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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 2, 2002 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 20, 2002 was approximately $478,128, computed on the
basis of the last reported bid price per share ($0.12) 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 20, 2002 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.......................... 15
Item 8 Financial Statements and Supplementary Data.......................................... 15
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 15
PART III
Item 10 Chairman and Executive Officers of the Registrant.................................... 16
Item 11 Executive Compensation............................................................... 18
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 21
Item 13 Certain Relationships and Related Transactions....................................... 22
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. On March 23, 1999, the Company filed a
petition for reorganization under chapter 11 of title 11 of the United States
Code and is operating as a debtor in possession. The Company filed its plan of
reorganization and related disclosure statement with the bankruptcy court on
February 5, 2002. The bankruptcy court confirmed the plan of reorganization on
March 20, 2002. All forward-looking statements are dependent upon the Company's
emergence from chapter 11.
In general, the results, performance or achievements of the Company and its
stores and the value of the Company's common stock are dependent upon a number
of factors including, without limitation, the following: effects resulting from
the commencement and completion of the chapter 11 cases; ability to meet sales
plans; weather and economic conditions; dependence on key personnel;
competition; ability to anticipate merchandise trends and consumer demand;
ability to maintain relationships with suppliers; successful implementation of
information systems; successful handling of merchandise logistics; inventory
shrinkage; ability to meet future capital needs; governmental regulations; and
other factors both referenced and not referenced in this Form 10-K. When used
in this Report on Form 10-K, the words "estimate," "project," "anticipate,"
"expect," "intend," "believe," and similar expressions are intended to identify
forward-looking statements.
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 20, 2002, the Company
operated 172 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 plans to open
up to 3 additional stores in fiscal 2002 and the Company closed 3 stores in
fiscal 2001, 7 stores in fiscal 2000 and 28 stores in fiscal 1999.
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 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 (EIK) and 99-686 (EIK) (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 revolving financing agreement (the "DIP Loan
Agreement") with Foothill Capital Corporation and Paragon Capital LLC, now
collectively known as Wells Fargo Retail Finance, LLC ("Wells Fargo"), (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 DIP Loan Agreement was entered into on March 23, 1999 and originally
provided the Company 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 the Company's working capital needs, the aggregate
amount of the loan was reduced to $35 million by an amendment dated July 31,
2001. A subsequent amendment, dated January 31, 2002, also extended the term of
the loan to May 31, 2002. Wells Fargo was granted a security interest in
substantially all of the Company's assets as security for the Company's
obligations under the DIP Loan Agreement. All obligations under the DIP Loan
Agreement are afforded "super-priority" administrative expense status in the
Chapter 11 Cases.
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
1
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.
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.
During fiscal year 2001, the Company was made aware of several third parties
that were interested in providing funding for a plan of reorganization of the
Company. The Company's management and their professionals and the Creditors'
Committee and its professionals evaluated each proposal and engaged in
discussions with each interested party. However, after careful consideration of
such offers, the Company and the Creditors' Committee determined that it was in
the best interests of all parties in interest for the Company to consider an
alternative approach which would not be dependent upon participation by third
parties. Accordingly, the Company and the Creditors' Committee evaluated a
creditor supported stand-alone plan that would be premised upon certain
creditors contractually guaranteeing to provide the Company with favorable
trade terms and additional liquidity upon the Company's emergence from chapter
11. The analysis and negotiations that ensued culminated in the formulation and
filing of the Company's proposed plan of reorganization with the Court on
December 20, 2001.
Thereafter, the Company and the Creditors' Committee engaged in extensive
negotiations with the Equity Committee regarding amendments to such proposed
plan that would result in the plan being fully consensual. Those negotiations
culminated in the filing of the Debtors' Amended Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code (as modified, supplemented and amended,
the "Plan") and the related disclosure statement (the "Disclosure Statement")
with the Court on February 5, 2002, both of which had the support of the
Creditors' Committee and the Equity Committee. All classes of claims and equity
interests entitled to vote on the Plan accepted the Plan and, on March 20,
2002, the bankruptcy court signed an order confirming the Plan.
The Plan is referenced as an Exhibit to this Form. All capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the Plan.
Certain of the principal provisions of the Plan are as follows:
. Upon the Company's emergence from chapter 11, most general unsecured
creditors will receive, in full satisfaction and discharge of their claims
against the Company, which approximate $44 million, approximately 90% of
the common stock of the reorganized Company; cash distributions of $1
million and, three years from emergence, $2.6 million, subject to certain
prepayment provisions. The Company's obligations with respect to the $2.6
million payment will be secured by a subordinated lien on certain of the
Company's assets.
. Upon the Company's emergence, holders of the Company's outstanding common
stock will receive 5% of the common stock of the reorganized Company and
warrants to purchase an additional 10% of the common stock of the
reorganized Company at various premiums to reorganization equity value.
. In connection with the Plan, certain trade vendors of the Company will
enter into agreements to provide the Company with favorable trade terms,
including, extended credit limits, extended payment terms and seasonal
advances.
. Also in connection with the Plan, certain trade vendors of the Company
will enter into an agreement with the Company, pursuant to which such
trade vendors will convert an aggregate of $3.13 million of trade
2
receivables in respect of goods shipped to the Debtors during the Chapter
11 Cases into a long term debt obligation evidenced by secured
subordinated notes.
. Pursuant to the Plan, a new board of directors will be deemed appointed as
of the effective date.
The Plan requires that certain administrative claims and any amounts
outstanding under the DIP Loan Agreement be paid on the effective date of the
Plan (the "Effective Date"). The Company has entered into a $40 million secured
financing facility with Wells Fargo, which will become effective concurrent
with the Plan, to repay the outstanding amounts owed under the DIP Loan
Agreement and fund the reorganized Company's obligations under the Plan and its
ongoing operations following emergence from bankruptcy. The Plan is expected to
become effective in early April 2002.
As of March 20, 2002, there were 7,503,098 shares of the Company's
pre-chapter 11 common stock issued and outstanding. Under the provisions of the
Plan, the pre-chapter 11 common stock will be canceled. Upon implementation of
the Plan, the Company will be authorized to issue 10,000,000 shares of New
Common Stock, par value $.01 (the "New Common Stock"), of which 1,500,000
shares of New Common Stock will be issued to make distributions pursuant to the
Plan as follows: (i) 1,350,000 shares of New Common Stock to holders of general
unsecured claims, (ii) 75,000 shares of New Common Stock to holders of
prepetition common stock, and (iii) 75,000 shares of New Common Stock to
certain members of the reorganized Company's management. The Company's Amended
and Restated Certificate of Incorporation to be filed on the Effective Date
will prohibit the transfer of any shares of New Common Stock or any rights to
acquire shares of New Common Stock to any person or group that is a 5%
shareholder of the Company.
Following the Effective Date, the Company will also issue warrants to
purchase an additional 153,928 shares of the New Common Stock, which amount
equals approximately 10% of the New Common Stock issued under the Plan, to the
holders of the Company's prepetition common stock and warrants to purchase up
to an additional 78,947 shares of the New Common Stock, which amount equals
approximately 5% of the New Common Stock issued under the Plan, to certain
members of the reorganized Company's management.
In addition, pursuant to the Plan, the reorganized Company will issue or
reserve for issuance to certain of the key employees of the reorganized Company
options to purchase an aggregate of 166,667 shares of New Common Stock, which
amount equals approximately 10% of the New Common Stock issued under the Plan,
in connection with an employee incentive plan to be implemented by the board of
directors of the reorganized Company.
As of February 2, 2002, the assets and liabilities of the Company on a
historical cost basis were $81.3 million and $100.2 million, respectively. On
or near the Effective Date, the Company will adopt the provisions of "fresh
start accounting," which require the Company to restate all assets and
liabilities to their fair values based upon the provisions of the Plan and
certain valuation studies currently underway. The Company has not yet
determined the impact of fresh start accounting on the historical consolidated
financial statements.
Copies of the Disclosure Statement for the Company's Amended Joint Plan of
Reorganization, the Joint Plan of Reorganization and the Order Confirming the
Debtors' Amended Joint Plan of Reorganization Under chapter 11 of the
Bankruptcy Code are attached hereto as Exhibits 10.28, 10.29 and 10.30
respectively, and are incorporated herein by reference.
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
3
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 of 49 cents. 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.
