding options to
purchase Leewards common stock, par value $.01 per share. Upon consummation of
the Merger, the Company will also repay the indebtedness under Leewards' bank
credit facility and subordinated notes. The Agreement and Plan of Merger
provides that if the Company consummates an underwritten offering of Michaels
Common stock on or before the closing of the Merger (a "Common Stock Offering")
resulting in either: (i) net proceeds per share of at least $42.00, the total
number of shares of Michaels Common Stock to be issued in connection with the
Merger shall be reduced by a number of shares (the "Reduced Share Number") equal
to 25% of the total number of shares sold in such offering excluding the
underwriters overallotment option (not to exceed 750,000 shares), and, in lieu
thereof, cash equal to the net proceeds per share multiplied by the Reduced
Share Number shall be distributed in connection with the Merger or (ii) net
proceeds per share of at least $39.00, the total number of shares of Michaels
Common Stock to be issued in connection with the Merger shall be reduced by a
number of shares (the "Alternate Reduced Share Number") equal to 25% of the
total number of shares sold in such offering excluding the underwriters
overallotment option (not to exceed 500,000 shares), and, in lieu thereof, cash
equal to the net proceeds per share multiplied by the Alternate Reduced Share
Number shall be distributed in connection with the Merger. The determination
of whether (i) or (ii) above applies to the Common Stock Offering shall be
determined by notice from Leewards to the Company on or before June 5, 1994.
If Leewards fails to provide such notice, Leewards shall be deemed to have
elected (ii) above. The Company has filed a Registration Statement on Form S-3
(No. 33-53639), which contemplates a public offering of Michaels Common Stock.
Consummation of the Merger is subject to customary conditions to closing,
including the expiration or termination of the waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, there having occurred no
material adverse changes in the condition (financial or otherwise), operations,
assets or liabilities of the Company or Leewards and approval of the Merger by
Leewards' shareholders (including termination of certain Leewards stockholders
agreements and warrants). The transaction is expected to close on or before
July 31, 1994.
OTHER ACQUISITIONS
In February 1994, the Company acquired Treasure House Stores, Inc., a
chain of nine arts and crafts stores operating primarily in the Seattle market,
for 280,000 shares of Michaels Common Stock. In April 1994, the Company
acquired the affiliated arts and crafts store chains of Oregon Craft & Floral,
with eight stores located primarily in the Portland, Oregon area, and H&H
Craft & Floral, with eight stores located in southern California, for a total
of 455,000 shares of Michaels Common Stock. All of these acquired stores will
be converted to the Michaels format with grand openings scheduled for May
through August of this year.
2
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS.
a. PRO FORMA FINANCIAL INFORMATION.
The following unaudited combined pro forma financial statements are
included herein on pages A-2 to A-5: (i) unaudited Pro Forma Combined Statement
of Income for the year ended January 30, 1994; (ii) Pro Forma Combined Balance
Sheet Information as of January 30, 1994; and (iii) the related notes
thereto.*
b. HISTORICAL FINANCIAL STATEMENTS OF LEEWARDS.
Included on pages F-3 to F-17 herein are the following: (i) the audited
Balance Sheets of Leewards as of January 30, 1994 and January 31, 1993;
(ii) the audited Statements of Operations of Leewards for the years ended
January 30, 1994 and January 31, 1993; (iii) the audited Statements of
Redeemable Preferred Stock and Common Stockholders' Equity of Leewards for the
years ended January 30, 1994 and January 31, 1993; (iv) the audited Statements
of Cash Flows of Leewards for the years ended January 30, 1994 and January 31,
1993; and (v) the related notes thereto.
c. EXHIBITS.
The following is a list of exhibits filed as part of this Current Report on
Form 8-K:
Exhibit
Number Description of Exhibit
- - ------- ----------------------
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.(1)
2.2 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.(2)
2.3 Amendment No. 1 to Stock Purchase Agreement(2)
2.4 Agreement and Plan of Merger, dated as of March 3, 1994, among
Michaels Stores, Inc. and the other parties listed therein.(1)
2.5 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.(1)
4.1 Restated Certificate of Incorporation of Michaels Stores, Inc.(3)
4.2 Bylaws of Michaels Stores, Inc. as amended and restated.(4)
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.(5)
4.5 First Amendment to Common Stock and Warrant Agreement, dated
October 31, 1984, between The First Dallas Group, Ltd. and Michaels
Stores, Inc.(5)
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.(5)
- - --------------------
* Pro forma financial statements do not reflect the acquisitions of Treasure
House Stores, Inc., Oregon Craft & Floral and H&H Craft & Floral, as such
acquisitions were not material in the aggregate.
3
<PAGE>
4.7 Third Amendment to Common Stock and Warrant Agreement, dated
February 27, 1985, between First Dallas Investments - Michaels Ltd.,
The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and
Michaels Stores, Inc.(4)
4.8 Amendment to Common Stock and Warrant Agreement, dated September 1,
1992, between Michaels Stores, Inc., The Andrew David Sparrow Wyly
Trust, Charles J. Wyly, Jr., The Martha Caroline Wyly Trust, The
Charles Joseph Wyly, III Trust, The Emily Ann Wyly Trust, The Jennifer
Lynn Wyly Trust, Donald R. Miller, Jr., Evan A. Wyly, The Laurie
Louise Wyly Trust, The Lisa Lynn Wyly Trust, The Sam Wyly and Rosemary
Wyly Children's Trust No. 1 of 1965 fbo Kelly Wyly and Tallulah,
Ltd.(3)
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.(5)
23 Consent of Deloitte & Touche(6)
____________________
(1) Previously filed as an exhibit to Michaels Stores, Inc.'s Registration
Statement on Form S-3 (No. 33-53639) and incorporated herein by reference.
(2) Previously filed as an exhibit to Michaels Stores, Inc. Registration
statement on Form S-3 (no. 33-52311) and incorporated herein by reference.
(3) Previously filed as an exhibit to Michaels Stores, Inc.'s Registration
Statement on Form S-8 (No. 33-54726) and incorporated herein by reference.
(4) Previously filed as an exhibit to Michaels Stores, Inc.'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 Michaels Stores, Inc.'s Annual Report on
Form 10-K for the year ended January 31, 1993 and incorporated herein by
reference.
(6) Filed herewith.
4
<PAGE>
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 hereunto duly authorized.
Date: May 23, 1994
MICHAELS STORES, INC.
