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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From June 29, 1997 to January 31, 1998
Commission File Number: 21859
FACTORY CARD OUTLET CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3652087
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2727 Diehl Road,
Naperville, IL 60563-2371
(Address of principal executive offices) (Zip Code)
(630) 579-2000
(Registrant's telephone number, including area code)
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 this 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 April 20, 1998 was approximately $62,820,400, computed on the
basis of the last reported sale price per share ($12.625) of such stock on the
NASDAQ National Market. 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 | |
The number of shares of the Registrant's Common Stock outstanding as of April
20, 1998 was 7,415,831.
Documents Incorporated by Reference:
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Part of Form 10-K Document Incorporated by Reference
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Part III (Items 10, Portions of the Registrant's Definitive Proxy Statement
to be used in connection with the Annual Meeting of
11, 12 and 13) Stockholders to be held on June 26, 1998.
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Transition Report on Form 10-K
TABLE OF CONTENTS
PART I
Page
Item 1 Business 1
Item 2 Properties 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a Quantitative and Qualitative Disclosures About Market Risks 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10 Chairman and Executive Officers of the Registrant 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners
and Management 20
Item 13 Certain Relationships and Related Transactions 20
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 Transition Report on 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. Such factors include,
among others, the following: ability to open and operate new stores; 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; ability to complete
corrective action necessary to address Year 2000 issues and other factors both
referenced and not referenced in this Transition Report on Form 10-K. When used
in this Transition 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
The Company changed its year end from the end of June to the Saturday
closest to January 31 and will use January as its fiscal year end in the future.
As a result, the financial information presented and discussed herein includes:
(i) a transition period beginning June 29, 1997 and ending January 31, 1998
("the transition period") and (ii) consolidated financial statements as
historically reported for years ended June 28, 1997, June 29, 1996, July 1,
1995, June 30, 1994 and June 30, 1993 ("the fiscal years"). For comparative
purposes, financial and operating data is also presented for the following
periods: (i) 53-weeks ended January 31, 1998, (ii) 52-weeks ended January 24,
1997 and (iii) 52-weeks ended January 25, 1996.
Factory Card Outlet Corp. is a rapidly growing chain of company-owned
superstores offering a vast assortment of party supplies, greeting cards,
giftwrap, balloons and other special occasion merchandise at everyday value
prices. As of April 4, 1998, the Company operated 190 stores in 22 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 the largest chain of company-owned
superstores in the card, party supply and special occasion industry. The
Company opened 58, 29 and 35 superstores in the 53-weeks ended January 31, 1998,
52-weeks ended January 24, 1997 and 52-weeks ended January 25, 1996,
respectively, and plans to open approximately 40 superstores in the next twelve
months, including 10 opened through April 4, 1998, and approximately 60
superstores in the following twelve months.
The Company's superstores provide customers with a value-oriented, "one-
stop" shopping destination for 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 new superstores average approximately 12,000 square
feet, with approximately 80% devoted to selling space, and are designed to
provide ease of shopping within an attractive, spacious and festive environment.
Market Overview
The U.S. market for party and special occasion merchandise was estimated to
be $9.4 billion in 1997 according to Party and Paper Retailer, a retail trade
publication. Numerous party and special occasion events throughout the year
drive frequent consumer purchases.
Larger format superstores, like Factory Card Outlet, have become the
fastest growing retail format within the card, party supply and special occasion
industry, as they have in other market segments such as books, office products,
home improvements, pet supplies and sporting goods. The development of the
special occasion category is being fueled by many of the same trends that have
driven superstore penetration in these retailing sectors, including fragmented
distribution and inefficient pricing. In addition, favorable demographic
trends, including the maturing of Baby-Boomers and the growing popularity of at-
home entertaining, are launching the industry's superstore growth.
1
Real Estate Strategy
The Company intends to open approximately 40 superstores in the twelve-
month period ending January 30, 1999 and approximately 60 in the twelve-month
period ending January 29, 2000. This expansion plan is designed to build on the
Company's position as the largest chain of company-owned superstores in the
card, party supply and special occasion industry. The Company's growth strategy
is to open stores in existing and new markets that can support multiple stores
and enable the Company to achieve operating, distribution and advertising
efficiencies. The Company also selectively enters small and mid-size markets
capable of supporting one or more superstores that meet its profitability
criteria.
Because the Company's stores attract a broad range of value-oriented women
across all age and demographic segments, the Company believes they are an
attractive tenant to real estate developers. The Company selects sites in
regional strip or power shopping centers based upon several factors including
location, demographics, anchor and other tenants, location within the center and
access. The Company seeks out co-tenants who draw customers with similar
characteristics and generate a high rate of shopping traffic, such as specialty
value-oriented women's retailers, leading chain supermarkets, arts and crafts
stores, chain drug stores and family restaurants.