. 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's average store size is
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 color and range from four to
twelve pages depending on the season. The Company plans to continue this direct
mail program and support all holidays and special events. The Company has also
used 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 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 20, 2002, the Company operated 172 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 20, 2002:
Number
of
Location Stores
-------- ------
Delaware (1)
Wilmington........ 1
Florida (9)
Gainesville....... 1
Jacksonville...... 1
Naples............ 1
Orlando........... 3
Tampa............. 3
Illinois (35)
Chicago Metro..... 27
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 (12)
Baltimore Metro..... 7
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................. 172
===
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, Amscan, Inc., representing approximately 11% and the ten largest
suppliers representing approximately 41% of the Company's aggregate purchases
for the fiscal year ended February 2, 2002. A small portion of the Company's
merchandise is imported from foreign manufacturers or their agents, principally
from the Far East and England. As is customary in its industry, the Company
generally does not have long-term contracts with any suppliers, however,
pursuant to the Plan, the Company will enter into agreements with certain of
its trade vendors to provide the Company with favorable trade terms, including,
extended credit limits, extended payment terms and seasonal advances.
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.
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 auto-replenishment of inventory and the ability to enter
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.
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 working conditions. The Company also must comply with the
provisions of the Americans with Disabilities Act
6
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 2,900 employees as of March 2, 2002, comprised
of approximately 1,200 full-time and approximately 1,700 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. The Company
filed its plan of reorganization and related disclosure statement with the
bankruptcy court on February 5, 2002. The bankruptcy court confirmed the plan
of reorganization on March 20, 2002. 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 2001 Fiscal 2000
------------------ -----------
Quarter High Low High Low
------- ---- ------------- ---- ----
First (ended May 5, 2001 and April 29, 2000)........ $.05 $.01 $.17 $.10
Second (ended August 4, 2001 and July 29, 2000)..... .02 .02 .21 .09
Third (ended November 3, 2001 and October 28, 2000). .03 less than .01 .10 .04
Fourth (ended February 2, 2002 and February 3, 2001) .01 less than .01 .05 .01
7
On March 20, 2002, the last bid price of the common stock reported on the OTC
Bulletin Board was $0.12. At February 27, 1999, the approximate number of
holders on record of the Common Stock was 114.
Pursuant to the Plan, the existing common stock will be cancelled. Upon
implementation of the Plan, the Company will be authorized to issue 10,000,000
shares of New Common Stock, par value $.01 (the "New Common Stock"), of which
1,500,000 shares of New Common Stock will be issued to make distributions
pursuant to the Plan as follows: (i) 1,350,000 shares of New Common Stock to
holders of general unsecured claims, (ii) 75,000 shares of New Common Stock to
holders of prepetition common stock, and (iii) 75,000 shares of New Common
Stock to certain members of the reorganized Company's management. The Company's
Amended and Restated Certificate of Incorporation to be filed on the Effective
Date will prohibit the transfer of any shares of New Common Stock or any rights
to acquire shares of New Common Stock to any person or group that is a 5%
shareholder of the Company.
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 DIP Loan Agreement 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 data presented on the next page under
the captions "Statement of Operations Data" and "Balance Sheet Data" as of
January 29, 2000, January 30, 1999, January 31, 1998 and June 28, 1997, and for
the fiscal years ended January 30, 1999 and 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 2, 2002 and February 3, 2001, and for the
fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000, and
the report thereon, are included elsewhere in this Annual Report on Form 10-K.
In addition, selected consolidated financial data is presented as of and for
the 53-week period ended January 31, 1998. This financial data and all
operating 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
52-Weeks 53-Weeks 52-Weeks 52-Weeks 53-Weeks period
ended ended ended ended ended ended
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31, Jan. 31,
2002 2001 2000 1999 1998 1998
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
Statement of Operations Data:
Net sales...................................... $ 227,943 $ 226,122 $ 217,658 $ 226,499 $ 174,497 $ 110,699
Cost of sales.................................. 121,862 122,289 121,224 134,996 87,079 56,977
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................................ 106,081 103,833 96,434 91,503 87,418 53,722
Selling, general and administrative expenses... 102,146 101,190 101,892 114,836 82,066 53,935
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations............... 3,935 2,643 (5,458) (23,333) 5,352 (213)
Interest expense............................... 2,813 3,344 3,049 4,572 1,482 1,269
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before reorganization items,
net, income taxes (benefit) and
extraordinary item......................... 1,122 (701) (8,507) (27,905) 3,870 (1,482)
Reorganization items, net...................... 6,653 7,998 19,082 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (benefit) and
extraordinary item............................ (5,531) (8,699) (27,589) (27,905) 3,870 (1,482)
Income taxes (benefit)......................... -- -- -- 451 1,652 (593)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item..... (5,531) (8,699) (27,589) (28,356) 2,218 (889)
Extraordinary item............................. -- -- (1,292) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ (5,531) $ (8,699) $ (28,881) $ (28,356) $ 2,218 $ (889)
========== ========== ========== ========== ========== ==========
Earnings (loss) per share--basic
Before extraordinary item.................... $ (0.74) $ (1.16) $ (3.68) $ (3.82) $ 0.31 $ (0.12)
Extraordinary item........................... -- -- (0.17) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (0.74) $ (1.16) $ (3.85) $ (3.82) $ 0.31 $ (0.12)
========== ========== ========== ========== ========== ==========
Weighted average shares outstanding............ 7,503,098 7,503,098 7,503,098 7,422,069 7,261,542 7,261,542
========== ========== ========== ========== ========== ==========
Earnings (loss) per share--diluted
Before extraordinary item.................... $ (0.74) $ (1.16) $ (3.68) $ (3.82) $ 0.28 $ (0.12)
Extraordinary item........................... -- -- (0.17) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (0.74) $ (1.16) $ (3.85) $ (3.82) $ 0.28 $ (0.12)
========== ========== ========== ========== ========== ==========
Weighted average shares outstanding............ 7,503,098 7,503,098 7,503,098 7,422,069 7,946,188 7,261,542
========== ========== ========== ========== ========== ==========
Operating Data: (Unaudited)
Number of stores:
Opened during period........................ 0 0 0 33 58 42
Closed/relocated during period.............. 3 7 28 3 2 2
Open at end of period....................... 172 175 182 210 180 180
Comparable store sales increase(1).......... 5.1% 5.0% 0.7% 0.8% 8.3% 9.5%
Average sales per store(2).................. $ 1,316 $ 1,264 $ 1,175 $ 1,129 $ 1,170 $ 676
Balance Sheet Data (at end of period):
Working capital.............................. $ 17,293 $ 16,362 $ 18,969 $ 22,977 $ 50,230 $ 50,230
Total assets................................. 81,299 83,712 90,803 107,571 115,030 115,030
Total debt(3)................................ 27,903 26,017 22,869 34,153 34,189 34,189
Total stockholders' equity (deficit)......... (18,933) (13,402) (4,703) 24,178 51,734 51,734
Fiscal
year
ended
June 28,
1997
----------
Statement of Operations Data:
Net sales...................................... $ 133,945
Cost of sales.................................. 65,981
----------
Gross profit................................ 67,964
Selling, general and administrative expenses... 63,077
----------
Income (loss) from operations............... 4,887
Interest expense............................... 1,402
----------
Income (loss) before reorganization items,
net, income taxes (benefit) and
extraordinary item......................... 3,485
Reorganization items, net...................... --
----------
Income (loss) before income taxes (benefit) and
extraordinary item............................ 3,485
Income taxes (benefit)......................... 1,462
----------
Income (loss) before extraordinary item..... 2,023
Extraordinary item............................. (313)
----------
Net income (loss)........................... $ 1,710
==========
Earnings (loss) per share--basic
Before extraordinary item.................... $ 0.35
Extraordinary item........................... (0.05)
----------
Net income (loss)............................ $ 0.30
==========
Weighted average shares outstanding............ 5,739,962
==========
Earnings (loss) per share--diluted
Before extraordinary item.................... $ 0.30
Extraordinary item........................... (0.04)
----------
Net income (loss)............................ $ 0.26
==========
Weighted average shares outstanding............ 6,686,243
==========
Operating Data: (Unaudited)
Number of stores:
Opened during period........................ 35
Closed/relocated during period.............. 2
Open at end of period....................... 140
Comparable store sales increase(1).......... 11.5%
Average sales per store(2).................. $ 1,101
Balance Sheet Data (at end of period):
Working capital.............................. $ 35,459
Total assets................................. 85,702
Total debt(3)................................ 7,690
Total stockholders' equity (deficit)......... 52,273
- --------
(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. A store's sales are excluded
from the calculation of comparable sales in the fiscal month of the store
closing.
(2) Includes only stores open during the entire period.
(3) Total debt is defined as total current and long-term debt, including
capital lease obligations.
