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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Fiscal Year Ended February 3, 2001 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended
Commission File Number: 21859
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FACTORY CARD OUTLET CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3652087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2727 Diehl Road, Naperville, IL 60563-2371
(Address of principal executive offices) (Zip Code)
(630) 579-2000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(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 [_]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 27, 2001 was approximately $79,688, computed on the
basis of the last reported bid price per share ($0.02) of such stock on the
Over the Counter Bulletin Board system. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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 this Form 10-K [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The number of shares of the Registrant's Common Stock outstanding as of
March 27, 2001 was 7,503,098.
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Factory Card Outlet Corp.
(Debtor in possession effective March 23, 1999)
Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Page
----
Item 1 Business............................................................................... 1
Item 2 Properties............................................................................. 7
Item 3 Legal Proceedings...................................................................... 7
Item 4 Submission of Matters to a Vote of Security Holders.................................... 7
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters............... 7
Item 6 Selected Financial Data................................................................ 8
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Item 7a Quantitative and Qualitative Disclosures About Market Risks............................ 13
Item 8 Financial Statements and Supplementary Data............................................ 14
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 14
PART III
Item 10 Chairman and Executive Officers of the Registrant...................................... 15
Item 11 Executive Compensation................................................................. 15
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 15
Item 13 Certain Relationships and Related Transactions......................................... 15
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 17
PART I
ITEM 1. BUSINESS
General
Factory Card Outlet Corp. ("FCO") and its subsidiary, Factory Card Outlet of
America Ltd. (collectively, with FCO, the "Company"), are a chain of company-
owned stores offering a wide selection of greeting cards, giftwrap, balloons,
everyday and seasonal party supplies and other special occasion merchandise at
everyday value prices. As of March 27, 2001, the Company operated 175 stores in
20 states. Based on the published number of stores of the Company's competitors
as compiled by the Company from various business publications and other
publicly available information, the Company believes it is one of the largest
chains of company-owned stores in the greeting card, party supply and special
occasion industry. The Company opened 33 and 58 stores in fiscal 1998 and 1997,
respectively. The Company currently has no plans to open any additional stores
in fiscal 2001 and the Company closed 28 stores in fiscal 1999 and 7 stores in
fiscal 2000.
The Company's stores provide customers with a value-oriented, "one-stop"
shopping destination for greeting card, party supply and special occasion
merchandise for all major holidays and celebratory events, including birthdays,
graduations, weddings, baby showers and other family, religious and special
occasions. The Company's newer stores average approximately 12,000 square feet,
with approximately 80% of the space devoted to selling space, and are designed
to provide ease of shopping within an attractive, spacious and festive
environment.
Proceedings Under Chapter 11 of the Bankruptcy Code
On March 23, 1999, the Company filed petitions for reorganization under
chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The
petitions were filed in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") and are currently assigned case numbers 99-
685 (PJW) and 99-686 (PJW) (the "Chapter 11 Cases"). The Chapter 11 Cases have
been procedurally consolidated for administrative purposes. The Company is
currently operating its business and managing its properties as a debtor in
possession pursuant to the Bankruptcy Code.
Subsequent to the commencement of the Chapter 11 Cases, the Company sought
and obtained several orders from the Bankruptcy Court that were intended to
stabilize their business and enable the Company to continue business operations
as a debtor in possession. The most significant of these orders (1) approved a
$50 million debtor in possession loan agreement, the revolving credit and
guarantee agreement, among FCO, as borrower, Foothill Capital Corporation, as
agent, and Paragon Capital LLC, as oversight agent, each for itself and any
other lenders party thereto (the "Loan Agreement"), (2) permitted the Company
to operate their consolidated cash management system during the Chapter 11
Cases in substantially the same manner as it was operated prior to the
commencement of the Chapter 11 Cases, and (3) authorized payment of prepetition
wages, vacation pay and employee benefits and reimbursement of employee
business expenses.
The Loan Agreement was entered into on March 23, 1999. The Loan Agreement
originally provided FCO with a revolving line of credit for loans and letters
of credit in an aggregate amount not to exceed $50 million, including the
ability to issue up to $10 million of letters of credit, to be used for its
ongoing working capital needs and for general corporate purposes. However, as
$50 million was in excess of FCO's working capital needs, the aggregate amount
of the loan was reduced to $32.5 million by an amendment dated March 19, 2001.
The amendment also extended the term of the loan from March 23, 2001 to the
earlier of July 31, 2001 or the effective date of the Company's plan of
reorganization. The lenders under the Loan Agreement were granted a security
interest in substantially all of FCO's assets as security for FCO's obligations
under the Loan Agreement. All obligations under the Loan Agreement are afforded
"super-priority" administrative expense status in the Chapter 11 Cases.
1
On April 6, 1999, a statutory committee of unsecured creditors (the
"Creditors' Committee") was appointed by the Office of the United States
Trustee to represent the interests of the Company's unsecured creditors in the
Chapter 11 Cases. The Creditors' Committee has the right to review and object
to certain business transactions and may participate in the formulation of the
Company's long term business plan and plan of reorganization. The Company is
required to reimburse certain fees and expenses of the Creditors' Committee,
including fees for attorneys and other professionals, to the extent allowed by
the Bankruptcy Court.
On July 12, 2000, the Bankruptcy Court directed the United States Trustee to
appoint an additional committee consisting of equity security holders (the
"Equity Committee"). The Company is required to pay the aggregate fees and
expenses of the Equity Committee's professionals up to $250,000, subject to the
Equity Committee's right to seek an increase in said amount upon a showing that
the Equity Committee, through its members and/or its professionals, has
conferred a tangible benefit on the Company's estates.
The Company has the right, subject to Bankruptcy Court approval and certain
other limitations, to assume or reject executory contracts and unexpired
leases. In this context, "assumption" means that the Company agrees to perform
their obligations and cure all existing defaults under the contract or lease,
and "rejection" means that the Company is relieved from its obligations to
perform further under the contract or lease but is subject to a claim for
damages for the breach thereof. Any damages resulting from rejection of
executory contracts and unexpired leases are treated as general unsecured
claims in the Chapter 11 Cases. The Company obtained approval from the
Bankruptcy Court to close and conduct closing sales at 27 stores. Subsequent to
the closing of such stores, the Company sought and obtained approval from the
Bankruptcy Court to reject 26 of the closed store leases and assume and assign
one of such leases. On August 24, 2000 and January 31, 2001, an additional 5
and 2 store leases, respectively, were rejected. The Company will continue to
analyze, and may assume or reject, additional leases and other existing
contracts. The time within which the Company must assume or reject unexpired
leases of real property, with the exception of one lease, currently expires on
June 29, 2001. The time within which the Company must assume that one lease
expires on May 31, 2001. The Company, however, may request that the Bankruptcy
Court grant an extension of the time within which it must assume or reject
unexpired leases of real property.
The Bankruptcy Code provides that the Company has an exclusive period during
which only it may propose, file and solicit acceptances of a plan of
reorganization. The exclusive period for the Company to propose a plan of
reorganization was set to expire on March 30, 2001. However, by motion, dated
March 29, 2001, the Company requested an extension of such exclusive period to
and including July 31, 2001. The motion to extend the exclusive period is
currently scheduled to be heard by the Bankruptcy Court on April 30, 2001. If
the Company fails to file a plan of reorganization during the exclusive period
or, after such plan has been filed, if the Company fails to obtain acceptance
of such plan from the requisite impaired classes of creditors and equity
security holders during the exclusive period, any party in interest, including
a creditor, an equity security holder, a committee of creditors or equity
security holders, or an indenture trustee, may file their own plan of
reorganization for the Company.
On February 2, 2001, the Company, the Creditors' Committee and Factory Card
Holdings, Inc. ("FCH") entered into a letter of intent which provided the basic
parameters of an FCH investment in the Company and the chapter 11 plan of
reorganization that would result therefrom. Subsequent to the execution of the
letter of intent, FCH completed its due diligence. The Company, the Creditors'
Committee and FCH then proceeded to negotiate the specific terms of the
definitive transaction documents and the plan of reorganization. Those
negotiations culminated in the execution of that certain Agreement on Plan of
Reorganization of Factory Card Outlet Corp., dated as of March 26, 2001 (the
"FCH Agreement"). The FCH Agreement, which is subject to, among other things,
confirmation of a plan of reorganization that would have to be voted upon by
creditors, provides for an investment of at least $10 million in the Company
upon its emergence from chapter 11, at least $6 million of which would be in
the form of equity.
The Company and FCH anticipate that they will file their Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code Proposed by the Company
and Factory Card Holdings, Inc. (the "Plan") and their
2
Joint Disclosure Statement of the Company and Factory Card Holdings, Inc.
pursuant to Section 1125 of the Bankruptcy Code (the "Disclosure Statement") by
mid April 2001. The Plan will provide that general unsecured creditors, whose
claims are estimated to approximate $44 million, will receive a total cash
distribution approximating $6 million, of which $5 million will be payable over
a period of five years. The $5 million distribution will be subject to downward
adjustment under certain circumstances. An additional distribution of up to $5
million will be available in the event that FCH were successful in raising
proceeds from a public offering or other disposition of the Company's assets
within a seven year period from the Company's emergence from chapter 11. The
holders of the Company's outstanding common stock will not receive any
distribution because the Plan will not result in creditors recovering the full
amount of their claims. Consequently, the existing stock is expected to be
cancelled.
The Company and FCH will seek Court approval of the Disclosure Statement
after it is filed. Upon Court approval, the Disclosure Statement, along with
the Plan, will be sent to impaired creditors for their consideration and
approval. Following the solicitation period, the Bankruptcy Court will consider
whether to confirm the plan. In order to confirm a plan of reorganization, the
Bankruptcy Court, among other things, is required to find that (1) with respect
to each impaired class of creditors and equity security holders, each holder in
such class will, pursuant to the plan, receive at least as much as such holder
would receive in a liquidation, (2) each impaired class of creditors and equity
security holders has accepted the plan by the requisite vote (except as
provided in the following sentence), and (3) confirmation of the plan is not
likely to be followed by a liquidation or a need for further financial
reorganization of the Company or any successors to the Company unless the plan
proposes such liquidation or reorganization. If any impaired class of creditors
or equity security holders does not accept a plan and assuming that all of the
other requirements of the Bankruptcy Code are met, the proponent of the plan
may invoke the "cram down" provisions of the Bankruptcy Code. Under these
provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-
acceptance of the plan by an impaired class of creditors or equity security
holders if certain requirements of the Bankruptcy Code are met with respect to
the non-accepting class. As the holders of the Company's outstanding common
stock will not receive any distribution under the Plan and, consequently, will
be deemed to have rejected the Plan, the Company and FCH currently intend to
request confirmation of the Plan under the cram down provisions of the
Bankruptcy Code.