Business
The key elements of the Company's business are as follows:
Merchandise Offering. The Company offers a wide selection of everyday and
--------------------
seasonal party and special occasion merchandise. With over 23,000 SKU's in each
of its superstores, the Company's stores provide a single destination for a
customer's special occasion product needs. The stores offer product selections
for all major holidays and seasonal events, such as Valentine's Day, St.
Patrick's Day, Passover, Easter, Mother's Day, Father's Day, Grandparent's Day,
Secretary'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:
. 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. By offering a full line of coordinated and
complementary patterns and designs, the Company seeks to meet all of a
customer's party needs, from children's birthdays and holiday celebrations,
to at-home entertainment.
. 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 the everyday low price of $0.39 each. In addition to traditional
lines of greeting cards, the stores also carry an extensive selection of
contemporary and humorous cards. Boxed everyday cards are regularly sold at
substantial discounts and boxed holiday cards (Christmas, Hanukkah and
Kwanzaa) are sold at 50% off manufacturers' suggested retail prices.
2
. Giftwrap - The Company believes its stores have become a destination for
shoppers seeking a wide selection of giftwrap and giftwrap accessories and
sell most of these items at lower prices than competitors. The Company
offers one of the largest assortments of giftwrap of any retailer in the
United States, as well as an extensive selection of bows, ribbons and
related accessories in a large cascading waterfall display of complementary
colors and distinctive patterns. Items include glossy, printed, solid and
foil giftwrap, solid and printed ribbons, bows, gift bags, gift boxes,
tissue paper and shred and gift tags.
. Balloons - Balloons are increasingly popular as clever and inexpensive all-
occasion gifts and often replace traditional floral bouquets as they are
longer lasting. The Company's stores offer value in mylar and latex
balloons and carry popular licensed designs along with a large selection
for any occasion. The stores create specialty and seasonal-oriented
bouquets combining balloons with other fashion goods such as giftware,
stuffed animals and candy. Customers can order balloons in advance by
phone or take advantage of the Company's walk-in service.
. 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 (such as cake decorations, place
setting cards and confetti), 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 all purchases. The
Company typically sells merchandise at discounts of 20% to 60% off
manufacturers' suggested retail prices. In addition, the superstores 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. To distinguish the Company's superstores
from competitors and build customer traffic and loyalty, the selection of over
4,000 high-quality everyday and seasonal greeting cards are sold for $0.39 each
everyday.
Attractive, Spacious and Festive Superstore Format. The Company's stores
--------------------------------------------------
have an attractive and festive atmosphere within a spacious "easy to shop"
superstore, encouraging browsing and repeat visits by customers. 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 interiors are festively decorated with arrays of
colorful merchandise to emphasize everyday and seasonal themes. The Company has
increased the size of its new superstores to approximately 12,000 square feet, a
size management believes is optimal for displaying an expanded merchandise
selection in a friendly shopping environment, while benefiting from store-level
efficiencies.
Targeted Advertising. The Company utilizes a Company-wide direct mail
--------------------
program to reach targeted customers and highlight the breadth and value of its
merchandise. The direct mail pieces are printed in 4-color and range from four
to eight pages depending on the season. The Company plans to continue to expand
this direct mail program and support all holidays and special events. The
Company also uses radio advertising to support major holiday selling seasons.
In addition, the Company will continue to test television advertising in
selected markets in the next twelve months.
3
Management Team and Systems. The Company's management team and systems
---------------------------
provide the foundation for continued long-term rapid growth. Its experienced and
incentivized management team averages over twenty years of broad specialty
retailing experience. The Company's management believes that controls and a
proper infrastructure are necessary to achieve growth in a desirable, controlled
fashion. Over the past three years, the Company has invested significant
resources in people, systems, and infrastructure to support its growth and make
it more efficient. Point-of-sale ("POS") systems are supplying management with
sales information which is being used to enhance merchandise planning and buying
programs, better manage inventories and maximize sales.
Distribution Center and Office Complex. The Company completed the
--------------------------------------
consolidation of its distribution facilities and offices into a new distribution
center and office complex in Naperville, Illinois in February 1998. The newly-
constructed, three-story office building and 300,000 square-foot distribution
center sits on 39 acres of land. The lease agreement provides for the expansion
of the warehouse to 600,000 square feet, as needed. The Company believes it is
the only special occasion superstore chain to have a distribution facility.
When coupled with a large store base and central purchasing capabilities,
management believes that this facility will provide the Company substantial
purchasing and distribution efficiencies along with greater financial controls
over the movement of inventory.