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 20, 2002,
the Company operated 172 stores in 20 states. The Company's fiscal year ends on
the Saturday closest to January 31st. The Company currently has plans to open
up to 3 additional stores in fiscal 2002 and the Company closed 3 stores in
fiscal 2001, 7 stores in fiscal 2000, all due to reorganization and 28 stores
in fiscal 1999, 27 due to reorganization and 1 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 filed its plan of reorganization
and related disclosure statement with the bankruptcy court on February 5, 2002.
The bankruptcy court confirmed the plan of reorganization on March 20, 2002.
The Company is currently operating its business and managing its properties as
a debtor in possession pursuant to the Bankruptcy Code, but expects to emerge
from bankruptcy in early April 2002. 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 July 2001 and January 2002, the Company closed and conducted closing
sales at 2 stores and 1 store, 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 2, 2002, the Company
recorded a provision for reorganization costs relating to the store closings of
approximately $0.8 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 $5.2 million, of which $1.5 million relates to
retention bonus accruals for salaried associates in the fiscal year ended
February 2, 2002. Furthermore, in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"), the Company wrote off $0.7 million of impaired long-lived
assets that related to prior year store closings.
In fiscal 2000, the Company closed and conducted closing sales at 7 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 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, of which $2.3
million relates to retention bonus accruals for salaried associates 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 $8.3 million, of which $2.1 million relates to
retention bonus accruals for salaried associates during the fiscal year ended
January 29, 2000.
10
Critical Accounting Policies
Critical Accounting Policies are defined as those that are reflective of
significant judgements and uncertainties and potentially result in materially
different results under different assumptions and conditions. The Company has
prepared the accompanying financial statements in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates under
different assumptions or conditions. The Company has identified the following
critical accounting policies utilized in the preparation of these financial
statements.
Merchandise Inventories
As discussed in Note 2 "Summary of Accounting Policies" in the Notes to the
Consolidating Financial Statements, 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
performs periodic evaluations of the net realizable value of merchandise,
including 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. Based on these evaluations, a
provision for the excess of inventory cost over the net realizable value is
recorded as a reduction to the net inventory balance.
Contractual Obligations
As discussed in Note 2 "Summary of Accounting Policies" in the Notes to the
Consolidating Financial Statements, 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 $7,555 and $8,584 at February 2, 2002 and at February 3, 2001 respectively.
Accumulated amortization related to such fixed assets was $4,467 and $6,161 at
February 2, 2002 and February 3, 2001, respectively. Fixed assets held under
capital leases consist principally of technology, office and warehouse
equipment.
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 2, 2002.
Capital Operating
leases leases
------- ---------
Fiscal year:
2002....................................................................... 341 $ 23,436
2003....................................................................... 253 23,335
2004....................................................................... 105 22,146
2005....................................................................... 3 19,256
Thereafter................................................................. -- 57,382
--- --------
Total minimum lease payments.................................................. 702 $145,555
========
Less amount representing interest............................................. 59
---
Present value of minimum lease payments (including long-term lease obligations
of $338).................................................................... 643
===
Related Party Transactions
None.
11
Results of Operations
The following table sets forth, for the periods indicated, selected
statements of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
[Fiscal 2001] [Fiscal 2000] [Fiscal 1999]
Fiscal year Fiscal year Fiscal year
ended ended ended
Feb. 2, 2000 Feb. 3, 2001 Jan. 29, 2000
------------- ------------- -------------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 53.5 54.1 55.7
----- ----- -----
Gross profit............................................. 46.5 45.9 44.3
Selling, general and administrative expenses................ 44.8 44.7 46.8
----- ----- -----
Income (loss) from operations............................ 1.7 1.2 (2.5)
Interest expense............................................ 1.2 1.5 1.4
----- ----- -----
Income (loss) before reorganization items, net and
extraordinary item..................................... 0.5 (0.3) (3.9)
Reorganization items, net................................... 2.9 3.5 8.8
----- ----- -----
Loss before extraordinary item.............................. (2.4) (3.8) (12.7)
Extraordinary item--loss on early retirement of debt, net of
income tax benefit........................................ -- -- 0.6
----- ----- -----
Net loss.................................................... (2.4)% (3.8)% (13.3)%
===== ===== =====
Number of stores open at end of period...................... 172 175 182
52-Weeks Ended February 2, 2002 (Fiscal 2001) Compared to 53-Weeks Ended
February 3, 2001 (Fiscal 2000)
Net Sales. Net sales increased $1.8 million, or 1.0%, to $227.9 million in
fiscal 2001 from $226.1 million in fiscal 2000. The increase resulted primarily
from a strong demand for the Company's basic party merchandise offset by
decreases in the greeting card category. Comparable store sales increased $11.1
million or 5.1%. No new stores were opened in fiscal 2001 or fiscal 2000 and a
closed store's sales are excluded from the calculation of comparable store
sales in the fiscal month of the store closing.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $2.3 million, or 2.2%, to $106.1 million in fiscal 2001 from $103.8
million in fiscal 2000. As a percentage of net sales, gross profit was 46.5% in
fiscal 2001 and 45.9% in fiscal 2000. The higher gross profit percentage
resulted from improved shrink experience, partially offset by higher
distribution costs.
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 periods presented. Selling, general and administrative
expenses increased $1.0 million, or 1.0%, to $102.1 million in fiscal 2001 from
$101.1 million in fiscal 2000. As a percentage of net sales, selling, general
and administrative expenses increased to 44.8% in fiscal 2001 from 44.7% in
fiscal 2000.
Interest Expense. Interest expense was $2.8 million in fiscal 2001 compared
to $3.3 million in fiscal 2000. This decrease resulted from lower effective
interest rates.
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management does not believe that it is more likely
than not that deferred tax assets created by net operating losses in fiscal
2001 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
12
potential tax benefits resulting from these net operating losses. As a result,
the effective tax rate for fiscal 2001 and 2000 was zero.
53-Weeks Ended February 3, 2001 (Fiscal 2000) Compared to 52-Weeks Ended
January 29, 2000 (Fiscal 1999)
Net Sales. Net sales increased $8.5 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 Chapter 11 Cases. All sales
categories, with the exception of giftwrap, enjoyed sales increases in fiscal
2000. Comparable store sales increased $10.7 million or 5.0%. No new stores
were opened in fiscal 2000 or fiscal 1999 and a closed store's sales are
excluded from the calculation of comparable store sales in the fiscal month of
the store closing.
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 periods 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.
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management does not believe that it is more likely
than not 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 1999 was zero.
Liquidity and Capital Resources
As of March 20, 2002, the Company had $23.7 million of borrowings
outstanding under the DIP Loan Agreement and had utilized approximately $0.2
million of the DIP Loan Agreement to issue letters of credit. The Company
believes that its cash flow from operations and borrowings under the DIP Loan
Agreement will provide it with sufficient liquidity to conduct its operations
while the Chapter 11 Cases are pending. The Company anticipates that all
amounts outstanding under the DIP Loan Agreement will be repaid on the
Effective Date of the Plan from the proceeds of a $40 million secured revolving
credit financing facility (including a $10 million sublimit for letters of
credit) that the Company has entered into with Wells Fargo (the "New
Facility"). The New Facility will have a term of three years and will become
effective concurrent with the Plan in early April 2002. The New Facility is
adequate to fund the Company's current business plans.
The Company's present plans call for total capital expenditures of not more
than $3.9 million in the fiscal year ending February 1, 2003. The Company had
no material commitments in connection with these planned capital expenditures
at February 2, 2002. In connection with the Plan, certain trade vendors of the
Company will
13
enter into agreements to provide the Company with favorable trade terms,
including, extending credit limits, extended payment terms and seasonal
advances.
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.
The Company entered into separation agreements with William E. Freeman,
Chairman and Chief Executive Officer, and Glen J. Franchi, Executive Vice
President and Chief Operating Officer. Under the terms of the agreement, the
Company is to make total payments of $936,000 and $631,000 respectively, for
severance payments, vacation payments, management incentive bonuses and
retention bonuses. These payments will be made in April 2002. The separation
agreements are attached hereto as Exhibits 10.32 and 10.33, respectively.
Cash flow used in operating activities was $0.25 million in fiscal 2001
compared to $1.7 million in fiscal 2000. The decrease is due to a $3.2 million
lower net loss and changes in accounts payable and accrued expenses, offset by
increases in inventory levels and decreases in the non-cash portion of
reorganization expenses.
Cash flow used in investment activities was $1.1 million in fiscal 2001 and
$2.2 million in fiscal 2000. The Company's capital expenditures were primarily
related to investments in information technology systems and warehouse
equipment and fixtures.
Cash flow provided by financing activities was $1.3 million in fiscal 2001
and $2.5 million in fiscal 2000 and is attributable in both years to the level
of borrowings and repayments.
