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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-22834
SUCCESSORIES, INC.
(Exact Name of Registrant as Specified in its Charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 SPRINGER DRIVE
LOMBARD, ILLINOIS 60148
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 953-8440
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. X
The aggregate market value of the $.01 par value Common Stock held by
non-affiliates of the registrant on April 28, 1997, based upon the last
reported sale price on that date on the Nasdaq National Market of $6.25 per
share, was approximately $35,663,000.
Registrant had 5,706,028 shares of $.01 par value Common Stock,
outstanding as of April 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission within 120 days of February 1, 1997 are incorporated by
reference into Part III hereof.
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of personal
and business motivational and self-improvement products, many of which are
the Company's own proprietary designs. Successories' products include
distinctive lines of wall decor, desktop art, books, audio tapes,
personalized gifts and awards, greeting cards and mugs. In addition, the
Company sells other motivational products supplied by third parties.
Company personnel create proprietary art work and designs that can be used
in conjunction with a wide variety of products. The Company will also
customize its products to fulfill customers'special needs.
The majority of the Company's sales are derived from proprietary
products that have been internally developed, designed, or customized. All
products are designed to have a positive motivational or self-improvement
theme that can be used to reinforce basic business goals such as customer
service, attitude and teamwork, or to recognize achievement and good
performance, or as customer gifts. The Company's products also appeal to
individuals for both personal and professional motivation, and for gifts.
The Company's products are also purchased by organized sports teams and
individual athletes for motivational or inspirational purposes.
The Company has a wide range of customers, including Fortune 500
companies, mid-sized and small businesses, sole proprietors, entrepreneurs,
sales people, schools, athletic organizations and individuals. The
Company's products are marketed primarily under its SUCCESSORIES trade name
through direct marketing (both catalog and telemarketing), retail sales
(both franchise, co-retailing and Company-owned stores), and wholesale
distribution.
As of February 1, 1997, there were 95 SUCCESSORIES retail stores, 48
of which were Company- owned and 47 were franchised. The Company also
owns and operates one British Links retail store. For the fiscal year
ended February 1, 1997, the Company mailed a total of 11.7 million catalog
pieces. The following table shows the number of Company-owned and
franchised retail locations open at the beginning of the fiscal year, the
number opened and closed during the fiscal year, and the total open at the
end of the fiscal year:
Company-Owned Franchised
Locations Locations
At February 3, 1996 54 43
Opened 8 6
Acquired (British Links) 1 0
Closed (14) (2)
At February 1, 1997 49 47
The operating subsidiaries (the "Subsidiaries") of the Company
commenced operations in 1985 and their original owners included certain
current officers and directors of the Company. In October 1990, Primus
Development Group II Ltd. ("Primus") acquired in excess of 90% of the share
ownership of the Subsidiaries through a share exchange. The Company was
formed as a wholly-owned subsidiary of Primus and, in February 1992, Primus
merged into the Company. In March 1991 and April 1993, the Company
acquired the remaining outstanding shares of the Operating Subsidiaries
through share exchanges.
PRODUCTS
A majority of the Company's sales are derived from proprietary
products which either have been internally developed or designed, or
individually customized. All products are designed to have a positive
motivational or self-improvement theme which can be used in businesses to
reinforce basic business goals such as customer service, attitude and
teamwork, to recognize achievement and good performance and for customer
gifts. The Company's products also appeal to many individuals for both
personal and professional motivation and for gifts.
As of February 1, 1997, the Company offered a total of 3,500 stock-
keeping units ("SKUs"), of which 2,250 are available to the retail stores.
SUCCESSORIES retail stores generally carry an average of 850 SKUs and
kiosks carry an average of 550 SKUs. The Company's SUCCESSORIES catalog
carries approximately 500 SKUs in the 40-page version and 700 SKUs
in its 52-page edition.
The Company's proprietary wall decor product line includes dramatic
photography and other art developed, designed or customized in-house and
printed on high-quality coated paper stock with various motivational
captions. In addition, the Company produces posters with motivational
messages without photography. Company designers give each grouping of wall
decor products a unique uniform overall appearance, including consistent
visual themes, a range of predominant colors and distinctive border design
and lettering, thereby providing each grouping with a Trade Dress.
The prints within each product grouping are also similar in size. Most
framed art comes in a high-quality aluminum frame with an electroplated
high-gloss black finish. High-quality tempered glass is used for safety
reasons to protect against damage.
The Company's wall decor includes framed and unframed lithographs in
various sizes ranging from 16-inch by 20-inch to 24-inch by 30-inch. The
Company's merchandise is categorized into the product "groupings" that
convey a specific theme and Trade Dress.
The Company markets smaller versions (5-inch by 7-inch) of its wall
decor as well as other products designed to be placed on desktops and
countertops. In addition mini-sized framed lithographs and mouse pads are
produced in house. The Company also purchases other merchandise from third
parties. All desktop products contain motivational words and/or
images similar to those used for Wall Decor.
All books and tapes sold by the Company are specifically selected for
their motivational or inspirational content and include those published by
the Company as well as by third parties. The Company markets collections
of motivational or inspirational quotations containing illustrations by
Company artists, and educational books for sales, customer service and
human resource professionals.
The Company offers a wide variety of customized products to its
customers. In-house custom capabilities include hot-stamping,
screen-printing, and engraving for logos and personalized messages.
Etched brass and crystal products are also available. Some of the products
with customized features include employee awards, promotional items and
corporate gifts.
While SUCCESSORIES retail stores typically carry many of the Company's
proprietary products, they also carry a variety of products purchased
from outside vendors.
The Company recently acquired British Links Golf Classics, Inc., a
Dallas, Texas-based catalog company which sells "a tradition of fine golf
gifts, art and collectibles." Although the major product category is
wall decor the Company also sells watches, pens, wall plaques, clocks,
framed prints, chairs, lamps, books, planters, keepsake wooden boxes,
display racks and cabinets, glasses, mugs, jewelry and other related products.
PRODUCT DEVELOPMENT
The Company tries to expand its most popular product lines by offering
one or two new items with each new catalog version and by creating new
product lines that are distinctive in appearance from existing lines.
SALES AND MARKETING
The Company generates revenue through direct marketing, Company-owned
retail stores, franchise stores, wholesale distribution, and licensing
agreements. The Company believes that each one of these channels is an
efficient way to reach a specific segment of the customers. Customers are
categorized as follows:
- corporate buyers including executives, sales managers, human
resource managers and production managers of larger corporations,
- entrepreneurial buyers including small business owners, home
office businesses, sales professionals, and
- consumers who are primarily purchasing the Company's products as
a gift for the end user.
The Company believes that the optimal way to reach its diverse
customer base is to market its products through several distribution
channels. In addition, the Company believes that its different
distribution channels provide numerous benefits in cross-marketing. For
example, retail stores allow potential customers to view, first-hand, the
quality of the product offerings which may lead to future catalog sales.
In addition, retail stores act as a source of new customers for the
Company's catalog mailing list.
For the fiscal year ended February 1, 1997, retail revenues including
Company-owned stores were approximately 34% of total revenues, while
revenues derived from direct mail sales were approximately 49% of total
revenues. Revenues for the fiscal year ended February 1, 1997, from all
other sources (including wholesale revenues, product sales to franchisees,
franchise fees and royalty income) were approximately 17% of the Company's
total revenues.
The Company's revenue base is comprised of a wide range of customers
including Fortune 500 companies, mid-sized and small businesses, corporate
management personnel, athletic and educational organizations and retail
customers. No individual customer accounted for more than 10% of the
Company's net sales during the fiscal year ended February 1, 1997.
The Company emphasizes customer service to achieve its goal of
producing a high level of customer satisfaction. All merchandise sold to
the Company's direct mail and retail customers may be returned promptly
for any reason.
DIRECT MARKETING
Through the use of its SUCCESSORIES catalogs, the Company targets
sales managers, executives of small and medium-sized businesses, meeting
planners, human resource managers, corporate training managers and athletic
coaches who have purchased or shown a willingness to purchase the Company's
products in the past. These customers use the Company's products to
reinforce important work themes, to motivate and recognize employees, and
as gifts at meetings and conventions. In addition, the Company is
constantly prospecting for new customers by mailing its catalogs to
prospective customers which have favorable demographic profiles or purchasing
patterns.
The Company's catalog features the entire line of proprietary products
and some third-party products. The two types of catalogs currently being
mailed are a 52-page version mailed to customers and catalog requesters
and a 40-page version mailed to individuals on rented lists with the objective
to acquire them as new customers.
The Company maintains a large proprietary in-house database. Building
on this foundation, Successories maintains an ongoing prospecting effort by
testing various mailing lists and evaluating people's responsiveness to
the Company's product offerings. When a prospect makes a purchase, they are
promoted to the 52-page catalog using selection criteria based on purchase
history. A group of corporate sales representatives handle larger
corporate accounts through telemarketing. During the fiscal year ended
February 1, 1997, the Company mailed approximately 11.7 million Successories
catalogs.
During 1996, the Company acquired the stock of British Links Golf
Classics, Inc., a Dallas, Texas-based catalog company specializing in golf
wall decor and high-end golf gifts. The Company believes that, due to the
popularity of golf and its acceptance in the business community, the
Company will be able to generate incremental sales of British Links
products to the Company's in-house mailing list of business executives,
entrepreneurs and sales people. British Links produced four digest-size
issues of the British Links catalog with an average number of 64 pages per
issue and mailed approximately two million catalogs during the period
October 1996 through February 1, 1997.
RETAIL SALES
COMPANY-OWNED STORES
The Company's retail locations consist of stores and kiosks primarily
located in shopping malls. The Company's SUCCESSORIES stores were
introduced in early 1991. As of February 1, 1997, the Company owned a
total of 49 retail locations, including 44 stores and 5 kiosks. The
Company's retail stores are located in the District of Columbia, Canada and
the following states:
Arizona Indiana Oklahoma
California Maryland Pennsylvania
Colorado Massachusetts Texas
Florida Michigan Virginia
Georgia Minnesota Wisconsin
Illinois New York
Kiosks are self-contained, 10' by 12' retail displays located in the
center aisle of an enclosed shopping mall where all four sides of the
display are available for showing products and conducting sales. The
center of the kiosk is utilized for storage. Because of the lower costs
associated with establishing, furnishing and stocking such a location,
these types of locations offer a relatively inexpensive way for both the
Company and its franchisees to test mall locations prior to opening a
larger store.
Depending on seasonality, location, size of market and build-out
costs, the Company generally expects a new store to achieve profitability
within twelve months of opening.
Retail Division plans currently call for moderate expansion in the
next fiscal year with focus on profit enhancement at existing company-owned
stores and kiosks, rather than on new store revenues.
In April, 1997, the Company signed a three-year agreement with
Waldenbook Company, Inc., a subsidiary of the Borders Group, Inc., whereby
Successories will add retail kiosks to be owned and operated by Waldenbook.
These kiosks will be open from September through January. The Company
expects approximately 100 of these kiosks to be opened in 1997, the first
year of the agreement.
WHOLESALE DISTRIBUTION
The Company sells products to a number of wholesale customers. In
1996, the Company designed and introduced the WINNERS
Collection brand for wholesale distribution. Wholesale customers include
other direct marketing distributors and distributors who have acquired
distribution rights for the Company's products in other countries.
The Company licenses some of its proprietary images to third parties
for use in their products for which the Company receives a royalty payment.
These third parties generally market office supply products such as pens,
notebooks and note cubes either through retail stores or through direct
marketing catalog sales.
SALES TO FRANCHISEES
The Company's franchising strategy is to broaden its product
distribution through sales to franchisees. The Company attracts qualified
franchise operators with a low initial franchise fee. The franchisee then
purchases for resale Company manufactured products and products from others
that are Company-approved. Due to the proprietary nature of most of the
Company's products, the Company is the only available source for most products
sold by franchisees. Product sales to franchisees are typically made at a
discount to retail or at product cost plus a certain percentage.
FRANCHISING PROGRAM
The Company has devised a strategy whereby the development of Company-
owned stores is concentrated on major metropolitan areas with a base
population in excess of one million people, while franchise store
development is concentrated in areas with a base population of fewer than
one million people. The Company believes that it can operate Company-owned
stores most efficiently and profitably in areas where it has the ability to
operate multiple units in relatively close proximity. The operation of
several stores in a metropolitan area "cluster" allows the Company to
benefit from management and distribution efficiencies resulting from
providing products and services to several locations at once, as
opposed to providing such services to individual stores. In geographic
areas where the population and demographics suggest a single retail
location rather than several locations in a cluster, the Company may seek to
place a franchisee to act as an owner/operator. As an owner/operator, the
individual franchisee has the ability to service an individual retail
operation more efficiently than the Company by maintaining lower overhead
costs than those required by a single isolated Company-owned store.