By: /s/ R. DON MORRIS
------------------------------------
R. Don Morris
Executive Vice President, Chief
Financial Officer and Director
5
<PAGE>
Pro Forma Combined Condensed Financial Statements of Michaels and Leewards
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined statement of income of the
Company for the year ended January 30, 1994 has been prepared as if the Leewards
Acquisition, which will be accounted for by the purchase method of accounting,
occurred on February 1, 1993, the beginning of fiscal year 1993. The
accompanying unaudited pro forma combined balance sheet of the Company as of
January 30, 1994 has been prepared as if the Leewards Acquisition occurred on
that date.
The historical financial information of Leewards has been derived from its
historical financial statements included herein. The historical financial
information of the Company has been derived from the historical financial
statements appearing or incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended January 30, 1994. Certain amounts in the
statement of operations of Leewards for fiscal year 1993 included in the pro
forma combined statement of income have been reclassified to conform to the
method of presentation used by Michaels. The pro forma adjustments are
preliminary and are based upon available information and assumptions that
management of the Company believes are reasonable. The unaudited pro forma
combined financial statements do not purport to represent the financial position
or results of operations which would have occurred had such transactions been
consummated on the dates indicated or the Company's financial position or
results of operations for any future date or period. These unaudited pro forma
financial statements should be read in conjunction with the historical financial
statements of the Company and Leewards.
A-1
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................................. $ 619,688 $ 191,136 $ 810,824
Cost of sales and occupancy expense........................ 403,869 130,638 $ (1,903)(A) 532,604
Selling, general and administrative expense................ 174,463 57,000 443(B) 233,598
1,692(C)
----------- ----------- ------------- -----------
Operating income........................................... 41,356 3,498 (232) 44,622
Interest expense........................................... 6,378 3,439 (1,775)(D) 8,042
Other (income) and expense, net............................ (7,666) 635 (7,031)
----------- ----------- ------------- -----------
Income before income taxes................................. 42,644 (576) 1,543 43,611
Provision for income taxes................................. 16,357 (236) 1,294(E) 17,415
----------- ----------- ------------- -----------
Net income................................................. $ 26,287 $ (340) $ 249 $ 26,196
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Earnings per common and common equivalent share............ $ 1.53 $ 1.40
Earnings per common share -- assuming full dilution........ $ 1.52 $ 1.40
Weighted average common and common equivalent shares....... 17,231 1,451 18,682
Weighted average shares assuming full dilution............. 19,809 1,451 21,260
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
A-2
<PAGE>
PRO FORMA COMBINED BALANCE SHEET INFORMATION
JANUARY 30, 1994
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO
PRO FORMA FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
----------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents.................................... $ 867 $ 2,946 $ (2,205)(F) $ 1,608
Marketable and other securities......................... 67,956 -- 67,956
Merchandise inventories................................. 206,185 53,090 (6,770)(G) 252,505
Prepaid expenses and other.............................. 16,004 5,270 (2,000)(G) 33,774
14,500 (G)
----------- --------- ------------ -----------
Total current assets.................................. 291,012 61,306 3,525 355,843
----------- --------- ------------ -----------
Property and equipment, net............................... 75,872 18,945 (3,887)(G) 90,930
Costs in excess of net assets of acquired operations,
net...................................................... 23,503 -- 67,690 (G) 91,193
Other assets.............................................. 7,443 6,517 (6,517)(G) 7,443
----------- --------- ------------ -----------
$ 397,830 $ 86,768 $ 60,811 $ 545,409
----------- --------- ------------ -----------
----------- --------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 42,309 $ 15,157 $ 57,466
Short-term bank debt.................................... 13,000 15,525 $ 16,961 (H) 45,486
Subordinated debentures................................. 16,961 (16,961)(H) --
Income taxes payable.................................... 7,866 -- 1,038 (G) 8,904
Accrued liabilities and other........................... 46,021 13,563 3,624 (F) 87,586
24,378 (G)
----------- --------- ------------ -----------
Total current liabilities............................. 109,196 61,206 29,040 199,442
----------- --------- ------------ -----------
Convertible subordinated notes............................ 97,750 97,750
Deferred income taxes and other........................... 5,469 3,195 (3,195)(G) 5,469
----------- --------- ------------ -----------
Total long-term liabilities........................... 103,219 3,195 (3,195) 103,219
----------- --------- ------------ -----------
212,415 64,401 25,845 302,661
----------- --------- ------------ -----------
Redeemable preferred stock................................ -- 29,583 (29,583)(G) --
Shareholders' equity:
Common stock............................................ 1,670 2 (2)(G) 1,815
145 (F)
Additional paid-in capital.............................. 107,168 733 (733)(G) 164,356
57,188 (F)
Retained earnings....................................... 76,577 (7,951) 7,951 (G) 76,577
----------- --------- ------------ -----------
Total shareholders' equity............................ 185,415 (7,216) 64,549 242,748
----------- --------- ------------ -----------
$ 397,830 $ 86,768 $ 60,811 $ 545,409
----------- --------- ------------ -----------
----------- --------- ------------ -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
A-3
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Adjustments to the pro forma combined statement of income to reflect the
consummation of the Leewards Acquisition as of February 1, 1993 are as follows:
(A) To eliminate nonrecurring costs, primarily rental and related
occupancy costs, associated with the Leewards distribution center. Upon
consummation of the Leewards Acquisition and completion of the conversion of
the Leewards stores, the Leewards distribution center is to be closed.
(B) To adjust selling, general and administrative expense to (i) expense
pre-opening costs deferred by Leewards consistent with the Company's
accounting policy whereby pre-opening costs are expensed in the fiscal year
in which the store opens and (ii) to eliminate nonrecurring costs, primarily
salaries and related benefits, associated with reductions of Leewards
personnel and other costs.
(C) To amortize costs in excess of net assets acquired over a 40-year
period on a straight-line basis.
(D) To reduce the interest expense on the Leewards indebtedness
consisting of approximately $17 million of subordinated debentures and $11.5
million of average short-term borrowings from their stated rates of 13.5%
and 7.75%, respectively, to 4.9%, which rate approximates the Company's
incremental borrowing rate for fiscal year 1993. In connection with the
Leewards Acquisition, the Leewards subordinated debentures and short-term
borrowings are required to be repaid.
(E) To reflect the tax effects applicable to the above entries,
exclusive of the amortization of costs in excess of net assets acquired, at
a 40% effective tax rate.