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 Company's emergence from
chapter 11. 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 38 stores in fiscal
2001, 2000 and 1999. The Company has completed its review of all of its
prepetition contracts and leases and will assume the remaining executory
contracts and unexpired real property leases that it has not otherwise rejected
prior to, or in connection with, its emergence from chapter 11 on the Effective
Date.
The DIP 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 covenants as of
February 2, 2002.
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 level of noncash reorganization
items and the recognition of liabilities subject to compromise in fiscal 1999.
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 $8.6 million in fiscal 1999
and is attributable in both years to the level of borrowings and repayments.
14
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 with a minimum threshold of 7.0%. The interest rate under the New
Facility is variable based upon the prime rate or LIBOR with a minimum
threshold of 5.0%.
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.
15
PART III
ITEM 10. CHAIRMAN AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Company's Restated By-Laws currently provide for four directors.
Pursuant to the Plan, as of the Effective Date, nine new directors will be
deemed appointed. The names of the current directors, their ages, the
respective years in which each first became a director of the Company, and
their respective principal occupations during the past five years are as
follows:
Name Age Position With The Company Director Since
---- --- ------------------------- --------------
William E. Freeman 59 Chairman and Chief Executive Officer 1989
J. Bayard Kelly... 70 Director 1989
Gerald L. Gitner.. 56 Director 2000
Laurie M. Shahon.. 50 Director 2000
William E. Freeman has been Chairman and Chief Executive Officer since
October 1999. He also served as President of the Company from October 1999 to
March 2002. 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.
J. Bayard Kelly has been a Director since 1989. Since October 1995, Mr.
Kelly has served as a merchandise consultant to the Company's operating
subsidiary, and is the Company's Chairman Emeritus. Mr. Kelly was the founder
of the Company's operating subsidiary and its President from 1989 to 1995.
Gerald L. Gitner has been a Director since November 2000 and is a member of
the Compensation Committee and the Audit Committee. Mr. Gitner is currently the
Chairman of D.G. Associates, Inc., a consulting services firm. He was Chairman
of the Board and Chairman of the Executive Committee of the Board of TWA, Inc.
He has also served as Chief Executive Officer of TWA, Inc. TWA, Inc. filed a
petition for bankruptcy under Chapter 11 in January 2001. Mr. Gitner has also
served as the Co-Chairman of Global Aircraft Leasing Ltd. Mr. Gitner is a
director of ICTS International, N.V., trustee of Rochester Institute of
Technology and serves as a trustee of The American College of Management in
Dubrovnik, Croatia.
Laurie M. Shahon has been a Director since November 2000 and is a member of
the Compensation Committee and the Audit Committee. Ms. Shahon is the President
of the Wilton Capital Group, a firm she founded in 1994 to make private direct
investments in venture capital companies and medium sized buyouts, which
focuses, among other industries, on retailing and consumer products. Prior to
founding Wilton Capital, Ms. Shahon was a Managing Director at '21'
International Holdings, a private holding company. While there, she also served
as Vice Chairman and Chief Operating Officer of Color Tile, a 700 store
flooring chain. Prior to joining '21' International Holdings, Ms. Shahon was an
investment banker at Morgan Stanley and Salomon Brothers. Ms. Shahon is a
member of the Board of Directors of One Price Clothing Stores, Homeland
Holdings and Safelite Auto Glass.
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
William E. Freeman(1).. 59 Chairman and Chief Executive Officer
Gary W. Rada........... 48 President and General Merchandise Manager
James D. Constantine(1) 49 Senior Vice President, Chief Financial Officer and Treasurer
Glen J. Franchi(1)..... 48 Executive Vice President and Chief Operating Officer
Timothy F. Gower....... 51 Senior Vice President, Retail Store Operations
16
- --------
(1) With the exception of Timothy Gower, all the Officers listed above hold
their respective positions in both the Company and the Company's operating
subsidiary. Messrs. Freeman and Franchi will be resigning from the Company
effective on or prior to the Effective Date. Pursuant to individual
separation agreements, Mr. Freeman and Mr. Franchi will be receiving
severance payments, vacation payments, management incentive and retention
bonuses that may approximate, in the aggregate, $936,000 and $631,000,
respectively, and will be provided with certain medical and other benefits.
Also on the Effective Date, Mr. Rada will assume the position of Chief
Operating Officer as well as President. Michael Perri will assume the
position of Vice President and General Merchandising Manager and Mr.
Constantine will assume the position of Executive Vice President, Chief
Financial and Administrative Officer.
William E. Freeman--see biography above in Directors.
Gary W. Rada has been President since March 2002 and was Executive Vice
President from October 1999 to March 2002. 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.
James D. Constantine has been Treasurer since April 2002 and 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 Chief Operating
Officer of the Company since March 1995 and served as Treasurer from March 1995
to April 2002. 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.
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 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.
Section 16 Reporting
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's outstanding
common stock ("Common Stock"), to file reports of ownership and changes in
ownership of such securities with the Securities and Exchange Commission (the
"SEC"). Officers, directors and greater-than-10% beneficial owners are required
to furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon a review of the copies of the forms furnished to the Company,
and/or written representations from certain reporting persons that no other
reports were required, the Company believes that all Section 16(a) filing
requirements applicable to its officers, directors and 10% beneficial owners
during or with respect to the year ended February 2, 2002 were met.
17
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
earned by the Company's President and Chief Executive Officer and each of the
other four most highly compensated officers of the Company and its operating
subsidiary (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company during the twelve-month periods ended February
2, 2002 (a 52-week period), February 3, 2001 (a 53-week period) and January 29,
2000 (a 52-week period).
Annual Compensation
-------------------------------------------------
Comp.
Awards
Securities
Underlying All Other
Fiscal Bonus Option/ Compensation
Name and Principal Position Year Salary (1)(2) SARs (#)(2) (3)
- --------------------------- ------ -------- -------- ----------- ------------
William E. Freeman(4).............................. 2001 $281,154 $131,255 -- $66,978
President and Chief Executive Officer 2000 265,000 179,500 -- 67,652
1999 81,835 14,524 -- 5,299
Glen J. Franchi.................................... 2001 262,500 111,396 -- 7,327
Executive Vice President, Chief Operating Officer 2000 239,657 60,480 -- 4,724
and Treasurer 1999 200,000 31,512 -- 8,948
Gary W. Rada....................................... 2001 252,500 110,830 -- 1,130
Executive Vice President and 2000 239,501 58,080 -- 1,643
General Merchandise Manager 1999 221,535 35,912 -- 3,811
James D. Constantine(5)............................ 2001 198,077 67,681 -- 3,709
Senior Vice President and 2000 172,240 45,600 -- 1,315
Chief Financial Officer 1999 -- -- -- --
Timothy F. Gower................................... 2001 183,269 80,370 -- 3,974
Senior Vice President, Retail Store Operations 2000 173,812 42,240 -- 3,475
1999 163,075 25,435 -- 3,790
- --------
(1) The amounts shown in the bonus column represent payments under the
Company's Management Incentive Plan and Retention Bonus Plans.
(2) Bonuses are paid and stock options are generally granted after the end of
each fiscal year based on performance during such year. Accordingly, bonus
payments and option grants are reported in this table for the year to which
they relate, instead of the year in which they are paid or granted.
(3) "All Other Compensation" consists of life insurance, payments to the
executive's account pursuant to the Company's Savings Plan, automobile
allowances, and reimbursement of relocation and living expenses.
(4) Mr. Freeman was elected President and Chief Executive Officer in October
1999.
(5) Mr. Constantine joined the Company in February 2000.
Option Grants, Exercises And Holdings
Twelve-month Period Ended February 2, 2002 Option Grants. There have been
no options granted to the Named Executive Officers during the twelve-month
period ended February 2, 2002.
Twelve-month Period Ended February 2, 2002 Option Exercises And
Holdings. The following table sets forth certain information regarding options
held at February 2, 2002. No Named Executive Officer exercised any options
during this period.
18
Aggregate Options Exercised In Last Fiscal Year And Fiscal Year-end Option
Values
Number of Securities Value of Unexercised In-
Underlying Unexercised The Money Options at
Options at 2/2/02 (#) 2/2/01($)(1)
-------------------------- -------------------------
Name Exercisable Unexerciseable Exercisable Unexercisable
---- ----------- -------------- ----------- -------------
William E. Freeman.. 100,320 -- -- --
Glen J. Franchi..... 59,708 -- -- --
Gary W. Rada........ 20,000 -- -- --
Timothy F. Gower.... 11,250 3,750 -- --
James D. Constantine -- -- -- --
- --------
(1) Represents the difference between the per share exercise price and the
closing price of the Common Stock on February 2, 2002 ($ 0.02).