In September 1999 the Company announced that it received notification that
the NASDAQ's staff had delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999.
Business
The key elements of the Company's business are as follows:
Merchandise Offering. The Company offers a wide selection of greeting cards,
giftwrap, balloons, everyday and seasonal party supplies and special occasion
merchandise. With over 23,000 SKUs in each of its stores, the Company's stores
provide a single destination for a customer's special occasion product needs.
The stores offer product selections for all major holidays and seasonal events,
such as Valentine's Day, St. Patrick's Day, Passover, Easter, Secretary's Day,
Mother's Day, Father's Day, Grandparent's Day, Fourth of July, Rosh Hashanah,
Halloween, Thanksgiving, Christmas, Hanukkah, Kwanzaa and New Year's;
celebratory events, including birthdays, graduations, weddings and baby
showers; and other family, religious and special occasions. The following five
major product categories comprise the Company's merchandise offering:
. Greeting Cards--The Company's stores feature approximately 4,000 titles
of high quality, everyday and seasonal greeting cards for all occasions,
all sold at an everyday low price. Boxed everyday and holiday cards are
regularly sold at substantial discounts off manufacturers' suggested
retail prices.
. Giftwrap--The Company believes its stores have become a destination for
shoppers seeking a wide selection of giftwrap and giftwrap accessories
and sells most of these items at lower prices than competitors. Items
include glossy, printed, solid and foil giftwrap, solid and printed
ribbons, bows, gift bags, gift boxes, tissue paper and gift tags.
3
. Balloons--Balloons are increasingly popular for all occasions. The
Company's stores offer value in mylar and latex balloons and carry
popular licensed designs along with a large selection for any occasion.
. Party Supplies--The Company stocks a broad selection of party supply
merchandise for everyday and special occasions in a wide variety of
attractive patterns and distinctive colors. Party supplies include
tableware, tablecovers, cutlery, invitations, party favors, milestone
birthday items, pinatas, banners, decorations, candles, decor and other
related party items.
. Other Special Occasion Merchandise--The Company complements its major
product lines by offering many other special occasion items in order to
provide a "one-stop" shopping destination for customers. These items
include candy, birthday and wedding items, candles and candle holders,
stationery, gifts, novelty items and seasonal products.
Everyday Value Pricing. The Company's strategy of everyday value pricing is
designed to provide customers with consistent value on purchases. The Company
typically sells merchandise at discounts of 20% to 60% off manufacturers'
suggested retail prices. In addition, the stores feature a "power aisle"
offering a wide selection of opportunistic buys and manufacturers' seasonal
over-runs, all priced at deep discounts and frequently changed to create
continued customer interest.
Attractive, Spacious and Festive Superstore Format. The Company's stores
have an attractive and festive atmosphere within a spacious "easy to shop"
store. The superstores are designed to provide a comfortable shopping
experience, with bright lighting, wide carpeted aisles and fixtures that offer
customers easy access to merchandise. The Company has increased the size of its
new stores to approximately 12,000 square feet. Management is currently
evaluating the size of the Company's stores to determine if 12,000 square feet
is optimal.
Targeted Advertising. The Company utilizes a Company-wide direct mail
program to reach targeted customers and highlight the breadth and value of its
merchandise. The direct mail pieces are printed in 4-color and range from four
to eight pages depending on the season. The Company plans to continue this
direct mail program and support all holidays and special events. The Company
also uses radio advertising to support select major holiday selling seasons.
Distribution Center and Office Complex. The Company completed the
consolidation of its distribution facilities and offices into a new
distribution center and office complex in Naperville, Illinois in February
1998. The newly-constructed, three-story office building and 300,000 square-
foot distribution center is on 39 acres. The lease agreement provides for the
expansion of the warehouse to 600,000 square feet, as needed. The Company
believes it is one of a few special occasion store chains to have a
distribution facility. Management believes the distribution facility can
provide the Company purchasing and distribution efficiencies.
Store Locations. As of March 27, 2001, the Company operated 175 stores in 20
states, all of which are leased. The Company's store leases typically have an
average initial term of 10 years with two five-year renewal options.
4
Set forth below is a list of the Company's store locations by state as of
March 27, 2001:
Number
of
Location Stores
-------- ------
Delaware (1)
Wilmington......... 1
Florida (10)
Gainesville........ 1
Jacksonville....... 1
Naples............. 1
Orlando............ 4
Tampa.............. 3
Illinois (36)
Chicago Metro...... 28
Bloomington........ 1
Champaign.......... 1
DeKalb............. 1
Fairview Heights... 1
Moline............. 1
Peoria............. 1
Rockford........... 1
Springfield........ 1
Indiana (18)
Indianapolis
Metro............. 5
Anderson........... 1
Bloomington........ 1
Clarksville........ 1
Evansville......... 2
Fort Wayne......... 1
Highland........... 1
Lafayette.......... 1
Merrillville....... 1
Michigan City...... 1
Mishawaka.......... 1
Muncie............. 1
Richmond........... 1
Iowa (7)
Des Moines Metro... 3
Cedar Rapids....... 1
Davenport.......... 1
Dubuque............ 1
Waterloo........... 1
Number
of
Location Stores
-------- ------
Kentucky (5)
Louisville Metro... 3
Florence........... 1
Owensboro.......... 1
Maryland (13)
Baltimore Metro.... 8
Washington, D.C.
Metro (MD)........ 4
Salisbury.......... 1
Michigan (1)
Benton Harbor...... 1
Minnesota (6)
Minneapolis St.
Paul Metro........ 4
Mankato............ 1
Rochester.......... 1
Missouri (9)
St. Louis Metro.... 5
Cape Girardeau..... 1
Columbia........... 1
Joplin............. 1
Springfield........ 1
Nebraska (5)
Omaha Metro........ 3
Lincoln............ 1
Grand Island....... 1
New York (9)
Buffalo Metro...... 3
Albany............. 1
Olean.............. 1
Rochester.......... 3
Syracuse........... 1
North Carolina (3)
Charlotte.......... 1
Raleigh............ 1
Winston Salem...... 1
Number
of
Location Stores
-------- ------
Ohio (19)
Cincinnati Metro... 3
Cleveland Metro.... 4
Columbus Metro..... 5
Akron.............. 2
Dayton............. 1
Lancaster.......... 1
Mansfield.......... 1
St. Clairsville.... 1
Wooster............ 1
Pennsylvania (5)
Erie............... 1
Hanover............ 1
State College...... 1
Wilkes Barre-
Scranton.......... 2
South Carolina (2)
Charleston......... 1
Greenville......... 1
Tennessee (5)
Chattanooga........ 2
Memphis............ 1
Nashville.......... 2
Virginia (6)
Washington D.C.
Metro (VA)........ 1
Fredericksburg..... 1
Lynchburg.......... 1
Norfolk-Newport
News.............. 2
Richmond........... 1
West Virginia (1)
Clarksburg......... 1
Wisconsin (14)
Milwaukee Metro.... 6
Appleton........... 1
Eau Claire......... 1
Green Bay.......... 1
Janesville......... 1
Madison............ 2
Oshkosh............ 1
Wausau............. 1
---
Total............... 175
===
5
Product Sourcing
The Company has historically been able to take advantage of volume purchase
discounts due to its size and the use of its distribution center. The Company
purchases its inventory from more than 300 vendors world-wide, with the largest
supplier, Creative Expressions, Inc., representing approximately 11.1% and the
ten largest suppliers representing approximately 39.8% of the Company's
aggregate purchases for the fiscal year ended February 3, 2001. A small portion
of the Company's merchandise is imported from foreign manufacturers or their
agents, principally from the Far East. As is customary in its industry, the
Company does not have long term contracts with any suppliers.
Although the Company believes that its well-established relationships with
overseas suppliers have historically provided it with an advantage over many of
its competitors by enabling the Company to offer an extensive selection of
distinctive products at higher gross margins, the Company's liquidity problems
and the Chapter 11 Cases could have a material adverse effect on the Company
and its relationships with its suppliers.
Management Information Systems
The Company believes that its management information systems are an
important factor in supporting its business and enhancing its competitive
position in the industry. Over the past three years, the Company has invested
significant resources in systems and infrastructure to support its business and
make it more efficient. The Company uses a management information and control
system, which is based on the JDA Merchandise Management System software
package ("JDA") and supports the complete range of retail cycle functions in
the areas of finance, merchandising and distribution. All stores are linked to
the Company's headquarters through personal computers, which interface with an
IBM AS/400 and provide the stores with the ability to enter store orders and
payroll information and send and receive electronic mail. These personal
computers are also tied into the Company's point-of-sale system ("POS system").
The POS system provides sales information to the Company's stores and central
office and is used to enhance merchandise planning and buying programs. While
the POS system provides sales information, the Company intends to focus its
future systems development efforts on enhancing inventory management tools.
Competition
The greeting card, party supply and special occasion industry is highly
competitive. The Company currently competes against a diverse group of
retailers, ranging from other party supply and greeting card retailers to
designated departments in drug stores, general mass merchandisers, supermarkets
and department stores of local, regional and national chains. In addition, a
trend toward discounting the cost of party supplies and greeting cards is
developing and the Company may encounter additional competition from new
entrants in the future. Some of the Company's competitors have substantially
greater financial resources and experience than the Company.
Trademarks
The Company has registered trademarks under the name of "Factory Card
Outlet"(R) and "Partymania"(R) and the "Partymania"(R) design on the Principal
Register of the United States Patent and Trademark Office.
Government Regulation
Each of the Company's stores must comply with regulations adopted by Federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. More stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors, and difficulties or failures in obtaining the
required licenses or approvals, can delay and sometimes prevent, the opening of
a new store. In addition, the Company must comply with the Fair Labor Standards
Act and various state laws governing various matters such as minimum wage,
overtime and other
6
working conditions. The Company also must comply with the provisions of the
Americans with Disabilities Act of 1990, as amended, which requires generally
that employers provide reasonable accommodation for employees with disabilities
and that stores be accessible to customers with disabilities.
Employees
The Company had approximately 2,950 employees as of March 3, 2001, comprised
of approximately 1,150 full-time and approximately 1,800 part-time employees.
The number of store employees increases during peak selling seasons. The
Company's employees are not covered by a collective bargaining agreement. The
Company believes its relations with its employees are generally good.
ITEM 2. PROPERTIES
In addition to the Company's stores, all of which are leased, the Company
also leases a distribution center in Naperville, Illinois, with the initial
lease term expiring in February 2007. The Company has the option to renew the
initial term of the lease for an additional period of 5 years. This facility
consists of a three-story office building and 300,000 square-foot distribution
center that sits on 39 acres of land.