Adjustments to the pro forma balance sheet to reflect the consummation
of the Leewards Acquisition as of January 30, 1994 are as follows:
(F) To record the costs of the Leewards Acquisition
<TABLE>
<C> <S> <C> <C>
1. Cash consideration to be paid $ 2,205
2. Shares to be issued in connection with the
Leewards Acquisition (1,451,468 shares at
an assumed price of $39.50 per share) 57,333
3. Liabilities incurred by Leewards in
connection with the Leewards Acquisition
by Michaels $ 2,374
4. Transaction costs 1,250 3,624
--------- ---------
Total acquisition costs $ 63,162
---------
---------
</TABLE>
(G) To adjust the carrying values of the net assets acquired to
estimated fair value as of January 30, 1994 and to accrue various
liabilities assumed in connection with the Leewards Acquisition
<TABLE>
<C> <S> <C> <C>
1. Write-down inventories to liquidate
incompatible merchandise of Leewards $ 6,770
2. Write-off deferred pre-opening costs to
conform Leeward's accounting policy to
that of Michaels 2,000
3. Write-off tradenames and other deferred
costs of Leewards 6,517
</TABLE>
A-4
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<C> <S> <C> <C>
4. Accrue costs of closing certain Leewards'
stores, corporate office and warehouse
including lease termination costs,
severance pay and other costs $ 20,971
5. Accrue costs associated with the changeover
of stores from the Leewards format to the
Michaels format 3,407 24,378
---------
6. Write-off of the carrying values of
leasehold improvements related to
facilities to be closed and other
adjustments to state other property and
equipment at estimated fair value 3,887
7. Record deferred tax assets related to the
above adjustments (14,500)
8. Eliminate deferred tax liabilities of
Leewards at the Leewards Acquisition date (3,195)
9. Record income tax liabilities assumed by
Michaels in connection with the Leewards
Acquisition related primarily to the
termination of the LIFO method of
inventory valuation for tax reporting
purposes, net of the tax benefits related
to certain transaction costs 1,038
10. Eliminate redeemable preferred stock and
common stockholders' deficit of Leewards
as of the Leewards Acquisition date (22,367)
---------
Excess of fair value of liabilities over
net assets acquired 4,528
Total acquisition costs 63,162
---------
Costs in excess of the net assets acquired $ 67,690
---------
---------
</TABLE>
(H) To reflect additional borrowings on Michaels' credit facility to
fund the required repayment of the Leewards subordinated notes in connection
with the Leewards Acquisition.
A-5
<PAGE>
Financial Statements of Leewards
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
INDEX TO FINANCIALS
PAGE
----
INDEPENDENT AUDITOR'S REPORT.............................................. F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED JANUARY 30, 1994 AND
JANUARY 31, 1993:
Balance Sheets.......................................................... F-3
Statements of Operations................................................ F-5
Statements of Redeemable Preferred Stock and Common
Stockholders' Equity................................................... F-6
Statements of Cash Flows................................................ F-7
Notes to Financial Statements........................................... F-8
F-1
<PAGE>
Two Prudential Plaza Telephone: (312)946-3000
180 North Stetson Avenue Facsimile: (312)946-2600
Chicago, Illinois 60601-6779
INDEPENDENT AUDITORS' REPORT
Board of Directors
Leewards Creative Crafts, Inc.
Elgin, Illinois
We have audited the accompanying balance sheets of Leewards Creative Crafts,
Inc. as of January 30, 1994 and January 31, 1993 and the related statements of
operations, of redeemable preferred stock and common stockholders' equity, and
of cash flows for the years then ended. 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, such financial statements present fairly, in all material
respects, the financial position of Leewards Creative Crafts, Inc. as of January
30, 1994 and January 31, 1993 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 11, the Company has entered into an Agreement and Plan
of Merger (the "Agreement") whereby it will become a wholly owned subsidiary of
Michaels Stores, Inc. ("Michaels"). The Agreement also provides that
simultaneously with the merger closing, Michaels shall cause the Company to
repay its long-term debt.
DELOITTE & TOUCHE
March 4, 1994
(May 11, 1994 as to Note 11)
F-2
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 2,946 $ 2,619
Accounts receivable, net of allowance for doubtful accounts:
1994 -- $2; 1993 -- $3......................................................................... 1,372 654
Merchandise inventories......................................................................... 53,090 37,530
Prepaid expenses and other current assets....................................................... 3,898 2,745
Deferred income taxes........................................................................... 343 495
--------- ---------
Total current assets........................................................................ 61,649 44,043
PROPERTY AND EQUIPMENT:
Land............................................................................................ 732 733
Buildings and improvements...................................................................... 987 972
Leasehold improvements.......................................................................... 6,918 5,169
Machinery and equipment......................................................................... 20,822 13,860
Construction in progress........................................................................ 84 20
--------- ---------
29,543 20,754
Less accumulated depreciation and amortization.................................................. 10,598 8,631
--------- ---------
Property and equipment -- net............................................................... 18,945 12,123
OTHER ASSETS:
Trade name, less accumulated amortization:
1994 -- $871; 1993 -- $719..................................................................... 5,188 5,340
Other intangibles, less accumulated amortization:
1994 -- $11,557; 1993 -- $11,113............................................................... 596 1,040
Deferred financing costs, less accumulated amortization:
1994 -- $2,687; 1993 -- $2,299................................................................. 656 892
Notes receivable................................................................................ 70
Miscellaneous assets............................................................................ 7 7
--------- ---------
Total other assets.......................................................................... 6,517 7,279
--------- ---------
TOTAL............................................................................................. $ 87,111 $ 63,445
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
--------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable................................................................................ $ 15,157 $ 9,147
Accrued expenses................................................................................ 12,851 11,193
Taxes other than income taxes................................................................... 712 798
Current maturities of long-term debt............................................................ 17,602 7,348
Long-term debt classified as current (Note 4)................................................... 14,884
Income taxes payable............................................................................ 1,098
--------- ---------
Total current liabilities................................................................... 61,206 29,584
LONG-TERM DEBT.................................................................................... 16,961
DEFERRED INCOME TAXES............................................................................. 3,538 3,926
--------- ---------
Total liabilities........................................................................... 64,744 50,471
COMMITMENTS AND CONTINGENCIES (Note 10)
REDEEMABLE PREFERRED STOCK:
Class A Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1994
-- 4,000; 1993 -- 2,135; shares outstanding: 1994 -- 2,349; 1993 -- 2,135...................... 10 9
Class B Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1994
-- 4,700; 1993 -- 2,514; shares outstanding: 1994 -- 2,765; 1993 -- 2,514...................... 11 10
Exchangeable Preferred Stock, $0.01 par value; shares authorized: 1994 -- 800,000; 1993 --
393,472; shares outstanding: 1994 -- 427,322; 1993 -- 393,472.................................. 325 255
Class C Senior Convertible Preferred Stock, $0.01 par value; 562,500 shares authorized: 549,629
shares outstanding............................................................................. 5 5
Class D Senior Convertible Preferred Stock, $0.01 par value; shares authorized: 1994 -- 194,050;
shares outstanding, 194,035.................................................................... 2
Class E Senior Convertible Preferred Stock, $0.01 par value; shares authorized and outstanding:
1994 -- 129,712................................................................................ 1
Undesignated Preferred Stock, $0.01 par value; shares authorized and outstanding: 1994 --
1,605,038; 1993 -- 2,039,379; 0 shares issued..................................................