Employee Benefit Programs
The Company believes that fostering an ownership culture encourages superior
performance by the Company's management and key store employees. To that end,
the Company has adopted a program to provide to officers, employees,
consultants, sponsors and directors of the Company equity incentives that are
designed to create such an ownership culture and to encourage these officers,
employees and directors to remain with Company. The components of such program
are as follows:
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the Company's stockholders in November 1996. The Purchase Plan has
a term of ten years and is administered by the Compensation Committee of the
Board of Directors. Not more than 1,000,000 shares of Common Stock shall be
made available for purchase under the Purchase Plan. The Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), and is designed to be implemented through consecutive
calendar quarter offering periods during its term. Under the Purchase Plan, any
employee who is employed by the Company for at least 20 hours per week and more
than five months in any calendar year, and who has worked for the Company for
at least 1,000 hours as of the first day of the offering period, is eligible to
participate in the Purchase Plan; however, such 1,000 hour requirement does not
apply to any employee employed on the date of the Company's initial public
offering in December 1996.
1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Option Plan") was adopted by the Board of Directors and approved by the
Company's stockholders in July 1989 and has been amended from time to time
solely to reserve additional shares for future awards. At May 25, 1999, a total
of 139,357 shares of Common Stock were reserved for future issuance under the
1989 Option Plan. The 1989 Option Plan is administered by the Compensation
Committee. Under the 1989 Option Plan, options may be granted to employees,
consultants and directors. Only employees may receive incentive stock options,
which are intended to qualify for certain favorable tax treatment. The exercise
price of incentive stock options under the 1989 Option Plan must equal the fair
market value (as defined in the 1989 Option Plan) of the Common Stock on the
date of grant. Options granted under the 1989 Option Plan generally vest on an
annual basis over three or four years, and must be exercised within ten years.
The 1989 Option Plan terminated in July 1999.
The Company filed its Plan with the bankruptcy court on February 5, 2002.
The bankruptcy court confirmed the plan of reorganization on March 20, 2002. As
of the Effective Date of the Plan, all existing stock and all stock options
will be cancelled. Pursuant to the Plan, the reorganized Company will issue or
reserve for issuance to certain of the key employees of the reorganized Company
options to purchase an aggregate of 166,667 shares of New Common Stock, which
amount equals approximately 10% of the New Common Stock issued under the Plan,
in connection with an employee incentive plan to be implemented by the board of
directors of the reorganized Company.
19
Incentive Savings Plan. The Company has in effect an Incentive Savings Plan
(the "Savings Plan"), which is a tax-qualified defined contribution plan for
employees meeting certain eligibility requirements. The Savings Plan permits
employees to elect to contribute up to 13% of their compensation to the Savings
Plan. The Company makes a matching contribution of one-third of the
participant's before-tax contribution for each calendar year, up to the lesser
of 6% of such participant's compensation for such calendar year, or the
statutory maximum (adjusted annually). Participant's contributions, as well as
the Company's matching contributions, to the Incentive Savings Plan vest
immediately. Benefits are generally distributed after termination of employment
in the form of a lump sum.
Director Compensation
Pursuant to the Company's 1997 Outside Director Stock Option Plan approved
by the stockholders in November 1997, directors who are not officers, employees
or consultants of the Company may be granted options 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 the 1997 Outside Director Stock Option 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. Directors who are not officers,
employees or consultants of the Company are reimbursed for travel to each Board
of Directors meeting at which they are present as well as their reasonable
expenses in connection with the performance of their duties. In addition,
effective November 2000, each director will receive an annual retainer of
$25,000, payable quarterly, plus $750 for each Board and Committee meeting
attended.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership Of Common Stock
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 20, 2002 by (i) each person known to
the Company to beneficially own 5% or more of the Common Stock, (ii) each of
the Directors and the Chief Executive Officer and other Named Executive
Officers and (iii) all executive officers and directors of the Company as a
group. The number of shares of Common Stock shown as owned below assumes the
exercise of all currently exercisable options held by the applicable person or
group, and the percentage shown assumes the exercise of such options and
assumes that no options held by others are exercised. Unless otherwise
indicated below, the persons named below have sole voting and investment power
with respect to the number of shares set forth opposite their respective names.
For purposes of the following table, each person's "beneficial ownership" of
the Company's Common Stock has been determined in accordance with the rules of
the Securities and Exchange Commission ("SEC").
Number Percentage
of Shares of Shares
Beneficially Beneficially
Name of Beneficial Holder Owned Owned
- ------------------------- ------------ ------------
Garlen Investments Limited(1).............................. 1,131,708 15.1%
c/o Jarir Investments
Post Office Box 3196, Riyadh 11471, Saudi Arabia
Ronald L. Chez(2).......................................... 1,027,800 13.7%
c/o Schuyler, Roche & Zwirner
130 East Randolph Street
Chicago, Illinois 60601
Allstate Insurance Company(3).............................. 873,356 11.6%
3075 Sanders Road/Allstate Plaza
Northbrook, IL 60062
Jasmine Trustees Ltd....................................... 381,398 5.1%
Post Office Box 675
Vine Street Chambers
Vine Street, ST. Helier
Jersey, Channel Islands United Kingdom
William E. Freeman(4)...................................... 223,610 3.0%
J. Bayard Kelly(5)......................................... 102,667 1.4%
Gerald L. Gitner(6)........................................ 4,016 *
Laurie M. Shahon........................................... 0 0.0%
Glen J. Franchi(7)......................................... 61,810 *
Gary W. Rada(8)............................................ 30,250 *
Timothy F. Gower(9)........................................ 11,250 *
James D. Constantine....................................... 0 0.0%
All directors and executive officers as a group (8 persons) 433,603 5.8%
- --------
* Less than 1%.
(1) Garlen Investments Limited is beneficially owned by Mandataria Fiduciary
Limited, as trustee of a trust for the benefit of Muhammad Abdul Rahman
Al-Agil, Nasser Abdul Rahman Al-Agil, Abdullah Abdul Rahman Al-Agil,
Abdulkarim Abdul Rahman Al-Agil and Abdulsalam Abdul Rahman Al-Agil.
(2) Based on Amendment No. 3 to the Schedule 13D filed with the SEC on June 14,
1999.
(3) Allstate Insurance Company is the beneficial owner of 873,356 shares of the
Common Stock which are held by the following owners of record: Allstate
Insurance Company--560,552, Allstate Life Insurance
21
Company--225,498, Continental Trust Company as Trustee for the Allstate
Retirement Plan--49,878 and Continental Trust Company as Trustee for the
Agents Pension Plan--37,428.
(4) Includes options to purchase 100,320 shares.
(5) Includes options to purchase 43,644 shares. All the Common Stock and
options to purchase Common Stock are held in the Revocable Living Trust for
J. Bayard Kelly, of which Mr. Kelly is the beneficial owner.
(6) Includes options to purchase 4,016 shares.
(7) Includes options to purchase 59,708 shares.
(8) Includes options to purchase 20,000 shares.
(9) Includes options to purchase 11,250 shares.
ITEM 13. CERTAIN TRANSACTIONS
None.
22
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 2, 2002 and February 3,
2001
Consolidated Statements of Operations for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Stockholders' Deficit for the fiscal years
ended February 2, 2002, February 3, 2001 and January 29, 2000
Consolidated Statements of Cash Flows for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000
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 2, 2002 and February 3, 2001
Condensed Financial Information of Factory Card Outlet
Corp.--Statements of Operations for the fiscal years ended February
2, 2002, February 3, 2001 and January 29, 2000
Condensed Financial Information of Factory Card Outlet
Corp.--Statements of Cash Flows for the fiscal years ended February
2, 2002, February 3, 2001 and January 29, 2000
Notes to Condensed Financial Information of Factory Card Outlet Corp.
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
- ------- -----------
3.1(1) Form of Amended and Restated Certificate of Incorporation of the 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.
23
Exhibit
No. Description
------- -----------
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 of July 2, 1996 by and between FCO and Petra Capital, L.L.C. ("Petra")
10.8.1(1) Stock Purchase Warrant dated July 2, 1996 by and between the Company and Petra, as amended.
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.
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.
