SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
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.
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(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
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (214) 580-8242
----------------
Reference is made to the Current Report on Form 8-K (the "Form 8-K") filed
by Michaels Stores, Inc. on May 23, 1994. Item 5 of the Form 8-K is hereby
amended to read it its entirety as follows:
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
approximately 5 to 10 Michaels 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 certain shares of preferred stock and the
net value of outstanding options to purchase Leewards common stock. Upon
consummation of the Merger, the Company will also repay the indebtedness under
Leewards' bank credit facility and subordinated notes. Substantially all of
the conditions to the consummation of the Leewards Acquisition have been
satisfied, including approval of Leewards' stockholders and termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Consummation of the acquisition is nevertheless subject to certain customary
conditions to closing, including there having occurred no material adverse
changes in the condition (financial or otherwise), operations, assets or
liabilities of the Company or Leewards. The Leewards Acquisition is expected
to close on or before July 8, 1994. The Company has filed a Registration
Statement on Form S-3 (No. 33-53639), as amended, relating to a public offering
of Michaels Common Stock, which is expected to close following the closing of
the Leewards Acquisition. The offering includes the sale by certain Leewards
stockholders of shares of Michaels Common Stock to be received by them in
connection with the Merger. Under the Agreement and Plan of Merger, if the
Company consummates an underwritten offering of Michaels Common Stock on or
before the closing of the Leewards Acquisition resulting in 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 "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 Reduced Share Number shall be distributed in
connection with the Merger.
Michaels expects to incur a pretax charge in the quarter in which the
Leewards Acquisition is consummated. The charge will relate to the cost of
closing approximately 5 to 10 existing Michaels store locations in connection
with the integretion of Leewards. In accordance with generally accepted
accounting principles, the cost of closing the Company's existing store
locations will be expensed while the cost of closing the acquired Leewards
store locations will be included as an adjustment to the purchase price of
the acquisition.
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. The Treasure House stores have
been converted to the Michaels format and the Oregon Craft & Floral and the
H&H Craft and Floral stores are being converted to the Michaels format with
grand openings scheduled for July through August of this year.
NEW CREDIT FACILITY
In June 1994, Michaels entered into a new three-year, unsecured $150
million revolving credit facility to replace its existing $100 million
revolving credit facility.
2
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-6: (i) unaudited Pro Forma Combined
Statements of Income for the year ended January 30, 1994 and the quarter ended
May 1, 1994; (ii) Pro Forma Combined Balance Sheet Information as of
May 1, 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 31, 1993 and January 30, 1994 and the
unaudited balance sheet of Leewards as of May 1, 1994; (ii) the audited
Statements of Operations of Leewards for the years ended January 31, 1993 and
January 30, 1994 and the unaudited Statements of Operations for the quarters
ended May 2, 1993 and May 1, 1994; (iii) the audited Statements of Redeemable
Preferred Stock and Common Stockholders' Equity of Leewards for the years
ended January 31, 1993 and January 30, 1994 and the unaudited Statement of
Redeemable Preferred Stock and Common Stockholders' Equity of Leewards for the
quarter ended May 1, 1994; (iv) the audited Statements of Cash Flows of
Leewards for the years ended January 31, 1993 and January 30, 1994 and the
unaudited Statements of Cash Flows of Leewards for the quarters ended May 2,
1993 and May 1, 1994; 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 First Amendment to Agreement and Plan of Merger dated as of June 2,
1994 among Michaels Stores, Inc., LWA Acquisition Corporation and
Leewards Creative Crafts, Inc.(2)
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.(3)
2.3 Amendment No. 1 to Stock Purchase Agreement(3)
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.(4)
4.2 Bylaws of Michaels Stores, Inc. as amended and restated.(5)
4.3 Form of Common Stock Certificate.(5)
4.4 Common Stock and Warrant Agreement, dated as of October 16, 1984,
between Michaels Stores, Inc. and Peoples Restaurants, Inc., including
Form of Warrant.(6)
4.5 First Amendment to Common Stock and Warrant Agreement, dated
October 31, 1984, between The First Dallas Group, Ltd. and Michaels
Stores, Inc.(6)
4.6 Second Amendment to Common Stock and Warrant Agreement, dated
November 28, 1984, between First Dallas Investments - Michaels I, Ltd.
and Michaels Stores, Inc.(6)
- - - - - --------------------
* 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
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.(7)
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.(4)
4.9 Indenture, dated as of January 22, 1993, between Michaels Stores, Inc.
and NationsBank of Texas, N.A., as Trustee, including the form of 4
3/4%/6 3/4% Step-up Convertible Subordinated Note, included
therein.(6)
23 Consent of Deloitte & Touche(8)
99 Credit Agreement dated as of June 17, 1994 among Michaels Stores,
Inc., NationsBank of Texas, N.A. and the other Lenders signatory
thereto.(8)
____________________
(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.'s Quarterly
Report on Form 10-Q for the quarter ended May 1, 1994 and incorporated
herein by reference.
(3) Previously filed as an exhibit to Michaels Stores, Inc. Registration
statement on Form S-3 (no. 33-52311) and incorporated herein by reference.
(4) Previously filed as an exhibit to Michaels Stores, Inc.'s Registration
Statement on Form S-8 (No. 33-54726) 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, 1994 and incorporated herein by
reference.
(6) 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.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-9456) and incorporated herein by reference.
(8) Filed herewith.
4
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: June 21, 1994
MICHAELS STORES, INC.