Additional paid-in capital...................................................................... 29,229 18,579
--------- ---------
Total redeemable preferred stock............................................................ 29,583 18,858
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value; shares authorized: 1994 -- 4,000,000; 1993 -- 2,800,000; shares
outstanding: 78,281............................................................................ 1 1
Class B Common Stock, $0.01 par value; shares authorized: 1994 -- 300,000; 1993 -- 200,000;
shares outstanding: 73,275..................................................................... 1 1
Class C Common Stock, $0.01 par value; shares authorized: 1994 -- 600,000; 0 shares issued......
Additional paid-in capital...................................................................... 733 746
Deficit......................................................................................... (7,951) (6,632)
--------- ---------
Common stockholders' deficiency............................................................. (7,216) (5,884)
--------- ---------
TOTAL............................................................................................. $ 87,111 $ 63,445
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
NET SALES............................................................................... $ 190,261 $ 169,014
COST OF SALES........................................................................... 99,093 86,431
----------- -----------
91,168 82,583
OPERATING EXPENSES:
Selling and delivery.................................................................. 76,219 63,845
General and administrative............................................................ 6,900 5,754
Amortization of deferred pre-opening expenses......................................... 1,387 1,092
Depreciation and amortization......................................................... 3,549 3,431
----------- -----------
88,055 74,122
----------- -----------
OPERATING EARNINGS...................................................................... 3,113 8,461
OTHER INCOME (EXPENSE):
Restructuring expenses (Notes 1, 4 and 6)............................................. (24) (1,632)
Gain (loss) on assets disposal........................................................ (226) 503
Interest income....................................................................... 22
Interest expense:
Related parties..................................................................... (2,285) (2,137)
Other............................................................................... (1,154) (1,759)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................................................... (576) 3,458
INCOME TAXES
Currently payable..................................................................... 93 1,159
Deferred income taxes (benefit)....................................................... (329) 394
----------- -----------
(236) 1,553
----------- -----------
NET INCOME (LOSS)....................................................................... $ (340) $ 1,905
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------------------------------
EXCHANGEABLE
EXCHANGEABLE EXCHANGEABLE PREFERRED CONVERTIBLE CONVERTIBLE CONVERTIBLE
CLASS A CLASS B STOCK CLASS C CLASS D CLASS E
------------- ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 2, 1992............... $ 439 $ 759 $ 371
Amortization of issuance fees.........
Class A, Class B and exchangeable
preferred dividends accrued.......... 330 390 447
Sale of Class C preferred stock....... $ 30
Sale of common stock..................
Repurchase and cancellation of
outstanding shares...................
Paid-in-kind dividend................. (760) (1,139) (563)
Reverse split-common stock and Class C
preferred............................ (25)
Repurchase options....................
Net income............................
------ ------------- ------ -----
BALANCE, JANUARY 31, 1993............... 9 10 255 5
Amortization of issuance fees.........
Class A, Class B and Exchangeable
preferred dividends accrued.......... 215 252 408
Sale of Class D preferred stock....... $ 2
Sale of Class E preferred stock....... $ 1
Paid-in-kind dividend, May 1, 1993.... (338)
Repurchase options....................
Paid-in-kind dividend, January 15,
1994................................. (214) (251)
Net loss..............................
-- --
------ ------------- ------ -----
BALANCE, JANUARY 30, 1994............... $ 10 $ 11 $ 325 $ 5 $ 2 $ 1
-- --
-- --
------ ------------- ------ -----
------ ------------- ------ -----
<CAPTION>
REDEEMABLE
PREFERRED
STOCK COMMON STOCKHOLDERS' EQUITY
---------- ------------------------------------------
ADDITIONAL ADDITIONAL
PAID-IN COMMON CLASS B PAID-IN
CAPITAL STOCK COMMON CAPITAL DEFICIT
---------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 2, 1992............... $ 5,890 $ 5 $ 5 $ 1,190 $ (7,314)
Amortization of issuance fees......... 56 (56)
Class A, Class B and exchangeable
preferred dividends accrued.......... (1,167)
Sale of Class C preferred stock....... 10,146
Sale of common stock.................. 100
Repurchase and cancellation of
outstanding shares................... (1) (527)
Paid-in-kind dividend................. 2,462
Reverse split-common stock and Class C
preferred............................ 25 (3) (4) 7
Repurchase options.................... (24)
Net income............................ 1,905
-- --
---------- ----------- --------
BALANCE, JANUARY 31, 1993............... 18,579 1 1 746 (6,632)
Amortization of issuance fees......... 104 (104)
Class A, Class B and Exchangeable
preferred dividends accrued.......... (875)
Sale of Class D preferred stock....... 5,840
Sale of Class E preferred stock....... 3,903
Paid-in-kind dividend, May 1, 1993.... 338
Repurchase options.................... (13)
Paid-in-kind dividend, January 15,
1994................................. 465
Net loss.............................. (340)
-- --
---------- ----------- --------
BALANCE, JANUARY 30, 1994............... $ 29,229 $ 1 $ 1 $ 733 $ (7,951)
-- --
-- --
---------- ----------- --------
---------- ----------- --------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (340) $ 1,905
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization........................... 3,549 3,290
Deferred income taxes................................... (236) 503
Loss (gain) on disposal of fixed assets................. 226 (503)
Changes in:
Accounts receivable................................... (718) 521
Merchandise inventories............................... (15,560) 6,969
Prepaid expenses and other current assets............. (1,153) 1,303
Accounts payable...................................... 6,010 (11,952)
Accrued expenses and other liabilities................ 4 (448)
Taxes other than income............................... (86) (46)
Notes receivable...................................... (70) 88
Miscellaneous assets.................................. (1)
-------- --------
Net cash flows from operating activities............ (8,374) 1,629
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (9,670) (1,141)
Proceeds from sale of property............................ 57 1,503
-------- --------
Net cash flows from investing activities............ (9,613) 362
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing fees paid for restructuring revolving and term
credit agreements........................................ (152) (433)
Proceeds from issuance of stock........................... 9,746 10,276
Repurchase of stock....................................... (13) (551)
Issuance of subordinated debt accrual notes............... 2,077
Net borrowings (repayments) under revolving credit
agreement................................................ 8,177 (13,934)
Increase in checks outstanding............................ 556 474
-------- --------
Net cash flows from financing activities............ 18,314 (2,091)
-------- --------
NET INCREASE (DECREASE) IN CASH............................. 327 (100)