Store Locations. As of April 4, 1998, the Company operated 190 stores in
---------------
22 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 April
4, 1998:
Number Number Number
of of of
Location Stores Location Stores Location Stores
-------- ---------- -------- --------- -------- --------
DELAWARE (1) MINNESOTA (5) TEXAS (7)
Wilmington................. 1 Minneapolis St. Paul Dallas-Fort Worth Metro.. 1
FLORIDA (7) Metro.................... 3 Houston Metro............ 2
Jacksonville............... 1 Mankato.................. 1 San Antonio.............. 2
Orlando.................... 4 Rochester................ 1 Texarkana................ 1
Tampa...................... 2 MISSOURI (10) Tyler.................... 1
ILLINOIS (42) St. Louis Metro.......... 6 VIRGINIA (10)
Chicago Metro.............. 33 Cape Girardeau........... 1 Washington D.C. Metro (VA) 4
Bloomington................ 1 Columbia................. 1 Fredericksburg........... 1
Champaign.................. 1 Joplin................... 1 Lynchburg................ 1
DeKalb..................... 1 Springfield.............. 1 Norfolk-Newport News..... 2
Fairview Heights........... 1 NEBRASKA (5) Richmond................. 2
Moline..................... 1 Omaha Metro.............. 3 WEST VIRGINIA (1)
Mount Vernon............... 1 Lincoln.................. 1 Clarksburg............... 1
Peoria..................... 1 Grand Island............. 1 WISCONSIN (14)
Rockford................... 1 NEW YORK (9) Milwaukee Metro.......... 6
Springfield................ 1 Buffalo Metro............ 3 Appleton................. 1
INDIANA (18) Albany................... 1 Eau Claire............... 1
Indianapolis Metro......... 6 Olean.................... 1 Green Bay................ 1
Anderson................... 1 Rochester................ 3 Janesville............... 1
Bloomington................ 1 Syracuse................. 1 Madison.................. 2
Clarksville................ 1 NORTH CAROLINA (3) Oshkosh.................. 1
Evansville................. 2 Charlotte................ 1 Wausau................... 1
Fort Wayne................. 1 Raleigh.................. 1
Highland .................. 1 Hickory.................. 1 --------
Lafayette ................. 1 OHIO (18) TOTAL 190
Merrillville............... 1 Cincinnati Metro......... 4 ========
Mishawaka.................. 1 Cleveland Metro.......... 4
Muncie..................... 1 Columbus Metro........... 4
Richmond................... 1 Akron.................... 2
IOWA (6) Dayton................... 1
Des Moines Metro........... 2 Mansfield................ 1
Cedar Rapids............... 1 St. Clairsville.......... 1
Davenport.................. 1 Wooster.................. 1
Dubuque.................... 1 PENNSYLVANIA (6)
Waterloo................... 1 Erie..................... 1
KANSAS (1) Hanover.................. 1
Olathe..................... 1 Lancaster................ 1
KENTUCKY (4) State College............ 1
Louisville Metro........... 2 Wilkes Barre-Scranton.... 2
Florence................... 1 SOUTH CAROLINA (3)
Owensboro.................. 1 Charleston............... 1
MARYLAND (13) Columbia................. 1
Baltimore Metro............ 8 Greenville............... 1
Washington, D.C. Metro (MD) 4 TENNESSEE (6)
Salisbury.................. 1 Chattanooga.............. 2
MICHIGAN (1) Memphis.................. 2
Benton Harbor.............. 1 Nashville................ 2
5
Product Sourcing
Due to its increasing size and the use of its distribution center, the
Company is able to take advantage of volume purchase discounts and implement
system controls over its inventory and merchandise selection. The Company
purchases its inventory from more than 300 vendors world-wide, with the largest
supplier, Creative Expressions, Inc., representing approximately 14%, and the
largest ten suppliers representing approximately 60% of the Company's aggregate
purchases for the 53-weeks ended January 31, 1998. A portion of the Company's
merchandise is imported from foreign manufacturers or their agents, principally
from the Far East. As is customary in its industry, the Company does not have
long term contracts with any suppliers except Fine Art Developments, p.l.c., a
publicly-owned United Kingdom company and a stockholder of the Company ("Fine
Art").
In order to ensure a consistent supply of first-run, high-quality greeting
cards, the Company entered into a supply agreement with Fine Art (the "Fine Art
Agreement"), which expires on December 31, 1999 (with automatic one-year
renewals thereafter). Under the Fine Art Agreement, the Company is required to
purchase from Fine Art a minimum of 42% of the Company's total annual
requirement of greeting cards, which percentage is subject to modification upon
the consent of the parties.
The Company believes that its well-established relationships with overseas
suppliers provide it with an advantage over many of its competitors because the
Company is able to offer an extensive selection of distinctive products at
higher gross margins. The Company also believes that it benefits from the
significant buying power resulting from its size and that, by operating its own
distribution facilities, it can make opportunistic purchases, import products
directly and achieve greater operating efficiencies.
Management Information Systems
The Company uses a management information and control system, which is
based on the JDA Merchandise Management System software package ("JDA") acquired
by the Company in 1994 and supports the complete range of retail cycle functions
in the areas of finance, merchandising and distribution. All stores are linked
to the Company's headquarters through personal computers which interface with an
IBM AS/400 and provide the stores with the ability to enter store orders and
payroll information and send and receive electronic mail. These personal
computers are also tied into the Company's new POS system and allow managers to
review their stores' merchandising performance by product category.