24
Exhibit
No. Description
------- -----------
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 24, 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 February 10, 2000
10.20(8) Sixth Amendment to Debtor In Possession Loan and Security Agreement between FCO and
Foothill Capital Corporation, Paragon Capital LLC and Other Financial Institutions dated June 27,
2000
10.21(8) Seventh Amendment to Debtor In Possession Loan and Security Agreement between FCO and
Foothill Capital Corporation, Paragon Capital LLC and Other Financial Institutions dated October
5, 2000
10.22(8) 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 19,
2001
10.23(10) Ninth Amendment to Debtor In Possession Loan and Security Agreement between FCO and Wells
Fargo Retail Finance [successor in interest to Foothill Capital Corporation and Paragon Capital,
LLC] and Other Financial Institutions dated July 31, 2001
10.24 Tenth Amendment to Debtor In Possession Loan and Security Agreement between FCO and Wells
Fargo Retail Finance [successor in interest to Foothill Capital Corporation and Paragon Capital,
LLC] and Other Financial Institutions dated January 29, 2002
10.25(7) Separation Agreement between Factory Card Outlet Corp. and Stewart M. Kasen dated October 8,
1999
10.26(7) Separation Agreement between Factory Card Outlet Corp. and Frederick G. Kraegel dated March 3,
2000
10.27(7) Employment Agreement between Factory Card Outlet Corp. and James D. Constantine dated
March 1, 2000
25
Exhibit
No. Description
- ------- -----------
10.28(9) Disclosure Statement for Company's Amended Joint Plan of Reorganization, dated February 5,
2002
10.29(9) Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated
February 5, 2002
10.30(9) Order Confirming the Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, dated February 5, 2002
10.31 Commitment letter dated February 15, 2002 from Wells Fargo
10.32 Separation Agreement between Factory Card Outlet Corp. and William E. Freeman dated April 5,
2002
10.33 Separation Agreement between Factory Card Outlet Corp. and Glen J. Franchi dated April 5, 2002
21.1(1) List of the subsidiaries of the Company
23.1 Consent of KPMG LLP
- --------
Notes
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.
7. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 2000.
8. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended February 2, 2001.
9. Incorporated by reference to the Company's Current Report on Form 8-K filed
March 25, 2002.
10. Incorporated by reference to the Company's Current Report on Form 8-K filed
August 21, 2001.
(b) Reports on Form 8-K.
Company's Current Report on Form 8-K filed on December 21, 2001--Factory
Card Outlet Announces the Filing of a Plan of Reorganization.
26
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/ JAMES D. CONSTANTINE
By: _______________________________
James D. Constantine,
Senior Vice President,
Chief Financial Officer and
Treasurer
Dated: April 8, 2002
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.
Name Title Date
---- ----- ----
/S/ WILLIAM E. FREEMAN Chairman and Chief Executive April 8, 2002
- ------------------------- Officer
William E. Freeman
/S/ JAMES D. CONSTANTINE Senior Vice President, Chief April 8, 2002
- ------------------------- Financial Officer and
James D. Constantine Treasurer [Chief Accounting
Officer]
/S/ GERALD L. GITNER Director April 8, 2002
- -------------------------
Gerald L. Gitner
/S/ J. BAYARD KELLY Director April 8, 2002
- -------------------------
J. Bayard Kelly
/S/ LAURIE M. SHAHON Director April 8, 2002
- -------------------------
Laurie M. Shahon
27
INDEX TO FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Page
----
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001........... F-3
Consolidated Statements of Operations for the fiscal years ended February 2, 2002,
February 3, 2001 and January 29, 2000........................................... F-4
Consolidated Statements of Stockholders' Deficit for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000......................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended February 2, 2002,
February 3, 2001 and January 29, 2000........................................... F-6
Notes to Consolidated Financial Statements........................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Factory Card Outlet Corp.:
We have audited the accompanying consolidated balance sheets of Factory Card
Outlet Corp. and subsidiary as of February 2, 2002 and February 3, 2001 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the fiscal years ended February 2, 2002, February 3, 2001 and January
29, 2000. These consolidated financial statements are the responsibility of the
Company's management. 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 2, 2002 and February 3, 2001,
and the results of their operations and their cash flows for the fiscal years
ended February 2, 2002, February 3, 2001 and January 29, 2000 in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Chicago, Illinois
March 22, 2002, except as to note 12,
which is as of April 8, 2002
F-2
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
February 2, February 3,
2002 2001
----------- -----------
ASSETS
------
Current assets:
Cash........................................................................... $ 182 $ 281
Merchandise inventories........................................................ 59,496 55,883
Prepaid expenses and other..................................................... 2,949 2,086
-------- --------
Total current assets....................................................... 62,627 58,250
Fixed assets, net................................................................. 18,414 25,061
Other assets...................................................................... 258 401
-------- --------
Total assets............................................................... $ 81,299 $ 83,712
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Debt........................................................................... $ 27,260 $ 25,699
Accounts payable............................................................... 8,071 7,634
Accrued expenses............................................................... 9,698 8,407
Current portion of obligations under capital leases............................ 305 148
-------- --------
Total current liabilities.................................................. 45,334 41,888
Obligations under capital leases.................................................. 338 170
Liabilities subject to compromise................................................. 54,560 55,056
-------- --------
Total liabilities................................................................. 100,232 97,114
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............................................................ (71,029) (65,498)
-------- --------
Total stockholders' deficit................................................ (18,933) (13,402)
-------- --------
Total liabilities and stockholders' deficit................................ $ 81,299 $ 83,712
======== ========
See accompanying notes to consolidated financial statements.
F-3
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statement of Operations
(Dollar amounts in thousands, except per share data)
Fiscal year ended
----------------------------------
February 2, February 3, January 29,
2002 2001 2000
----------- ----------- -----------
Net sales.............................................................. $ 227,943 $ 226,122 $ 217,658
Cost of sales.......................................................... 121,862 122,289 121,224
---------- ---------- ----------
Gross profit........................................................ 106,081 103,833 96,434
Selling, general and administrative expenses........................... 102,146 101,190 101,892
---------- ---------- ----------
Income (loss) from operations....................................... 3,935 2,643 (5,458)
Interest expense....................................................... 2,813 3,344 3,049
---------- ---------- ----------
Income (loss) before reorganization items, net, and extraordianry item. 1,122 (701) (8,507)
Reorganization items, net.............................................. 6,653 7,998 19,082
---------- ---------- ----------
Loss before extraordinary item...................................... (5,531) (8,699) (27,589)
Extraordinary item--loss on early retirement of debt, net of income tax
benefit.............................................................. -- -- (1,292)
---------- ---------- ----------
Net loss............................................................ $ (5,531) $ (8,699) $ (28,881)
========== ========== ==========
Loss per share--basic and diluted
Loss before extraordinary item...................................... $ (0.74) $ (1.16) $ (3.68)
Extraordinary item..................................................... -- -- (0.17)
---------- ---------- ----------
Net loss per share.................................................. $ (0.74) $ (1.16) $ (3.85)
========== ========== ==========
Weighted average shares outstanding--basic and diluted................. 7,503,098 7,503,098 7,503,098
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollar amounts in thousands)
Common stock
---------------- Additional Total
Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------ ---------- ----------- -------------
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)
--------- --- ------- -------- --------
Net loss................... -- -- -- (5,531) (5,531)
--------- --- ------- -------- --------
Balance at February 2, 2002 7,503,098 $75 $52,021 $(71,029) $(18,933)
========= === ======= ======== ========
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 2, February 3, January 29,
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net loss........................................................... $ (5,531) $ (8,699) $ (28,881)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization of fixed assets.................... 6,826 7,196 7,729
Amortization of deferred financing costs and debt discount....... 646 513 762
Noncash portion of reorganization items.......................... 2,422 3,491 14,034
Extraordinary loss on early retirement of debt................... -- -- 1,292
Loss on disposal of fixed assets................................. 11 22 36
Change in assets and liabilities:
(Increase) decrease in assets:
Merchandise inventories.......................................... (3,613) 259 1,470
Prepaid expenses and other....................................... (863) (338) (20)
Other assets..................................................... (503) (273) (835)
Increase (decrease) in liabilities:
Accounts payable................................................. 437 (1,469) (23,986)
Accrued expenses................................................. (177) (2,637) (4,317)
Liabilities subject to compromise................................ 95 270 41,437
--------- --------- ---------
Net cash (used in) provided by operating activities................. (250) (1,665) 8,721
Net cash used in investing activities--purchase of fixed assets, net (1,143) (2,219) (2,044)
Cash flows from financing activities:
Borrowings....................................................... 241,603 241,337 256,450
Repayment of borrowings.......................................... (240,042) (238,508) (264,759)
Payment of long-term obligations................................. (267) (377) (252)
--------- --------- ---------
Net cash provided by (used in) financing activities................. 1,294 2,452 (8,561)
--------- --------- ---------
Net decrease in cash................................................ (99) (1,432) (1,884)
Cash at beginning of year........................................... 281 1,713 3,597
--------- --------- ---------
Cash at end of year................................................. $ 182 $ 281 $ 1,713
========= ========= =========
Supplemental cash flow information:
Interest paid.................................................... $ 2,250 $ 2,740 $ 2,691
Income taxes refunded............................................ -- -- (792)
Supplemental disclosure of noncash financing activities:
Capital lease obligations incurred............................... -- -- 168
See accompanying notes to consolidated financial statements.