CASH AND CASH EQUIVALENTS -- Beginning of year.............. 2,619 2,719
-------- --------
CASH AND CASH EQUIVALENTS -- End of year.................... $ 2,946 $ 2,619
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest:
Related parties......................................... $ 2,290 $
-------- --------
-------- --------
Other................................................... $ 1,130 $ 1,804
-------- --------
-------- --------
Cash paid during the year for income taxes................ $ 1,103 $ 188
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
1. SUMMARY OF ACCOUNTING POLICIES:
OPERATIONS AND RESTRUCTURING
The Company engages in the retail sale of craft and home decor products. The
Company maintained the following number of Company-operated and franchised
stores at:
<TABLE>
<CAPTION>
COMPANY-
OPERATED FRANCHISES TOTAL
-------- ---------- -----
<S> <C> <C> <C>
January 30, 1994............................... 99 3 102
January 31, 1993............................... 85 2 87
</TABLE>
During the year ended January 31, 1993, the Company effected a restructuring
of its debt (Note 4), capital structure (Note 6) and ongoing operations. Costs
associated with these efforts, other than those directly associated with the
debt and capital restructurings, are included in restructuring expenses. Such
expenses include store closing, severance and other costs incurred in connection
with these efforts.
FISCAL YEAR-END -- The Company's fiscal year-end is the Sunday closest to
January 31.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash; amounts
due from major credit card companies, which are collected within 1 to 2 days
after date of sale; and highly liquid investments which, at time of purchase,
have maturities of three months or less.
MERCHANDISE INVENTORIES -- Merchandise inventories are stated at the lower
of last-in, first-out (LIFO) cost or market. During the year ended January 31,
1993, LIFO inventories were reduced from levels at the beginning of the year.
These reductions resulted in liquidation of LIFO inventory quantities carried at
the lower costs prevailing in the prior year as compared with the cost of the
current year's purchases. At January 30, 1994 and January 31, 1993, inventory
was valued at market which was lower than LIFO cost.
PRE-OPENING COSTS -- Pre-opening costs incurred for the opening of retail
locations are deferred and amortized over 12 months, commencing in the month
after the location opens. Unamortized deferred pre-opening costs included in
prepaid expenses were $2,208,000 and $97,000 at January 30, 1994 and January 31,
1993, respectively.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the respective assets, which are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................. 25-30 years
Leasehold improvements...................... Shorter of lease term or 10 years
Machinery and equipment..................... 3-10 years
</TABLE>
INTANGIBLE ASSETS -- Intangible assets, primarily the trade name, and
favorable lease agreements, are reported net of accumulated amortization. The
assets are being amortized on a straight-line basis over their useful lives
which range from 3 to 40 years.
INCOME TAXES -- The Company adopted SFAS No. 109, "Accounting for Income
Taxes," in the year ended January 31, 1993 and, accordingly, computes deferred
taxes using the liability method. Deferred tax assets and liabilities are
recorded based on differences between the financial statements and income tax
basis of assets and liabilities and the tax rate in effect when these
differences are expected to reverse.
F-8
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
2. ACCRUED EXPENSES
Accrued expenses include the following (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Outstanding checks................................................... $ 4,895 $ 4,339
Accrued payroll...................................................... 2,396 2,970
Other................................................................ 5,560 3,884
--------------- ---------------
Total................................................................ $ 12,851 $ 11,193
--------------- ---------------
--------------- ---------------
</TABLE>
3. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Current:
Federal............................................................ $ 829
State.............................................................. $ 93 330
------ -------
93 1,159
------ -------
Deferred:
Federal............................................................ (273) 310
State.............................................................. (56) 84
------ -------
(329) 394
------ -------
Total provision (benefit) for income taxes........................... $ (236) $ 1,553
------ -------
------ -------
</TABLE>
Provision for deferred taxes results from temporary differences in the
recognition of revenue and expense for financial statement and tax purposes.
Temporary differences arise principally from the following (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Amortization of intangibles.......................................... $ (203) $ (285)
Deferred store pre-opening costs..................................... 708 (321)
Accrued liabilities.................................................. (294) 137
Inventory capitalization............................................. (416) 205
Inventory reserves................................................... 127 118
Depreciation......................................................... 343 183
State taxes and effect of changes in state tax rates................. 70 109
Alternative minimum tax.............................................. (47) 171
Net operating loss................................................... (667)
Other................................................................ 50 77
------ ------
Total................................................................ $ (329) $ 394)
------ ------
------ ------
</TABLE>
The difference between the statutory federal income tax rate and the
effective tax rate is as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
------------- -------------
<S> <C> <C>
Statutory federal income tax rate.................................... (34.0)% 34.0%
State taxes, net of federal benefit.................................. (6.9) 6.1
Deferred tax adjustment.............................................. 4.8
----- -----
Effective income tax rate............................................ 40.9% 44.9%
----- -----
----- -----
</TABLE>
F-9
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
3. INCOME TAXES (CONTINUED)
At January 30, 1994 and January 31, 1993, the components of the deferred
income tax liability and asset were as follows (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax liability:
Intangibles.............................................................. $ 2,368 $ 2,558
Property and equipment................................................... 1,894 1,487
Other, net............................................................... (54) (119)
Net operating loss carryforward.......................................... (670)
----------- -----------
Total.................................................................. $ 3,538 $ 3,926
----------- -----------
----------- -----------
Deferred tax asset:
Inventory................................................................ $ 337
Accrued expenses......................................................... 860 $ 487
Prepaid expenses......................................................... (1,129) (184)
AMT credit carryforward.................................................. 218 91
Other -- net............................................................. 57 101
----------- -----------
Total.................................................................. $ 343 $ 495
----------- -----------
----------- -----------
</TABLE>
At January 30, 1994, the Company has $218,000 of AMT credits available for
carryforward to future years and an NOL carryforward of $1,635,000 which expires
in 2009.