Prospective franchisees frequently approach the Company on an
unsolicited basis. Franchisees must meet specific qualification criteria
and are pre-screened to substantiate level of interest and compliance
with certain minimum net worth and liquid asset tests. Prospective
franchisees who meet the initial qualification requirements are invited to
the Company's headquarters for extensive interviews with Company
executives, who must approve all franchisees. Upon approval,
franchisees sign a franchise agreement and pay a franchise fee prior to
participating in the franchise training and orientation program.
The Company provides its franchisees with a comprehensive system of
business training, education, site selection assistance, professional
marketing, promotion and advertising programs and other forms of franchise
support.
FRANCHISE OPERATIONS
All franchisees are required to comply with Company-established
operational policies and procedures relating to, among other things,
quality of service, training, design and decor of stores and trademark
usage. The Company's operations personnel make periodic visits to
franchise stores to ensure that the stores are operating in conformity with
Successories standards. The Company retains the right to receive an
assignment of any leasehold interest and gain possession of the store if
the franchisee fails to comply with the Company's operational policies and
procedures or upon expiration of the franchise agreement.
The Company provides its franchisees with training at both the
Company's headquarters and at Company-owned retail locations focused on the
various aspects of store management including marketing fundamentals,
financial controls and product knowledge. In addition, the Company
provides ongoing employee training to franchisees and their managers, as
well as its own managers.
Various factors are considered in evaluating sites including trade
area demographics, availability and cost of space, location of competitors
and total retail sales in a given enclosed shopping area. The Company
reviews all proposed franchise store locations and reserves the right to
review the lease terms thereof.
FRANCHISE AGREEMENT
The Company attracts qualified franchise operators with a low initial
franchise fee. The franchised store purchases Company products or products
that are Company-approved. Due to the proprietary nature of most of the
Company's products, the Company is the only available source for many
products sold by franchisees. The franchise fee for the first store is
$35,000, and $30,000 for each additional store, payable in full upon
execution of a franchise agreement. Franchisees are responsible for the
costs of leasehold improvements, inventory, furniture, fixtures, decor and
certain other items including initial working capital.
Franchisees currently pay a monthly royalty to the Company of 2% of
franchise gross sales. All franchisees are further required to spend
between $2,000 and $3,000 on grand opening advertising followed by 3% of
monthly gross sales for local advertising and promotion.
The franchise agreements have an initial term of five years with an
option for the franchisee to renew for three additional, successive terms
of five years each. The agreements also provide the Company with the right
to purchase the franchisee's store assets upon termination or expiration of
the franchise agreement, and a right of first refusal if the franchise is
to be sold. The franchisee must obtain the Company's approval in all
instances where there is a sale of the franchise. The franchise agreement
is granted for the operation of a single retail store at a specified
location. The Company reserves certain rights within close proximity to
franchised retail stores to sell products through channels of distribution
distinct from that of a franchised retail business.
MANUFACTURING, ORDER FULFILLMENT AND DISTRIBUTION
The Company's manufacturing operations consist primarily of framing,
product-engraving, hot-stamping and silk screening. The Company mounts and
assembles its framed wall decor in-house and has developed a special
packaging system designed to reduce the risk of breakage in shipping.
Generally, the Company's catalog customers may choose to have their
orders sent via ground shipment, express economy (4 - 6 days), express (2 -
3 days) or next day shipment. The Company's manufacturing operations and
order fulfillment capabilities enable it to accommodate last-minute orders
for a variety of products, and to produce samples of products for existing
and potential customers. These capabilities further enable the Company to
produce and test products before inclusion in the distribution channels.
The Company depends upon outside suppliers for many items such as
mugs, stationary and components for framing, all of which are readily
available from a number of suppliers. In addition, the Company outsources
its film work and printing, although its creative staff works closely with
outside film houses and printers to assure that all work is done to the
Company's specifications and satisfaction.
SEASONALITY
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality."
COMPETITION
The industry supplying motivational, self-improvement and custom
awards is highly competitive and fragmented, with limited barriers to
entry. The primary bases for competition are customer service, selection,
price, quality and name recognition. Although certain classes of products
offered by the Company such as greeting cards, mugs and books are offered
by many other companies, the Company is not aware of any other company with
established distribution channels that offers a similar range of products
with motivational and self-improvement themes.
The Company competes with other franchisors for qualified franchisees.
The Company's strategy is to attract franchisees with successful business
and management backgrounds. Franchisees are not required to have
experience in the retail industry or with the types of products offered by
the Company.
TRADEMARKS AND SERVICE MARKS
The Company owns a federal registration for the service mark
SUCCESSORIES on the Principal Register of the United States Patent and
Trademark Office ("PTO"). The Company believes the use of the service mark
SUCCESSORIES is important in establishing and maintaining its reputation
and is committed to protecting this service mark by vigorously challenging
any unauthorized use.
Although many of the quotations, photographs and other art work used
by the Company are in the public domain and are not individually
protectable under copyright and trademark laws, the Company continually
endeavors to protect its products by giving them a distinctive trade dress.
EMPLOYEES
As of February 1, 1997, the Company employed 562 persons, 316 of whom
were employed full time. Of this total, 249 were employed at corporate
headquarters in marketing, manufacturing, order fulfillment or
administrative capacities, and 313 were field personnel, store
managers or store personnel. The Company is not a party to any
collective bargaining agreements and has not experienced a strike or work
stoppage. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company leases all Company stores from various property owners
under terms typical in enclosed mall, strip shopping center or hotel
leases. Lease terms vary from five to ten years for stores,
and six months to one year for kiosks. None of the Company's stores leases
are individually material to the operations of the Company, and the Company
expects that it will be able to renew its leases on satisfactory terms as
they expire.
The Company leases its executive offices and manufacturing/warehouse
space in Lombard, Illinois, under the terms of a lease agreements which
expire May 31, 1997. Its executive offices occupy 29,313 square feet and
its manufacturing/warehouse facilities occupy 92,632 square feet. In July
1996 the Company executed a lease for a new corporate headquarters and
manufacturing/warehouse facility. The lease is for approximately 30,000
square feet of office space and 100,000 square feet of
manufacturing/warehouse space located in Aurora, Illinois. The lease
commences June 1, 1997 for a 12-year term.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company.
The Company is, however, involved in routine litigation arising in the
ordinary course of its business, and, while the results of the proceedings
cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
Arnold M. Anderson 52 Chief Executive Officer, Chairman of the Board and
Director for the Company since June 1995; prior
thereto, Chief Executive Officer, President, Chairman
of the Board and Director for the Company and its
predecessor (Primus) since October 1990; prior thereto,
Chairman and President of the Operating Subsidiaries.
James M. Beltrame 53 Chief Operating Officer and President for the Company
since June 1995, Director for the Company from March
1995, Chief Financial Officer for the Company from
March 1995 to June 1996; prior thereto, Chief Financial
Officer for RTO Enterprises since 1992; prior thereto,
Director, Executive Vice President, Chief Financial
Officer for Restaurant Associates since 1984.
M. Andrew King 39 Vice President and Chief Financial Officer from June
1996; Vice President of Administration and Treasurer
for the Company since 1995; prior thereto, Treasurer
for RTO Enterprises since 1991; prior thereto,
principal owner of Birchwood Financial Group.
Timothy C. Dillon 34 Vice President, General Counsel and Secretary for the
Company since 1993, Director for the Company since
1995; prior thereto, President of First American
Franchise Corporation since 1992; prior thereto,
attorney for Francorp, Inc.
Raymond A. Mackie 57 Vice President of Manufacturing Operations for the
Company since April 1995; prior thereto, Operations
Manager of Ivex Packaging Corporation since 1993; prior
thereto, Vice President of Operations for Hexacomb
Corporation since 1990.
Michael H. McKee 43 Senior Vice President, Creative Director and Director
for the Company and its predecessor since October 1990;
prior thereto, Creative Director of Product Development
and Advertising for the Operating Subsidiaries.
John F. Halpin 43 Senior Vice President, Direct Marketing Division for
the Company since September, 1996; prior thereto, Vice
President of Marketing for Foster & Gallagher, Inc.;
prior thereto, Director of Mail Order Promotions for
Encyclopedia Britannica.
Peter C. Walts 36 Senior Vice President of Business Development for the
Company and its predecessor since October 1990; prior
thereto, held various positions with the Operating
Subsidiaries.
Jill K. Werner 41 Vice President, Retail Division for the Company
since 1996; prior thereto, held various positions
within the Company since 1993; prior thereto,
principal owner of I. M. Petite, Inc., retail
store chain since 1982.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the NASDAQ National Market under
the symbol SCES.
The following table sets forth the high and low closing bid prices for
the Company's Common Stock as reported by the NASDAQ Stock Market for the
applicable periods shown.
BID PRICE RANGE
Fiscal Year Ended February 3, 1996 HIGH LOW
First Quarter $9.125 $6.25
Second Quarter 7.625 5.625
Third Quarter(Ended
February 3, 1996) 9.25 6.75
Fiscal Year Ended February 1, 1997
First Quarter $9.125 $7.750
Second Quarter 8.375 5.125
Third Quarter 7.625 4.875
Fourth Quarter 8.250 6.375
As of April 15, 1997, the number of holders of record of the Company's
Common Stock was approximately 602, and there were approximately 1,150
beneficial owners of the Company's Common Stock.
On December 17, 1996, the Company sold 1,212 shares of its Series B
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") to
Infinity Inventors, Ltd., a non-U.S. person ("Infinity"), and Seacrest
Capital Limited, a non-U.S. person ("Seacrest"), for $5,000,000 in cash
in a non-public transaction exempt from registration pursuant to Regulation
D under the Securities Act. Each share has a liquidation preference of $5,000
(the "Liquidation Preference") and a par value of $100 per share. The Series
B Preferred Stock shares are entitled to a dividend at a rate of 4.95% per
annum.
Each share of Series B Preferred Stock is convertible into that number
of shares of Common Stock obtained by dividing the Liquidation Preference
by the lesser of (X) $9.00 and (Y) the average of the closing bid prices
per share of Common Stock on NASDAQ for the five consecutive trading days
immediately preceding the date of determination (the "Market Price"). The
Conversion Price may be increased by an amount equal to the formula:
I = (C = (1.25 x 9.00)) /2, where
I = Increase in Conversion Price
C = Market Price
All outstanding Series B Preferred Stock shall automatically be
converted into Common Stock on December 17, 1998; provided, however, that the
conversion right of a holder of Series B Preferred Stock is limited (subject
to certain exceptions) so that in no instance shall the maximum number of
shares of Common Stock which such holder may receive on conversion exceed
at any one time, an amount equal to the remainder of (X) 4.99% of the then
issued and outstanding shares of Common Stock following such conversion minus
(Y) the number of shares of Common Stock of the Company then owned by such
holder; and provided, further, that the Company shall not be obligated to
honor any conversion (including any automatic conversions on December 17,
1998) if after giving effect to the issuance of the shares of Common Stock,
the Company would not be in compliance with applicable National Association
of Securities Dealers corporate governance rules (the "Conversion Limit").
Any shares of Series B Preferred Stock which cannot be converted solely as
a result of the Conversion Limit must be redeemed by the Company for an amount
equal to the number of shares of Common Stock that would have been issued
upon such conversion uultiplied by the Market Price.
For the year ended February 1, 1997, none of the shares of the Series B
Preferred Stock had been converted into common stock of the Company.
On March 31, 1997, subsequent to the year ended February 1, 1997, the
Company paid a cash dividend on preferred stock in the amount of $86,293.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for the Company and its
subsidiaries for the three years ended April 30, 1995, the nine-month stub
period ended February 3, 1996 and the year ended February 1, 1997. For
discussion purposes, management refers to the stub period of May 1, 1995
through February 3, 1996 as the nine months ended February 3, 1996. Per
share amounts have been adjusted to reflect a 3 for 2 stock split paid
April 12, 1994.
Nine Months
Ended Year Ended
YEARS ENDED APRIL 30 FEBRUARY 3, FEBRUARY 1,
1993 1994 1995 1996 1997
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net product sales . $12,478 $28,594 $42,809 $35,484 $56,032
Income (loss) before income taxes
and cumulative effect of change
in accounting principle . . 1,605 3,619 (7,745) (688) (2,347)
Income tax expense (benefit) 580 1,405 -- (1,388) (2,609)
Income (loss) before cumulative effect
of change in accounting
principle . . . . . . . . . . 1,025 2,214 (7,745) 700 262
Cumulative effect of change in accounting
principle for income taxes . . 580 -- -- -- --
Net income (loss) . . . . . . . $1,605 $2,214 ($7,745) 700 $ 262
Earning (loss) per common and
common share equivalent . . . $0.47 $0.50 ($1.60) $0.13 ($.16)
Weighted average number of common
shares and equivalents
outstanding 3,419,000 4,393,000 4,854,000 5,467,000 5,321,000
BALANCE SHEET DATA:
Total assets . . . 7,056 21,790 29,166 32,166 32,680
Long-term debt . . 618 218 8,275 8,528 4,094
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and
Notes thereto included elsewhere in this Report.