The Company believes that its management information systems will be an
important factor in supporting its continued expansion and enhancing its
competitive position in the industry. The Company completed installation of a
fully integrated retail management software package that automated the areas of
finance, merchandising and distribution during 1996 and implemented a POS system
in all stores by April 1997. The POS system is providing sales information to
the Company's stores and central office and is being utilized in the Company's
business operations and controls, performance monitoring programs, decision
support and business planning. Management believes that the POS system will
continue to result in improvements in central office operations, particularly in
the areas of merchandise planning and automated replenishment, inventory control
and performance measurement.
6
Competition
The card, party supplies 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 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 the
minimum wage, overtime and other working conditions. The Company also must
comply with the provisions of the Americans with Disabilities Act of 1990, as
amended, which requires generally that employers provide reasonable
accommodation for employees with disabilities and that stores be accessible to
customers with disabilities.
Employees
The Company had approximately 2,712 employees as of April 4, 1998,
comprised of 986 full-time and 1,726 part-time employees. The number of store
employees increases during peak selling seasons. None of the Company's
employees are covered by collective bargaining agreements. 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 lease term
expiring in February 2007. This facility consists of a newly-constructed,
three-story office building and 300,000 square-foot distribution center which
sits on 39 acres of land. The lease agreement provides for the expansion of the
warehouse to 600,000 square feet, as needed. The Company is also phasing out of
its last distribution facility in Elk Grove Village, Illinois, with its lease
term expiring in July 1998.
7
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. As of the date of this Transition 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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has traded on the NASDAQ National Market under
the symbol "FCPY" since the Company's initial public offering on December 31,
1996. 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.
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HIGH LOW
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TWO YEARS ENDED JANUARY 31, 1998
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Fourth Quarter (beginning December 13, 1996)......... $11.00 $9.00
First Quarter Ended April 3, 1997.................... 10.00 8.00
Second Quarter Ended July 2, 1997.................... 10.25 5.38
Third Quarter Ended November 1, 1997................. 8.94 5.19
Fourth Quarter Ended January 31, 1998................ 7.63 5.69
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On April 20, 1998, the last sale price of the Common Stock reported on the
NASDAQ National Market was $12.625 share. At April 20, 1998, the approximate
number of holders on record of the Common Stock was 117.
Dividends
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends for the foreseeable future. The Company expects
that earnings will be retained for the continued growth and development of the
Company's business. In addition, the Loan and Security Agreement between the
Company and Bank Boston Retail Finance, Inc. 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."
8
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data presented below under
the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as
of the end of, each of the fiscal years in the five-year period ended June 28,
1997, are derived from the consolidated financial statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial statements
as of January 31, 1998 and June 28, 1997, and for the seven-month transition
period ended January 31, 1998 and for each of the fiscal years in the three-year
period ended June 28, 1997, and the independent auditors' report thereon, are
included elsewhere in this Transition Report on Form 10-K. In addition,
selected consolidated financial and operating data is presented as of and for
the 53-week period ended January 31 1998, the 52-week period ended January 24,
1997 and the 52-week period ended January 24, 1996. This data was derived from
the unaudited consolidated financial statements of the Company. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Transition Report on Form 10-K.
9
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands, except share and per share and operating data)
Transition
Period
53-Weeks 52-Weeks 52-Weeks Period
Ended Ended Ended Ended
Jan. 31, Jan. 24, Jan. 25, Jan. 31,
1998 1997 1996 1998
-------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA: (Unaudited) (Unaudited) (Unaudited)
Net sales.............................................. $ 174,497 $ 117,604 $ 78,919 $ 110,699
Cost of sales and occupancy............................ 110,200 74,317 49,949 71,984
-------------- -------------- -------------- --------------
Gross profit....................................... 64,297 43,287 28,970 38,715
Selling, general and administrative expenses.......... 58,945 40,323 28,731 38,929
-------------- -------------- -------------- --------------
Income (loss) from operations...................... 5,352 2,964 239 (214)
Interest expense....................................... 1,482 2,114 881 1,269
-------------- -------------- -------------- --------------
Income (loss) before taxes and extraordinary item.. 3,870 850 (642) (1,483)
Income tax (benefit)................................... 1,652 273 (243) (594)
-------------- -------------- -------------- --------------
Income (loss) before extraordinary item............ 2,218 577 (399) (889)