By: /s/ R. DON MORRIS
------------------------------------
R. Don Morris
Executive Vice President, Chief
Financial Officer and Director
5
Pro Forma Combined Condensed Financial Statements of Michaels and Leewards
PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined statements of income of the
Company for the year ended January 30, 1994 and the quarter ended May 1, 1994
have 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 May 1, 1994 has been prepared as if the
Leewards Acquisition occurred on that date.
The historical financial information of the Company and Leewards has been
derived from the respective historical financial statements incorporated by
reference or included herein. Certain amounts in the statements of operations of
Leewards for fiscal year 1993 and the quarter ended May 1, 1994 included in the
pro forma combined statements 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.
The pro forma combined financial statements do not include the financial
statements of 1) Treasure House, which was acquired by the Company in February
1994 and will be accounted for using the pooling-of-interests method of
accounting, or 2) Oregon Craft & Floral and H&H Craft & Floral, which were
acquired as of May 1, 1994 and will be accounted for using the purchase method
of accounting, since the acquisitions are not considered material, individually
or in the aggregate, to the operating results or financial position of the
Company. Sales of Treasure House were approximately $15.6 million and $3.8
million for the year ended January 30, 1994 and the quarter ended May 1, 1994,
respectively. Combined sales of Oregon Craft & Floral and H&H Craft & Floral for
the same periods were approximately $41.8 million and $7.4 million,
respectively.
A-1
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 30, 1994
(UNAUDITED)
PRO
PRO FORMA FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
-------- -------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales....................................................................... $619,688 $191,136 $ --(A) $810,824
Cost of sales and occupancy expense............................................. 403,869 130,638 (1,903)(B) 532,604
Selling, general and administrative expense..................................... 174,463 57,000 443(C) 233,708
1,802(D)
-------- -------- ------------ --------
Operating income................................................................ 41,356 3,498 (342) 44,512
Interest expense................................................................ 6,378 3,439 (1,775)(E) 8,042
Other (income) and expense, net................................................. (7,666) 635 (7,031)
-------- -------- ------------ --------
Income before income taxes...................................................... 42,644 (576) 1,433 43,501
Provision for income taxes...................................................... 16,357 (236) 1,294(F) 17,415
-------- -------- ------------ --------
Net income...................................................................... $ 26,287 $ (340) $ 139 $ 26,086
-------- -------- ------------ --------
-------- -------- ------------ --------
Earnings per common and common equivalent share................................. $ 1.53 $ 1.41
Earnings per common share -- assuming full dilution............................. $ 1.52 $ 1.41
Weighted average common and common equivalent shares............................ 17,231 1,271 18,502
Weighted average shares assuming full dilution.................................. 19,809 1,271 21,080
See accompanying Notes to Pro Forma Combined Financial Statements.
A-2
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE QUARTER ENDED MAY 1, 1994
(UNAUDITED)
PRO
PRO FORMA FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
-------- -------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales....................................................................... $159,798 $ 46,507 $ --(A) $206,305
Cost of sales and occupancy expense............................................. 103,511 33,207 (619)(B) 136,099
Selling, general and administrative expense..................................... 47,216 14,332 (1,334)(C) 60,664
450(D)
-------- -------- ------------ --------
Operating income................................................................ 9,071 (1,032) 1,503 9,542
Interest expense................................................................ 2,026 994 (485)(E) 2,535
Other (income) and expense, net................................................. (1,031) 45 (986)
-------- -------- ------------ --------
Income before income taxes...................................................... 8,076 (2,071) 1,988 7,993
Provision for income taxes...................................................... 3,109 (849) 975(F) 3,235
-------- -------- ------------ --------
Net income...................................................................... $ 4,967 $ (1,222) $ 1,013 $ 4,758
-------- -------- ------------ --------
-------- -------- ------------ --------
Earnings per common and common equivalent share................................. $ 0.28 $ 0.25
Earnings per common share -- assuming full dilution............................. $ 0.28 $ 0.25
Weighted average common and common equivalent shares............................ 17,785 1,271 19,056
Weighted average shares assuming full dilution.................................. 17,856 1,271 19,127
See accompanying Notes to Pro Forma Combined Financial Statements.