4. LONG-TERM DEBT
Long-term debt consists of (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Revolving and term loan(a)................................................. $ 15,525 $ 7,348
Subordinated debentures(b),(c)............................................. 16,961 16,961
----------- -----------
Total long-term debt (See Note 11)......................................... 32,486 24,309
Less current maturities.................................................... (32,486) (7,348)
----------- -----------
Total.................................................................... $ $ 16,961
----------- -----------
----------- -----------
</TABLE>
(a) In August 1988, the Company entered into a secured revolving credit and
term loan agreement (the "agreement") which enabled the Company to borrow up to
a maximum of $25,000,000. On June 13, 1990, the Company restructured the
agreement to provide for additional borrowings up to $32,000,000 through August
19, 1993. On April 2, 1993 the borrowing limit was reduced to $29,920,000.
Borrowings outstanding under the agreement are (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Revolving loans............................................................ $ 14,067 $ 4,235
Term loan.................................................................. 1,458 3,113
----------- -----------
Total.................................................................... $ 15,525 $ 7,348
----------- -----------
----------- -----------
</TABLE>
The borrowings under the agreement are collateralized by the assets of the
Company. Interest is payable monthly based on the rate of interest publicly
announced by Citibank in New York, New York as Citibank's "base rate" ("Base
Rate"). In the year ended January 30, 1994, the interest rate was
F-10
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
4. LONG-TERM DEBT (CONTINUED)
Base Rate plus 2% for the period from February 1, 1993 to April 2, 1993 and Base
Rate plus 1.75% for the period from April 3, 1993 to January 30, 1994. During
the prior year ended January 31, 1993, the interest rate was Base Rate plus 5%
for the period from February 3, 1992 to June 22, 1992 and Base Rate plus 2% for
the period from June 23, 1992 to January 31, 1993. In the year ended January 30,
1994, the interest rate fluctuated between 7.75% and 8.0% and was 7.75% at
year-end; in the prior year, the rate fluctuated between 8.0% and 11.5% and was
8.0% at year-end.
Under the revolving credit loan, as restructured, the full availability of
this credit line is contingent on the cost of collateralized inventory, less
certain adjustments. Commitment fees on the revolving loan are one-half of one
percent of the average daily unused portion of the total facility, payable
monthly.
The term loan, as restructured, requires quarterly principal payments of
$413,750 and the balance on August 19, 1994.
The Company is in the preliminary stages of negotiating a new and expanded
credit facility.
In consideration for expanding the credit facility, the Company paid a
one-time fee of $200,000 and issued warrants to Citicorp to purchase 3,250
shares of Class B Common Stock, par value $0.01 per share, subject to adjustment
under certain antidilution provisions. The warrants are exercisable from the
date of issuance at $141.65 per share and expire the later of June 13, 1995 or
upon full payment of the credit facility.
The agreement has covenants providing for mandatory prepayment provisions
and requiring the Company to meet specified financial ratios and income tests.
Such tests include, but are not limited to, net worth and earnings before
interest, depreciation and taxes. The covenants impose limitations on, among
other things, the amount of capital expenditures for each year, creating or
incurring liens, and selling assets or granting guarantees, and prohibit
declaring or paying dividends on common stock unless specifically permitted
under the terms of the agreement. The Company has received waivers for all
events of noncompliance with such covenants during the fiscal year ended January
31, 1993. The Company was not in compliance with all covenants at January 30,
1994. Accordingly, at that date, all amounts outstanding under the agreement are
due on demand (See Note 11).
(b) In August 1988, the Company sold $14,884,000 of subordinated debentures
to a related party. Interest is payable semi-annually at 13.5%. Annual principal
payments of $3,742,000 begin May 15, 1997 and the remaining balance is due May
15, 2000. Included in interest expense are $2,285,000 and $2,137,000 for the
years ended January 30, 1994 and January 31, 1993, respectively, for the
indebtedness.
The debentures contain covenants, including limitations on indebtedness,
liens, and the incurrence of other subordinated indebtedness, and restrict
payments such as dividends on common stock. The Company has received waivers for
all events of noncompliance with such covenants during the fiscal year ended
January 31, 1993. At January 30, 1994, because of cross default provisions with
respect to the agreement referred to in (a) above, all amounts outstanding at
that date under the subordinated debentures also are due on demand and have been
classified as currently payable (See Note 11).
(c) RESTRUCTURING -- On June 22, 1992, the subordinated debentures were
restructured and amended to provide, among other things, for the interest
payments due on May 15 and November 15, 1992 to be made in the form of
additional promissory notes ("accrual notes") in the principal amount of the
interest payable at each date. The accrual notes will bear interest at 13.5% per
annum, payable semi-annually, and $1,038,000 is due on March 15, 1994 with the
balance due on November 15, 1994.
F-11
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
4. LONG-TERM DEBT (CONTINUED)
In addition, an acquirer of the Class C Senior Convertible Stock (Note 6)
acquired $5,000,000 of the subordinated debentures.
Scheduled principal maturities of long-term debt classified as current for
fiscal years subsequent to January 30, 1994 are as follows (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED
- - -----------
<S> <C>
February 1, 1998..................................................... $ 3,742
January 31, 1999..................................................... 3,742
Thereafter........................................................... 7,400
---------
Total................................................................ $ 14,884
---------
---------
</TABLE>
Unamortized deferred financing costs of $656,000 and $892,000 at January 30,
1994 and January 31, 1993, respectively, consist of professional and commitment
fees incurred in connection with the Company's revolving and term loan facility
and subordinated debentures. Such costs are being amortized on a straight-line
basis over the terms of the related debt.