Extraordinary item..................................... - (313) - -
-------------- -------------- -------------- --------------
Net income (loss).................................. $ 2,218 $ 264 $ (399) $ (889)
============== ============== ============== ==============
Earnings (loss) per share - basic
Before extraordinary item............................ $ 0.31 $ 0.13 $ (0.10) $ (0.12)
Extraordinary item................................... - (0.07) - -
-------------- -------------- -------------- --------------
Net income (loss).................................... $ 0.31 $ 0.06 $ (0.10) $ (0.12)
============== ============== ============== ==============
Weighted average shares outstanding.................... 7,261,542 4,408,801 4,068,409 7,261,542
============== ============== ============== ==============
Earnings (loss) per share - diluted (4)
Before extraordinary item............................ $ 0.28 $ 0.11 $ (0.08) $ (0.12)
Extraordinary item................................... - (0.06) - -
-------------- -------------- -------------- --------------
Net income (loss).................................... $ 0.28 $ 0.05 $ (0.08) $ (0.12)
============== ============== ============== ==============
Weighted average shares outstanding.................... 7,946,188 5,430,415 4,985,279 7,261,542
============== ============== ============== ==============
OPERATING DATA:
Number of stores:
Opened during period.............................. 58 29 35 42
Closed/relocated during period.................... 2 3 2 2
Open at end of period............................. 180 124 98 180
Comparable store sales increase (1).................. 8.3% 11.9% 10.3% 9.5%
Average sales per store (2).......................... $ 1,169,817 $ 1,076,618 $ 1,026,852 $ 676,185
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 50,229 $ 33,762 $ 21,245 $ 50,229
Total assets......................................... 116,243 75,475 50,049 116,243
Total debt (3)....................................... 34,189 2,568 17,187 34,189
Total stockholders' equity........................... 51,734 49,075 15,004 51,734
Fiscal Years
-------------------------------------------------------------------
June 28, June 29, July 1, June 30, June 30,
1997 1996 1995 1994 1993
----------- ---------- ---------- ----------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $ 133,946 $ 94,589 $ 63,174 $ 37,341 $ 24,333
Cost of sales and occupancy............................ 83,832 59,139 39,757 23,227 15,159
----------- ---------- ---------- ----------- ---------
Gross profit....................................... 50,114 35,450 23,417 14,114 9,174
Selling, general and administrative expenses.......... 45,227 33,733 22,316 12,876 8,066
----------- ---------- ---------- ----------- ---------
Income (loss) from operations...................... 4,887 1,717 1,101 1,238 1,108
Interest expense....................................... 1,402 1,529 411 497 311
----------- ---------- ---------- ----------- ---------
Income (loss) before taxes and extraordinary item.. 3,485 188 690 741 797
Income tax (benefit)................................... 1,462 118 322 292 (68)
----------- ---------- ---------- ----------- ---------
Income (loss) before extraordinary item............ 2,023 70 368 449 865
Extraordinary item..................................... (313) - - - -
----------- ---------- ---------- ----------- ---------
Net income (loss).................................. $ 1,710 $ 70 $ 368 $ 449 $ 865
=========== ========== ========== =========== =========
Earnings (loss) per share - basic
Before extraordinary item............................ $ 0.35 $ 0.02 $ 0.09 $ 0.17 $ 0.33
Extraordinary item................................... (0.05) - - - -
----------- ---------- ---------- ----------- ---------
Net income (loss).................................... $ 0.30 $ 0.02 $ 0.09 $ 0.17 $ 0.33
=========== ========== ========== =========== =========
Weighted average shares outstanding.................... 5,739,962 4,068,409 3,999,914 2,636,062 2,636,062
=========== ========== ========== =========== =========
Earnings (loss) per share - diluted (4)
Before extraordinary item............................ $ 0.30 $ 0.01 $ 0.07 $ 0.12 $ 0.23
Extraordinary item................................... (0.04) - - - -
----------- ---------- ---------- ----------- ---------
Net income (loss).................................... $ 0.26 $ 0.01 $ 0.07 $ 0.12 $ 0.23
=========== ========== ========== =========== =========
Weighted average shares outstanding.................... 6,686,243 5,249,479 5,180,984 3,805,696 3,791,750
=========== ========== ========== =========== =========
OPERATING DATA:
Number of stores:
Opened during period.............................. 35 32 25 15 11
Closed/relocated during period.................... 2 3 2 0 2
Open at end of period............................. 140 107 78 55 40
Comparable store sales increase (1).................. 11.5% 6.0% 22.2% 12.3% 9.6%
Average sales per store (2).......................... $1,101,000 $ 997,000 $ 941,000 $ 734,000 $ 645,000
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 35,459 $ 23,605 $ 15,625 $ 6,704 $ 2,479
Total assets......................................... 85,702 59,080 36,801 21,888 15,029
Total debt (3)....................................... 7,690 19,326 7,161 7,251 3,587
Total stockholders' equity........................... 52,273 17,124 16,640 4,257 3,807
- ------------
(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 a period, then it will
be included in the comparable store calculation in its 13th month of
operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
(2) Includes only stores open during the entire period.
(3) Total debt is defined as total current and long-term debt.
(4) Earnings per share for all periods have been restated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
and the Securities and Exchange Commission Staff Accounting Bulletin No.