The Company is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of
motivational and self-improvement products, many of which are the Company's
own proprietary designs. Its products include distinctive lines of wall
decor, desktop art, books, audio tapes, personalized gifts and awards,
greeting cards and mugs. In addition, the Company sells books, other
motivational products supplied by third parties. In-house designers
create proprietary art work and designs that can be used in conjunction with
a wide variety of products. Company personnel also customize products to
fulfill customers' special need.
The majority of the Company's sales are derived from proprietary products
that have been internally developed, designed, or customized. All products
are designed to have a positive motivational or self-improvement theme which
can be used to reinforce basic business goals such as customer service,
attitude and teamwork, or to recognize achievement and good performance, or
as customer gifts. The Company's products also appeal to individuals for
both personal and professional motivation, and for gifts. They are also
purchased by organized sports teams and individual athletes for
motivational or inspirational purposes.
The Company has a wide range of customers, including corporate buyers
(executives, sales managers, human resource managers, and production
managers of larger corporations), entrepreneurial buyers (small business
owners, home office businesses, and sales professionals), as well as
individual consumers, schools and athletic organizations. The Company's
products are marketed primarily under its SUCCESSORIES and WINNERS
collection trade names through direct marketing (both catalog and
telemarketing), retail sales (both franchise and Company-owned stores), and
wholesale distribution.
Although the Company utilizes multiple distribution channels for its
products, the Company's products have similar purposes and uses in each
channel of distribution and similar opportunities for growth. The
profitability varies among products and distribution channels. The Company
utilizes its facilities interchangeably for each distribution channel.
Furthermore, the marketing channels are directed at a single customer base
located primarily in the United States.
For the twelve months ended February 1, 1997, the nine months ended
February 3, 1996, and the twelve months ended April 30, 1995, retail sales,
direct mail sales and wholesale distribution sales accounted for the
following percentages of the Company's net product sales:
For the 12 Months For the 12 Months For the 9 Months For the 12 Months
Ended Ended Ended Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 FEBRUARY 3, 1996 APRIL 30, 1995
Retail 34% 36% 35% 31%
Direct Mail 49% 46% 46% 49%
Wholesale
Distribution* 17% 18% 19% 20%
__________________________________
*Includes sales to franchisees.
The gross profit margins for retail sales attributable to Company-owned
stores is slightly lower than direct marketing sales due to more
non-proprietary products being sold in retail. The gross profit margin for
wholesale sales and sales to franchisees is lower, since these sales are
made primarily at a significant discount from retail price.
During the fiscal year ended April 30, 1994, the Company repurchased
franchise development territories from a number of franchisees. At the
inception of the Company's franchise program, the Successories retail store
concept was in the initial stages and the Company had not fully developed
its plans for the expansion of its retail system. The Company initially
sold franchise development territories to individual franchisees, granting
each franchisee the right to develop multiple retail locations in a cluster
within the defined territory. As this program progressed, however, the
existing franchisees were either unwilling or unable to develop an
acceptable number of retail locations within their respective territories in
the time frame required to take maximum advantage of the opportunity.
As a result, the Company initiated a program to repurchase the existing
franchise development territories that were perceived as being
underdeveloped, and implemented an ongoing strategy to offer franchises
predominantly in areas that would not support the development of multiple
retail locations. During fiscal 1995, the Company completed the repurchase
of those major metropolitan areas that were perceived as being
underdeveloped, including Atlanta, Georgia; Los Angeles, California; and
Denver, Colorado. The Company's franchise agreements do not require the
Company to purchase the franchise and the Company does not expect a
continuing pattern of such repurchases in the future. The Company believes
that the areas subject to franchise development territory agreements that
remain in effect are being adequately developed so as not to require any
immediate additional repurchase efforts.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net product sales and the percentage change versus the prior
period for each line item presented, as taken from the Company's
Consolidated Statements of Operations. The reader should note that the
twelve months ended February 1, 1997 are being compared to the unaudited
results for the 12 months ended February 3, 1996. Furthermore, the results
for the nine months ended February 3, 1996 are compared to unaudited results
for nine months ended January 31, 1995 (dollars in thousands).
12 MONTHS ENDED 1997 VS 1996
FEBRUARY 1, 1997 FEBRUARY 3, 1996 INCREASE(DECREASE)
AMOUNT % AMOUNT % AMOUNT %
Net product sales $56,032 100.0 $46,145 100.0 $ 9,887 21.4
Cost of goods sold 23,557 42.0 19,864 43.0 3,693 18.6
Gross profit 32,475 58.0 26,281 57.0 6,194 23.6
Fees, royalties
& other 1,280 2.2 938 2.0 342 36.5
Gross margin 33,755 60.2 27,219 59.0 6,536 24.0
Operating expenses,
excluding special
charges 31,751 56.7 32,513 70.5 762 2.3
Income (loss) from
operations before
special charges 2,004 3.5 (5,294) (11.5) 7,298 137.9
Special charges 2,701 4.8 0 0.0 2,701 N/A
Loss from operations(697) (1.3) (5,294) (11.5) 4,597 86.8
Other income
(expenses) (1,650) (2.9) (1,283) (2.8) 367 28.6
Loss before taxes (2,347) (4.2) (6,577) (14.3) 4,230 64.3
Income tax benefit(2,609) (4.7) (1,388) (3.1) 1,221 N/A
Net Income (loss) $262 0.5 ($5,189) (11.2) $5,451 105.0
9 MONTHS ENDED 1996 VS. 1995
FEBRUARY 3, 1996 JANUARY 31, 1995 INCREASE(DECREASE)
AMOUNT % AMOUNT % AMOUNT %
Net product sales $35,484 100.0 $32,147 100.0 $ 3,337 10.4
Cost of goods sold 13,310 37.5 14,193 44.2 (883) (6.2)
Gross profit 22,174 62.5 17,954 55.8 4,220 23.5
Fees, royalties
& other 741 2.1 1,143 3.6 (402) (35.2)
Gross margin 22,915 64.6 19,097 59.4 3,818 20.0
Operating expenses,
excluding special
charges 22,724 64.0 20.478 63.7 2,246 11.0
Income (loss) from
operations before
special charges 191 0.6 (1,381) (4.3) 1,572 113.8
Special charges 0 0.0 0 0.0 0 0.0
Income (Loss) from
operations 191 0.6 (1,381) (4.3) 1,572 113.8
Other income
(expenses) (879) (2.5) (475) (1.5) 404 85.1
Income before taxes (688) (1.9) (1,856) (5.8) 1,168 62.9
Income tax benefit (1,388) (3.9) 0 0.0 1,388 N/A
Net Income (loss) $700 2.0 ($1,856) (5.8) $2,556 137.7
TWELVE MONTHS ENDED FEBRUARY 1, 1997 COMPARED TO TWELVE MONTHS ENDED
FEBRUARY 3, 1996
Net product sales for the twelve months ended February 1, 1997
increased 21.4% to $56,032,000 compared to $46,145,000 for the twelve
months ended February 3, 1996. Of the $9,887,000 net product sales
increase, approximately 23% of the increase is attributable to retail sales
and 64% of the increase is attributable to increased direct marketing
sales. Same store sales showed strong improvement with an increase of
$1,345,000 or 9.3% for the twelve months ended February 1, 1997, when
compared to the same period in the prior year. As of February 1, 1997, the
Company owned and operated 49 retail locations, compared to 54 locations as
of February 3, 1996. Franchise locations increased to 47 locations from 43
at February 3, 1996. The number of Direct Mail pieces during the twelve
months ended February 1, 1997, decreased to approximately 11.7 million from
13.8 million pieces mailed for the same period in the prior year.
Cost of sales as a percentage of net sales was 42% for the twelve
months ended February 1, 1997, compared to 43% for the same twelve-month
period ended in the prior year. This improvement is primarily the result
of continuing improvements in labor and overhead and streamlining the
Company's order fulfillment system.
Operating expenses excluding special charges declined as a percentage
of net sales to 56.7% for the twelve months ended February 1, 1997,
compared to 70.5% for the same twelve-month period in the prior year. The
reduction in operating expenses as a percentage of net sales is primarily a
result of improved management practices and cost containment efforts,
coupled with increased sales.
The Company recorded a special charge of $2,701,000 for the twelve
months ended February 1, 1997 which is comprised primarily of: a) reserve
for certain costs associated with the Company's relocation and
consolidation of its manufacturing and distribution facilities and its
business offices into a new facility in Aurora, Illinois; b) reserve for
costs associated with a plan to close up to five Company-owned stores that are
not performing profitably; and, c) write-down of the existing order entry
computer system in anticipation of replacing it during the upcoming fiscal
year.
Interest expense increased from $1,154,000 for the twelve months ended
February 3, 1996, to $1,491,000 for the twelve months ended February 1,
1997, an increase of $337,000 as a result of additional borrowings.
For the twelve months ended February 3, 1996 and February 1, 1997, the
Company has recorded a net tax benefit of $1,388,000 and $2,609,000,
respectively, which relates mainly to the recognition of a portion of
the net deferred tax asset which was generated as a result of net operating
losses incurred in prior periods, as well as the benefit associated with
the loss before taxes in the current period.
At February 1, 1997, net deferred tax assets were $5,375,000 after a
valuation allowance of zero. The Company believes it is more likely than
not that $5,375,000 of the available NOL carryforwards will be utilized
prior to their expiration.
To the extent that the NOL carryforwards and existing deductible
temporary differences are not offset by existing taxable temporary
differences reversing within the carryforward period, approximately
$13,500,000 of the remaining net operating loss carryforwards is expected
to be realized by achieving future profitable operations, based on the
following:
1. Significantly improved operating earnings during the prior fiscal
year, excluding the impact of certain one-time special charges.
Continued improvement is anticipated in future years.
2. Significant cost containment efforts continued to intensify in
the prior fiscal year and included head count reductions,
improved inventory management, reduced capital expenditures and
hiring freezes for most of the year and enhanced control over
catalog-related expenses.
3. Future cost containment efforts will continue into the next
fiscal year and include closing under-performing stores, scaling
back or eliminating certain under-performing catalogs, reducing
the number of prospecting catalogs to be sent, and the
relocating and consolidating of the Company's corporate,
manufacturing and distribution facilities.
The NOLs do not begin to expire until the year 2005.
As indicated above, realization of the recorded net tax benefit of
$5,375,000 is dependent upon generating sufficient taxable income prior to
expiration of the NOL carryforwards. Although realization is not assured,
the Company believes that it is more likely than not that the recorded
benefit will be realized. However, the amount of such realization could be
either increased or reduced in the near term if estimates of future taxable
income during the carryforward period are changed.
The Company reported a net income of $262,000 for the twelve months
ended February 1, 1997 compared to a net loss of $5,189,000 for the twelve
months ended February 3, 1996.
NINE MONTHS ENDED FEBRUARY 3, 1996 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 1995
Net product sales for the nine months ended February 3, 1996 increased
10.4% to $35,484,000 compared to $32,147,000 for the nine months ended
January 31, 1995. Of the $3,337,000 net product sales increase,
approximately 30% of the increase is attributable to retail sales and 58%
of the increase is attributable to increased direct marketing sales. Same
store sales were basically flat with a modest increase of $35,000 or 0.4%
for the nine months ended February 3, 1996, when compared to the same time
period in the prior year. As of February 3, 1996, the Company operated 54
retail locations compared to 50 locations as of January 31, 1995.
Franchise locations decreased to 43 locations from 46 at January 31, 1995.
The number of Direct Mail pieces during the nine months ended February 3,
1996, increased to approximately 10.3 million from 9.8 million pieces
mailed for the same period in the prior year.
Cost of sales as a percentage of net sales was 37.5% for the nine
months ended February 3, 1996, compared to 44.2% for the same nine-month
period ended in the prior year. The decrease in the cost of goods sold
percentage from 1996 to the prior year is primarily the result of
improvements in labor and overhead, as well as streamlining that has
occurred in the Company's order fulfillment system.
Operating expenses were basically flat as a percentage of net sales at
64.0% for the nine months ended February 3, 1996, compared to 63.7% for the
same nine-month period in the prior year. The improvements made in the
nine months ended February 3, 1996, due to cost reduction programs
implemented by the new management team, are somewhat masked due to one-time
costs associated with significant organizational changes (i.e., severance,
etc.).