A-3
PRO FORMA COMBINED BALANCE SHEET INFORMATION
MAY 1, 1994
(UNAUDITED)
ASSETS
PRO
PRO FORMA FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
-------- -------- ------------ --------
(IN THOUSANDS)
Current assets:
Cash and equivalents.............................................................. $ 2,867 $ 3,217 $ -- $ 6,084
Marketable and other securities................................................... 67,734 -- -- 67,734
Merchandise inventories........................................................... 230,406 48,833 (6,770)(H) 272,469
Deferred income taxes............................................................. -- 523 (523)(H) 16,616
16,616(H)
Prepaid expenses and other........................................................ 21,971 5,785 (1,211)(H) 26,545
-------- -------- ------------ --------
Total current assets............................................................ 322,978 58,358 8,112 389,448
-------- -------- ------------ --------
Property and equipment, net......................................................... 87,840 18,454 (3,757)(H) 102,537
Costs in excess of net assets of acquired operations, net........................... 43,954 -- 72,071(H) 116,025
Other assets........................................................................ 8,347 6,387 (6,336)(H) 8,398
-------- -------- ------------ --------
$463,119 $ 83,199 $ 70,090 $616,408
-------- -------- ------------ --------
-------- -------- ------------ --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 47,741 $ 9,551 $ -- $ 57,292
Short-term bank debt.............................................................. 56,000 18,118 9,175(G) 100,254
16,961(I)
Subordinated debentures........................................................... -- 16,961 (16,961)(I) --
Income taxes payable.............................................................. 4,252 -- 773(H) 5,025
Accrued liabilities and other..................................................... 45,259 14,572 3,976(G) 92,489
28,682(H)
-------- -------- ------------ --------
Total current liabilities....................................................... 153,252 59,202 42,606 255,060
-------- -------- ------------ --------
Convertible subordinated notes...................................................... 97,750 -- -- 97,750
Deferred income taxes and other..................................................... 5,521 2,852 (2,852)(H) 5,521
-------- -------- ------------ --------
Total long-term liabilities..................................................... 103,271 2,852 (2,852) 103,271
-------- -------- ------------ --------
Redeemable preferred stock.......................................................... -- 29,845 (29,845)(H) --
Shareholders' equity:
Common stock...................................................................... 1,746 2 (2)(H) 1,873
127(G)
Additional paid-in capital........................................................ 126,126 733 (733)(H) 177,480
51,354(G)
Retained earnings................................................................. 78,724 (9,435) 9,435(H) 78,724
-------- -------- ------------ --------
Total shareholders' equity...................................................... 206,596 (8,700) 60,181 258,077
-------- -------- ------------ --------
$463,119 $ 83,199 $ 70,090 $616,408
-------- -------- ------------ --------
-------- -------- ------------ --------
See accompanying Notes to Pro Forma Combined Financial Statements.
A-4
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) Revenues and related operating expenses of 20 overlapping Leewards
stores to be closed subsequent to the consummation of the Leewards
Acquisition have not been eliminated from the pro forma combined statements
of income since revenues are expected to increase in nearby Michaels stores.
The revenues of the 20 Leewards stores to be closed totaled $30.5 million
for the year ended January 30, 1994 and $7.0 million for the quarter ended
May 1, 1994.
(B) To eliminate nonrecurring costs, primarily rental and related
occupancy costs, associated with the Leewards distribution center, net of
incremental costs to be incurred at the Company's 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.
(C) To adjust selling, general and administrative expense to (i) account
for pre-opening costs incurred by Leewards consistent with the Company's
accounting policy whereby pre-opening costs are expensed in the fiscal year
in which the store opens by increasing (decreasing) expense by $2.0 million
and $(840,000) for the year ended January 30, 1994 and the quarter ended May
1, 1994, respectively, and (ii) eliminate nonrecurring costs, primarily
salaries and related benefits, associated with reductions of Leewards
corporate personnel and other costs of approximately $1.6 million and
$494,000 for the year ended January 30, 1994 and the quarter ended May 1,
1994, respectively.
(D) To amortize costs in excess of net assets acquired over a 40-year
period on a straight-line basis. The Company will assess the recoverability
of costs in excess of net assets acquired annually based on existing facts
and circumstances. The Company will generally consider projected earnings
before interest, taxes, depreciation and amortization, on an undiscounted
basis, as the on-going measure of recoverability.
(E) To reduce the interest expense on the Leewards indebtedness
consisting of approximately $17 million of subordinated debentures and
short-term borrowings (average outstanding borrowings approximated $11.5
million for the year ended January 30, 1994 and $16.8 million for the
quarter ended May 1, 1994) from their stated rates of 13.5% and 7.75%,
respectively, to 4.9%, which rate approximates the Company's incremental
borrowing rate for both of the periods presented. In connection with the
Leewards Acquisition, the Leewards subordinated debentures and short-term
borrowings are required to be repaid.
(F) 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 May 1, 1994 are as follows:
(G) To record the costs of the Leewards Acquisition. Cash payments and
shares issued are based on an assumed five day average closing stock price
of $40.50.
1. Cash consideration to be paid (funded with
short-term bank debt) $ 9,175
2. Shares to be issued in connection with the
Leewards Acquisition (1,271,146 shares) 51,481
3. Liabilities incurred by Leewards in
connection with the Leewards Acquisition
by Michaels $ 2,726
4. Transaction costs 1,250 3,976
--------- ---------
Total acquisition costs $ 64,632
---------
---------
A-5
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(H) To adjust the carrying values of the net assets acquired to
estimated fair value as of May 1, 1994 and to accrue various liabilities
assumed in connection with the Leewards Acquisition.
1. Write-down inventories to liquidate
incompatible merchandise of Leewards $ 6,770
2. Write-off deferred pre-opening costs to
conform Leewards' accounting policy to
that of Michaels 1,211
3. Write-off tradenames and other deferred
costs of Leewards 6,336
4. Accrue costs of closing Leewards' corporate
office and distribution center (including
lease termination costs, severance pay and
other costs) and costs associated with the
anticipated closing of certain Leewards'
stores (accrued closing costs relate only
to Leewards' stores) $ 24,182
5. Accrue costs associated with the changeover
of stores from the Leewards format to the
Michaels format 4,500 28,682
---------
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 3,757
7. Record deferred tax assets related to the
above adjustments (16,616)
8. Eliminate net deferred tax liabilities of
Leewards as of the Leewards Acquisition
date (2,329)
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 773
10. Eliminate redeemable preferred stock and
common stockholders' deficit of Leewards
as of the Leewards Acquisition date (21,145)
---------
Excess of fair value of liabilities over
net
assets acquired 7,439
Total acquisition costs 64,632
---------
Costs in excess of the net assets acquired $ 72,071
---------
---------
(I) 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-6
Financial Statements of Leewards
LEEWARDS CREATIVE CRAFTS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
INDEPENDENT AUDITORS' REPORT............................................................................... F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED JANUARY 31, 1993, JANUARY 30, 1994 AND (UNAUDITED) FOR THE THREE
MONTHS ENDED MAY 2, 1993 AND MAY 1, 1994
Balance Sheets........................................................................................... F-4
Statements of Operations................................................................................. F-6
Statements of Redeemable Preferred Stock and Common Stockholders' Equity................................. F-7
Statements of Cash Flows................................................................................. F-8
Notes to Financial Statements............................................................................ F-9
F-1
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 31, 1993 and January 30, 1994 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
31, 1993 and January 30, 1994 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
Chicago, Illinois
March 4, 1994
(May 11, 1994 as to Note 11)
F-2
(This page has been left blank intentionally.)