98.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a rapidly growing chain of company-owned superstores
offering a vast assortment of party supplies, greeting cards, giftwrap and other
special occasion merchandise at everyday value prices. The Company's first store
was opened in 1985 in the Chicago area. By 1989, the Company had grown to a
chain of 10 stores in the greater Chicago area offering a broad assortment of
greeting cards at 50% off manufacturers' suggested retail prices, as well as a
limited selection of party supplies, giftwrap, and other special occasion
products at discounted prices, in stores averaging approximately 5,000 square
feet.
During the fiscal years 1990 through 1993, the Company increased its store
prototype size to a range of 6,000 to 8,000 square feet, began to broaden its
merchandise offering to include a wider selection of party supplies, giftwrap
and other special occasion products and implemented its current $0.39 everyday
price for all greeting cards. During fiscal 1994, the Company began to
implement a strategic plan to build upon its position as the largest chain of
company-owned superstores in the industry. The key components of the plan
included: (i) the recruitment of a team of senior retail executives to affect a
management transition from the Company's founder; (ii) the enlargement of the
Company's merchandise offering to include a wider selection of party supplies,
giftwrap and other special occasion products; (iii) the expansion of the
Company's new superstores to approximately 12,000 square feet; and (iv) the
development of systems and infrastructure to support the Company's growth
strategy.
In April 1995, the Company hired as its President Mr. Charles R. Cumello, a
senior retail executive with over 26 years of experience and the Chief Executive
Officer of Waldenbooks since 1991. Since that time, Mr. Cumello has led the
recruitment of key senior management personnel in the areas of merchandising,
store operations, marketing, finance, real estate, distribution, human resources
and loss prevention, most of whom have experience in rapidly growing retail
companies. Mr. Cumello has also led an expansion of the Company's merchandise
offering and significant enhancements to the Company's systems and corporate
infrastructure. Mr. Cumello was appointed Chief Executive Officer on April 16,
1997.
The Company changed its fiscal year end from the end of June to the
Saturday closest to January 31 and will use January as its fiscal year end in
the future. As a result, the financial information presented and discussed
herein includes: (i) a transition period beginning June 29, 1997 and ending
January 31, 1998 ("the transition period") and (ii) consolidated financial
statements as historically reported for years ended June 28, 1997, June 29,
1996, July 1, 1995, June 30, 1994 and June 30, 1993, ("the fiscal years"). For
comparative purposes, financial and operating data is also presented for the
following periods: (i) 53-weeks ended January 31, 1998, (ii) 52-weeks ended
January 24, 1997 and (iii) 52-weeks ended January 25, 1996.
For the 53-weeks ended January 31, 1998, the Company reported an increase
in net income to $2.2 million, or $0.28 per diluted share, compared to net
income of $264,000, or $0.05 per diluted share in the 52-weeks ended January 24,
1997. The results for the 52-weeks ended January 24, 1997 included an
extraordinary charge, net of income tax benefit, of $313,000, or $0.06 per
diluted share, related to the early retirement of subordinated debt with
proceeds from the Company's initial public offering in December 1996.
11
Net sales for the 53-weeks ended January 31, 1998 increased 48.4% to $174.5
million from $117.6 million in 52-weeks ended January 24, 1997. Comparable
store sales increased 8.3% during the 53-week period ended January 31, 1998.
The Company achieved record net income for a twelve-month period by increasing
sales through an expanded merchandise selection while opening 58 new superstores
and significantly leveraging selling, general and administrative expenses.
The Company opened 58, 29, and 35 new stores during the 53-weeks ended
January 31, 1998, 52-weeks ended January 24, 1997 and 52-weeks ended January 25,
1996, respectively. The Company expects to open approximately 40 new
superstores in the twelve-month period ending January 30, 1999 and approximately
60 new superstores in the twelve-month period ending January 29, 2000. In
addition, the Company has remodeled, expanded and/or relocated 22 stores since
fiscal 1995.
Average store sales volumes have grown from $1.0 million for the 52-weeks
ended January 25, 1996 to $1.2 million for the 53-weeks ended January 31, 1998.
The Company believes it continues to have potential for same store sales growth
through the maturation of new stores, the full utilization of POS information,
the implementation of automatic replenishment and perpetual inventories and
refinements to its targeted advertising program.
The Company continues to refine and expand its targeted direct mail
advertising program by increasing its direct mail pieces from 9 during the 52-
week period ended January 24, 1997 to 12 during the 53-week period ended January
31, 1998. The Company will also continue testing television ads in selected
markets. The Company is reviewing its market penetration in each store for its
direct mail campaign to ensure it is maximizing its investment.
The Company's new superstore economics and return on investment ("ROI")
were strong during the 53-week period ended January 31, 1998. The Company's 122
superstores that were open for all of the 53-week period ended January 31, 1998
were, on average, just under four years of age. These superstores averaged $1.2
million in sales, a 16.2% EBITDA to sales and a 46.0% ROI. Of the 122
superstores, 41 were 11,500 square feet or greater in size. These superstores,
which represent the current store-size model, averaged $1.4 million in sales, a
17.0% EBITDA to sales, and a 55.6% ROI.