ITEM 3. LEGAL PROCEEDINGS
The Company commenced the Chapter 11 Cases on March 23, 1999. Additional
information relating to the Chapter 11 Cases is set forth in Part 1, Item 1 of
this Annual Report on Form 10-K under the caption "Proceedings under Chapter 11
of the Bankruptcy Code": and in Note 1 of the Notes to Consolidated Financial
Statements under the caption "Reorganization and Chapter 11 Filing."
Prior to the commencement of the Chapter 11 Cases, several court cases were
commenced by creditors of the Company relating to unpaid amounts due to such
creditors. These actions are now stayed as a result of Chapter 11 Cases. As of
the date of this Annual Report on Form 10-K, the Company is aware of no
material existing or threatened litigation to which it is or may be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock traded on the NASDAQ National Market under the
symbol "FCPY" until March 26, 1999, when the symbol was changed to "FCPYQ" as a
result of the commencement of the Chapter 11 Cases. The common stock was
delisted on September 1, 1999. The common stock now trades on the OTC Bulletin
Board, an electronic quotation service for NASD Market Makers. There can be no
assurance that the common stock will continue to trade on the OTC Bulletin
Board. The following table sets forth the high and low closing sale prices of
the Company's Common Stock as reported on the NASDAQ National Market for the
periods indicated. After September 1, 1999, the prices presented are bid
prices, which represent bid prices quoted by broker-dealers and do not
necessarily reflect prices from actual transactions.
Fiscal
2000 Fiscal 1999
--------- -----------
Quarter High Low High Low
------- ---- ---- ----- -----
First (ended April 29, 2000 and May 1, 1999)......... $.17 $.10 $2.44 $1.13
Second (ended July 29, 2000 and July 31, 1999)....... .21 .09 1.10 .05
Third (ended October 28, 2000 and October 30,1999)... .10 .04 .38 .03
Fourth (ended February 3, 2001 and January 29,
2000)............................................... .05 .01 .18 .05
7
On March 27, 2001, the last bid price of the common stock reported on the OTC
Bulletin Board was $0.02 At February 27, 1999, the approximate number of
holders on record of the Common Stock was 114.
Dividends
The Company has never paid cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. The Company expects
earnings will be retained for the continued development of the Company's
business. In addition, the Loan Agreement between the Company and its lenders
restricts the ability of the Company to pay cash dividends on its capital
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data presented below under
the captions "Statement of Operations Data" and "Balance Sheet Data" for, and
as of the end of, each of the fiscal years in the two-year period ended June
28, 1997 and the seven month transition period ended January 31, 1998, are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG LLP, independent certified
public accountants. The consolidated financial statements as of February 3,
2001 and January 29, 2000, and for the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999, and the report thereon, are included
elsewhere in this Annual Report on Form 10-K. In addition, selected
consolidated financial and operating data is presented as of and for the 53-
week period ended January 31, 1998. This data was derived from the unaudited
consolidated financial statements of the Company. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Annual Report on Form 10-K.
8
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollar amounts in thousands, except per share data)
Transition Fiscal Fiscal
53-Weeks 52-Weeks 52-Weeks 53-Weeks period year ended year ended
ended Feb. ended Jan. ended Jan. ended Jan. ended Jan. June 28, June 29,
3, 2001 29, 2000 30, 1999 31, 1998 31, 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Operations
Data:
Net sales............... $ 226,122 $ 217,658 $ 226,499 $ 174,497 $ 110,699 $ 133,945 $ 94,589
Cost of sales........... 122,289 121,224 134,996 87,079 56,977 65,981 46,029
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 103,833 96,434 91,503 87,418 53,722 67,964 48,560
Selling, general and
administrative
expenses............... 101,190 101,892 114,836 82,066 53,935 63,077 46,843
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............ 2,643 (5,458) (23,333) 5,352 (213) 4,887 1,717
Interest expense........ 3,344 3,049 4,572 1,482 1,269 1,402 1,529
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
reorganization items,
net, income taxes
(benefit) and
extraordinary item.... (701) (8,507) (27,905) 3,870 (1,482) 3,485 188
Reorganization items,
net.................... 7,998 19,082 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes (benefit)
and extraordinary
item................... (8,699) (27,589) (27,905) 3,870 (1,482) 3,485 188
Income taxes (benefit).. -- -- 451 1,652 (593) 1,462 118
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item.... (8,699) (27,589) (28,356) 2,218 (889) 2,023 70
Extraordinary item ..... -- (1,292) -- -- -- ( 313) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (8,699) $ (28,881) $ (28,356) $ 2,218 $ (889) $ 1,710 $ 70
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per
share--basic
Before extraordinary
item.................. $ (1.16) $ (3.68) $ (3.82) $ 0.31 $ (0.12) $ 0.35 $ 0.02
Extraordinary item..... -- (0.17) -- -- -- (0.05) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (1.16) $ (3.85) $ (3.82) $ 0.31 $ (0.12) $ 0.30 $ 0.02
========== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding............ 7,503,098 7,503,098 7,422,069 7,261,542 7,261,542 5,739,962 4,068,409
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per
share--diluted ........
Before extraordinary
item.................. $ (1.16) $ (3.68) $ (3.82) $ 0.28 $ (0.12) $ 0.30 $ 0.01
Extraordinary item..... -- (0.17) -- -- -- (0.04) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (1.16) $ (3.85) $ (3.82) $ 0.28 $ (0.12) $ 0.26 $ 0.01
========== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding............ 7,503,098 7,503,098 7,422,069 7,946,188 7,261,542 6,686,243 5,249,479
========== ========== ========== ========== ========== ========== ==========
Operating Data:
Number of stores:
Opened during period... 0 0 33 58 42 35 32
Closed/relocated during
period................ 7 28 3 2 2 2 3
Open at end of period.. 175 182 210 180 180 140 107
Comparable store sales
increase(1)........... 5.0% 0.7% 0.8% 8.3% 9.5% 11.5% 6.0%
Average sales per
store(2).............. $ 1,264 $ 1,175 $ 1,129 $ 1,170 $ 676 $ 1,101 $ 997
Balance Sheet Data (at
end of period):
Working capital........ $ 16,510 $ 18,969 $ 22,977 $ 50,230 $ 50,230 $ 35,459 $ 23,605
Total assets........... 83,712 90,803 107,571 115,030 115,030 85,702 59,080
Total debt(3).......... 25,699 22,869 34,153 34,189 34,189 7,690 19,326
Total stockholders'
equity (deficit)...... (13,402) (4,703) 24,178 51,734 51,734 52,273 17,124
- --------
(1) Includes stores open 13 or 14 months after their opening date. If the
opening date of a store falls in the first 14 days of a period, then it
will be included in the comparable store calculation in its 13th month of
operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
(2) Includes only stores open during the entire period.
(3) Total debt is defined as total current and long-term debt.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a chain of company-owned stores offering a wide selection of
greeting cards, giftwrap, balloons, everyday and seasonal party supplies and
special occasion merchandise at everyday value prices. As of March 27, 2001,
the Company operated 175 stores in 20 states. The Company currently has no
plans to open any additional stores in 2001 and the Company closed 7 stores in
2000, all due to reorganization and 28 stores in fiscal 1999, 27 due to
reorganization and one due to a natural disaster.
Chapter 11 Filing
On March 23, 1999, the Company filed a petition for reorganization under
chapter 11 of the Bankruptcy Code. The Company is currently operating its
business and managing its properties as a debtor in possession pursuant to the
Bankruptcy Code. See "Item 1. Business--Proceedings Under Chapter 11 of the
Bankruptcy Code" and Note 1 of Notes to the Consolidated Financial Statements.
Other Items
In August 2000 and January 2001, the Company closed and conducted closing
sales at 5 stores and 2 stores, respectively, that were in markets the Company
did not intend to continue to operate in or were underperforming or
unprofitable. During the fiscal year ended February 3, 2001, the Company
recorded a provision for reorganization costs relating to the store closings of
approximately $1.6 million. This provision included the write-down of fixed
assets, estimated lease rejection claims and the loss on the disposition of
merchandise inventory. In addition to the provision for the store closings,
reorganization costs for professional fees and other costs related to the
Company's reorganization were $6.4 million during the fiscal year ended
February 3, 2001.
In April 1999, the Company obtained approval from the Bankruptcy Court to
close and conduct closing sales at 27 stores that were in markets the Company
did not intend to continue to operate in or were underperforming or
unprofitable. During the fiscal year ended January 29, 2000, the Company
recorded a provision for reorganization costs relating to the store closings of
approximately $10.8 million. This provision included the write-down of fixed
assets, estimated lease rejection claims and the loss on the disposition of
merchandise inventory. In addition to the provision for the store closings,
reorganization costs for professional fees and other costs related to the
Company's reorganization were $8.2 million during the fiscal year ended January
29, 2000.
During the fiscal year ended January 30, 1999, as a result of the
reassessment of previous operating strategies, the Company recorded several
items which impacted the consolidated statement of operations. Cost of sales
and occupancy included a $11.3 million provision for certain merchandise which
was discontinued from the Company's ongoing inventory assortment, as well as
inventory with excess quantities on hand and certain seasonal inventory
remaining from past holidays. Selling, general and administrative expenses
included $3.6 million of charges consisting of: (1) a $2.1 million charge for
lease termination costs relating to executed leases for new stores which the
Company no longer plans to open; (2) a $0.7 million charge for employee
severance and the write-off of new store design costs; and (3) $0.8 million of
additional depreciation expense resulting from the change in the depreciable
lives of certain technology equipment from ten to five years. The provision for
income taxes for the fiscal year ended January 30, 1999 resulted from the
establishment of a valuation allowance of $11.3 million to fully reserve for
the Company's net deferred tax assets at January 30, 1999. See Note 8 "Income
Taxes" in the Notes to Consolidated Financial Statements.
During the first quarter of fiscal 1998, the Company consolidated its
distribution facilities and offices into a new distribution center in
Naperville, Illinois. The three-story office building and 300,000 square-foot
distribution center resides on 39 acres of land.