F-6
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars 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 (EIK) and 99-686 (EIK) (the "Chapter 11
Cases"). The Chapter 11 Cases have been procedurally consolidated for
administrative purposes.
On February 5, 2002, the Company filed the Debtors' Amended Joint Plan of
Reorganization Under Chapter 11 of the Bankruptcy Code (as modified,
supplemented and amended, the "Plan") and the related disclosure statement (the
"Disclosure Statement") with the Bankruptcy Court. All classes of claims and
equity interests entitled to vote on the Plan accepted the Plan and, on March
20, 2002, the Bankruptcy Court signed an order confirming the Plan. The Plan is
expected to become effective in early April 2002.
Certain of the principal provisions of the Plan are as follows:
. Upon the Company's emergence from chapter 11, most general unsecured
creditors will receive, in full satisfaction and discharge of their claims
against the Company, which approximate $44,000, approximately 90% of the
common stock of the reorganized Company; cash distributions of $1,000 and,
three years from emergence, $2,600, subject to certain prepayment
provisions. The Company's obligations with respect to the $2,600 payment
will be secured by a subordinated lien on certain of the Company's assets.
. Upon the Company's emergence, holders of the Company's outstanding common
stock will receive 5% of the common stock of the reorganized Company and
warrants to purchase an additional 10% of the common stock of the
reorganized Company at various premiums to reorganization equity value.
. In connection with the Plan, certain trade vendors of the Company will
enter into agreements to provide the Company with favorable trade terms,
including, extended credit limits, extended payment terms and seasonal
advances.
. Also in connection with the Plan, certain trade vendors of the Company
will enter into an agreement with the Company, pursuant to which such
trade vendors will convert an aggregate of $3,130 of trade receivables in
respect of goods shipped to the Debtors during the Chapter 11 Cases into a
long term debt obligation evidenced by secured subordinated notes.
. Pursuant to the Plan, a new board of directors will be deemed appointed as
of the Effective Date.
The Plan requires that certain administrative claims and any amounts
outstanding under the DIP Loan Agreement be paid on the Effective Date of the
Plan. The Company intends to enter into a $40,000 secured financing facility
with Wells Fargo Retail Finance, LLC, which will become effective concurrent
with the Plan, to repay the outstanding amounts owed under the debtor in
possession financing facility and fund the reorganized Company's obligations
under the Plan and its ongoing operations following emergence from bankruptcy.
As of March 20, 2002, there were 7,503,098 shares of the Company's
pre-chapter 11 common stock issued and outstanding. Under the provisions of the
Plan, the pre-chapter 11 common stock will be canceled. Upon implementation of
the Plan, the Company will be authorized to issue 10,000,000 shares of new
common stock, par value $.01 (the "New Common Stock"), of which 1,500,000
shares of New Common Stock will be issued to
F-7
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
make distributions pursuant to the Plan as follows: (i) 1,350,000 shares of New
Common Stock to holders of general unsecured claims, (ii) 75,000 shares of New
Common Stock to holders of prepetition common stock, and (iii) 75,000 shares of
New Common Stock to certain members of the reorganized Company's management.
The Company's Amended and Restated Certificate of Incorporation to be filed on
the effective date will prohibit the transfer of any shares of New Common Stock
or any rights to acquire shares of New Common Stock to any person or group that
is a 5% shareholder of the Company.
Following the effective date of the Plan, the Company will also issue
warrants to purchase an additional 153,928 shares of the New Common Stock,
which amount equals approximately 10% of the New Common Stock issued under the
Plan, to the holders of the Company's prepetition common stock and warrants to
purchase up to an additional 78,947 shares of the New Common Stock, which
amount equals approximately 5% of the New Common Stock issued under the Plan,
to certain members of the reorganized Company's management.
In addition, pursuant to the Plan, the reorganized Company will issue or
reserve for issuance to certain of the key employees of the reorganized Company
options to purchase an aggregate of 166,667 shares of New Common Stock, which
amount equals approximately 10% of the New Common Stock issued under the Plan,
in connection with an employee incentive plan to be implemented by the board of
directors of the reorganized Company.
As of February 2, 2002, the assets and liabilities of the Company on a
historical cost basis were $81,299 and $100,232, respectively. On or near the
effective date of the Plan, the Company will adopt the provisions of "fresh
start accounting," which require the Company to restate all assets and
liabilities to their fair values based upon the provisions of the Plan and
certain valuation studies currently underway. The Company has not yet
determined the impact of fresh start accounting on the historical consolidated
financial statements.
(2) Summary of Significant Accounting Policies
Basis of Presentation
All intercompany balances and transactions have been eliminated in
consolidation.
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 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 2, 2002, February 3, 2001 and January 29, 2000 are
referred to as fiscal 2001, 2000 and 1999, respectively. Fiscal 2001 and 1999
are 52 week periods and fiscal 2000 is a 53 week period.
F-8
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 41%
of the Company's aggregate purchases in fiscal year 2001. In fiscal year 2000
the Company's largest supplier represented approximately 11% and the ten
largest suppliers represented approximately 40% of the Company's aggregate
purchases. 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.
At February 2, 2002 and February 3, 2001, the Company has provisions of
$1,165 and $1,857, 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.
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 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 2001
and 2000, 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 $673 and $1,257 as of February 2, 2002 and
February 3, 2001, respectively. Amortization of these software costs was
approximately $759, $751 and $875 for fiscal 2001, 2000 and 1999, respectively.
Revenue Recognition
The Company records revenue at the point of sale for retail stores.
F-9
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2, 2002 and February 3, 2001, $858
and $839 of advertising production costs were included in prepaid expenses,
respectively. In fiscal 2001, 2000 and 1999, advertising expense was $7,218,
$8,157 and $7,897, respectively.
Loss per Share
Loss per share--basic and diluted was computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Loss
per share--diluted excludes the effect of stock options and warrants because
their inclusion would have been anti-dilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method.
(3) Fixed Assets
The components of fixed assets, net are as follows:
February 2, February 3,
2002 2001
----------- -----------
Furniture and equipment....................... $41,522 $44,370
Leasehold improvements........................ 13,383 12,888
------- -------
Total fixed assets..................... 54,905 57,258
Less accumulated depreciation and amortization 36,491 32,197
------- -------
Fixed assets, net.......................... $18,414 $25,061
======= =======
(4) Debtor in Possession Facility
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 "DIP Loan Agreement") which provides up to $35,000 (including a
$10,000 sublimit 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 with a minimum
threshold of 7.0% (7.0% at February 2, 2002). The DIP Loan Agreement expires on
May 31, 2002. Borrowings under the DIP 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.
The Company anticipates that all amounts outstanding under the DIP Loan
Agreement shall be repaid on the effective date of the Plan from the proceeds
of a $40,000 secured revolving credit financing facility (including a $10,000
sublimit for letters of credit) that the Company intends to enter into with
Wells Fargo Retail Finance, LLC (the "New Facility"). On February 15, 2002, the
Company signed a financing commitment letter with Wells Fargo Retail Finance,
LLC regarding the New Facility.
(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.
F-10
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The cost of fixed assets held under capital leases included in fixed assets
was $7,555 and $8,584 at February 2, 2002 and at February 3, 2001 respectively.
Accumulated amortization related to such fixed assets was $4,467 and $6,131 at
February 2, 2002 and February 3, 2001, respectively. Fixed assets held under
capital leases consist principally of technology, office and warehouse
equipment.
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 2, 2002.
Capital Operating
leases leases
------- ---------
Fiscal year:
2002........................................................... $341 $ 23,436
2003........................................................... 253 23,335
2004........................................................... 105 22,146
2005........................................................... 3 19,256
Thereafter..................................................... -- 57,382
---- --------
Total minimum lease payments...................................... 702 $145,555
========
Less amount representing interest................................. 59
----
Present value of minimum lease payments (including long-term lease
obligations of $338)............................................ $643
====
The Company currently has the right to assume or reject unexpired lease
contracts. Pursuant to the Plan, the Company will assume all unexpired leases
that it has not previously rejected upon the effective date of the Plan. 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 $23,955,
$24,684 and $25,722 in fiscal 2001, 2000 and 1999, respectively.