EBITDA represents income from operations plus depreciation and amortization
(excluding amortization of debt issuance costs). The Company believes that
EBITDA and related measures are commonly used by certain investors and analysts.
However, EBITDA should not be considered in isolation and is not a measure of
performance calculated in accordance with generally accepted accounting
principles.
The Company's current new superstore investment averages $438,000 and is
comprised of $195,000, net of landlord allowances, for leasehold improvements,
fixtures and equipment, $175,000 in net inventories, and $68,000 in pre-opening
costs which are expensed upon the store's grand opening.
The Company recently consolidated its distribution facilities and offices
into a new distribution center in Naperville, Illinois. The newly-constructed,
three-story office building and 300,000 square foot distribution center resides
on 39 acres of land. The lease agreement for the facility provides for the
expansion of the warehouse to 600,000 square feet, as needed. Company
management believes this new facility will provide distribution efficiencies and
better financial controls over the movement of inventory.
12
As of November 30, 1997, Party Express, the party goods division of
Hallmark Marketing Corporation, has refused to supply party goods, which include
many Disney and Warner Bros. licensed products, to the Company. The Company
believes that this decision will not have a material impact on its earnings for
the twelve-month period ended January 30, 1999, but could impact earnings beyond
that time. The Company is continuing to explore alternatives in an attempt to
resolve this situation or to allow the Company to acquire the licensed product
through other sources.
13
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of income data expressed as a percentage of net sales and the number
of stores open at the end of each such period:
Transition
53-Weeks 52-Weeks 52-Weeks Period
Ended Ended Ended Ended Fiscal Years
-------------------------------
Jan. 31, Jan. 24, Jan. 25, Jan. 31, June 28, June 29, July 1,
1998 1997 1996 1998 1997 1996 1995
-------- --------- -------- -------- --------------------- ----------
(Unaudited) (Unaudited) (Unaudited)
Net sales.............................. 100.0% 100.0 % 100.0 % 100.0 % 100.0 % 100.0% 100.0%
Cost of sales and occupancy............ 63.2 63.2 63.3 65.0 62.6 62.5 62.9
------ ------ ------ ------ ------ ------ ------
Gross profit......................... 36.8 36.8 36.7 35.0 37.4 37.5 37.1
Selling, general and administrative
expenses............................... 33.8 34.3 36.4 35.2 33.8 35.7 35.3
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations........ 3.0 2.5 0.3 (0.2) 3.6 1.8 1.8
Interest expense....................... 0.8 1.8 1.1 1.1 1.0 1.6 0.7
------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes and
extraordinary item................... 2.2 0.7 (0.8) (1.3) 2.6 0.2 1.1
Income tax (benefit)................... 0.9 0.2 (0.3) (0.5) 1.1 0.1 0.6
------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary
item................................. 1.3 0.5 (0.5) (0.8) 1.5 0.1 0.5
Extraordinary item on early retirement
of debt, net of income tax benefit..... - (0.3) - - (0.2) - -
------ ------ ------ ------ ------ ------ ------
Net income (loss)...................... 1.3% 0.2 % (0.5)% (0.8)% 1.3 % 0.1% 0.5%
====== ====== ====== ====== ====== ====== ======
Number of stores open at end of
period................................. 180 124 98 180 140 107 78
53-WEEKS ENDED JANUARY 31, 1998 COMPARED TO 52-WEEKS ENDED JANUARY 24, 1997
(Unaudited)
Net Sales. Net sales increased $56.9 million, or 48.4%, to $174.5 million
during the 53-weeks ended January 31, 1998 from $117.6 million for the 52-weeks
ended January 24, 1997. The increase resulted from (i) net sales of $31.3
million from 58 new stores opened during the 53-weeks ended January 31, 1998,
(ii) net sales of $16.0 million from stores opened prior to January 31, 1998 not
included in the comparable store base, and (iii) a comparable store sales
increase of $9.6 million, or 8.3%. This comparable store sales increase
resulted from an improved seasonal merchandise selection, especially during
Halloween and Christmas, and an expansion in the targeted advertising program.
The Company includes stores opened 13 or 14 months after their opening date in
the calculation of comparable sales. If the opening date of a store falls in
the first 14 days of a period, the store is included in the comparable store
calculation in its 13th month of operation; otherwise, a store is included in
the comparable store calculation in its 14th month of operation.
Gross Profit. Cost of sales and occupancy includes merchandising, store
occupancy, purchasing and distribution costs. Gross profit increased $21.0
million, or 48.5%, to $64.3 million during the 53-weeks ended January 31, 1998
from $43.3 million for the 52-weeks ended January 24, 1997. As a percentage of
net sales, gross profit was 36.8% during the 53-weeks ended January 31, 1998 and
the 52-weeks ended January 24, 1997. While there were increases in the freight
costs associated with servicing new market areas, these increases were offset by
leveraging the costs of the distribution facilities.