10
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
Fiscal year Fiscal year Fiscal year
ended ended ended
Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
------------ ------------- -------------
Net sales.......................... 100.0 % 100.0 % 100.0 %
Cost of sales...................... 54.1 55.7 59.6
Gross profit..................... 45.9 44.3 40.4
Selling, general and administrative
expenses.......................... 44.7 46.8 50.7
Income (loss) from operations.... 1.2 (2.5) (10.3)
Interest expense................... 1.5 1.4 2.0
Income (loss) before
reorganization items, net,
Income taxes (benefit) and
extraordinary item.............. (0.3) (3.9) (12.3)
Reorganization items, net.......... 3.6 8.8 --
Income (loss) before income taxes
(benefit) and extraordinary item.. (3.9) (12.7) (12.3)
Income taxes (benefit)............. -- -- 0.2
Income (loss) before extraordinary
item.............................. (3.9) (12.7) (12.5)
Extraordinary item--loss on early
retirement of debt, net of income
tax benefit....................... -- 0.6 --
Net income (loss).................. (3.9)% (13.3)% (12.5)%
Number of stores open at end of
period............................ 175 182 210
53-Weeks Ended February 3, 2001 (Fiscal 2000) Compared to 52-Weeks Ended
January 29, 2000 (Fiscal 1999)
Net Sales. Net sales increased $8.4 million, or 3.9%, to $226.1 million in
Fiscal 2000 from $217.7 million in Fiscal 1999. The increase resulted primarily
from better flow of merchandise to the stores. Fiscal 1999 sales were
negatively impacted by the reduced flow of merchandise resulting from issues
associated with the Company's liquidity and the Chapter 11 Cases. All sales
categories, with the exception of giftwrap, enjoyed net sales increases in the
current fiscal year. Comparable store sales increased $10.7 million or 5.0%.
The Company includes stores opened 13 or 14 months after their opening date in
the calculation of comparable store sales. If the opening date of a store falls
in the first 14 days of a period, the store is included in the comparable store
calculation in its 13th month of operation; otherwise, a store is included in
the comparable store calculation in its 14th month of operation.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $7.4 million, or 7.7%, to $103.8 million in Fiscal 2000 from $96.4
million in Fiscal 1999. As a percentage of net sales, gross profit was 45.9% in
Fiscal 2000 and 44.3% in Fiscal 1999. The higher gross profit percentage
resulted from the realization of better margins in the basic party and balloon
categories and from a sales price increase in cards from 39 cents to 49 cents
in April 2000, partially offset by higher shrink experience in Fiscal 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Store occupancy expenses are included in selling, general and administrative
expenses for all information presented. Selling, general and administrative
expenses decreased $0.7 million, or 0.7%, to $101.2 million in Fiscal 2000 from
$101.9 million in Fiscal 1999. The decrease resulted primarily from operating 7
fewer stores in Fiscal 2000. As a percentage of net sales, selling, general and
administrative expenses decreased to 44.7% in Fiscal 2000 from 46.8% in Fiscal
1999.
Interest Expense. Interest expense was $3.3 million in Fiscal 2000 compared
to $3.0 million in Fiscal 1999. This increase resulted from increases in
borrowing levels partially offset by lower interest rates.
11
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management believes that it is not likely that
deferred tax assets created by net operating losses in Fiscal 2000 will be
realized through future taxable income. Therefore, the Company has increased
its valuation allowance, which was established in Fiscal 1999, to fully reserve
for the potential tax benefits resulting from these net operating losses. As a
result, the effective tax rate for Fiscal 2000 and Fiscal 1999 was zero.
52-Weeks Ended January 29, 2000 Compared to 52-Weeks Ended January 30, 1999
(Fiscal 1998)
Net Sales. Net sales decreased $8.8 million, or 3.9%, to $217.7 million in
Fiscal 1999 from $226.5 million in Fiscal 1998. The decrease resulted primarily
from liquidation of merchandise and closure of 27 stores starting in April
1999. These store closures resulted in decreased sales of $22.8 million in
Fiscal 1999. Offsetting the decrease was a comparable store sales increase of
$1.4 million or 0.7% and new store sales of $12.6 million.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $4.9 million, or 5.4%, to $96.4 million in Fiscal 1999 from $91.5
million in Fiscal 1998. As a percentage of net sales, gross profit was 44.3%
during Fiscal 1999 and 40.4% for Fiscal 1998. The higher gross profit
percentage resulted primarily from the $11.3 million inventory provision
recorded in Fiscal 1998 discussed above under "Other Items".
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Store occupancy expenses are included in selling, general and administrative
expenses for all information presented. Selling, general and administrative
expenses decreased $12.9 million, or 11.3%, to $101.9 million in Fiscal 1999
from $114.8 million in Fiscal 1998. The decrease resulted from operating 28
fewer stores in Fiscal 1999. Additionally, a portion of the decrease can be
attributed to charges taken in Fiscal 1998 discussed above in "Other Items". As
a percentage of net sales, selling, general and administrative expenses
decreased to 46.8% in Fiscal 1999 from 50.7% in Fiscal 1998.
Interest Expense. Interest expense was $3.0 million in Fiscal 1999 compared
to $4.6 million in Fiscal 1998. This decrease resulted from lower borrowing
levels needed to support 28 fewer stores.
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management believes that it is not likely that
deferred tax assets created by net operating losses in Fiscal 1999 will be
realized through future taxable income. Therefore, the Company has increased
its valuation allowance which was established in Fiscal 1998, to fully reserve
for the potential tax benefits resulting from these net operating losses. As a
result, the effective tax rate in Fiscal 1999 was zero.
Liquidity and Capital Resources
Current Sources and Uses of Cash
Cash flow used in operating activities was $1.7 million in Fiscal 2000
compared to $8.7 million of cash flow provided in Fiscal 1999. The items most
significantly influencing this change were the decreases in the noncash portion
of reorganization items and the increases in liabilities subject to compromise
offset by the decreases in accounts payable.
Cash flow used in investment activities was $2.2 million in Fiscal 2000 and
$2.0 million in Fiscal 1999. The Company's capital expenditures were primarily
related to investments in information technology systems.
Cash flow provided by financing activities was $2.5 million in Fiscal 2000,
while cash flow used in financing activities was $8.5 million in Fiscal 1999
and are attributable in both years to the level of borrowings and repayments.
12
On March 23, 1999, the Company filed the Chapter 11 Cases to address certain
operational and liquidity disruptions. The Company's liquidity position for the
remainder of fiscal 2001 will be impacted primarily by the success of
initiatives undertaken to improve store level cash flows and the effects of the
Chapter 11 Cases. The Company's uses of capital for the remainder of fiscal
2001 are expected to include working capital for operating expenses and
satisfaction of current liabilities, expenditures related to maintaining and
refurbishing existing stores, interest payments on outstanding borrowings and
costs associated with the Chapter 11 Cases. The Company's long-term liquidity
and the adequacy of the Company's capital resources cannot be determined until
a plan of reorganization has been approved and confirmed in connection with the
Chapter 11 Cases.
As a debtor in possession under the Bankruptcy Code, actions to collect
prepetition indebtedness are stayed and certain contractual obligations may not
be enforced against the Company. With the approval of the Bankruptcy Court,
certain of these obligations may be paid prior to the confirmation of the
reorganization plan. To date, the Company has received approval to pay
customary obligations associated with the daily operation of its business,
including the timely payment of new inventory shipments, employee wages and
other obligations. As permitted under the Bankruptcy Code, the Company received
Bankruptcy Court approval to reject 13 real estate leases for stores that were
never opened and to close and conduct closing sales at 27 stores in fiscal
1999. The Company has not completed its review of all of its prepetition
contracts and leases for assumption or rejection. The ultimate amount of, and
settlement terms for, such liabilities are subject to an approved plan of
reorganization and, accordingly, the timing and form of settlement are not
presently determinable.
The Company is a party to the Loan Agreement dated as of March 23, 1999, as
amended, which was entered into subsequent to the commencement of the Chapter
11 Cases and will terminate upon the earlier of July 31, 2001 or the effective
date of the Company's plan of reorganization. The Loan Agreement provides the
Company with a revolving line of credit for loans and letters of credit in an
aggregate amount not to exceed $32.5 million outstanding at any one time,
including a sublimit of $10.0 million for the issuance of letters of credit.
The Company intends to use all amounts borrowed under the Loan Agreement for
its ongoing working capital needs and for other general corporate purposes of
the Company.
The Loan Agreement contains certain restrictive covenants, which, among
other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of
the Company to grant liens and incur additional indebtedness. The Company was
in compliance with or had obtained waivers for all such convenants as of
February 3, 2001.
As of March 27, 2001, the Company had $26.0 million of borrowings
outstanding under the Loan Agreement and had utilized approximately $0.6
million of the Loan Agreement to issue letters of credit. The Company believes
that its cash flow from operations and borrowings under the Loan Agreement will
provide it with sufficient liquidity to conduct its operations while the
Chapter 11 Cases are pending. The Company will be exploring opportunities to
obtain long-term financing to support the Company's business plan after it
emerges from Chapter 11; however, there can be no assurance that the Company
will be able to obtain such financing on satisfactory terms, if at all.
The Company's present plans call for total capital expenditures of not more
than $3.0 million in the fiscal year ending February 2, 2002. The Company had
no material commitments in connection with these planned capital expenditures
at February 3, 2001.
The Company does not intend to pay cash dividends in the foreseeable future
and its current Loan Agreement restricts it from paying dividends on its
capital stock.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks from changes in interest rates. The
interest rate on the Company's revolving credit facilities, which represent a
significant portion of the Company's outstanding debt, is variable based on the
prime rate.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Report
commencing on page F-1 and is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
14
PART III
In accordance with general instruction G(3) of Form 10-K, except as set
forth below, the information called for by items 10, 11, 12 and 13 of Part III
will be filed by an amendment to this Form 10-K on or prior to 120 days after
the end of the Company's fiscal year.
ITEM 10. CHAIRMAN AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
William E. Freeman(1)... 58 Chairman, President and Chief Executive Officer
James D.
Constantine(1)......... 48 Senior Vice President and Chief Financial Officer
Executive Vice President, Chief Operating Officer and
Glen J. Franchi(1)...... 47 Treasurer
Executive Vice President and General Merchandising
Gary W. Rada(1)......... 47 Manager
Carol A. Travis(1)...... 50 Vice President and Secretary
Timothy F. Gower........ 50 Senior Vice President, Retail Store Operations
Robert Krentzman........ 52 Vice President, Information Technology
Joseph M. Cabon......... 54 Vice President, Distribution
William A. Beyerl....... 49 Vice President, Human Resources
- --------
(1) All the Officers, other than William Freeman, James Constantine, Glen
Franchi, Gary Rada and Carol Travis, only hold their respective positions
in the Company's operating subsidiary.
William E. Freeman has been Chairman, President and Chief Executive Officer
since October 1999. He is a co-founder of the Company, and has been a director
of the Company since forming the investor group that acquired it in July 1989.
Mr. Freeman was Chairman of the Board of Directors of the Company from April
1994 to April 1997. From May 1994 to October 1995, he was Chief Executive
Officer of the Company's operating subsidiary, and from May 1994 to September
1996, he was Chief Executive Officer of the Company. From 1989 to 1994, he was
President of the Company.