Interest expense increased from $334,000 for the nine months ended
January 31, 1995 to $866,000 for the nine months ended February 3, 1996, an
increase of $532,000. This increase reflects additional borrowings over the
prior period , as well as $120,000 of fees paid in association with the
amendments to the existing term loan.
Income tax expense for the nine months ended January 31, 1995, was
zero as the Company had incurred a net loss. For the nine months ended
February 3, 1996, the Company has recorded a net tax benefit of $1,388,000
which relates to the recognition of a portion of the net deferred tax asset
which was generated as a result of net operating losses incurred in prior
periods.
At April 30, 1995, the Company had determined, based upon evidence
then available, that a valuation allowance of $3,897,000 was required
against net deferred tax assets at that date due to the uncertainty as to
whether the benefits of net operating loss (NOL) carryforwards would be
realized. At that date, such valuation allowance reduced net deferred tax
assets to zero. At February 3, 1996, net deferred assets were $1,600,000
after a valuation allowance of $2,635,000. The Company believes that it is
more likely than not that $1,600,000 of the available NOL carryforwards
will be utilized prior to their expiration.
To the extent that the NOL carryforwards and existing deductible
temporary differences are not offset by existing taxable temporary
differences reversing within the carryforward period, $1,600,000 of the
remaining net operating loss carryforwards is expected to be realized by
achieving future profitable operations based on the following:
1. During the period May 1, 1995 through February 3, 1996, the
Company launched a turnaround strategy to improve performance by
implementing a cost reduction program and enhancing asset
utilization. Specifically, this strategy included: (a) a
corporate office restructuring that resulted in head count
reductions; (b) efforts to increase recipients of the Company
catalog; (c) implementation of more sophisticated systems to
better track marketing efforts and enhance inventory management;
(d) utilization of outside consultants to assist in the
development of a more efficient process flow; and, (e)
implementation of improved budgeting, forecasting and performance
monitoring techniques.
2. The improved budgetary, forecasting and performance monitoring
techniques have permitted the Company to more accurately project
future results of operations and to better understand the
sensitivity of various factors of both revenues and costs.
3. While pre-tax operations for the period ended February 3, 1996
resulted in a pre-tax loss of $688,000, the Company believes that
operations for the period would have been profitable had they not
been adversely affected by the neccessary implementation of the
strategy described above which resulted in significant non-recurring
charges. These improved results for the period ended February 3,
1996 compare with a net loss of $7,745,000 for the year ended
April 30, 1995.
The NOLs do not begin to expire until the year 2005.
As indicated above, realization of the recorded net tax benefit of
$1,600,000 is dependent on generating sufficient taxable income prior to
expiration of the NOL carryforwards. Although realization is not assured,
the Company believes that it is more likely than not that the recorded
benefit will be realized. However, the amount of such realization could be
either increased or reduced in the near term if estimates of future taxable
income during the carryforward period are changed.
The Company reported a net income of $700,000 for the nine months
ended February 3, 1996 compared to a net loss of $1,856,000 for the nine
months ended January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $2,283,000 was used in the Company's operating activities
for the twelve months ended February 1, 1997, compared to $74,000 for
fiscal 1996 and $5,170,000 in fiscal 1995. The increase in cash used
during the most recent period, when compared to the prior period, is
primarily the result of the reducing accounts payable by $4.3 million from
$6.6 million at February 3, 1996 down to $2.3 million at February 1, 1997.
During fiscal years 1994 and 1995, the Company provided financing
arrangements to certain of its franchisees. As of February 1, 1997,
$72,000 was due from franchisees in the form of notes receivable, compared
to $252,000 due at February 3, 1996. The Company has no plans to provide
financing to any of its franchisees in the future.
The Company's allowance for doubtful accounts and sales returns
decreased from $719,000 as of April 30, 1995 to $500,000 as of February 3,
1996. The allowance remained basically flat at $506,000 as of February 1,
1997. The decrease from 1995 to February 3, 1996 reflects improved
processes implemented by the Company's financial management, which has
resulted in fewer accounts that involve credit risk. Furthermore, the
Company has implemented new collection procedures that have reduced the
overall aging (past due status) of accounts receivable.
For the year ended February 1, 1997, net cash used in investing
activities was $1,125,000 compared to $1,679,000 for the nine months ended
February 3, 1996 and $6,036,000 in fiscal 1995. The capital expenditures
for the twelve months ended February 1, 1997 were primarily for new retail
stores, as well as for manufacturing and data processing equipment and
systems. Also in the current fiscal year, the Company purchased the stock
of British Links Golf Classics, Inc. for $1,260,000 which is comprised of a
combination of cash, Successories stock and promissory notes. (See Note 3
in the Notes to Consolidated Financial Statements.) The Company expects
moderate expansion of its retail stores during the coming fiscal year.
Net cash provided by financing activities during the twelve months
ended February 1, 1997, was $2,178,000, compared to $1,805,000 for the nine
months ended February 3, 1996 and $11,478,000 in fiscal 1995. At February
1, 1997, options for 982,000 shares were outstanding, of which 469,000 were
exercisable. These options were issued at exercise prices equal to the
fair market value of the underlying common stock at the date of grant. A
portion of such options are below current market value and a portion of
such options are above current market value.
During the twelve months ended February 1, 1997, the Company issued
Series A and B preferred stock. Net proceeds were $6,382,000 and were used
to pay down existing debt and accounts payable. (See Note 15 in the Notes
to Consolidated Financial Statements)
On January 12, 1995, the Company sold 150,000 shares of common stock
for $13.2825 per share, or an aggregate of $1,992,375 in an off-shore
transaction to a non-U.S. person pursuant to Regulation S under the
Securities Act. Regulation S is a safe harbor exemption from registration
under the Securities Act for sales of securities that occur outside the
U.S. The proceeds of the sale were used for working capital to fund
product inventories for the holiday season.
On October 25, 1994, the Company entered into a credit facility with
its bank. The facility was comprised of two revolving lines of credit: a
$7,500,000 Fixed Asset Revolving Loan (the Fixed Asset Loan), and a
$7,500,000 Revolving Credit Loan (the Working Capital Loan). Both
facilities were unsecured.
The Fixed Asset Loan was to expire on October 25, 1996, at which time
it was to convert to a fully amortizing three-year term loan. At the
option of the Company, the Fixed Asset Loan bore interest at LIBOR reserve
adjusted rate ("LIBOR") plus 1.75%, or the prime rate plus 0.25%. The
purpose of the Fixed Asset Loan was to fund the purchase of leasehold
improvements related to the opening of additional retail locations.
The Working Capital Loan was to expire on October 25, 1996. At the
option of the Company, the Working Capital Loan bore interest at LIBOR plus
1.50%, or the prime rate. The purpose of the Working Capital Loan was to
fund general working capital requirements.
Under its credit facility, the Company was required to maintain
certain financial ratios and levels of net worth and, among other things,
future indebtedness, dividends and capital expenditures were restricted.
As of April 30, 1995, the Company was in default of several covenants
contained in its credit facility. As a result, on May 31, 1995, the
Company and its bank executed an Agreement ("the Forbearance Agreement")
which revised the covenants set forth in the original credit facility and
which restricted advances on the Company's Working Capital Loan to
$500,000. The Forbearance Agreement expired on July 31, 1995, and was
replaced by an Amended and Restated Credit Agreement ("the Credit
Agreement").
The Credit Agreement was comprised of a $10.0 million Term Loan ("the
Term Loan") and a $3.0 million Revolving Loan ("the Revolving Loan"). Both
facilities are secured by all assets of the Company. As of July 31, 1995,
amounts due to the bank under the original Loan Agreement were converted to
the Term Loan.
On September 25, 1995, an amendment ("the Amendment") was made to the
Credit Agreement that lowered the borrowing base associated with the
Revolving Loan. The Amendment: (1) reduced the borrowing base for
inventory to $6.0 million from $7.0 million; (2) reduced the borrowing base
for Accounts Receivable from $1.55 million to $1.0 million; and (3) fixed
the predetermined borrowing limit at $2.0 million.
In November 1995, the Company negotiated a total amount of additional
financing of $1.5 million. This amount was raised, in various
installments, principally from management (Mac Anderson and James
M. Beltrame), significant shareholders, and various members of the Board of
Directors. The total principal amount carried an annual interest rate of
10% and matured November 1, 1996. The $1.5 million of principal also
contained warrants to purchase 120,000 shares of common stock at a price of
$4.725. The warrants were granted to each lender on a specified pro rata
basis. The Company extended the maturity date for $1,250,000 of the
original amount financed through November 11, 1997. The annual interest
rate for the extended financing remains at 10%. The Company granted
125,000 options on a pro rata basis to each lender participating in the
extended financing.
The Company reduced the Term Loan by $1 million as of January 31,
1996, as required by the Credit Agreement. The remaining $9 million
matured May 1, 1996. The Term Loan bears interest at the prime rate plus
1.0%.
The Revolving Loan expired on January 1, 1996.
On February 7, 1996, an amendment (the "Second Amendment") was made to
the Credit Agreement to reestablish the Revolving Loan which had expired on
January 1, 1996. The Revolving Loan allowed the Company to borrow up to
$2.5 million, subject to certain borrowing base restrictions. Mr. Anderson
and Mr. Beltrame severally guaranteed one million dollars of the Revolving
Loan.
On May 1, 1996, an amendment (the "Third Amendment") was made to the
Credit Agreement to extend the maturity date of both the Revolving Loan and
Term Loan to May 1, 1997. The Agreement to extend the Term Loan maturity
date includes a provision requiring a monthly principal payment of $75,000
effective June 1, 1996.
On December 16, 1996, the Credit Agreement (the "Fourth Amendment")
was amended to change the borrowing limitations under the Revolving Loan to
20% of Eligible Retail Inventory with all other borrowing base calculations
remaining unchanged. The amendment also ratified the Company's acquisition
of British Links Golf Classics, Inc.
On December 17, 1996, the Credit Agreement was further amended (the
"Fifth Amendment") to reflect the payment by the Company of $4,000,000 on
the $8,475,000 Term Loan and the bank's agreement to increase the Company's
Revolving Loan to a maximum of $4,000,000. The interest rate for both
credit facilities was set at the Prime Rate in effect from time to time
plus one percent. The maturity date for the Term Loan and Revolving Loan
were extended to May 1, 1998. The amendment also requires the Company to
remit monthly principal and interest payments on the Term Loan in the
amount of $94,808.
On January 30, 1997, the Credit Agreement was further amended (the
"Sixth Amendment") to allow for the execution of a standby letter of credit
by the Company which was previously restricted by the terms of the Credit
Agreement. The ability to issue a standby letter of credit was required by
the Company in order to provide adequate security in connection with the
Company's construction and lease of a new corporate headquarters and
manufacturing facility.
The Company believes that internally-generated funds and the credit
facilities will be sufficient to meet its current operating needs and to
fund anticipated capital expenditures in fiscal year ending January 31,
1998.
The funding for the relocation to the new facility as well as related
leasehold improvements of approximately $2,000,000 and the purchase of a
new computer system will be obtained by using the available $4,000,000 on
the Revolving Loan and any remainder will be obtained through operating
income of the Company.
SEASONALITY
The Company generally experiences peak sales in the fourth quarter of
its fiscal year (November through January) due to the holiday season, and
its lowest sales levels in its second fiscal quarter (May through July).
The effects of seasonality are greater in the Company's retail operations
than in its catalog operations. Most expenses are incurred evenly
throughout the year, although some selling and administrative expenses are
variable with sales. The Company's quarterly operating results may also
vary depending upon such factors as the opening of new stores, new catalog
mailings, and the timing of new product introductions by the Company. The
Company's cash requirements generally reach a seasonal peak in October to
finance increased inventory levels needed to meet third and fourth quarter
sales demand.
INFLATION
The Company does not believe that inflation has had a material impact
on its operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such forward-looking statements
may be deemed to include, among other things, statements relating to
anticipated financial performance, management's long-term performance goals,
programs to reduce the Company's costs and enhance asset utilization, the
potential realization of benefits from net operating loss carryforwards prior
to their expiration, the Company's generation of funds sufficient to meet its
current operating needs and to fund anticipated capital expenditures, as well
as statements relating to the Company's operational and growth strategies.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be accurate, and actual results could
differ materially from those addressed in forward-looking statements
contained in this From 10-K or in any document incorporated by reference
herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statement Schedules on page F-1. Such
Financial Statements and Schedules are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information regarding the above will be included under the caption,
"Election of Directors," in the Company's definitive proxy statement for
its 1997 annual meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days after February 1, 1997,
and is incorporated herein by reference. Information regarding executive
officers of the Company is included under a separate caption in Part I
hereof, and is incorporated herein by reference, in accordance with General
Instruction G(3) to Form 10-K, and Instruction 3, Item 401(b) of Regulation
S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above will be included under the caption,
"Compensation and Other Transactions with Management," in the Company's
definitive proxy statement for its 1997 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission within 120
days after February 1, 1997, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the above will be included under the caption,
"Security Ownership," in the Company's definitive proxy statement for its
1997 annual meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days after February 1, 1997,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above will be included under the caption,
"Compensation and Other Transactions with Management," in the Company's
definitive proxy statement for its 1997 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission within 120
days after February 1, 1997, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. See Index to Financial Statements
2. Financial Statement Schedules are incorporated herein by
reference. Such Financial Statements and Schedules are
incorporated herein by reference.