F-3
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
(IN 000'S EXCEPT SHARE DATA)
ASSETS
JANUARY 31, JANUARY 30, MAY 1,
1993 1994 1994
----------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 2,619 $ 2,946 $ 3,217
Accounts receivable, net of allowance for doubtful accounts
of $3, $2 and $2, respectively.............................. 654 1,372 1,008
Merchandise inventories...................................... 37,530 53,090 48,833
Prepaid expenses and other current assets.................... 2,745 3,898 4,777
Deferred income taxes........................................ 495 343 523
----------- ----------- -----------
Total current assets..................................... 44,043 61,649 58,358
PROPERTY AND EQUIPMENT:
Land......................................................... 733 732 732
Buildings and improvements................................... 972 987 1,009
Leasehold improvements....................................... 5,169 6,918 6,975
Machinery and equipment...................................... 13,860 20,822 20,731
Construction in progress..................................... 20 84 397
----------- ----------- -----------
20,754 29,543 29,844
Less accumulated depreciation and amortization............... 8,631 10,598 11,390
----------- ----------- -----------
Property and equipment -- net............................ 12,123 18,945 18,454
OTHER ASSETS:
Trade name, less accumulated amortization of $719, $871 and
$908, respectively.......................................... 5,340 5,188 5,151
Other intangibles, less accumulated amortization of $11,113,
$11,557 and $11,629, respectively........................... 1,040 596 524
Deferred financing costs, less accumulated amortization of
$2,299, $2,687 and $2,740, respectively..................... 892 656 603
Notes receivable............................................. -- 70 --
Miscellaneous assets......................................... 7 7 109
----------- ----------- -----------
Total other assets....................................... 7,279 6,517 6,387
----------- ----------- -----------
TOTAL.......................................................... $ 63,445 $ 87,111 $ 83,199
----------- ----------- -----------
----------- ----------- -----------
See notes to financial statements.
F-4
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
(IN 000'S EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
JANUARY 31, JANUARY 30, MAY 1,
1993 1994 1994
----------- ----------- -----------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable............................................. $ 9,147 $ 15,157 $ 9,551
Accrued expenses............................................. 11,193 12,851 13,673
Taxes other than income taxes................................ 798 712 899
Current maturities of long-term debt......................... 7,348 17,602 20,195
Long-term debt classified as current (Note 4)................ -- 14,884 14,884
Income taxes payable......................................... 1,098 -- --
----------- ----------- -----------
Total current liabilities................................ 29,584 61,206 59,202
LONG-TERM DEBT................................................. 16,961 -- --
DEFERRED INCOME TAXES.......................................... 3,926 3,538 2,852
----------- ----------- -----------
Total liabilities........................................ 50,471 64,744 62,054
COMMITMENTS AND CONTINGENCIES (Note 10)
REDEEMABLE PREFERRED STOCK:
Class A Cumulative Exchangeable Senior Preferred Stock, $0.01
par value; shares authorized: 1993 -- 2,135; 1994 -- 4,000;
shares outstanding: 1993 -- 2,135; 1994 -- 2,349............ 9 10 68
Class B Cumulative Exchangeable Senior Preferred Stock, $0.01
par value; shares authorized: 1993 -- 2,514; 1994 -- 4,700;
shares outstanding: 1993 -- 2,514; 1994 -- 2,765............ 10 11 80
Exchangeable Preferred Stock, $0.01 par value; shares
authorized: 1993 -- 393,472; 1994 -- 800,000; shares
outstanding: 1993 -- 393,472; 1994 -- 427,322 and 470,054,
respectively................................................ 255 325 4
Class C Senior Convertible Preferred Stock, $0.01 par value;
562,500 shares authorized: 549,629 shares outstanding....... 5 5 5
Class D Senior Convertible Preferred Stock, $0.01 par value;
shares authorized: 1994 -- 194,050; shares outstanding,
194,035..................................................... -- 2 2
Class E Senior Convertible Preferred Stock, $0.01 par value;
shares authorized and outstanding: 1994 -- 129,712.......... -- 1 1
Undesignated Preferred Stock, $0.01 par value; shares
authorized and outstanding: 1993 -- 2,039,379; 1994 --
1,605,038; 0 shares issued..................................