5. PENSION PLAN
The Company has a defined benefit pension plan for its hourly workers with
benefits based on a fixed dollar rate per year of service. The plan assets are
invested primarily in short-term bonds and in equity securities. The Company's
funding policy is to contribute annually the minimum amount required by the
applicable Internal Revenue Code regulation. In April 1992, as part of a series
of cost reductions, the Company froze the hourly pension plan. As a result,
there will be no new entrants to the plan and no additional benefits accruing to
current participants beyond those earned as of the date the plan was frozen.
The following presents the funded status of the plan (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Estimated accumulated benefit obligation, including vested benefits......... $ 2,076 $ 1,866
----------- -----------
----------- -----------
Estimated accumulated vested obligation....................................... $ 1,857 $ 1,709
----------- -----------
----------- -----------
Projected benefit obligation.................................................. $ (2,076) $ (1,866)
Plan assets at market value................................................... 2,084 2,012
----------- -----------
Plan assets in excess of projected benefit obligation......................... 8 146
Unrecognized prior service cost............................................... 13 16
Unrecognized net gain......................................................... (75) (234)
----------- -----------
Accrued pension cost.......................................................... $ (54) $ (72)
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
5. PENSION PLAN (CONTINUED)
Pension expense includes the following components (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Interest cost on projected benefit obligation................................ $ 143 $ 142
Actual return on assets..................................................... (151) (102)
Net amortization and deferral............................................... (9) (59)
------ ------
Net periodic pension income................................................. $ (17) $ (19)
------ ------
------ ------
Actuarial assumptions:
Discount rate............................................................... 7.25% 8.0%
Asset rate of return........................................................ 8.0% 8.0%
</TABLE>
The Company has a trusteed profit-sharing plan, providing employees a
deferred compensation (401(k)) provision and Company matching provision. Under
the plan, eligible employees are permitted to contribute up to 15% of gross
compensation into the plan, and the Company will match each employee
contribution up to 4% of gross compensation at a rate established by the Board
of Directors.
The Company and its employees made the following contributions to the plan
during the years ended (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Employee contributions........................................................ $ 752 $ 672
Company matching contributions................................................ 141 117
----- -----
Total profit-sharing contributions............................................ $ 893 $ 789
----- -----
----- -----
</TABLE>
6. REDEEMABLE PREFERRED AND COMMON STOCK
a. EXCHANGEABLE PREFERRED STOCK -- Each share of Exchangeable Preferred
Stock is exchangeable for subordinated debentures due May 2, 2003 at the option
of the Company, but, if not exchanged, must be redeemed at that date or upon
sale of the Company, if earlier. The exchange rate and redemption price is
$10.00 per share.
b. CLASS A AND CLASS B CUMULATIVE EXCHANGEABLE SENIOR PREFERRED STOCK -- On
June 13, 1990, the Company authorized and issued 1,375 shares each of Class A
and Class B 30% Cumulative Exchangeable Senior Preferred Stock, $0.01 par value
per share, for $1,000 per share. Each share of Class A and Class B preferred
stock is, at the option of the Company, exchangeable for subordinated debentures
due May 2, 2003, but if not exchanged, must be redeemed on that date or upon
sale of the Company, if earlier. The exchange rate and redemption price is
$1,000 per share.
On June 22, 1992, the terms of the preferred stock were amended to reduce
the annual dividend rate on the Class A and Class B Cumulative Exchangeable
Senior Preferred Stock to 10% annually ($100 per share) from 30% annually ($300
per share), payable on January 15, and to reduce the dividend rate on the
Exchangeable Preferred Stock to 10% annually ($1.00 per share) from 14% annually
($1.40 per share), payable on May 1. All dividends in arrears as of June 22,
1992 on the preferred shares were paid in kind in lieu of cash payments. For so
long as the Class C, Class D, and Class E Preferred Stock is outstanding, future
dividends on the Class A and Class B Cumulative Exchangeable Senior Preferred
Stock and Exchangeable Preferred Stock must be paid in kind.
F-13
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
Accrued and undeclared dividends at January 30, 1994 and January 31, 1993
were as follows (in 000's):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Class A Cumulative Exchangeable Senior Preferred Stock....................... $ 10 $ 9
Class B Cumulative Exchangeable Senior Preferred Stock....................... 11 10
Exchangeable Preferred Stock................................................. 321 251
</TABLE>
Such accrued and undeclared dividends have been added to the carrying values
of the stock to which they accrue.
Issuance fees totalling approximately $287,000 related to the Redeemable
Preferred Stock were deducted from the related paid-in capital at the time of
issuance of these shares. Such fees are being amortized over the period ending
May 2, 2003.
c. CLASS C SENIOR CONVERTIBLE PREFERRED STOCK -- On June 22, 1992, the
Company issued 549,629 shares of Class C Senior Convertible Preferred Stock
("Class C Preferred Stock"), par value $0.01 per share, for $10,561,700. The
Class C Preferred Stock is convertible into common stock at the option of the
holder on a one-for-one basis. If unconverted, the Class C Preferred Stock must
be redeemed on June 15, 1999 or upon sale of the Company, if earlier. The
initial redemption price is $19.22 per share, increasing 10.0% per annum.
Issuance fees totalling approximately $386,000 related to the Class C Senior
Convertible Preferred Stock were deducted from the related paid-in capital at
the time of issuance of these shares. Such fees are being amortized over the
period ending June 15, 1999.
d. CLASS D AND CLASS E SENIOR CONVERTIBLE PREFERRED STOCK -- On May 28,
1993, the Company issued 194,035 and 129,712 shares of Class D and Class E
Senior Convertible Stock, respectively ("Class D and Class E Preferred Stock"),
par value $0.01 per share, for $6,000,000 and $4,010,000, respectively. The
Class D and Class E Preferred Stock is convertible into common stock at the
option of the holder on a one-for-one basis. If unconverted, the Class D and
Class E Preferred Stock must be redeemed on June 15, 1999 or upon sale of the
Company, if earlier. The initial redemption price is $30.92 per share,
increasing 10.0% per annum.
Issuance fees totalling approximately $158,000 and $106,000, respectively,
related to the Class D and Class E Preferred Stock, were deducted from the
related paid-in capital at the time of issuance of these shares. Such fees are
being amortized over the period ending June 15, 1999.