3. See Index to Exhibits immediately following the signature
page.
(b) There were no reports on Form 8-K filed during the quarter ended
February 1, 1997.
(c) See Index to Exhibits immediately following the signature page.
(d) See Index to Financial Statements and Financial Schedules on page
F-1.
ITEM 14(A). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
PAGE
(1) Financial Statements:
Report of Independent Accountants....................F-2 & F-3
Consolidated Balance Sheets................................F-4
Consolidated Statements of Operations......................F-5
Consolidated Statements of Changes in Shareholders' Equity.F-6
Consolidated Statements of Cash Flows......................F-7
Notes to Consolidated Financial Statements.................F-8
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
All other schedules called for under Regulation S-X are not submitted
because they are not applicable, or not required, or because the required
information is not material or is included in the financial statements or
notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Stockholders of
Successories, Inc.
We have audited the accompanying consolidated balance sheet of
Successories, Inc. (an Illinois corporation) and subsidiaries as of
February 1, 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Successories, Inc. and subsidiaries as of February 1, 1997, and the results
of its operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule on Page
S-1 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 18, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Stockholders
of Successories, Inc.
In our opinion, the accompanying consolidated balance sheet at February 3,
1996 and the related consolidated statements of operations, of cash flows
and of changes in stockholders' equity for the period May 1, 1995 through
February 3, 1996 and for the year ended April 30, 1995 of Successories,
Inc. present fairly, in all material respects, the financial position,
results of operations and cash flows of Successors, Inc. and its
subsidiaries as of February 3, 1996 and for the period May 1, 1995 through
February 3, 1996 and for the year ended April 30, 1995, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally
accepted auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above. We have not audited the
consolidated financial statements of Successories, Inc. for any period
subsequent to February 3, 1996.
PRICE WATERHOUSE LLP
Chicago, Illinois
April 26, 1996, except as to the
pro forma information for the period
May 1, 1995 through February 3, 1996
presented in Note 10, the date of
which is April 18, 1997
SUCCESSORIES, INC.
CONSOLIDATED BALANCE SHEETS
February 1, February 3,
ASSETS 1997 1996
Current assets:
Cash $ -0- $ 1,230,000
Accounts and notes receivable, net 4,157,000 3,296,000
Inventories, net 8,970,000 9,088,000
Prepaid catalog expenses 2,006,000 3,725,000
Other prepaid expenses 1,180,000 1,067,000
Total current assets 16,313,000 18,406,000
Property and equipment, net of accumulated
depreciation and amortization 8,000,000 10,615,000
Notes receivable, net 301,000 471,000
Deposits 378,000 173,000
Deferred income taxes 5,375,000 1,600,000
Intangible and other assets net of accumulated
amortization of $1,065,000 and $925,000 2,313,000 901,000
Total assets $32,680,000 $32,166,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $2,215,000 $ 1,882,000
Accounts payable 2,318,000 6,652,000
Reserve for stores to be closed 420,000 --
Reserve for relocation-related expenses 497,000 --
Other accrued expenses 747,000 1,487,000
Total current liabilities 6,197,000 10,021,000
Long-term debt 4,094,000 8,528,000
Total liabilities 10,291,000 18,549,000
Minority interests in consolidated
subsidiaries 509,000 583,000
Commitments and contingencies
Mandatorily redeemable Series B
Preferred stock - 5,472,000 --
$100 par value, 1212 shares authorized and outstanding
Stockholders' equity:
Common stock $.01 par - 20,000,000
shares authorized; 5,703,000 and
5,208,000 shares issued and
outstanding, respectively 57,000 52,000
Common stock warrants 370,000 370,000
Additional paid-in capital 20,362,000 16,301,000
Accumulated deficit (4,345,000) (3,481,000)
Foreign currency translation adjustment (36,000) (208,000)
Total stockholders' equity 16,408,000 13,034,000
Total liabilities and stockholders' equity $32,680,000 $32,166,000
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Period May 1, 1995
Year Ended through Year Ended
FEBRUARY 1,1997 FEBRUARY 3, 1996 APRIL 30, 1995
Net product sales $56,032,000 $35,484,000 $42,809,000
Cost of goods sold 23,557,000 13,310,000 20,748,000
Gross profit on product 32,475,000 22,174,000 22,061,000
Fees, royalties and
other income 1,280,000 741,000 1,340,000
Gross margin 33,755,000 22,915,000 23,401,000
Operating expenses,
excluding special charges 31,751,000 22,724,000 30,267,000
Special Charges 2,701,000 - -
Income(loss) from
operations (697,000) 191,000 (6,866,000)
Other income (expense):
Minority interests in
subsidiaries (184,000) (100,000) (181,000)
Interest Income 19,000 48,000 49,000
Interest expense (1,491,000) (866,000) (622,000)
Other 6,000 39,000 (125,000)
Total other expense (1,650,000) (879,000) (879,000)
Loss before income
taxes (2,347,000) (688,000) (7,745,000)
Income tax benefit (2,609,000) (1,388,000) -
Net income(loss) $ 262,000 $ 700,000 ($7,745,000)
Earnings (loss) per common and
common equivalent share ($ .16) $ .13 ($ 1.60)
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign
Additional Currency Total
COMMON STOCK Paid-In Accumulated Translation Stockholders'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT WARRANTS EQUITY
Balance at
April 30,
1994 4,735,000 $48,000 $12,859,000 $3,564,000 ($28,000) $16,443,000
Net loss (7,745,000) (7,745,000)
Foreign currency
translation
adjustment (29,000) (29,000)
Common stock transactions:
Sales of
common
shares 158,000 1,000 2,033,000 2,034,000
Exercise of
stock
options 224,000 2,000 919,000 921,000
Balance at
April 30,
1995 5,117,000 51,000 15,811,000 (4,181,000) (57,000) $11,624,000
Net income 700,000 700,000
Foreign currency
translation
adjustment (151,000) (151,000)
Issuance of warrants $378,000 378,000
Common stock transactions:
Sales of common
shares 79,000 1,000 433,000 434,000
Exercise of stock
options and
warrants 12,000 - 57,000 (8,000) 50,000
Balance at
February 3,
1996 5,208,000 52,000 16,301,000 (3,481,000) (208,000) 370,000 13,034,000
Net Income 262,000 262,000
Foreign
currency translation
adjustment 172,000 172,000
Preferred stock transactions:
Preferred stock
dividends (33,000) (33,000)
Accretion of
Preferred stock
discount (1,093,000) (1,093,000)
Common stock
transactions:
British Links
acquisi-
tion 91,000 1,000 499,000 500,000
Sales of common
shares 65,000 1,000 313,000 314,000
Conversion of Series A
pref-
erred
shares 301,000 3,000 1,997,000 2,000,000
Tax benefit of stock
options exercised 1,050,000 1,050,000
Exercise of
stock
options 38,000 0 202,000 202,000
Balance at
February 1,
1997 5,703,000 $57,000 $20,362,000 ($4,345,000)($36,000)$370,000$16,408,000
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3,1996 APRIL 30, 1995
Cash flows provided by
(used in) operating activities:
Net income (loss) $ 262,000 $ 700,000 ($7,745,000)
Adjustments to reconcile
net income (loss) to
net cash used in operating
activities net of effects of
purchase transaction:
Depreciation & amortization
expense 3,527,000 1,388,000 1,471,000
Deferred income taxes (2,656,000) (1,600,000) --
1,133,000 488,000 (6,274,000)
Changes in operating assets and
liabilities:
Accounts and notes receivable (853,000) 485,000 239,000
Inventories 428,000 (735,000) (1,633,000)
Prepaid catalog expense 1,844,000 (1,166,000) (314,000)
Other prepaid expenses (113,000) 420,000 (732,000)
Accounts payable (4,617,000) 380,000 3,166,000
Reserve for stores to be closed 420,000 -- --
Reserve for relocation-related
expenses 497,000 -- --
Accrued expenses 689,000 271,000 366,000
Other (1,711,000) (217,000) 11,000
Net cash used in operating
activities (2,283,000) (74,000) (5,170.000)
Cash flows from investing activities:
Net cash paid in acquisitions (360,000) - (126,000)
Purchase of property and equipment (765,000) (1,679,000) (5,910,000)
Net cash used in investing
activities (1,125,000) (1,679,000) (6,036,000)
Cash flows from financing activities:
Proceeds from issuing
common stock, net 314,000 434,000 2,034,000
Proceeds from issuing Series A and B
preferred stock, net 6,382,000 -- --
Proceeds from exercise of stock
options and warrants 202,000 57,000 922,000
Preferred stock dividends (11,000) -- --
Proceeds from debt borrowings 2,500,000 4,551,000 14,972,000
Repayments of debt (7,209,000) (3,237,000) (6,450,000)
Net cash provided by financing
activities 2,178,000 1,805,000 11,478,000
Net increase (decrease) in cash (1,230,000) 52,000 272,000
Cash at beginning of period 1,230,000 1,178,000 906,000
Cash at end of period $ 0 $1,230,000 $1,178,000
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF THE BUSINESS:
Successories, Inc. (formerly Celex Group, Inc.), a holding company, and
its subsidiaries, Celebrating Excellence Inc., Celebrating Excellence of
Illinois, Inc., Celex Successories, Inc., Successories DFW Joint Venture,
Successories Minnesota Joint Venture and Successories of Illinois, Inc.,
(collectively, the "Company") is in the business of creating and marketing
proprietary and purchased products for personal and business motivation.
The Company considers itself a single line of business with products that
are marketed primarily under its SUCCESSORIES, WINNERS collection and
BRITISH LINKS trade names through direct marketing (both catalog and
telemarketing), retail sales (both franchise and Company-owned stores), and
wholesale distribution. The Company operates a chain of Successories
retail stores located primarily throughout the United States. A portion of
the Company's sales are made through the extension of credit. Accounts
receivable from credit sales are generally unsecured.
The Company also operates a franchising program whereby it sells franchises
to market the Celebrating Excellence line of products under the
Successories trademark. Notes receivable from franchisees, when accepted,
are secured by the personal guarantee of the franchisee as well as by the
assets of the franchise store.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CHANGE IN REPORTING PERIODS AND YEAR END
Effective May 1, 1995, the Company changed its reporting period to a 4-5-4
week format. In addition, the Company changed its year end from April 30 to
the Saturday closest to January 31 (i.e., February 1, 1997 and February 3,
1996). The change was made to conform with retail industry reporting
practices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The financial results of franchise
operations have not been reflected in the Company's financial statements.
REVENUE RECOGNITION
Net revenues include retail, direct mail and wholesale activities.
Retail sales include sales at Company-owned stores, net of returns and
allowances. Wholesale and direct mail revenues, as well as product
sales to franchisees, are generally recognized at the time orders are
shipped.
The Company recognizes initial franchise fee revenue when all material
services or conditions relating to the sale of a franchise have been
substantially performed or satisfied; generally coincident with the retail
store opening. No deferred revenue was recorded as of February 1, 1997 or
February 3, 1996.
The Company's franchise agreements generally require franchisees to remit
royalty payments of 2% of gross revenues derived from proprietary product
sales. The Company records this income as earned.
ACCOUNTS AND NOTES RECEIVABLE, NET
These receivables include $198,000 and $519,000 of notes receivable at
February 1, 1997 and February 3, 1996, respectively. Accounts and notes
receivable are net of an allowance for doubtful accounts and sales returns
of $506,000 and $500,000 at February 1, 1997 and February 3, 1996,
respectively. As of February 1, 1997 and February 3, 1996, approximately
17% and 32%, respectively, of accounts and notes receivable were due from
Successories franchisees.
INVENTORIES, NET
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PREPAID CATALOG EXPENSES
Prepaid catalog expenses consist primarily of catalog and related
production and mailing costs. The Company changed its amortization period
for catalog costs effective February 1, 1995. The effect of this change in
estimate increased amortization expense for the year ended April 30, 1995
by $702,000 and decreased net income by $702,000 ($0.14 per share).