Additional paid-in capital................................... 18,579 29,229 29,685
----------- ----------- -----------
Total redeemable preferred stock......................... 18,858 29,583 29,845
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value; shares authorized: 1993 --
2,800,000; 1994 -- 4,000,000; shares outstanding: 78,281.... 1 1 1
Class B Common Stock, $0.01 par value; shares authorized:
1993 -- 200,000; 1994 -- 300,000; shares outstanding:
73,275...................................................... 1 1 1
Class C Common Stock, $0.01 par value; shares authorized:
1994 -- 600,000; 0 shares issued............................
Additional paid-in capital................................... 746 733 733
Deficit...................................................... (6,632) (7,951) (9,435)
----------- ----------- -----------
Common stockholders' deficiency.......................... (5,884) (7,216) (8,700)
----------- ----------- -----------
TOTAL.......................................................... $ 63,445 $ 87,111 $ 83,199
----------- ----------- -----------
----------- ----------- -----------
See notes to financial statements.
F-5
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF OPERATIONS
(IN 000'S)
YEAR ENDED QUARTER ENDED
------------------------ --------------------
JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1993 1994 1993 1994
----------- ----------- --------- ---------
(UNAUDITED)
NET SALES....................................................... $ 169,014 $ 190,261 $ 39,064 $ 46,246
COST OF SALES................................................... 86,431 99,093 19,615 24,252
----------- ----------- --------- ---------
82,583 91,168 19,449 21,994
OPERATING EXPENSES:
Selling and delivery.......................................... 63,845 76,219 16,288 19,483
General and administrative.................................... 5,754 6,900 1,511 1,801
Amortization of deferred pre-opening expenses................. 1,092 1,387 105 840
Depreciation and amortization................................. 3,431 3,549 834 954
----------- ----------- --------- ---------
74,122 88,055 18,738 23,078
----------- ----------- --------- ---------
OPERATING EARNINGS (LOSS)....................................... 8,461 3,113 711 (1,084)
OTHER INCOME (EXPENSE):
Restructuring expenses (Notes 1, 4 and 6)..................... (1,632) (24) -- (12)
Gain (loss) on asset disposal................................. 503 (226) -- 19
Other......................................................... 22 -- -- --
Interest expense:
Related parties............................................. (2,137) (2,285) (572) (572)
Other....................................................... (1,759) (1,154) (218) (422)
----------- ----------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............................... 3,458 (576) (79) (2,071)
INCOME TAXES
Currently payable............................................. 1,159 93 -- --
Deferred income taxes (benefit)............................... 394 (329) (32) (849)
----------- ----------- --------- ---------
1,553 (236) (32) (849)
----------- ----------- --------- ---------
NET INCOME (LOSS)............................................... $ 1,905 $ (340) $ (47) $ (1,222)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
See notes to financial statements.
F-6
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
(IN 000'S)
REDEEMABLE PREFERRED STOCK
-------------------------------------------------------------------------------------------------
EXCHANGEABLE ADDITIONAL
EXCHANGEABLE EXCHANGEABLE PREFERRED CONVERTIBLE CONVERTIBLE CONVERTIBLE PAID-IN
CLASS A CLASS B STOCK CLASS C CLASS D CLASS E CAPITAL
------------ ------------ ------------ ----------- ----------- ----------- ----------
BALANCE, FEBRUARY 2, 1992..... $ 439 $ 759 $ 371 $-- -$- -$- $ 5,890
Amortization of issuance
fees....................... -- -- -- -- -- -- 56
Class A, Class B and
exchangeable preferred
dividends accrued.......... 330 390 447 -- -- -- --
Sale of Class C preferred
stock...................... -- -- -- $ 30 -- -- 10,146
Sale of common stock........ -- -- -- -- -- -- --
Repurchase and cancellation
of outstanding shares...... -- -- -- -- -- -- --
Paid-in-kind dividend....... (760) (1,139) (563) -- -- -- 2,462
Reverse split-common stock
and Class C preferred...... -- -- -- (25) -- -- 25
Repurchase options.......... -- -- -- -- -- -- --
Net income.................. -- -- -- -- -- -- --
------ ------------ ------ ----------- ----- ----- ----------
BALANCE, JANUARY 31, 1993..... 9 10 255 5 -- -- 18,579
Amortization of issuance
fees....................... -- -- -- -- -- -- 104
Class A, Class B and
Exchangeable preferred
dividends accrued.......... 215 252 408 -- -- -- --
Sale of Class D preferred
stock...................... -- -- -- -- 2 -- 5,840
Sale of Class E preferred
stock...................... -- -- -- -- -- 1 3,903
Paid-in-kind dividend, May
1, 1993.................... -- -- (338) -- -- -- 338
Repurchase options.......... -- -- -- -- -- -- --
Paid-in-kind dividend,
January 15, 1994........... (214) (251) -- -- -- -- 465
Net loss.................... -- -- -- -- -- -- --
------ ------------ ------ ----------- ----- ----- ----------
BALANCE, JANUARY 30, 1994
(UNAUDITED): 10 11 325 5 2 1 29,229
Net loss.................... -- -- -- -- -- -- --
Amortization of issuance
fees....................... -- -- -- -- -- -- 29
Class A, Class B and
Exchangeable preferred
dividends accrued.......... 58 69 106 -- -- -- --
Paid-in-kind dividend, May
1, 1994.................... -- -- (427) -- -- -- 427
------ ------------ ------ ----------- ----- ----- ----------
BALANCE, MAY 1, 1994.......... $ 68 $ 80 $ 4 $ 5 $ 2 $ 1 $29,685
------ ------------ ------ ----------- ----- ----- ----------
------ ------------ ------ ----------- ----- ----- ----------
COMMON STOCKHOLDERS' EQUITY
--------------------------------------
CLASS ADDITIONAL
COMMON B PAID-IN
STOCK COMMON CAPITAL DEFICIT
------ ------ ---------- -------
BALANCE, FEBRUARY 2, 1992..... $5 $5 $1,190 $(7,314)
Amortization of issuance