(6) Liabilities Subject to Compromise
The components of liabilities subject to compromise at February 2, 2002 and
February 3, 2001 are as follows:
February 2, February 3,
2002 2001
----------- -----------
Accounts payable..................................................... $37,325 $37,325
Accrued expenses..................................................... 1,570 1,570
Capital lease obligations............................................ 2,320 2,887
Potential claims related to rejection of certain real property leases 6,552 6,287
Deferred rent obligations............................................ 6,793 6,987
------- -------
$54,560 $55,056
======= =======
F-11
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. As a result, recorded amounts may
be adjusted in the future. The Plan provides for the satisfaction of all
prepetition liabilities, pursuant to the terms of the Plan, on or subsequent to
the date that the Plan becomes effective.
(7) Reorganization Items, net
In January 2002 and July 2001, the Company closed and conducted closing
sales at one 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 2001, the Company recorded a provision for reorganization costs
relating to these store closings of approximately $757. 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 $5,199, of which $1,469 relates to retention
bonus accruals for salaried associates in fiscal 2001. Furthermore, in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), the
Company wrote off $697 of impaired long-lived assets that related to prior year
store closings.
In fiscal 2000, the Company closed and conducted closing sales at seven
stores 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, of which $2,252 relates to retention bonus accruals
for salaried associates in fiscal 2000.
In fiscal 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, of which
$2,077 relates to retention bonus accruals for salaried associates in fiscal
1999.
F-12
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Income Taxes
Income taxes (benefit) are as follows:
Valuation
Current Deferred Allowance Total
------- -------- --------- -----
Fiscal 2001:
Federal.. $ -- $ (649) $ 649 $ --
State.... -- (276) 276 --
---- -------- ------- -----
$ -- $ (925) $ 925 $ --
==== ======== ======= =====
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 $ --
==== ======== ======= =====
Income tax benefit differs from the amounts computed by applying the Federal
income tax rate of 34% to loss before income tax benefit as a result of the
following:
Fiscal Fiscal Fiscal
2001 2000 1999
------ ------ ------
Computed "expected" income tax benefit....................... (34.0)% (34.0)% (34.0)%
Increase (decrease) in income taxes resulting from:
Increase (decrease) in valuation allowance................ 16.7 (0.6) 38.5
State net operating loss carrybacks and carryforwards..... (2.3) (4.6) (5.6)
State and local income taxes, net of Federal income taxes. (2.6) (0.7) 1.1
Reorganization costs, net................................. 21.9 39.2 --
Other, net................................................ 0.3 0.7 --
----- ----- -----
Income tax benefit........................................... -- % -- % -- %
===== ===== =====
F-13
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes 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 2, February 3,
2002 2001
----------- -----------
Deferred tax assets related to:
Alternative minimum tax credit carryforward.. $ 564 $ 564
Deferred rent liabilities.................... 1,064 1,138
Accrued expenses............................. 1,853 1,809
Merchandise inventories...................... 446 703
Net operating loss carryforwards............. 20,226 20,498
-------- --------
Total deferred tax assets............. 24,153 24,712
Valuation allowance.......................... (23,205) (22,280)
-------- --------
Net deferred tax assets.................. 948 2,432
Deferred tax liabilities related to fixed assets 948 2,432
-------- --------
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 2, 2002 and February 3, 2001.
At February 2, 2002, the Company had net operating loss ("NOL")
carryforwards for Federal tax purposes of $50,795 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.
(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. Pursuant to the terms of the Plan, all
options will be cancelled upon the Effective Date of the Plan. In lieu thereof,
the Plan provides for the board of directors of the reorganized Company to
adopt a New Employee Stock Option Plan.
F-14
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
There have been no Outside Director Stock Options granted subsequent to the
bankruptcy filing on March 23, 1999. Pursuant to the terms of the Plan, all
options issued under the 1997 Outside Director Stock Option Plan will be
cancelled upon the effective date of the Plan. The board of directors of the
reorganized Company may consider implementing a new outside director stock
option plan.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standards ("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 2001, 2000 and
1999 were 386,340, 407,545 and 540,664, respectively. Stock options exercisable
at the end of the same fiscal years were 379,590, 378,795 and 438,639,
respectively. Additionally, the range of exercise prices for options
outstanding at February 2, 2002 and at February 3, 2001 was $9.00 to $1.63.
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 2001, 2000 and
1999, the Company's discretionary matching contributions to the ISP Plan were
$235, $199 and $193, respectively. The ISP Plan also allows for a discretionary
base contribution to 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. There were no withholdings from employees
for purchases under the ESPP Plan in fiscal 2001, 2000 and 1999.
(10) Fair Value of Financial Instruments
The Company's financial instruments at February 2, 2002 and February 3, 2001
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.
F-15
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which
establishes financial accounting and reporting for acquired goodwill and other
intangible assets and supercedes APB Opinion No. 17, "Intangible Assets". The
provisions of SFAS No. 142 are effective for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS No. 142 during the first quarter
of fiscal 2002 and such adoption is not expected to have a material impact on
the financial condition or results of operations of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) normal use of the
asset. The Company is required and plans to adopt the provisions of SFAS No.
143 for the first quarter of fiscal 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of those obligations on the date of adoption. Because
of the effort necessary to comply with the adoption of SFAS No. 143, it is not
practical for management to estimate the impact of adopting this Statement at
the date of this report.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", although it retains many of the
fundamental provisions of that Statement. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001. The Company will
adopt SFAS No. 144 during the first quarter of fiscal 2002 and such adoption is
not expected to have a material impact on the financial condition or results of
operations of the Company.
(12) Subsequent Event
On April 8, 2002, the Company has entered into a $40,000 secured financing
facility with Wells Fargo Retail Finance, LLC, which will become effective
concurrent with the Plan.
(13) Quarterly Financial Information (unaudited)
Following is a summary of unaudited quarterly information:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2001:
Total sales.................................... $56,235 $57,013 $51,480 $63,215
Gross profit................................... 25,821 27,590 23,784 28,886
Income (loss) before reorganization items...... (956) 2,390 (1,420) 1,108
Net income (loss).............................. (2,360) 1,172 (3,131) (1,212)
Net income (loss) per share--basic and diluted. (0.31) 0.16 (0.42) (0.17)
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)
F-16
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Factory Card Outlet Corp.:
Under date of March 22, 2002, except as to note 12, which is as of April 8,
2002, we reported on the consolidated balance sheets of Factory Card Outlet
Corp. and subsidiary as of February 2, 2002 and February 3, 2001 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the fiscal years ended February 2, 2002, February 3, 2001 and January
29, 2000, 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.
/s/ KPMG LLP
Chicago, Illinois
March 22, 2002
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 share data)
February 2, February 3,
2002 2001
----------- -----------
ASSETS
Current assets:
Due from subsidiary......................................................... $ 12,179 $ 12,179
Note receivable--subsidiary................................................. 61,913 54,379
-------- --------
Total current assets.................................................... 74,092 66,558
Investment in subsidiary....................................................... (93,025) (79,960)
-------- --------
Total assets............................................................ $(18,933) $(13,402)
======== ========
STOCKHOLDERS' DEFICIT
Common stock--$.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............................................................ (71,029) (65,498)
-------- --------
Total stockholders' deficit............................................. $(18,933) $(13,402)
======== ========
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 2, February 3, January 29,
2002 2001 2000
----------- ----------- -----------
Royalty income............................. $ 3,420 $ 3,392 $ 3,265
Interest income--subsidiary note receivable 5,571 4,887 4,277
Equity in net loss of subsidiary........... (13,065) (15,430) (34,787)
Operating expenses......................... 1,457 1,548 1,636
-------- -------- --------
Net loss................................ $ (5,531) $ (8,699) $(28,881)
======== ======== ========
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 2, February 3, January 29,
2002 2001 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss............................................................ $(5,531) $(8,699) $(28,881)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Equity in net loss of subsidiary................................ 13,065 15,430 34,787
Decrease in due from subsidiary................................. -- -- 1,537
------- ------- --------
Net cash provided by operating activities........................... 7,534 6,731 7,443
------- ------- --------
Cash used in investing activities:
Increase in note receivable from subsidiary......................... (7,534) (6,731) (7,460)
------- ------- --------
Net decrease in cash................................................... -- -- (17)
Cash at beginning of year.............................................. -- -- 17
------- ------- --------
Cash at end of year.................................................... $ -- $ -- $ --
======= ======= ========
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 2, 2002 and February 3,
2001 and for the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000. 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 filed its plan of reorganization and
related disclosure statement with the bankruptcy court on February 5, 2002. The
bankruptcy court confirmed the plan of reorganization on March 20, 2002. 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
(6.75% at February 2, 2002). The note and any accrued interest is due and
payable on demand. Pursuant to the Plan, the current assets Note
Receivable--Subsidiary of $61,913 and Due From Subsidiary of $12,179 shall be
contributed to capital under the reorganized Company.
(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