James D. Constantine has been Senior Vice President and Chief Financial
Officer since February 2000. Prior to joining the Company, he was Senior
Assistant Treasurer for Sears, Roebuck and Co. and held various managerial
positions from 1981 to 1999. From 1974 to 1981 he held various managerial
positions with Deloitte & Touche LLP.
Glen J. Franchi has been Executive Vice President and Treasurer of the
Company since March 1995. He has been the Chief Operating Officer of the
Company's operating subsidiary since November 1990. Prior to joining the
Company, from 1977 to 1989, he held various management and senior financial
positions with Carson Pirie Scott Co., a chain of retail department stores.
Gary W. Rada has been Executive Vice President since October 1999. From
January 1998 to October 1999, he served as Senior Vice President and General
Merchandise Manager. From 1997 to 1998, he served as the Vice President of
General Merchandise for Bruno's, a Birmingham, Alabama supermarket and drug
chain, which filed a voluntary Chapter 11 petition in February 1998. Prior to
joining Bruno's, he held various management and merchandising positions with
American Stores, including Merchandise Manager at American Drug Stores and Vice
President of General Merchandise and Grocery Merchandising at Jewel Food
Stores.
Carol A. Travis has been with the Company since it was originally founded in
1985, serving as Secretary of the Company since May 1994 and as Vice President
since June 1994. She has been a Vice President of the Company's operating
subsidiary since August 1987.
Timothy F. Gower has been Senior Vice President, Retail Store Operations
since October 1999. From April 1998 to October 1999, he served as Vice
President, Retail Store Operations. Prior to that, from August
15
1997 to March 1998, he served as Vice President of Store Operations for Zellers
Inc., Canada's largest discount store chain. Prior to joining Zellers, he held
various store operations positions with Office Max and F&M SuperDrug Stores.
Robert Krentzman has been Vice President, Information Technology since
September 1995. From March 1994 to September 1995, he served as Director of
Management Information Systems. From 1990 to 1994, he was Director, Management
Information Systems, for Reader's Market, a division of Waldenbooks.
Joseph M. Cabon has been Vice President, Distribution since April 1995. From
December 1993 to January 1995, he was employed as a consultant in retail
distribution. From October 1992 through December 1993, he was Vice President,
Logistics for One Price Clothing, a specialty retailer. In January 1995, he
filed a bankruptcy petition under chapter 7 of the United States Bankruptcy
Code, and that same month received a discharge from indebtedness in connection
therewith.
William A. Beyerl has been Vice President, Human Resources since December
1999. From June 1999 to December 1999 he served as Director of Human Resources.
From September 1997 to June 1999, he served as Director of Store Operations.
From 1991 to 1997, he served as Director of Human Resources for Today's Man, a
specialty menswear retailer on the East Coast. Prior to joining Today's Man, he
held various management positions with Bradlees Department Stores and Gimbel's
Department Stores.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report on Form 10-K.
1. The following financial statements of the Company are filed as a
separate section of this Report commencing on page F-1.
Independent Auditors' Report
Consolidated Balance Sheets as of February 3, 2001 and January 29,
2000
Consolidated Statements of Operations for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999
Consolidated Statements of Stockholders' Deficit for the fiscal years
ended February 3, 2001, January 29, 2000 and January 30, 1999
Consolidated Statements of Cash Flows for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is filed as a separate section
of this Report commencing on page S-1.
Independent Auditors' Report
Condensed Financial Information of Factory Card Outlet Corp.--Balance
Sheets as of February 3, 2001 and January 29, 2000
Condensed Financial Information of Factory Card Outlet Corp.--
Statements of Operations for the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999
Condensed Financial Information of Factory Card Outlet Corp.--
Statements of Cash Flows for the fiscal years ended February 3, 2001,
January 29, 2000 and January 30, 1999
Notes to Condensed Financial Information of Factory Card Outlet Corp.
17
3. List of Exhibits.
The following exhibits are included as part of this Annual Report on Form
10-K or incorporated herein by reference.
Exhibit
No. Description
------- -----------
Form of Amended and Restated Certificate of Incorporation of the
3.1(1) Company.
3.2(2) Amended and Restated By-Laws of the Company.
4.1(1) Specimen of Registrant's Common Stock Certificate.
10.1(1) Employment Agreement, dated as of April 6, 1995, by and between the
Company and Charles R. Cumello.
10.2(1) Consulting Agreement, dated July 30, 1996 by and between the Company
and J. Bayard Kelly.
10.3(1) Supply Agreement, dated as of August 2, 1996, by and between the
Company and Fine Art Developments, p.l.c.
10.4(1) Lease Agreement between the Company and Prudential Insurance Company
of America, dated September 25, 1992.
10.5(1) Lease Agreement between the Company and Elk Grove Village Industrial
Park Ltd., dated July 17, 1995.
10.5.1(1) Industrial Building Lease dated as of October 28, 1996 by and
between Centerpoint Realty Services Corporation and FCO.
10.6.1(1) 1989 Stock Option Plan of the Company, as amended.
10.6.2(1) 1996 Employee Stock Purchase Plan of the Company.
10.6.3(1) Incentive Savings Plan of the Company.
10.7(1) Business Purpose Revolving Promissory Note dated November 1, 1996
from the Company and FCO to Bank One.
10.7.1(1) Business Loan Agreement dated as of November 1, 1996 among the
Company, FCO and Bank One.
10.7.2(2) Commitment letter dated September 9, 1997 from Bank One.
10.8(1) Loan Agreement dated as July 2, 1996 by and between FCO and Petra
Capital, L.L.C. ("Petra")10.8.2 (1) Secured Promissory Note dated
July 2, 1996 by and between FCO and Petra.
10.8.3(1) Security Agreement dated July 2, 1996 by and between FCO and Petra.
10.8.4(1) Guaranty Agreement dated July 2, 1996 by and between the Company and
Petra.
10.9.1(1) Loan Agreement dated November 15, 1995 by and between FCO and Sirrom
Capital Corporation ("Sirrom").
10.9.2(1) Stock Purchase Warrant dated November 15, 1995 by and between the
Company and Sirrom.
10.9.3(1) Secured Promissory Note dated November 15, 1995 by and between FCO
and Sirrom.
10.9.4(1) Security Agreement dated November 15, 1995 by and between FCO and
Sirrom.
10.9.5(1) Guaranty Agreement dated November 15, 1995 by and between the
Company and Sirrom.
10.9.6(1) First Amendment to Loan Agreement and Loan Documents dated June 28,
1996 by and between FCO and Sirrom.
18
Exhibit No. Description
----------- -----------
10.9.7(1) Stock Purchase Warrant dated June 28, 1996 by and between the
Company and Sirrom.
10.9.8(1) Secured Promissory Note dated June 28, 1996 by and between FCO
and Sirrom.
10.9.9(1) Amended and Restated Stock Purchase Warrant dated July 30, 1996
by and between the Company and Sirrom.
10.9.10(1) Amendment to Stock Purchase Warrant dated July 30, 1996 by and
between the Company and Sirrom.
10.10.1(1) Term Lease Master Agreement dated October 28, 1996 by and
between FCO and IBM Credit Corporation.
10.10.2(1) Master Lease Agreement dated August 19, 1996 by and between FCO
and Symbol Lease, Inc.
10.11(3) Loan and Security Agreement dated January 30, 1998 among Factory
Card Outlet of America, Ltd. and BankBoston Retail Finance Inc.
10.11.1 (4) First Amendment to Loan and Security Agreement between FCO and
BankBoston Retail Finance Inc. dated July 17, 1998
10.11.2(4) Term Loan and Security Agreement between FCO and Back Bay
Capital, LLC dated July 17, 1998
10.12(3) 1997 Outside Director Stock Option Plan
10.13(5) Separation and Release Agreement between Factory Card Outlet
Corp. and Charles R. Cumello
10.14(6) Debtor In Possession Loan and Security Agreement between FCO and
Foothill Capital Corporation, Paragon Capital LLC and Other
Financial Institutions dated March 23, 1999
10.15(7) First Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated April 14,
1999
10.16(7) Second Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated August 20,
1999
10.17(7) Third Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated September 20,
1999
10.18(7) Fourth Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated December 20,
1999
10.19(7) Fifth Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated March 3, 2000
10.20 Sixth Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated March 3, 2000
10.21 Seventh Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated March 3, 2000
10.22 Eighth Amendment to Debtor In Possession Loan and Security
Agreement between FCO and Foothill Capital Corporation, Paragon
Capital LLC and Other Financial Institutions dated March 3, 2000
19
Exhibit No. Description
----------- -----------
10.23(7) Separation Agreement between Factory Card Outlet Corp. and
Stewart M. Kasen dated October 8, 1999
10.24(7) Separation Agreement between Factory Card Outlet Corp. and
Frederick G. Kraegel dated March 3, 2000
10.25(7) Employment Agreement between Factory Card Outlet Corp. and James
D. Constantine dated March 1, 2000
21.1(1) List of the subsidiaries of the Company
23.1 Consent of KPMG LLP
- --------
1. Incorporated by reference to the Company's Registration Statement as amended
on Form S-1 Number 333-13827 as filed with the Commission on December 12,
1996.
2. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 28, 1997.
3. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended December 27, 1997.
4. Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 22, 1998.
5. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended October 31, 1998.
6. Incorporated by reference to the Company's Current Report on Form 8-K filed
on April 28, 1999.
(b) Reports on Form 8-K.
Company's Current Report on Form 8-K filed on April 4, 2001.
Company's Current Report on Form 8-K filed on February 2, 2001.
Company's Current Report on Form 8-K filed on October 13, 2000.
7. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 2000.
20
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William E. Freeman and James D.
Constantine with full power to act without the other, his true and lawful
attorney-in-fact and agent, each with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this report on Form 10-K, and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person hereby, ratifying and confirming
that each of said attorneys-in-fact and agents or his substitutes may lawfully
do or cause to be done by virtue hereof.
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.
Factory Card Outlet Corp.
/s/ William E. Freeman
By: _________________________________
William E. Freeman, Chairman,
President and Chief Executive
Officer
Dated: April 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William E. Freeman Chairman, President and April 12, 2001
______________________________________ Chief Executive Officer
William E. Freeman
/s/ Glen J. Franchi Executive Vice President April 12, 2001
______________________________________ and Chief Accounting
Glen J. Franchi Officer
/s/ James D. Constantine Senior Vice President and April 12, 2001
______________________________________ Chief Financial Officer
James D. Constantine
/s/ Gerald L. Gitner Director April 12, 2001
______________________________________
Gerald L. Gitner
/s/ J. Bayard Kelly Director April 12, 2001
______________________________________
J. Bayard Kelly
/s/ Laurie M. Shahon Director April 12, 2001
______________________________________
Laurie M. Shahon
21
INDEX TO FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.. F-3
Consolidated Statements of Operations for the fiscal years ended February
3, 2001, January 29, 2000 and January 30, 1999.......................... F-4
Consolidated Statements of Stockholders' Deficit for the fiscal years
ended February 3, 2001, January 29, 2000 and January 30, 1999........... F-5
Consolidated Statements of Cash Flows for the fiscal years ended February
3, 2001, January 29, 2000 and January 30, 1999.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
We have audited the consolidated balance sheets of Factory Card Outlet Corp.
and subsidiary as of February 3, 2001 and January 29, 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999.