The Class C, Class D and Class E Preferred Stock rank pari passu and are
senior to the Exchangeable Preferred Stock and Class A and Class B Cumulative
Exchangeable Senior Preferred Stock.
e. COMMON STOCK -- Common stockholders have voting rights. Class B Common
Stock is non-voting and convertible into common stock at the option of the
stockholder at a conversion rate of 4.88884 shares of common stock for each
share of Class B Common Stock. Class C Common Stock is nonvoting and convertible
into common stock at the option of the stockholder at a conversion rate of 1
share of common stock for each share of Class C Common Stock.
7. STOCK SPLIT
On September 18, 1992, the Company amended and restated its charter which,
among other things, reduced the number of preferred shares authorized for
issuance to 3,000,000 and reduced the number of common shares authorized for
issuance to 3,000,000. In addition, a reverse stock split of the Company's
common stock, Class B Common Stock, and Class C Senior Convertible Preferred
F-14
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
7. STOCK SPLIT (CONTINUED)
Stock was accomplished, whereby one share was issued to replace each 5.333332
shares outstanding at the date of the split. All share and per share data, for
the year ended January 31, 1993, has been restated to reflect this split.
8. STOCK OPTIONS (ALL DATA REFLECTS THE STOCK SPLIT DESCRIBED IN NOTE 7)
In January 1989, the Company adopted a compensatory stock option plan (the
"1989 Plan"). Under the 1989 Plan, the Company granted restricted stock options
to purchase 41,759 shares of common stock at an exercise price of $2.00 or
$19.22 per share to key executives and employees. The right to exercise a stock
option was contingent upon the Company's achieving a cumulative earnings level
within four years of the date of the Plan or upon length of service. Options are
exercisable within ten years of the date of the grant. In addition, in June and
December 1992, the Company granted certain key executives 71,875 restricted
stock options at an exercise price of $19.22. The right to exercise these
options is contingent upon the Company's achieving a cumulative earnings target
through January 29, 1995. Options are exercisable within ten years of date of
the grant. In August 1993, the Company adopted an additional compensatory stock
option plan (the "1993 Plan"). Under the 1993 Plan, the Company granted
restricted options to purchase 58,500 shares of common stock at an exercise
price of $19.22 or $30.92 per share to key executives, directors and employees.
The right to exercise these options is contingent upon the Company's achieving a
cumulative earnings target through January 29, 1995. Options are exercisable
within ten years of the date of grant.
The following summarizes activity in the plans for the years ended:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Shares authorized.................................................... 172,134 113,634
--------------- ---------------
Outstanding shares granted, beginning of year........................ 111,258 50,000
Shares granted....................................................... 39,300 79,475
Shares canceled...................................................... (7,204) (18,217)
--------------- ---------------
Outstanding shares granted, end of year.............................. 143,354 111,258
--------------- ---------------
Shares available for grant........................................... 28,780 2,376
--------------- ---------------
--------------- ---------------
</TABLE>
Options for approximately 45,770 and 43,237 shares of common stock are
vested at January 30, 1994 and Janaury 31, 1993, respectively.
9. LEASES
The Company leases certain store premises and computer equipment. Certain
leases contain renewal options. The store leases generally provide that the
Company shall pay for property taxes, insurance and common area maintenance.
Future minimum rentals required under noncancelable operating leases which
have an original term of more than one year are as follows at January 30, 1994
(in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
- - ----------
<S> <C>
January 29, 1995................................................................. $ 18,146
January 28, 1996................................................................. 17,252
February 2, 1997................................................................. 15,822
February 1, 1998................................................................. 14,131
January 31, 1999................................................................. 11,701
Thereafter....................................................................... 40,542
-----------
Total............................................................................ $ 117,594
-----------
-----------
</TABLE>
F-15
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
9. LEASES (CONTINUED)
Rental expense for operating leases was $15,882,000 and $13,547,000 for the
years ended January 30, 1994 and January 31, 1993, respectively.
Certain store leases have percentage rent lease provisions. Percentage rent
paid totalled $258,000 and $182,000 for the years ended January 30, 1994 and
January 31, 1993, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of claims encountered in the normal
course of business. Management believes, based on advice of counsel, that the
ultimate outcome of all these matters will have no material adverse effect on
the Company.
The Company had arranged for letters of credit totalling $343,000 and
$153,000 as of January 30, 1994 and January 31, 1993, respectively, to secure
inventory purchases.
11. SUBSEQUENT EVENT
On May 10, 1994, the Company entered into an Agreement and Plan of Merger
(the "Agreement") whereby it will merge with a subsidiary of Michaels Stores,
Inc. ("Michaels") and thereby become a wholly owned subsidiary of Michaels. The
merger is expected to close in July, 1994. The Agreement also provides that
simultaneously with the closing, Michaels shall cause the Company to repay its
long-term debt.
F-16
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- - ------ -------
23 Consent of Deloitte & Touche
<PAGE>
Exhibit 23
Consent of Deloitte & Touche
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
listed below and in the related prospectuses of Michaels Stores, Inc. of our
report dated March 4, 1994 (May 11, 1994 as to Note 11) on the audit of the
financial statements of Leewards Creative Crafts, Inc. (the "Company") as of and
for the years ended January 30, 1994 and January 31, 1993, which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Agreement and Plan of Merger whereby the Company will become a subsidiary of
Michaels Stores, Inc.
<TABLE>
<CAPTION>
FORM REGISTRATION NO. PERTAINING TO MICHAELS STORES, INC.
<S> <C> <C>
S-8 2-92412 Stock Investment Plan
S-8 2-97848 Key Employee Stock Compensation Program
S-8 33-18476 Key Employee Stock Compensation Program
S-8 33-11985 Employees 401(k) Plan
S-3 33-21299 Registration of 802,000 shares of Common Stock
S-3 33-9456 Post Effective Amendment No. 1 to the Registration
Statement on Form S-1 for the registration of
1,000,000 shares of Common Stock
S-8 33-26338 Key Employee Stock Compensation Program
S-8 33-21573 Moskatel's, Inc. 401(k) Plan
S-3 33-22532 Registration of 30,000 shares of Common Stock
S-3 33-40673 Registration of 1,240,000 shares of Common Stock
S-8 33-43039 Employee Stock Purchase Plan
S-8 33-54726 Key Employee Stock Compensation Program
S-3 33-52311 Registration of 280,000 shares of Common Stock
S-3 33-67804 1992 Nonstatutory Stock Option Plan
</TABLE>
Deloitte & Touche
Chicago, Illinois
May 23, 1994