Effective May 1, 1995, the Company adopted SOP 93-7, "Reporting on
Advertising Costs," which outlines the accounting for direct marketing
advertising costs. The Company expenses the production costs of
advertising as incurred, except for direct-response advertising which is
capitalized and amortized over its expected period of future benefit.
Direct-response advertising consists primarily of mail order catalogs for
the Company's products. The capitalized costs of such advertising are
amortized over the twelve-month period following the date the catalog was
mailed based upon historical patterns of catalog response. The adoption of
this new accounting policy did not have a material effect on the Company's
financial statements.
At February 1, 1997 and February 3, 1996, $2,006,000 and $3,725,000,
respectively, of advertising was reported as assets.
Advertising expense was $11,062,000, $7,353,000, and $11,471,000,
respectively, for the year ended February 1, 1997, the period May 1, 1995
through February 3, 1996 and the year ended April 30, 1995, respectively.
OTHER PREPAID EXPENSES
Prepaid licensing cost is being capitalized and amortized over a three-year
period. Historically, this cost has been amortized over a two-year period.
The change in the amortization period was made to better approximate the
product lifecycle. This change resulted in an increase in income of
approximately $48,000 during the year ended February 1, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with depreciation and
amortization provided for on a straight-line basis over the estimated useful
lives (ranging from 3 to 15 years) of the related assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
useful life of the improvement or the term of the lease. Major renewals
and betterments are capitalized and maintenance and repair costs are
charged to expense as incurred.
During the year ended February 4, 1996, the Company adopted Financial
Accounting Standards Board Statement No. 121 (FAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of." The Company recorded special charges of approximately $1,689,000 for
the year ended February 1, 1997, to write down certain assets to their fair
value. These assets included the order entry computer system which the
Company plans to replace during 1997 and certain leasehold improvements in
relation to the relocation to the Company's new manufacturing/warehouse
facility.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this Standard, a deferred tax asset or liability is
determined at each balance sheet date by applying rates contained in
currently enacted tax laws to amounts that result from temporary
differences in the financial statement and tax basis of assets and
liabilities. Valuation allowances are provided to reduce net deferred tax
assets to amounts for which realization is assessed as more likely than
not.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist principally of costs in excess of the
fair value of net assets acquired in the purchase of certain businesses
(Note 3) and the repurchase of certain distribution rights. Such amounts
are being amortized on a straight line basis over 60 months to 480 months.
Such assets are periodically reviewed to determine recoverability by
comparing their carrying value with expected future cash flows.
ACCOUNTS PAYABLE
Checks outstanding, net of approximately $67,000 at February 1, 1997, are
included in Accounts Payable.
RESERVE FOR STORES TO BE CLOSED
Represents a reserve account established for certain costs to be incurred
in connection with plans to close up to five under-performing stores during
the fiscal year ended January 31, 1998.
RESERVE FOR RELOCATION-RELATED EXPENSES
Represents a reserve account established for certain costs associated with
relocating and consolidating the Company's office, manufacturing and
warehouse facilities into a new facility in Aurora, Illinois.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common and common equivalent shares are computed by
dividing net income (loss) less preferred stock dividends by the weighted
average number of common shares outstanding during each period presented,
including common share equivalents arising from the assumed exercise of
stock options and warrants. Common stock equivalents have been excluded
from the calculation of earnings per common share for the year ended April
30, 1995 because of their anti-dilutive effect.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
maintained in local currency. For financial reporting purposes, their
balance sheets are translated at current rates of exchange at the balance
sheet dates and their statements of operations are translated at average
rates of exchange in effect during the reporting period. The cumulative
effects of translation adjustments for the balance sheet are reflected as a
separate component of shareholders' equity. Gains and losses resulting
from foreign exchange transactions are recorded in the results of
operations of the period in which they occur. Such amounts were not
significant in any period presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of receivables, accounts payable and accruals
approximate their fair values because of their short term maturities. The
carrying amount of long term debt is also assumed to approximate its fair
value because such debt bears interest at floating rates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3 - ACQUISITIONS:
The Company purchased all of the stock of British Links Golf Classics, Inc.
on October 1, 1996 for approximately $1,260,000 which is comprised of a
combination of cash, Successories stock and promissory notes. The
promissory notes issued by the Company are subordinate to all other debt.
British Links Golf Classics, Inc. is a Dallas, Texas-based catalog company
which sells golf wall decor and high-end golf gifts.
On October 15, 1995, the Company repurchased the 20% minority interest in
Celex Successories, Inc. from its joint venture partner bringing the
Company's ownership to 100%. The purchase price of approximately $106,000
was settled through assignment of certain joint venture assets and
forgiveness of indebtedness owed by the partner.
On October 30, 1995, the Company purchased certain assets and assumed
certain liabilities of a franchisee who operated a Successories retail
location in Florida. The purchase price of approximately $128,000 was
settled through the assignment of certain assets and the forgiveness of
indebtedness owed by the franchisee.
During the year ended April 30, 1995, the Company purchased certain assets
and assumed certain liabilities of franchisees who operated Successories
retail locations in Washington D.C., Philadelphia, Pennsylvania and Salt
Lake City, Utah. The aggregate purchase price for these acquisitions was
$299,000, including cash of $126,000 and forgiveness of debt of $173,000.
In addition, the Company agreed to pay a royalty to the former owner of the
Washington D.C. franchise equal to 10% of the first $625,000 of gross sales
within a specific territory and 3% of gross sales, for the period of 36
months thereafter, within the same specific territory.
All of the aforementioned acquisitions were accounted for as purchases and
accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the acquisition date.
The results of operations of the acquired businesses are included in the
accompanying financial statements from the respective dates of acquisition.
The acquired businesses did not materially impact the consolidated
financial position or results of operations for the periods presented. In
the aggregate, the businesses acquired represent less than 10% of the
Company's consolidated assets and income from operations and the investment
in the acquired businesses is less than 10% of total Company assets as of
February 1, 1997 and February 3, 1996, respectively.
NOTE 4 - INVENTORIES:
Inventories are comprised of the following:
February 1, February 3,
1997 1996
Finished goods $4,057,000 $5,706,000
Raw materials 5,081,000 3,533,000
9,138,000 9,239,000
Less - Reserve for
obsolescence (168,000) (151,000)
$8,970,000 $9,088,000
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
February 1, February 3,
1997 1996
Furniture and equipment $ 8,052,000 $ 7,253,000
Leasehold improvements 7,096,000 7,097,000
Vehicles 92,000 92,000
15,240,000 14,442,000
Less - Accumulated depreciation
and amortization (7,240,000) (3,827,000)
$ 8,000,000 $10,615,000
NOTE 6 - DEBT:
Debt consists of the following:
February 1, February 3,
1997 1996
Line of credit facilities $4,495,000 $9,000,000
Subordinated notes (unsecured),
less discount of $0 and $308,334 at
February 1, 1997 & February 3, 1996,
respectively 1,250,000 1,192,000
Subordinated notes payable
(unsecured) 400,000 -
Capital lease obligations 146,000 183,000
Other 18,000 35,000
6,309,000 10,410,000
Less - Current portion (2,215,000) (1,882,000)
$4,094,000 $8,528,000
As of April 30, 1995, the Company was in default of several covenants
contained in the credit facility which was in effect at that date. As a
result, on May 31, 1995, the Company and its bank executed a Forbearance
Agreement, which expired on July 31, 1995 and was replaced by an Amended
and Restated Credit Agreement (the "Credit Agreement").
The Credit Agreement was comprised of a $10.0 million Term Loan (the "Term
Loan") and a $3.0 million Revolving Loan (the "Revolving Loan"). Both
facilities are secured by all assets of the Company. As of July 31, 1995,
the $9,150,000 amount then due to the bank under the original credit
facility was converted to the Term Loan and additional borrowings of
$850,000 were made. As required, the Company reduced the Term Loan by
$1,000,000 as of January 31, 1996. The remaining $9,000,000 matured on May
1, 1996.
Borrowings under the Revolving Loan were limited to the lesser of a
predetermined borrowing base related to specified percentages of eligible
receivables and inventory, or a predetermined amount. On September 25,
1995, an amendment (the "Amendment") was made to the Credit Agreement that
lowered the borrowing base associated with the Revolving Loan. Borrowing
capability under the Revolving Loan expired on January 1, 1996 and all
borrowings under that loan, aggregating approximately $1,977,000, were
repaid prior to that date.
On February 7, 1996, the Credit Agreement was further amended to
reestablish borrowing capabilities through May 1, 1996 under the Revolving
Loan to the lesser of (a) 75% of eligible receivables and 15% of eligible
inventory, or (b) $2,500,000. Two officers of the company severally
guaranteed borrowings under the loan up to an aggregate amount of
$1,000,000.
Subsequently, the bank further agreed to extend the maturity date of
borrowing capability under both the Term Loan and Revolving Loan to May 1,
1997. In return: (a) the Company agreed to make repayments of borrowings
under the Term Loan of $75,000 per month commencing June 1, 1996; (b) the
borrowing capabilities under the Revolving Loan were amended to 50% to 70%
of eligible receivables and 5% to 40% of eligible inventory depending upon
various categories of such assets as specified in the amendment and are
subject to unlimited change at the discretion of the bank; and, (c) the
Company agreed to use their best efforts to obtain by September 16, 1996, a
minimum of $10,000,000 in the form of either (i) a contribution of equity
capital and/or (ii) subordinated debt which would not become payable until
all bank loans were repaid and would not mature earlier than August 1,
1997. The use of any such proceeds would require the bank's written
consent. No change was made in interest rates or with respect to the
officers' guarantees. Accordingly, $600,000 of borrowings under the Term
Loan have been classified as a current liability in the consolidated
balance sheet at February 3, 1996.
Under the Credit Agreement, as amended, among other things, future
indebtedness, dividends and capital expenditures are restricted.
On December 16, 1996, the Credit Agreement was amended to change the
borrowing capabilities under the Revolving Loan to 20% of Eligible Retail
Inventory with all other borrowing base calculations remaining unchanged.
The amendment also ratified the Company's acquisition of British Links Golf
Classics, Inc.
On December 17, 1996, the Credit Agreement was further amended to reflect
the payment by the Company of $4,000,000 on the $8,475,000 Term Loan and
the bank's agreement to increase the Company's Revolving Loan to a maximum
of $4,000,000. The interest rate for both credit facilities was set at the
Prime Rate in effect from time to time plus one percent. The maturity date
for the Term Loan and the Revolving Loan was extended to May 1, 1998. The
amendment also requires the Company to remit monthly principal and interest
payments on the Term Loan in the amount of $94,808. At February 1, 1997,
there were no borrowings on the Revolving Loan.
On January 30, 1997, the Credit Agreement was further amended to allow for
the execution of a standby letter of credit by the Company which was
previously restricted by the terms of the Credit Agreement. The ability to
issue a standby letter of credit was required by the Company in order to
provide security in the amount of $500,000 in connection with the Company's
construction and lease and building of a new corporate headquarters and
manufacturing facility.
Interest on borrowings under the original credit facility that was in
effect at April 30, 1995 was at LIBOR reserve adjusted rate ("LIBOR") plus
1.5% to 1.75% (7.56% to 7.81% at that date). Under the credit agreement
effective July 31, 1995, borrowings under the Term Loan, at the option of
the Company, bore interest at LIBOR plus 2.50%, or the prime rate plus
0.25%. Interest on borrowing under the Revolving Loan were at LIBOR plus
2.25%, or the prime rate. Further, there was a fee of 0.5% on the
Revolving Loan commitment. Effective with the September 25, 1995
amendment, interest on the Term Loan was at the prime rate plus 1.0% and on
the Revolving Loan was at the prime rate plus 0.75%. Effective with the
December 17, 1996 amendment, interest on the Term Loan and on the Revolving
Loan was at the prime rate plus 1.0%.
On November 10, 1995, the Company borrowed $1,500,000 from certain
investors (including senior executives and members of the Board of
Directors). The related subordinated notes were originally due on November
1, 1996, and bear interest at 10%. Concurrent with these borrowings,
warrants for the purchase of 120,000 shares of the Company's common stock
were issued to the investors (Note 10).
The warrants were valued at $378,000, which amount was recorded as a credit
to stockholders' equity with a contra-reduction of the subordinated notes.
The notes as so discounted are being accredited to the $1,500,000 principal
balance over the term of the notes by charges to income.
The Company extended the maturity date for $1,250,000 of the original
amount financed to November 11, 1997. The interest rate for the extended
financing remains at 10%. The Company granted 125,000 options on a pro
rata basis to each lender participating in the extended financing.