These consolidated financial statements are the responsibility of the
management of Factory Card Outlet Corp. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Factory
Card Outlet Corp. and subsidiary as of February 3, 2001 and January 29, 2000,
and the results of their operations and their cash flows for the fiscal years
ended February 3, 2001, January 29, 2000 and January 30, 1999 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, in March 1999 the Company filed voluntary
petitions for relief under chapter 11 of title 11 of the United States Code. In
addition, the Company's results reflect continued net loses. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
Chicago, Illinois
March 21, 2001
F-2
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
February 3, January 29,
2001 2000
----------- -----------
ASSETS
------
Current assets:
Cash................................................. $ 281 $ 1,713
Merchandise inventories.............................. 55,883 56,142
Prepaid expenses and other........................... 2,086 1,748
-------- --------
Total current assets............................... 58,250 59,603
Fixed assets, net...................................... 25,061 30,559
Other assets........................................... 401 641
-------- --------
Total assets....................................... $ 83,712 $ 90,803
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Debt................................................. $ 25,699 $ 22,869
Accounts payable..................................... 7,634 9,103
Accrued expenses..................................... 8,407 8,662
-------- --------
Total current liabilities.......................... 41,740 40,634
Liabilities subject to compromise...................... 55,374 54,872
-------- --------
Total liabilities...................................... 97,114 95,506
Stockholders' deficit:
Common stock-$.01 par value. Voting class-authorized
15,000,000 shares; 7,503,098 shares issued and
outstanding. Non-voting class-authorized 205,000
shares; no shares issued or outstanding............. 75 75
Additional paid-in capital........................... 52,021 52,021
Accumulated deficit.................................. (65,498) (56,799)
-------- --------
Total stockholders' deficit........................ (13,402) (4,703)
-------- --------
Total liabilities and stockholders' deficit........ $ 83,712 $ 90,803
======== ========
See accompanying notes to consolidated financial statements.
F-3
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Fiscal year ended
-------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Net sales............................... $ 226,122 $ 217,658 $ 226,499
Cost of sales........................... 122,289 121,224 134,996
---------- ---------- ----------
Gross profit.......................... 103,833 96,434 91,503
Selling, general and administrative
expenses............................... 101,190 101,892 114,836
---------- ---------- ----------
Income (loss) from operations......... 2,643 (5,458) (23,333)
Interest expense........................ 3,344 3,049 4,572
---------- ---------- ----------
Loss before reorganization items, net,
income taxes
and extraordinary item................. (701) (8,507) (27,905)
Reorganization items, net............... 7,998 19,082 --
---------- ---------- ----------
Loss before income taxes and
extraordinary item................... (8,699) (27,589) (27,905)
Income taxes............................ -- -- 451
---------- ---------- ----------
Loss before extraordinary item........ (8,699) (27,589) (28,356)
Extraordinary item--loss on early
retirement of debt, net of income tax
benefit................................ -- (1,292) --
---------- ---------- ----------
Net loss.............................. $ (8,699) $ (28,881) $ (28,356)
========== ========== ==========
Loss per share--basic and diluted
Loss before extraordinary item........ $ (1.16) $ (3.68) $ (3.82)
Extraordinary item...................... -- (0.17) --
---------- ---------- ----------
Net loss per share.................... $ (1.16) $ (3.85) $ (3.82)
========== ========== ==========
Weighted average shares outstanding--
basic and diluted...................... 7,503,098 7,503,098 7,422,069
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollar amounts in thousands, except per share data)
Retained
Common stock Additional Earnings Total
---------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------ ---------- ----------- -------------
Balance at January 31,
1998................... 7,335,519 $ 73 $51,223 $ 438 $ 51,734
Net loss................ -- -- -- (28,356) (28,356)
Exercise of stock
options and warrants... 167,579 $ 2 $ 798 $ -- $ 800
--------- ---- ------- -------- --------
Balance at January 30,
1999................... 7,503,098 $ 75 $52,021 $(27,918) $ 24,178
Net loss................ -- -- -- (28,881) (28,881)
Balance at January 29,
2000................... 7,503,098 $ 75 $52,021 $(56,799) $ (4,703)
--------- ---- ------- -------- --------
Net loss................ -- -- -- (8,699) (8,699)
Balance at February 3,
2001................... 7,503,098 $ 75 $52,021 $(65,498) $(13,402)
========= ==== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-5
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Fiscal year ended
-------------------------------------
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net loss.................................. $ (8,699) $ (28,881) $ (28,356)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization of fixed
assets.................................. 7,196 7,729 8,039
Amortization of deferred financing costs
and debt discount....................... 513 762 543
Noncash portion of reorganization items.. 3,491 14,034 --
Extraordinary loss on early retirement of
debt.................................... -- 1,292 --
Deferred income taxes.................... -- -- 835
Loss on disposal of fixed assets......... 22 36 649
Stock option compensation................ -- -- 59
Change in assets and liabilities:
(Increase) decrease in assets:
Merchandise inventories.................. 259 1,470 11,254
Prepaid expenses and other............... (338) (20) 831
Other assets............................. (273) (835) (1,168)
Increase (decrease) in liabilities:
Accounts payable......................... (1,469) (23,986) 14,052
Accrued expenses......................... (2,637) (4,317) 4,262
Deferred rent liabilities................ -- -- 2,080
Liabilities subject to compromise........ 270 41,437 --
---------- ---------- ----------
Net cash (used in) provided by operating
activities................................ (1,665) 8,721 13,080
Net cash used in investing activities--
purchase of fixed assets, net............. (2,219) (2,044) (8,725)
Cash flows from financing activities:
Borrowings............................... 241,337 256,450 184,106
Repayment of borrowings.................. (238,508) (264,759) (183,152)
Payment of long-term obligations......... (377) (252) (1,959)
Proceeds from exercise of employee stock
options................................. -- -- 217
---------- ---------- ----------
Net cash provided by (used in) financing
activities................................ 2,452 (8,561) (788)
---------- ---------- ----------
Net (decrease) increase in cash............ (1,432) (1,884) 3,567
Cash at beginning of year.................. 1,713 3,597 30
---------- ---------- ----------
Cash at end of year........................ $ 281 $ 1,713 $ 3,597
========== ========== ==========
Supplemental cash flow information:
Interest paid............................ $ 2,740 $ 2,691 $ 4,225
Income taxes (refunded) paid............. -- (792) 307
Supplemental disclosure of noncash
financing activities:
Capital lease obligations incurred....... -- 168 1,301
Additional paid-in capital for warrants
issued.................................. -- -- 514
See accompanying notes to consolidated financial statements.
F-6
FACTORY CARD OUTLET CORP. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(1) Reorganization and Chapter 11 Filing
On March 23, 1999 Factory Card Outlet Corp. and its wholly owned subsidiary,
Factory Card Outlet of America, Ltd. (collectively, the "Company") filed
petitions for reorganization under chapter 11 of title 11 of the United States
Code (the "Bankruptcy Code"). The petitions were filed in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are
currently assigned case numbers 99-685 (PJW) and 99-686 (PJW) (the "Chapter 11
Cases"). The Chapter 11 Cases have been procedurally consolidated for
administrative purposes. The Company is currently operating its business and
managing its properties as a debtor in possession pursuant to the Bankruptcy
Code. The Company's liabilities, as of the petition date, are generally subject
to settlement in a plan of reorganization, which must be voted on by certain of
its creditors and confirmed by the Bankruptcy Court. Until a reorganization
plan has been confirmed, the Company is prevented from making payments on
prepetition debt unless permitted by the Bankruptcy Code or approved by the
Bankruptcy Court. The Company will review all unexpired prepetition executory
contracts and leases to determine whether they should be assumed or rejected.
Parties affected by the rejection of contracts and leases may file claims
against the Company.
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates continuity of
operations and the realization of assets and the satisfaction of liabilities in
the normal course of business. The commencement of the Chapter 11 Cases, and
net losses resulting in a deficit, raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not give effect to adjustments, some of which could be material, to the
carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization. The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the
Bankruptcy Court, (2) achieve satisfactory levels of future profitable
operations, (3) maintain adequate financing and (4) provide sufficient cash
from operations to meet future obligations.
The Bankruptcy Code provides that the Company has an exclusive period during
which only it may propose, file and solicit acceptances of a plan of
reorganization. The exclusive period for the Company to propose a plan of
reorganization currently expires on March 30, 2001. If the Company fails to
file a plan of reorganization during the exclusive period or, after such plan
has been filed, if the Company fails to obtain acceptance of such plan from the
requisite impaired classes of creditors and equity security holders during the
exclusive period, any party in interest, including a creditor, an equity
security holder, a committee of creditors or equity security holders, or an
indenture trustee, may file their own plan of reorganization for the Company.
The Company plans to develop a plan of reorganization for submission to the
Bankruptcy Court.
On February 2, 2001, the Company and the Creditors' Committee appointed in
its Chapter 11 case entered into a non-binding term sheet with Factory Card
Holdings, Inc. ("FCH") regarding a potential transaction which would provide
the Company with funding to enable it to emerge from Chapter 11. Because the
proposal would not result in creditors recovering the full amount of their
claims, the term sheet does not contemplate holders of the Company's
outstanding common stock receiving any distribution.
(2) Summary of Significant Accounting Policies
Basis of Presentation
All intercompany balances and transactions have been eliminated in
consolidation.
F-7
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Organization
The consolidated financial statements include the accounts of Factory Card
Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America
Ltd. The Company is a chain of company-owned stores offering a wide selection
of selection of greeting cards, giftwrap, balloons, everyday and seasonal party
supplies and other special occasion merchandise at everyday value prices.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period and
related disclosures. Actual results could differ from those estimates.