fees....................... -- -- -- (56)
Class A, Class B and
exchangeable preferred
dividends accrued.......... -- -- -- (1,167)
Sale of Class C preferred
stock...................... -- -- -- --
Sale of common stock........ -- -- 100 --
Repurchase and cancellation
of outstanding shares...... (1) -- (527) --
Paid-in-kind dividend....... -- -- -- --
Reverse split-common stock
and Class C preferred...... (3) (4) 7 --
Repurchase options.......... -- -- (24) --
Net income.................. -- -- -- 1,905
-- --
---------- -------
BALANCE, JANUARY 31, 1993..... 1 1 746 (6,632)
Amortization of issuance
fees....................... -- -- -- (104)
Class A, Class B and
Exchangeable preferred
dividends accrued.......... -- -- -- (875)
Sale of Class D preferred
stock...................... -- -- -- --
Sale of Class E preferred
stock...................... -- -- -- --
Paid-in-kind dividend, May
1, 1993.................... -- -- -- --
Repurchase options.......... -- -- (13) --
Paid-in-kind dividend,
January 15, 1994........... -- -- -- --
Net loss.................... -- -- -- (340)
-- --
---------- -------
BALANCE, JANUARY 30, 1994
(UNAUDITED): 1 1 733 (7,951)
Net loss.................... -- -- -- (1,222)
Amortization of issuance
fees....................... -- -- -- (29)
Class A, Class B and
Exchangeable preferred
dividends accrued.......... -- -- -- (233)
Paid-in-kind dividend, May
1, 1994.................... -- -- -- --
-- --
---------- -------
BALANCE, MAY 1, 1994.......... $1 $1 $ 733 $(9,435)
-- --
-- --
---------- -------
---------- -------
See notes to financial statements.
F-7
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF CASH FLOWS
(IN 000'S)
YEAR ENDED QUARTER ENDED
------------------------- --------------------
JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1993 1994 1993 1994
----------- ----------- ------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 1,905 $ (340) $ (47) $ (1,222)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization.......................................... 3,290 3,549 834 954
Deferred income taxes.................................................. 503 (236) (64) (1,209)
Loss (gain) on disposal of fixed assets................................ (503) 226 -- (19)
Changes in:
Accounts receivable.................................................. 521 (718) (202) 707
Merchandise inventories.............................................. 6,969 (15,560) (272) 4,257
Prepaid expenses and other current assets............................ 1,303 (1,153) 47 (879)
Accounts payable..................................................... (11,952) 6,010 306 (5,606)
Accrued expenses and other liabilities............................... (448) 4 (2,475) (447)
Taxes other than income.............................................. (46) (86) 100 187
Notes receivable..................................................... 88 (70) -- --
Miscellaneous assets................................................. (1) -- (154) (32)
----------- ----------- ------- -----------
Net cash flows from operating activities........................... 1,629 (8,374) (1,927) (3,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................................... (1,141) (9,670) (872) (282)
Proceeds from sale of property........................................... 1,503 57 -- --
----------- ----------- ------- -----------
Net cash flows from investing activities........................... 362 (9,613) (872) (282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing fees paid for restructuring revolving and term credit
agreements.............................................................. (433) (152) (8) --
Proceeds from issuance of stock.......................................... 10,276 9,746 -- --
Repurchase of stock...................................................... (551) (13) -- --
Issuance of subordinated debt accrual notes.............................. 2,077 -- -- --
Net borrowings (repayments) under revolving credit agreement............. (13,934) 8,177 2,375 2,593
Increase in checks outstanding........................................... 474 556 3 1,269
----------- ----------- ------- -----------
Net cash flows from financing activities........................... (2,091) 18,314 2,370 3,862
----------- ----------- ------- -----------
NET INCREASE (DECREASE) IN CASH............................................ (100) 327 (429) 271
CASH AND CASH EQUIVALENTS -- Beginning of year............................. 2,719 2,619 2,619 2,946
----------- ----------- ------- -----------
CASH AND CASH EQUIVALENTS -- End of year................................... $ 2,619 $ 2,946 $ 2,190 $ 3,217
----------- ----------- ------- -----------
----------- ----------- ------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest:
Related parties........................................................ $ -- $ 2,290 $ -- $ --
----------- ----------- ------- -----------
----------- ----------- ------- -----------
Other.................................................................. $ 1,804 $ 1,130 $ 270 $ 496
----------- ----------- ------- -----------
----------- ----------- ------- -----------
Cash paid during the year for income taxes............................... $ 188 $ 1,103 $ 25 $ 19
----------- ----------- ------- -----------
----------- ----------- ------- -----------
See notes to financial statements.
F-8
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES:
QUARTERLY FINANCIAL STATEMENTS BASIS OF PRESENTATION -- The accompanying
financial statements and related footnote disclosures of Leewards Creative
Crafts, Inc. (the "Company") as of May 1, 1994 and for the three months then
ended and for the three months ended May 2, 1993 are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, which are of a normal
and recurring nature necessary for the fair presentation of financial position,
results of operations and cash flows. The results of operations for the three
months ended May 1, 1994 and May 2, 1993 are not necessarily indicative of the
results which may be expected for the entire year.