On October 1, 1996, as part of the British Links acquisition, the Company
executed a promissory note aggregating $400,000. $100,000 is due May 1,
1997 and October 1, 1997, and $200,000 is due October 1, 1998. Interest is
at 8.25%.
The weighted average interest rate on borrowings outstanding as of February
1, 1997 and February 3, 1996 was 9.2% and 8.8%, respectively.
Aggregate future maturities of long-term debt, excluding capital lease
obligations, are as follows:
FISCAL YEAR ENDING
January 31, 1998 $ 2,215,000
January 30, 1999 3,948,000
$ 6,163,000
NOTE 7 - INCOME TAXES:
The consolidated provisions for income taxes consist of the following:
May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Current provision:
Federal $ - 212,000 ($40,000)
State 47,000 - (20,000)
Foreign - - -
Deferred income tax
provision (2,656,000) (1,600,000) 60,000
($2,609,000) ($1,388,000) $ 0
Deferred tax assets (liabilities) are comprised of the following:
February 1, February 3,
1997 1996
Deferred tax assets:
Accounts receivable $ 197,000 $ 195,000
Inventories 95,000 99,000
Prepaid expenses 1,272,000 -
Loss carryforwards 5,204,000 5,559,000
Total deferred tax assets 6,768,000 5,853,000
Deferred tax liabilities:
Prepaid expenses (1,126,000) (1,612,000)
Depreciation (267,000) (6,000)
Total deferred tax liabilities (1,393,000) (1,618,000)
Net deferred tax assets 5,375,000 4,235,000
Valuation allowance - (2,635,000)
$5,375,000 $1,600,000
At April 30, 1995, the Company had determined, based upon evidence then
available, that a valuation allowance of $3,897,000 was required against
net deferred tax assets at that date due to the uncertainty as to whether
the benefits of net operating loss (NOL) carryforwards would be realized.
At that date such valuation allowance reduced net deferred tax assets to
zero. At February 3, 1996, net deferred assets were $1,600,000 after a
valuation allowance of $2,635,000. At February 1, 1997, net deferred
assets were $5,375,000. Although realization is not assured, the Company
believes that it is more likely than not that the $5,375,000 deferred tax
asset will be realized. Realization of the recorded net tax benefit is
largely dependent on generating sufficient taxable income prior to
expiration of the NOL carryforwards. However, the amount of such
realization could be either increased or reduced in the near term if
estimates of future taxable income during the carryforward period are
changed.
To the extent that the NOL carryforwards and existing deductible temporary
differences are not offset by existing taxable temporary differences
reversing within the carryforward period, approximately $13,500,000 of the
remaining net operating loss carryforwards is expected to be realized by
achieving future profitable operations, based on the following:
1. Significantly improved operating earnings during the prior fiscal
year, excluding the impact of certain one-time special charges.
Continued improvement is anticipated in the in future years.
2. Significant cost containment efforts continued to intensify in the
prior fiscal year and included head count reductions, improved
inventory management, reduced capital expenditures and hiring freezes
for most of the year and enhanced control over catalog-related
expenses.
3. Future cost containment efforts will continue in the next fiscal
year and include closing of under-performing stores, scaling back or
eliminating certain under-performing catalogs reducing the number of
prospecting catalogs to be sent, costly new customer prospecting will
be more focused and efficient, and relocating and consolidating the
Company's corporate, manufacturing and distribution facilities.
The provision for income taxes differs from the U.S. statutory federal
income tax rate as follows:
May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Statutory U.S. rate (34.0%) (34.0%) (34.0%)
State income taxes (5.0) (5.0) (5.0)
Adjustment to prior year taxes - 30.7 -
Other, primarily
permanent items 5.6 12.1 1.4
Recognition of prior year
tax benefit (77.8) (205.3) -
Valuation allowance - 37.6
(111.2%) (201.5%) 0.0%
The Company files a consolidated income tax return. For tax return
purposes the Company has NOL carryforwards of approximately $13,500,000 at
February 1, 1997. There were no taxes available for recovery in the
statutory carryback period. Unused net operating losses expire in various
amounts during fiscal years 2005 through 2012. A portion of the NOL
carryforwards relates to deductions arising from the exercise of non-
qualified stock options. Accordingly, approximately $1,050,000 is
attributable to such stock option deductions, the benefit of which has been
credited to additional paid in capital for the year ended February 1, 1997.
NOTE 8 - RELATED PARTIES:
On April 26, 1994, the Company entered into a joint venture agreement with
a principal shareholder of the Company to operate a retail location under
the name Successories DFW Joint Venture. The Company sold area
distribution rights for Dallas, Texas to the principal shareholder for
$250,000. The principal shareholder contributed the area distribution
rights to the joint venture in exchange for a 40% interest. The Company
contributed certain property and equipment with a recorded value of
$100,000 in exchange for a 60% interest. Successories DFW Joint Venture
has been included in the accompanying consolidated financial statements
from the date of acquisition.
During the year ended February 1, 1997 the Company loaned a franchise owned
by the daughter of an outside director $77,000 related to the operation of
a retail location in Glendale, California.
A member of the Company's Board of Directors who is also a shareholder
served as a consultant to the Company on various tax matters. Fees paid to
his firm for said services during the year ended April 30, 1995, the period
May 1 through February 3, 1996 and the year ended February 1, 1997 were
$51,000, $72,000 and $141,000, respectively.
A member of the Company's Board of Directors who is also a shareholder
serves as legal counsel to the Company. Fees paid to the law firm in which
he is a partner for said services during the year ended April 30, 1995, the
period May 1, 1995 through February 3, 1996 and the year ended February 1,
1997 were $589,000, $237,000, and $262,000, respectively.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures to the consolidated statements of cash flows are
as follows:
May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Cash paid during the
period for:
Income taxes $11,250 $ - $ 266,000
Interest 1,277,000 737,000 534,000
In connection with acquisitions, liabilities were assumed as follows:
May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Fair value of assets
acquired $1,710,000 $225,000 $210,000
Notes issued (400,000)
Net cash paid (360,000) - (126,000)
Common shares issued (500,000) - -
Liabilities assumed $450,000 $225,000 $ 84,000
NOTE 10 - STOCK-BASED COMPENSATION PLANS:
The Company has a stock option plan, the Celex Group, Inc. Stock Option
Plan ("the Option Plan"), and an employee stock purchase plan. The Company
accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized in the financial statements. Had
compensation cost for the stock purchase plan and for stock options awarded
under this plan been determined consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
Period
May 1, 1995
Year Ended through
FEBRUARY 1, 1997 FEBRUARY 3, 1996
Net Income (Loss): As Reported $262,000 $700,000
Pro Forma (389,000) 523,000
EPS: As Reported ($.16) $.13
Pro Forma ($.28) $.10
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. Furthermore, management cannot attest to the reliability of the
pro forma compensation to predict future pro forma compensation except that
it is in full compliance with the FASB Statement No. 123.
The Company may grant options for up to 1,450,000 shares under the Option
Plan. The Company has granted options on 1,309,000 shares under the plan
through February 1, 1997. Under the Option Plan, the option exercise price
equals the stock's market price on date of grant. Options granted under
these plans vest after five years and expire after ten years.
During fiscal 1994, the Company initiated a non-compensatory Employee Stock
Purchase Plan ("the Plan"). The Company intends that the Plan shall
qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. Generally, the Plan provides for qualifying
employees to elect to have a percentage of their compensation used to
purchase common stock of the Company.
During the year ended February 1, 1997, 65,000 shares of the Company's
stock were purchased at prices ranging from $4.78 and $6.69. During the
period May 1, 1995 through February 3, 1996, 87,123 shares were purchased
at prices ranging from $5.31 to $7.43. During the year ended April 30,
1995, 25,000 shares were purchased at prices ranging from $8.75 to $21.75.
A summary of the status of the Option Plan and the Stock Purchase Plan
("the Plans") for the year ended February 1, 1997, for the period May 1,
1995 through February 3, 1996 and the year ended April 30, 1995 and changes
during the years then ended is presented in the table and narrative below:
For the For the Period For the
Year Ended May 1, 1995 to Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Weighted Weighted Weighted
Average Average Average
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
Outstanding at beginning
of year 821,250 $5.02 717,000 $4.72 866,250 $4.37
Granted 385,000 6.95 135,250 6.83 82,500 8.60
Exercised (192,500) 1.90 (3,750) 5.33 (193,000) 4.43
Forfeited (32,000) 6.22 (27,250) 6.03 (38,750) 6.53
Expired 0 0 0
Cancelled 0 0 0
Outstanding at
end of year 981,750 6.22 821,250 5.02 717,000 4.72
Exercisable at
end of year 468,950 6.23 448,000 4.07 424,250 3.77
Weighted average
fair value
of options
granted $5.39 $5.30 N/A
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for the nine option grants in 1995: weighted average risk-free interest
rate of 6.30; expected dividend yields of 0.00 percent; expected life of
10.0 years; weighted average expected volatility of 103.10 percent.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for the fourteen option grants in 1996: weighted average risk-free
interest rate of 6.24; expected dividend yields of 0.00 percent; expected
life of 10.0 years; weighted average expected volatility of 98.36 percent.
NOTE 11 - EMPLOYMENT AGREEMENTS:
The Company has employment agreements with certain individuals requiring
minimum aggregate annual payments of $658,000. The employment agreements
are for a three-year term.
NOTE 12 - LEASES AND LEASE COMMITMENTS:
OFFICE SPACE
The Company occupies office, manufacturing and warehouse space under terms
of a lease agreement which expires on May 31, 1997. In July, 1996, the
Company signed a build-to-suit lease agreement with a 12-year term for a
new facility. The Company pays all operating expenses and real estate
taxes, building maintenance and repair, and fire and insurance premium
costs in excess of stipulated amounts.
In addition, the Company leases its retail store locations under operating
leases having terms which are month-to-month or non-cancelable and expire
at varying times through fiscal year 2005. The Company is responsible for
its proportionate share of real estate taxes and maintenance in addition to
insurance for the leased facilities. In addition, certain leases require
rent payments equal to a percentage of sales in excess of predetermined
levels.
Annual future minimum payments under operating leases with noncancelable
terms in excess of one year are as follows:
Office & Retail
FISCAL YEAR ENDING WAREHOUSE LOCATIONS TOTAL
January 31, 1998 $843,000 $1,816,000 $2,659,000
January 30, 1999 759,000 1,478,000 2,237,000
January 29, 2000 759,000 1,401,000 2,160,000
February 3, 2001 760,000 1,146,000 1,906,000
February 2, 2002 760,000 1,068,000 1,828,000
Thereafter 5,633,000 2,522,000 8,155,000
$9,514,000 $9,431,000 $18,945,000
Rental expense recorded during the year ended February 1, 1997, the period
May 1, 1995 through February 3, 1996 and for the year ended April 30, 1995,
for all operating leases aggregated approximately $3,360,000, $3,270,000
and $2,657,000, respectively.
In connection with the Company's relocation plan, commitments of
approximately $1 million have been made primarily relating to fixed assets
and relocation expenses, which will be financed using the available
$4,000,000 on the Revolving Loan and any remainder, if necessary, will be
financed with operating income of the Company.
CAPITAL LEASE OBLIGATIONS
The Company acquired various items of equipment under lease arrangements
which are being accounted for as capital leases. Equipment under capital
leases has been recorded as property and equipment with a cost of
approximately $758,000 and $694,000 at February 1, 1997 and February 3,
1996, respectively, and accumulated depreciation of $621,000 and $516,000
at those dates.
The future minimum lease payments under all capitalized leases together
with the present value of the net minimum lease payments are as follows:
FISCAL YEAR ENDING
January 31, 1998 $ 99,000
January 30, 1999 30,000
January 29, 2000 12,000
February 3, 2001 9,000
February 2, 2002 9,000
Total minimum lease payments 159,000
Less amount representing interest (13,000)
Present value of minimum lease payments $146,000
NOTE 13 - RETAIL STORES, FRANCHISING COMMITMENTS AND OBLIGATIONS:
Changes in Company-owned and franchised stores were as follows:
COMPANY-OWNED STORES FRANCHISED STORES
May 1, 1995 May 1, 1995
Year Ended through Year Ended Year Ended through Year Ended
February 1, February 1, April 30, February 1, February 3, April 30,
1997 1996 1995 1997 1996 1995
Beginning
of the
period 54 51 35 43 42 28
Opened 8 6 32 6 8 33
Acquired
(British
Links) 1 0 0 0 0 0
Closed (14) (3) (16) (2) (7) (19)
End of
Period 49 54 51 47 43 42
Franchise fee revenues approximated $51,000, $135,000 and $884,000 for the
year ended February 1, 1997, the period May 1, 1995 through February 3,
1996 and for the year ended April 30, 1995, respectively.