Fiscal Years
The Company's fiscal year ends on the Saturday closest to January 31. The
years ended February 3, 2001, January 29, 2000 and January 30, 1999 are
referred to as fiscal 2000, 1999 and 1998, respectively. Fiscal 2000 is a 53
week period and fiscal 1999 and 1998 are 52 week periods.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or estimated
net realizable value utilizing the retail method. In determining the cost of
inventory, the Company includes costs incurred to purchase, store and
distribute goods prior to sale. The company purchases its inventory from more
than 300 vendors world-wide, with the largest supplier representing
approximately 11% and the ten largest suppliers representing approximately 40%
of the Company's aggregate purchases in fiscal year 2000. Similarly, in fiscal
year 1999 the company's largest supplier represented approximately 11% and the
ten largest suppliers represented approximately 40% of the Company's aggregate
purchases. In fiscal year 1998 the company's largest supplier represented
approximately 9% and the ten largest suppliers represented approximately 42% of
the Company's aggregate purchases.
At February 3, 2001 and January 29, 2000, the Company has provisions of
$1,857 and $4,166, respectively, for certain merchandise which is to be
discontinued from its ongoing inventory assortment, as well as inventory with
excess quantities on hand and certain seasonal inventory remaining from past
holidays.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization is computed
on a straight line basis over three to ten years for fixtures and equipment and
over the initial term of the lease for leasehold improvements. Amortization
related to capital leases is also included in depreciation and amortization.
During fiscal 1998, the Company changed its estimate of the depreciable lives
of certain technology equipment from ten to five years, resulting in additional
depreciation expense of $771.
Income Taxes
The Company files a consolidated Federal income tax return. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial reporting and tax
F-8
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
bases of assets and liabilities and are determined using tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
Deferred Rent Liabilities
Certain of the Company's operating leases provide for scheduled increases in
base rentals over their terms. For these leases, the Company recognizes the
total rental amounts expected to be paid over the lease terms on a straight
line basis and, accordingly, has established corresponding deferred rent
liabilities for the differences between the amounts recognized and the amounts
paid. The Company also receives certain lease incentives, primarily
construction allowances. These allowances have been deferred and are amortized
on a straight-line basis over the initial term of a lease as a reduction of
rent expense. In fiscal 2000 and fiscal 1999, deferred rent liabilities were
reclassified to liabilities subject to compromise.
Intangibles
Certain software costs are capitalized and amortized on a straight line
basis over three years. Unamortized software costs which are included in fixed
assets, net were approximately $1,257 and $1,315 as of February 3, 2001 and
January 29, 2000, respectively. Amortization of these software costs was
approximately $751, $875 and $917 for fiscal 2000, 1999 and 1998, respectively.
Revenue Recognition
The Company records revenue at the point of sale for retail stores. The
Company provides for returns at the time of sale based upon projected
merchandise returns.
Advertising Expenses
The Company expenses advertising costs when the advertising first occurs.
Advertising production costs incurred before the advertising takes place are
recorded as a prepaid expense. At February 3, 2001, and January 29, 2000, $839
and $694 of advertising production costs were included in prepaid expenses,
respectively. In fiscal 2000, 1999 and 1998, advertising expense was $8,157,
$7,897 and $8,335, respectively.
Loss per Share
Loss per share--basic was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Loss per share--
diluted includes the effect of stock options and warrants.
Options to purchase common stock outstanding during the periods presented
were not included in the computation of loss per share--diluted because the
option price was greater than the average market price of the common shares
during the respective periods.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method.
F-9
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Fixed Assets
The components of fixed assets, net are as follows:
February 3, January 29,
2001 2000
----------- -----------
Furniture and equipment........................... $44,370 $43,772
Leasehold improvements............................ 12,888 12,206
------- -------
Total fixed assets............................ 57,258 55,978
Less accumulated depreciation and amortization.... 32,197 25,419
------- -------
Fixed assets, net............................... $25,061 $30,559
======= =======
(4) Debt
Subsequent to the commencement of the Chapter 11 Cases, the Company entered
into a Revolving Credit and Guaranty Agreement in March 1999 and subsequent
amendments (the "Loan Agreeement") which provides up to $32,500 (including
$10,000 for letters of credit) to fund working capital needs and for general
corporate purposes. Borrowings under the facility are limited by inventory
levels and have an interest rate of 1% over prime (9.50% at February 3, 2001).
The Loan Agreement expires on the earlier of July 31, 2001 or the effective
date of the Company's plan of reorganization. Borrowings under the Loan
Agreement are secured by substantially all of the Company's assets. Certain
restrictive covenants apply, including maintenance of certain inventory levels,
achievement of specified operating results and limitations on the incurrence of
additional liens and indebtedness, capital expenditures, asset sales and
payment of dividends, all of which have been met or waived.
Proceeds from the Loan Agreement were used in March 1999 to repay all
borrowings under the Company's previous revolving credit agreement and term
loan. As a result, the Company recognized an extraordinary loss of $1,292
associated with the early retirement of the Company's previous revolving credit
agreement and term loan.
(5) Lease Commitments
The Company conducts substantially all of its activities using leased
premises. Store and office leases generally provide that real estate taxes,
insurance, maintenance, and operating expenses are obligations of the Company.
Certain store leases also provide for contingent rentals based on sales in
excess of specified minimums.
The cost of fixed assets held under capital leases included in fixed assets
was $8,584 and $8,608 at February 3, 2001 and at January 29, 2000 respectively.
Accumulated amortization related to such fixed assets was $6,131 and $4,416 at
February 3, 2001 and January 29, 2000, respectively. Fixed assets held under
capital leases consist principally of technology, office and warehouse
equipment.
F-10
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments for capital and
operating leases with initial or remaining terms in excess of one year as of
February 3, 2001.
Capital Operating
leases leases
------- ---------
Fiscal year:
2001................................................... $ 515 $ 23,663
2002................................................... 314 23,568
2003................................................... 35 23,293
2004................................................... 32 22,325
Thereafter............................................. 3 50,301
----- --------
Total minimum lease payments......................... 899 $143,150
========
Less amount representing interest...................... 58
-----
Present value of minimum lease payments (including
long-term lease obligations of $366).................. $ 841
=====
The Company currently has the right to assume or reject unexpired lease
contracts. Future minimum lease payments exclude payment for leases that have
been rejected pursuant to Bankruptcy Court orders. Certain lessors of rejected
leases have filed claims for damages and an estimate for such potential claims
has been included in liabilities subject to compromise. The lease obligations
described above are subject to possible adjustment under the Chapter 11 Cases.
Rent expense charged to operations under operating leases was $24,684,
$25,722 and $26,001 in fiscal 2000, 1999 and 1998, respectively.
(6) Liabilities Subject to Compromise
The components of liabilities subject to compromise at February 3, 2001 and
January 29, 2000 are as follows:
February 3, January 29,
2001 2000
----------- -----------
Accounts payable................................. $ 39,216 $39,216
Accrued expenses................................. 1,959 1,675
Capital lease obligations........................ 3,205 3,597
Potential claims related to rejection of certain
real property leases............................ 4,007 3,356
Deferred rent obligations........................ 6,987 7,028
-------- -------
$ 55,374 $54,872
======== =======
In conjunction with the Chapter 11 Cases, differences between claims filed
by potential creditors and amounts recorded by the Company are currently being
identified and reconciled. Any differences will be resolved by negotiated
agreement between the Company and the claimant or by the Bankruptcy Court.
Additional claims may arise in conjunction with the termination of contractual
obligations related to executory contracts and leases. As a result, recorded
amounts may be adjusted in the future. A plan of reorganization may materially
change the amount and terms of these prepetition liabilities.
F-11
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Reorganization Items, net
In August 2000 and January 2001, the Company closed and conducted closing
sales at five and two stores, respectively, that were in markets the Company
did not intend to continue to operate in or were underperforming or
unprofitable. During fiscal 2000, the Company recorded a provision for
reorganization costs relating to these store closings of approximately $1,587.
This provision included the write-down of fixed assets, estimated lease
rejection claims and the loss on the disposition of merchandise inventory. In
addition to the provision for the store closings, costs for professional fees
and other costs related to the Company's reorganization were $6,411 in fiscal
2000.
In April 1999, the Company obtained approval from the Bankruptcy Court to
close and conduct closing sales at 27 stores that were in markets the Company
did not intend to continue to operate in or were underperforming or
unprofitable. During fiscal 1999, the Company recorded a provision for
reorganization costs relating to these store closings of approximately $10,837.
This provision included the write-down of fixed assets, estimated lease
rejection claims and the loss on the disposition of merchandise inventory. In
addition to the provision for the store closings, costs for professional fees
and other costs related to the Company's reorganization were $8,245 in fiscal
1999.
(8) Income Taxes
Income taxes (benefit), excluding the tax benefit related to the
extraordinary item in fiscal 2000 are as follows:
Valuation
Current Deferred Allowance Total
------- -------- --------- ------
Fiscal 2000
Federal................................... $ -- $ 634 $ (627) $ 7
State..................................... -- (581) 574 (7)
----- -------- ------- ------
$ -- $ 53 $ (53) $ --
===== ======== ======= ======
Fiscal 1999:
Federal:.................................. $ -- $ (8,893) $ 8,530 $ (363)
State..................................... -- (2,124) 2,487 363
----- -------- ------- ------
$ -- $(11,017) $11,017 $ --
===== ======== ======= ======
Fiscal 1998:
Federal................................... $(406) $ (8,383) $ 9,905 $1,116
State..................................... 23 (2,099) 1,411 (665)
----- -------- ------- ------
$(383) $(10,482) $11,316 $ 451
===== ======== ======= ======
F-12
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes (benefit) differs from the amounts computed by applying the
Federal income tax rate of 34% to income (loss) before income taxes (benefit)
as a result of the following:
Fiscal Fiscal Fiscal
2000 1999 1998
------ ------ ------
Computed "expected" income taxes (benefit)............. (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
Increase (decrease) in valuation allowance........... (0.6) 38.5 40.6
State net operating loss carrybacks and
carryforwards....................................... (4.6) (5.6) (2.8)
State and local income taxes, net of Federal income
taxes............................................... (0.7) 1.1 (2.3)
Reorganization costs, net............................ 39.2 -- --
Other, net........................................... 0.7 -- 0.1
----- ----- -----
Income taxes (benefit)................................. -- % -- % 1.6 %
===== ===== =====
Deferred income taxes on the balance sheet reflect the net tax effect of
operating loss and alternative minimum tax credit carryforwards along with the
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
February 3, January 29,
2001 2000
----------- -----------
Deferred tax assets related to:
Alternative minimum tax credit carryforward.......... $ 564 $ 564
Deferred rent liabilities............................ 1,138 1,154
Accrued expenses..................................... 1,809 2,002
Merchandise inventories.............................. 703 1,580
Net operating loss carryforwards..................... 20,498 20,151
-------- --------
Total deferred tax assets........................ 24,712 25,451
Valuation allowance.................................. (22,280) (22,333)
-------- --------
Net deferred tax assets............................ 2,432 3,118
Deferred tax liabilities related to fixed assets....... 2,432 3,118
-------- --------
Net deferred tax asset............................. $ -- $ --
======== ========
In assessing the realization of deferred tax assets, management considers
the likelihood that those assets will be realized through future taxable
income. Because the realization of the deferred tax assets may be limited by
events involving the Chapter 11 Cases or other events related to the ownership
of the Company, the Company has recorded a valuation allowance related to the
net deferred tax assets at February 3, 2001 and January 29, 2000.