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:
COMPANY-
OPERATED FRANCHISES TOTAL
--------------- --------------- -----
January 31, 1993......................................................... 85 2 87
January 30, 1994......................................................... 99 3 102
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,
which reduction of LIFO inventory quantities had no material effect on 1993
operating earnings. Inventories at January 31, 1993, January 30, 1994, May 2,
1993 and May 1, 1994 were 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 $97,000 and $2,208,000 at January 31, 1993 and January 30,
1994, 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:
Buildings and improvements.................. 25-30 years
Leasehold improvements...................... Shorter of lease term or 10 years
Machinery and equipment..................... 3-10 years
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.
F-9
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED)
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.
2. ACCRUED EXPENSES
Accrued expenses include the following (in 000's):
JANUARY 31, JANUARY 30,
1993 1994
--------------- ---------------
Outstanding checks................................................... $ 4,339 $ 4,895
Accrued payroll...................................................... 2,970 2,396
Other................................................................ 3,884 5,560
--------------- ---------------
Total................................................................ $ 11,193 $ 12,851
--------------- ---------------
--------------- ---------------
3. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
000's):
JANUARY 31, JANUARY 30,
1993 1994
--------------- ---------------
Current:
Federal............................................................ $ 829
State.............................................................. 330 $ 93
------- ------
1,159 93
------- ------
Deferred:
Federal............................................................ 310 (273)
State.............................................................. 84 (56)
------- ------
394 (329)
------- ------
Total provision (benefit) for income taxes........................... $ 1,553 $ (236)
------- ------
------- ------
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):
JANUARY 31, JANUARY 30,
1993 1994
--------------- ---------------
Amortization of intangibles.......................................... $ (285) $ (203)
Deferred store pre-opening costs..................................... (321) 708
Accrued liabilities.................................................. 137 (294)
Inventory capitalization............................................. 205 (416)
Inventory reserves................................................... 118 127
Depreciation......................................................... 183 343
State taxes and effect of changes in state tax rates................. 109 70
Alternative minimum tax.............................................. 171 (47)
Net operating loss................................................... (667)
Other................................................................ 77 50
------ ------
Total................................................................ $ (394) $ (329)
------ ------
------ ------
F-10
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The difference between the statutory federal income tax rate and the
effective tax rate is as follows:
JANUARY 31, JANUARY 30,
1993 1994
------------- -------------
Statutory federal income tax rate.......................................... 34.0% (34.0)%
State taxes, net of federal benefit........................................ 6.1 (6.9)
Deferred tax adjustment.................................................... 4.8 --
----- -----
Effective income tax rate.................................................. 44.9% (40.9)%
----- -----
----- -----
At January 31, 1993 and January 30, 1994, the components of the deferred
income tax liability and asset were as follows (in 000's):
JANUARY 31, JANUARY 30,
1993 1994
----------- -----------
Deferred tax liability:
Intangibles.............................................................. $ 2,558 $ 2,368
Property and equipment................................................... 1,487 1,894
Other, net............................................................... (119) (54)
Net operating loss carryforward.......................................... -- (670)
----------- -----------
Total.................................................................. $ 3,926 $ 3,538
----------- -----------
----------- -----------
Deferred tax asset:
Inventory................................................................ $ 337
Accrued expenses......................................................... $ 487 860
Prepaid expenses......................................................... (184) (1,129)
AMT credit carryforward.................................................. 91 218
Other -- net............................................................. 101 57
----------- -----------
Total.................................................................. $ 495 $ 343
----------- -----------
----------- -----------
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):
JANUARY 31, JANUARY 30,
1993 1994
----------- -----------
Revolving and term loan(a)................................................. $ 7,348 $ 15,525
Subordinated debentures(b),(c)............................................. 16,961 16,961
----------- -----------
Total long-term debt (See Note 11)......................................... 24,309 32,486
Less current maturities.................................................... (7,348) (32,486)
----------- -----------
Total.................................................................... $ 16,961 $ --
----------- -----------
----------- -----------
(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.
F-11
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Borrowings outstanding under the agreement are (in 000's):
JANUARY 31, JANUARY 30,
1993 1994
----------- -----------
Revolving loans............................................................ $ 4,235 $ 14,067
Term loan.................................................................. 3,113 1,458
----------- -----------
Total.................................................................... $ 7,348 $ 15,525
----------- -----------
----------- -----------
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 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 and at May 1, 1994. Accordingly, at those dates, all amounts outstanding
under the agreement were 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
F-12
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
fiscal year ended January 31, 1993. At January 30, 1994, and at May 1, 1994,
because of cross default provisions with respect to the agreement referred to in
(a) above, all amounts outstanding at those dates under the subordinated
debentures also were 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 bear interest at 13.5% per
annum, payable semi-annually, and $1,038,000 was due on March 15, 1994 with the
balance due on November 15, 1994. All amounts due under these debentures remain
unpaid at May 1, 1994.
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):
YEARS ENDED
- - - - - ---------------------------------------------------------------------------------------------
February 1, 1998............................................................................. $ 3,742
January 31, 1999............................................................................. 3,742
Thereafter................................................................................... 7,400
---------
Total........................................................................................ $ 14,884
---------
---------
Unamortized deferred financing costs of $892,000 and $656,000 at January 31,
1993 and January 30, 1994, 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.