The Company is obligated in accordance with the terms of each franchisee's
respective franchise agreement to provide certain services, such as
training, pre-opening assistance, site selection, advertising and
promotion.
NOTE 14 - LEGAL MATTERS:
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits related to its business. The Company does not
believe that the ultimate resolution of these matters will be material to
its business, financial position or results of operations.
NOTE 15 - PREFERRED STOCK:
On September 16, 1996, the Company issued 400 shares of Series A Cumulative
Convertible Preferred Stock with a liquidation preference of $5,000 per
share and a par value of $100 per share in an off-shore transaction to a
non-U.S. person pursuant to Regulation S under the United States Securities
Act of 1933, as amended. Regulation S is a safe harbor exemption from
registration under the Securities Act for sales of securities that occur
outside the U.S. The 400 shares of Series A Cumulative Convertible
Preferred Stock were converted into $2,000,000 of Common Stock during
the year.
On December 17, 1996, the Company issued 1,212 shares of Series B $100 par
Cumulative Convertible Preferred Stock in a transaction exempt from
registration pursuant to Regulation D under the Securities Act. Each share
has a liquidation preference of $5,000 and a par value of $100 per share.
The Series B Cumulative Convertible Preferred Stock is convertible into
common stock as follows:
(i) 50% of the shares are convertible into $3,030,000 of common stock
on the 61st day following the closing of the transaction;
(ii) 100% of the shares are convertible into $6,060,000 of common stock
on the 91st day following the closing of the transaction.
The convertible preferred shares are entitled to a dividend at a rate of
4.95% per annum.
In the event that the Company enters into a transaction to sell assets or
any consolidation or in the event of a change in control, the Company is
required to redeem the Series B Preferred Stock.
For the year ended February 1, 1997, none of the shares of the Series B
Cumulative Convertible Preferred stock have been converted into Common
Stock. The accretion discount relating to Series A and Series B Preferred
Stock for the year was $1,093,000.
NOTE 16 - EARNINGS (LOSS) PER SHARE:
May 1, 1995
Year Ended through Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
Net Income (Loss): $262,000 $700,000 ($7,745,000)
Preferred stock
dividends (1,093,000) -- --
Earnings (loss) attributable
to common shareholders (831,000) 700,000 (7,745,000)
Weighted average number
of common equivalent
shares outstanding 5,321,000 5,467,000 4,854,000
Earnings (loss) per common
and common equivalent
share ($.16) $.13 ($1.60)
NOTE 17 - SPECIAL CHARGES:
The Company recorded a special charge of $2,701,000 for the twelve months
ended February 1, 1997 which is comprised primarily of: a) reserve for
certain costs associated with the Company's relocation and consolidation of
its manufacturing operations and business offices into a new manufacturing
and distribution facility in Aurora, Illinois; b) costs associated with a
plan to close five Company-owned stores that were not performing
profitably; and, c) write-down of the existing order entry computer system
in anticipation of replacing it during the upcoming fiscal year.
NOTE 18 - 401(K) PLAN:
The Company has a 401(K) Retirement Savings Plan ("the Plan") in which
full-time employees who have completed one year of service are eligible to
participate in the Plan. Enrollment is open on the January 1st or July 1st
immediately following one year of service. The Company is required to
match $.20 on the dollar on the first 6% of deferral.
The Company contributions to the Plan were approximately $30,000 and
$37,000 for the year ended February 1, 1997, and the period May 1, 1995
through February 3, 1996, respectively.
NOTE 19 - QUARTERLY INFORMATION (UNAUDITED):
For the For the For the
Year Ended 9 Months Ended Year Ended
FEBRUARY 1, 1997 FEBRUARY 3, 1996 APRIL 30, 1995
FIRST QUARTER
Net sales $11,608,000 N/A $7,776,000
Gross profit 7,060,000 5,260,000
Net earnings (loss) (838,000) 216,000
Earnings (loss) per
Common share ($0.16) 0.04
SECOND QUARTER
Net sales 11,528,000 $ 9,817,000 9,992,000
Gross profit 6,514,000 5,658,000 6,886,000
Net earnings (loss) (808,000) (1,294,000) 825,000
Earnings (loss) per
Common share (0.15) (0.25) 0.16
THIRD QUARTER
Net sales 14,223,000 10,816,000 14,379,000
Gross profit 7,819,000 6,384,000 5,807,000
Net earnings (loss) 23,000 (596,000) (2,898,000)
Earnings (loss) per
Common share 0.005 (0.12) (0.61)
FOURTH QUARTER
Net sales 18,673,000 14,851,000 10,662,000
Gross profit 11,082,000 10,132,000 4,108,000
Net earnings (loss) 1,885,000 2,590,000 (5,888,000)
Earnings per
Common share (loss) 0.14 0.48 (1.21)
- F23 -
SUCCESSORIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged Balance
beginning to costs to other (1) at end of
OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
DESCRIPTION
FEBRUARY 1, 1997
Allowance for
doubtful accounts 221,346 246,243 0 271,792 195,797
Reserve for sales
returns 278,719 244,467 0 213,277 309,909
Reserve for obsolescence
and shrinkage 151,419 31,022 0 14,117 168,324
FEBRUARY 3, 1996
Allowance for
doubtful Accounts 488,705 (144,750) 0 122,609 221,346
Reserve for sales
returns 230,295 894,332 0 845,908 278,719
Reserve for
obsolescence and
shrinkage 250,000 0 0 98,581 151,419
APRIL 30, 1995
Allowance for doubtful
accounts 352,500 425,404 0 289,199 488,705
Reserve for sales
returns 35,000 937,845 0 742,550 230,295
Reserve for obsolescence
and shrinkage 100,000 150,000 0 0 250,000
(1) Bad debt write-offs less recoveries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUCCESSORIES, INC.
Date: May 2, 1997 By: /S/ ARNOLD M.ANDERSON
Arnold M. Anderson
Chief Executive Officer and Chairman of
the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE DATE
/S/ ARNOLD M. ANDERSON May 2, 1997
Arnold M. Anderson
Chief Executive Officer, Chairman of the Board and Director
(Principal Executive Officer)
/S/ JAMES M. BELTRAME May 2, 1997
James M. Beltrame
President, Chief Operating Officer and Director
/S/ M. ANDREW KING
May 2, 1997
Vice President Finance and Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)
/S/ MICHAEL H. MCKEE May 2, 1997
Michael H. McKee
Senior Vice President, Creative Department and Director
/S/ TIMOTHY C. DILLON May 2, 1997
Timothy C. Dillon
Vice President, General Counsel, Secretary and Director
/S/ MERVYN C. PHILLIPS, JR. May 2, 1997
Mervyn C. Phillips, Jr.
Director
/S/ MICHAEL SINGLETARY May 2, 1997
Michael Singletary
Director
/S/ C. JOSEPH LABONTE May 2, 1997
C. Joseph LaBonte
Director
/S/ SEAMAS T. COYLE May 2, 1997
Seamas T. Coyle
Director
/S/ GUY E. SNYDER May 2, 1997
Guy E. Snyder
Director
/S/ STEVEN B. LARRICK May 2, 1997
Steven B. Larrick
Director
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of Registrant (1)
3.2 Articles of Amendment to the Company's Articles of Incorporation
changing the Company's name to Successories, Inc. (2)
3.3 Certificate of Designation creating the Company's Series A
Cumulative Convertible Preferred Stock (2)
3.4 Certificate of Designation creating the Company's Series B
Cumulative Convertible Preferred Stock (2)
3.5 By-laws of Registrant (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Series A Cumulative Convertible Preferred Stock
Certificate (2)
4.3 Specimen Series B Cumulative Convertible Preferred Stock
Certificate (2)
10.1 Form of Franchising Agreement (3)
10.2 Employment Agreement with Arnold M. Anderson
dated February 28, 1993 (1)
10.3 Credit Agreement with Harris Trust and Savings
Bank (4)
10.4 Credit Agreement and Guaranty between the
Company and NBD Bank (5)
10.5 First Forbearance Agreement between the Company
and NBD Bank (6)
10.6 Amended and Restated Credit Agreement between
the Company and NBD Bank dated as of July 31,
1995 (7)
10.7 Lease Agreements between LaSalle National Trust
Bank as Trustee under Trust No. 107739 and
Celebrating Excellence (4)
10.8 Stock Option Instrument for Arnold M. Anderson
dated November 19, 1991 (1)
10.9 Celex Group, Inc. Stock Option Plan (1)
10.10 Joint Venture Agreement with Morrison DFW, Inc.
and related documents (4)
10.11 Indemnification Agreement dated May 26, 1995
between the Company and Arnold M. Anderson (7)
Indemnification Agreements in the form filed were
also entered into by the Company with Messrs.
James M. Beltrame, Seamas T. Coyle, Timothy C. Dillon,
C. Joseph LaBonte, Steven B. Larrick, Michael H. McKee,
Mervyn C. Phillips, Jr., Michael Singletary, Guy E. Snyder
and Peter C. Walts
10.12 First Amendment to the Credit Agreement between
the Company and NBD Bank dated as of September 25,
1995 (8)
10.13 Second Amendment to the Credit Agreement between
the Company and NBD Bank dated as of February 7,
1996 (9)
10.14 Form of Subordinated Note, Common Stock Purchase Warrant
and Subordination Agreement relating to issuance of $1,500,000
Subordinated Notes and Warrants to purchase 120,000 shares of
the Company's Common Stock (9)
10.15 Common Stock Option Agreement granted to
Arnold M. Anderson and Incentive Stock Option
Agreement granted to Arnold M. Anderson (9)
10.16 Common Stock Option Agreement granted to
James M. Beltrame and Incentive Stock Option
Agreement granted to James M. Beltrame (9)
10.17 Third Amendment to the Credit Agreement between the
Company and NBD Bank dated as of May 2, 1996 (9)
10.18 Employment Agreement with Arnold M. Anderson dated
March 1, 1996 (10)
10.19 Employment Agreement with James M. Beltrame dated
June 1, 1996 (10)
10.20 Employment Agreement with Michael H. McKee dated
June 1, 1996 (10)
10.21 Common Stock Option Agreement granted to James M. Beltrame
dated June 17, 1996 (10)
10.22 Agreement and Plan of Merger among Successories, Inc.,
British Links Acquisition Corp., British Links Golf Classics,
Inc.,
David J. Houston and Michael McArthur dated October 1, 1996 (11)
10.23 Regulations D Securities Subscription Agreement among Successories,
Inc., Infinity Investors Limited and Seacrest Capital Limited
dated December 17, 1996 (2)
10.24 Registration Rights Agreement dated as of December 17, 1996, by
and among Successories, Inc., Infinity Investors Limited and
Seacrest Capital Limited (2)
10.25 Form of Subordinated Note Extensions, Stock Options and
Subordination Agreement relating to the extension of $1,250,000 of
Subordinated Notes, and options to purchase 125,000 shares of the
Company's Common Stock (2)
10.26 Fourth Amendment to the Credit Agreement between the
Company and American National Bank & Trust Company of
Chicago dated as of December 16, 1996 (filed herewith)
10.27 Fifth Amendment to the Credit Agreement between the
Company and American National Bank & Trust Company
of Chicago dated as of December 17, 1996 (filed herewith)
10.28 Sixth Amendment to the Credit Agreement between the
Company and American National Bank & Trust Company
of Chicago dated as of January 30, 1997 (filed herewith)
21.1 Subsidiaries (4)
23.1 Consent of Arthur Anderson LLP(filed herewith)
23.2 Consent of Price Waterhouse LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
__________
(1) Previously filed with Registration Statement on Form SB-2, No. 33-67530C
filed on August 17, 1993, and incorporated herein by reference.
(2) Previously filed with Registration Statement on Form S-3, No. 333-19313,
and incorporated herein by reference.
(3) Previously filed with Post-effective Amendment Number 1 to the
Registration Statement on Form SB-2, No. 33-67530C filed on January 19,
1994, and incorporated herein by reference.
(4) Previously filed with Annual Report on Form 10-K for the year ended
April 30, 1994, and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter ended
July 31, 1995, and incorporated herein by reference.
(6) Previously filed with the Company's Form 8-K dated June 7, 1995,
reporting Date of Event May 26, 1995, and incorporated herein by
reference.
(7) Previously filed with the Company's Annual Report on Form 10-K for the
year ended April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q for the quarter ended
October 28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for the
year ended February 3, 1996, and incorporated herein by reference.
(10) Previously filed with the Company's Form 10-Q for the quarter ended
August 3, 1996 and incorporated herein by reference.
(11) Previously filed with the Company's Form 10-Q for the quarter ended
November 2, 1996 and incorporated herein by reference.