At February 3, 2001, the Company had net operating loss ("NOL")
carryforwards for Federal tax purposes of $51,918 which expire beginning in
2017. The utilization of NOL carryforwards may be significantly limited by
future events related to direct and/or indirect ownership changes of the
Company.
F-13
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Employee Benefit Plans
1989 Incentive Stock Option Plan
A stock option plan was approved by the stockholders of the Company in July
1989 to provide additional incentives and opportunities through stock ownership
to employees, outside directors and consultants of the Company. Under the plan,
incentive stock options may be granted for the purchase of the Company's common
stock at an exercise price not less than 100% of the fair market value at the
time of grant as determined by the Board of Directors. The term of each option
is also determined by the Board of Directors, but can not be more than ten
years from the date of grant. Options are exercisable in accordance with the
plan and generally vest at the rate of 20% to 25% per year from the date of
grant. There have been no Incentive Stock Options granted subsequent to the
bankruptcy filing on March 23, 1999.
Outside Director Stock Option Plan
In November 1997, the Company's shareholders approved the 1997 Outside
Director Stock Option Plan permitting stock option awards to directors who are
not employees of the Company. The 1997 Outside Director Stock Option Plan was
effective in July 1997 and expires in July 2007. Under the plan, options may be
granted for the purchase of the Company's common stock at an exercise price not
less than 100% of the fair market value of a share of common stock on the date
of grant. The number of shares of common stock reserved in connection with this
plan is 250,000, subject to certain adjustments. The Company granted 160,000
options in November 1997 to eligible directors which become exercisable at the
rate of 8.33% per quarter through November 2000.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standard ("SFAS") No. 123, the Company's net loss would not have been
materially different.
The number of stock options outstanding at the end of fiscal 2000, 1999 and
1998 were 407,545, 540,664 and 1,017,505, respectively. Stock options
exercisable at the end of the same fiscal years were 378,795, 438,639 and
679,937, respectively. Additionally, the range of exercise prices for options
outstanding at February 3, 2001 and at January 29, 2000 was $9.00 to $1.63.
There have been no Outside Director Stock Options granted subsequent to the
bankruptcy filing on March 23, 1999.
On March 26, 2001, the Company and the Creditors' Committee appointed in its
Chapter 11 case entered into agreement, subject to confirmation, on a Plan of
Reorganization of Factory Card Outlet Corp. with Factory Card Holdings, Inc
("FCH"). The agreement would provide the Company with funding to enable it to
emerge from Chapter 11. The Plan of Reorganization does not contemplate holders
of the Company's outstanding common stock receiving any distribution because
the Plan of Reorganization would not result in creditors recovering the full
amount of their claims. Consequently, the existing stock and all incentive
stock option plans would be cancelled if the Plan of Reorganization is
confirmed.
Incentive Savings Plan
The Incentive Savings Plan (the "ISP Plan") is a defined contribution plan
sponsored by the Company for all eligible employees. Participants in the ISP
Plan may elect to contribute between 2% and 13% of their pre-tax base salary,
subject to limitations imposed by the Internal Revenue Service. The Company
makes a discretionary matching contribution to the ISP Plan at the rate of 33%
of the first 6% of the participant's contribution. For fiscal 2000, 1999 and
1998, the Company's discretionary matching contributions to the ISP Plan were
$199, $193 and $230, respectively. The ISP Plan also allows for a discretionary
base contribution to
F-14
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be made by the Company only if it has current or accumulated net profits. No
discretionary base contributions have been made by the Company to date.
Employee Stock Purchase Plan
In December 1996, the Company adopted an Employee Stock Purchase Plan (the
"ESPP Plan") to provide eligible employees the opportunity to purchase shares
of its common stock. Employees may purchase shares, through payroll deductions,
up to 10% of the employee's compensation, not to exceed $5 per offering period,
at a price per share equal to 90% of the fair market value of the common stock
as of the last day of any offering. Withholdings from employees for purchases
under the ESPP Plan were -0- in fiscal 2000 and 1999 and $70 in fiscal 1998.
(10) Fair Value of Financial Instruments
The Company's financial instruments at February 3, 2001 and January 29, 2000
include accounts payable and debt. The Company has assumed that the carrying
value of trade accounts payable approximates fair value because of the short
period in which these liabilities are settled. The Company believes the
carrying value of the debt approximates fair value due to the variable rate of
interest on this instrument. Such fair values are subject to possible
adjustment in conjunction with the bankruptcy proceedings discussed in Note 1.
(11) Quarterly Financial Information (unaudited)
Following is a summary of unaudited quarterly information:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Fiscal 2000:
Total sales............................. $ 54,442 $59,426 $50,778 $61,476
Gross profit............................ 25,480 28,815 22,904 26,634
Income (loss) before reorganization
items.................................. (727) 1,666 (2,625) 985
Net income (loss)....................... (2,738) 303 (5,488) (776)
Net income (loss) per share--basic and
diluted................................ (0.36) 0.04 (0.73) (0.11)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Fiscal 1999:
Total sales............................. $ 52,533 $52,234 $50,485 $62,406
Gross profit............................ 24,413 25,813 21,148 25,060
Income (loss) before reorganization
items and extraordinary item........... (2,249) 249 (4,781) (1,726)
Loss before extraordinary item.......... (14,796) (1,760) (7,078) (3,955)
Net loss................................ (16,088) (1,760) (7,078) (3,955)
Net loss per share--basic and diluted... (2.14) (0.23) (0.94) (0.54)
F-15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
Under date of March 21, 2001 we reported on the consolidated balance sheets
of Factory Card Outlet Corp. and subsidiary as of February 3, 2001 and January
29, 2000 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the fiscal years ended February 3, 2001, January 29,
2000 and January 30, 1999, which are included in this Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we
also audited the related financial statement schedule as listed in Item
14(a)(2) of this Form 10-K. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 of the Notes
to the Consolidated Financial Statements, on March 23, 1999, the Company filed
a voluntary petition for relief under chapter 11 of title 11 of the United
States Code. In addition, the Company's results reflect continued net losses.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chicago, Illinois
March 21, 2001
S-1
Schedule I
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
February 3, January 29,
2001 2000
----------- -----------
ASSETS
------
Current assets:
Due from subsidiary.................................. $ 12,179 $ 12,179
Note receivable--subsidiary.......................... 54,379 47,648
-------- --------
Total current assets............................... 66,558 59,827
Investment in subsidiary............................... (79,960) (64,530)
-------- --------
Total assets....................................... $(13,402) $ (4,703)
======== ========
STOCKHOLDERS' DEFICIT
---------------------
Common stock -$.01 par value. Voting class--authorized
15,000,000 shares;
7,503,098 shares issued and outstanding at February 3,
2001 and
January 29, 2000. Non-voting class--authorized 205,000
shares, no shares
issued or outstanding................................. 75 75
Additional paid-in capital............................. 52,021 52,021
Accumulated deficit.................................... (65,498) (56,799)
-------- --------
Total stockholders' deficit........................ $(13,402) $ (4,703)
======== ========
See accompanying notes to condensed financial information.
S-2
Schedule I
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
Fiscal year Fiscal year Fiscal year
ended ended ended
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Royalty income............................ $ 3,392 $ 3,265 $ 3,397
Interest income--subsidiary note
receivable............................... 4,887 4,277 2,981
Equity in net loss of subsidiary.......... (15,430) (34,787) (33,231)
Operating expenses........................ 1,548 1,636 1,581
-------- -------- --------
Loss before income tax benefit.......... (8,699) (28,881) (28,434)
Income tax benefit........................ -- -- (78)
-------- -------- --------
Net loss................................ $ (8,699) $(28,881) $(28,356)
======== ======== ========
See accompanying notes to condensed financial information.
S-3
Schedule I
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Fiscal year Fiscal year Fiscal year
ended ended ended
February 3, January 29, January 30,
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net loss................................. $(8,699) $(28,881) $(28,356)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in net loss of subsidiary....... 15,430 34,787 33,231
Decrease in due from subsidiary........ -- 1,537 141
------- -------- --------
Net cash provided by operating
activities.............................. 6,731 7,443 5,016
------- -------- --------
Cash used in investing activities:
Increase in note receivable from
subsidiary.............................. (6,731) (7,460) (5,233)
------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of employee stock
options................................. -- -- 217
------- -------- --------
Net decrease in cash....................... -- (17) --
Cash at beginning of year.................. -- 17 17
------- -------- --------
Cash at end of year........................ $ -- $ -- $ 17
======= ======== ========
Supplemental disclosure of cash flow
information:
Noncash financing activities--
Additional paid-in capital for warrants
issued.................................. -- -- 514
See accompanying notes to condensed financial information.
S-4
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
(Dollar amounts in thousands)
(1) Basis of Accounting
The Condensed Financial Information of Factory Card Outlet Corp. ("the
Company") has been prepared pursuant to Securities and Exchange Commission
rules and regulations and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto as of February 3, 2001 and January 29,
2000 and the fiscal years ended February 3, 2001, January 29, 2000 and January
30, 1999. The Condensed Financial Information of the Company has been prepared
on an unconsolidated basis. The Company's investment in and amounts due from
its subsidiary are recorded on the equity basis.
(2) Chapter 11 Filing
On March 23, 1999, the Company and its subsidiary, Factory Card Outlet of
America, Ltd., filed a petition for reorganization under chapter 11 of title 11
of the United States Code. The Company is currently operating its business and
managing its properties as a debtor in possession pursuant to the Bankruptcy
Code. See Note 1 to the Notes to Consolidated Financial Statements.
(3) Guarantees
The Company has guaranteed the credit and debt agreements between its
subsidiary and various lenders. For information related to the agreements, see
Notes 1 and 4 of Notes to Consolidated Financial Statements.
(4) Notes Receivable--Subsidiary
During fiscal 1997, the subsidiary issued a note to the Company. Interest is
accrued quarterly based on the prime lending rate plus two percent per year
(10.50% at February 3, 2001). The note and any accrued interest is due and
payable on demand.
(5) Royalty and Licensing Agreement
In June 1997 the Company entered into a Royalty and Licensing Agreement
("Agreement") with its subsidiary. This Agreement grants its subsidiary the
right to use trademarks and tradenames owned by the Company in exchange for a
royalty fee of one and one-half percent of net sales from operations.
S-5