F-13
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PENSION PLAN (CONTINUED)
The following presents the funded status of the plan (in 000's):
JANUARY 31, JANUARY 30,
1993 1994
----------- -----------
Actuarial present value of benefit obligation:
Estimated accumulated benefit obligation, including vested benefits......... $ 1,866 $ 2,076
----------- -----------
----------- -----------
Estimated accumulated vested obligation....................................... $ 1,709 $ 1,857
----------- -----------
----------- -----------
Projected benefit obligation.................................................. $ (1,866) $ (2,076)
Plan assets at market value................................................... 2,012 2,084
----------- -----------
Plan assets in excess of projected benefit obligation......................... 146 8
Unrecognized prior service cost............................................... 16 13
Unrecognized net gain......................................................... (234) (75)
----------- -----------
Accrued pension cost.......................................................... $ (72) $ (54)
----------- -----------
----------- -----------
Pension expense includes the following components (in 000's):
JANUARY 31, JANUARY 30,
1993 1994
------------ ------------
Interest cost on projected benefit obligation................................ $ 142 $ 143
Actual return on assets..................................................... (102) (151)
Net amortization and deferral............................................... (59) (9)
------ ------
Net periodic pension income................................................. $ (19) $ (17)
------ ------
------ ------
Actuarial assumptions:
Discount rate............................................................... 8.0% 7.25%
Asset rate of return........................................................ 8.0% 8.0%
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):
JANUARY 31, JANUARY 30,
1993 1994
------------- -------------
Employee contributions........................................................ $ 672 $ 752
Company matching contributions................................................ 117 141
----- -----
Total profit-sharing contributions............................................ $ 789 $ 893
----- -----
----- -----
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
F-14
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
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.
Accrued and undeclared dividends at January 30, 1994 and January 31, 1993
were as follows (in 000's):
1993 1994
--------- ---------
Class A Cumulative Exchangeable Senior Preferred Stock.................................. $ 9 $ 10
Class B Cumulative Exchangeable Senior Preferred Stock.................................. 10 11
Exchangeable Preferred Stock............................................................ 251 321
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.
F-15
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
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
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:
JANUARY 31, JANUARY 30,
1993 1994
--------------- ---------------
Shares authorized.................................................... 113,634 172,134
--------------- ---------------
Outstanding shares granted, beginning of year........................ 50,000 111,258
Shares granted....................................................... 79,475 39,300
Shares canceled...................................................... (18,217) (7,204)
--------------- ---------------
Outstanding shares granted, end of year.............................. 111,258 143,354
--------------- ---------------
Shares available for grant........................................... 2,376 28,780
--------------- ---------------
--------------- ---------------
Options for approximately 43,237 and 45,770 shares of common stock are
vested at January 31, 1993 and January 30, 1994, 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.
F-16
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LEASES (CONTINUED)
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):
YEAR ENDED
- - - - - ---------------------------------------------------------------------------------
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
-----------
-----------
Rental expense for operating leases was $13,547,000 and $15,882,000 for the
years ended January 31, 1993 and January 30, 1994, respectively.
Certain store leases have percentage rent lease provisions. Percentage rent
paid totalled $182,000 and $258,000 for the years ended January 31, 1993 and
January 30, 1994, 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 $153,000 and
$343,000 as of January 31, 1993 and January 30, 1994, 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-17
INDEX TO EXHIBITS
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 First Amendment to Agreement and Plan of Merger dated as of June 2,
1994 among Michaels Stores, Inc., LWA Acquisition Corporation and
Leewards Creative Crafts, Inc.(2)
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.(3)
2.3 Amendment No. 1 to Stock Purchase Agreement(3)
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.(4)
4.2 Bylaws of Michaels Stores, Inc. as amended and restated.(5)
4.3 Form of Common Stock Certificate.(5)
4.4 Common Stock and Warrant Agreement, dated as of October 16, 1984,
between Michaels Stores, Inc. and Peoples Restaurants, Inc., including
Form of Warrant.(6)
4.5 First Amendment to Common Stock and Warrant Agreement, dated
October 31, 1984, between The First Dallas Group, Ltd. and Michaels
Stores, Inc.(6)
4.6 Second Amendment to Common Stock and Warrant Agreement, dated
November 28, 1984, between First Dallas Investments - Michaels I, Ltd.
and Michaels Stores, Inc.(6)
- - - - - --------------------
* 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.
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.(7)
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.(4)
4.9 Indenture, dated as of January 22, 1993, between Michaels Stores, Inc.
and NationsBank of Texas, N.A., as Trustee, including the form of 4
3/4%/6 3/4% Step-up Convertible Subordinated Note, included
therein.(6)
23 Consent of Deloitte & Touche(8)
99 Credit Agreement dated as of June 17, 1994 among Michaels Stores,
Inc. NationsBank of Texas, N.A. and the other Lenders signatory
thereto.(8)
____________________
(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.'s Quarterly
Report on Form 10-Q for the quarter ended May 1, 1994 and incorporated
herein by reference.
(3) Previously filed as an exhibit to Michaels Stores, Inc. Registration
statement on Form S-3 (no. 33-52311) and incorporated herein by reference.
(4) Previously filed as an exhibit to Michaels Stores, Inc.'s Registration
Statement on Form S-8 (No. 33-54726) 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, 1994 and incorporated herein by
reference.
(6) 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.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-9456) and incorporated by reference.
(8) Filed herewith.