14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include labor, advertising, depreciation and other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $18.6 million, or 46.2%, to $58.9 million
during the 53-weeks ended January 31, 1998 from $40.3 million for the 52-weeks
ended January 24, 1997. Approximately $16.6 million of this increase resulted
from the opening and operation of 58 new superstores during the 53-weeks ended
January 31, 1998. The remaining balance of the increase resulted from
additional general and administrative costs to support the growth in stores. As
a percentage of net sales, selling, general and administrative expenses
decreased to 33.8% for the 53-weeks ended January 31, 1998 from 34.3% for the
52-weeks ended January 24, 1997.
Interest Expense. Interest expense was $1.5 million for the 53-weeks ended
January 31, 1998 compared to $2.1 million for the 52-weeks ended January 24,
1997. This decrease resulted from a reduction in debt from applying proceeds
received from the Company's initial public offering in December 1996 partially
offset by the increased borrowings to support the opening of 58 new superstores
and increased inventory levels.
Provision for Income Taxes. The effective tax rate for the 53-weeks ended
January 31, 1998 was 42.7% compared to 32.1% for the 52-weeks ended January 24,
1997. This increase resulted from the change in fiscal year-end from June to
January.
52-WEEKS ENDED JANUARY 24, 1997 COMPARED TO 52-WEEKS ENDED JANUARY 25, 1996
(UNAUDITED)
Net Sales. Net sales increased $38.7 million, or 49.0%, to $117.6
million during the 52-weeks ended January 24, 1997 from $78.9 million for the
52-weeks ended January 25, 1996. The increase resulted from (i) net sales of
$14.8 million from 29 new stores opened during the 52-weeks ended January 24,
1997, (ii) net sales of $15.1 million from stores opened prior to January 24,
1997 not included in the comparable store base, and (iii) a comparable store
sales increase of $8.8 million, or 11.9%. This comparable store increase
resulted from the expansion of the Company's party merchandise selection and its
targeted advertising program.
Gross Profit. Gross profit increased $14.3 million, or 49.3%, to $43.3
million during the 52-weeks ended January 24, 1997 from $29.0 million for the
52-weeks ended January 25, 1996. As a percentage of net sales, gross profit was
36.8% during the 52-weeks ended January 24, 1997 compared to 36.7% for the 52-
weeks ended January 25, 1996. Gross profit as a percentage of net sales
increased slightly primarily from improved inventory shrinkage and leveraging
occupancy costs against higher comparable store sales. These increases were
offset by higher distribution costs associated with servicing new market areas,
opening a second distribution facility and a decrease in capitalized inventory
overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.6 million, or 40.4%, to $40.3 million
during the 52-weeks ended January 24, 1997 from $28.7 million for the 52-weeks
ended January 25, 1996. Approximately $8.6 million of this increase resulted
from the opening and operation of 29 new superstores during the 52-weeks ended
January 24, 1997. The remaining balance of the increase resulted primarily from
salaries and other associated costs of new administrative personnel, higher
depreciation related to systems and stock option compensation. As a percentage
of net sales, selling, general and administrative expenses decreased to 34.3%
for the 52-weeks ended January 24, 1997 from 36.4% for the 52-weeks ended
January 25, 1996.
15
Interest Expense. Interest expense was $2.1 million for the 52-weeks ended
January 24, 1997 compared to $0.9 million for the 52-weeks ended January 25,
1996. This increase resulted from increased borrowings to support the opening
of 29 new superstores and increased inventory levels.
Provision for Income Taxes. The Company's effective tax rate for the 52-
weeks ended January 24, 1997 was 32.1% compared to a benefit of 37.9% for the
52-weeks ended January 25, 1996. This increase resulted from the change in
fiscal year-end from June to January.
TRANSITION PERIOD COMPARED TO FISCAL YEAR 1997
Results of operations for the transition period ended January 31, 1998 include
amounts for a seven month period, while results for the fiscal year ended June
28, 1997 include amounts for a twelve-month period. Results (in terms of dollar
amounts) for these periods are not directly comparable. Accordingly,
management's discussion and analysis for these periods is generally based upon a
comparison of specified results as a percentage of net sales.
Net Sales. Net sales decreased $23.2 million, or 17.3%, to $110.7 million in
the transition period from $133.9 million in fiscal year 1997. This decrease
resulted primarily from reporting seven months for the transition period
compared to twelve months for fiscal 1997. The decrease was offset by the
addition of 42 new superstores during the transition period which generated net
sales of $17.3 million. Sales from comparable stores increased 9.5% for the
transition period compared to the same seven months included in fiscal 1997.
This increase was driven mainly by improved seasonal merchandise selection,
especially for Halloween and Christmas.
Gross Profit. Gross profit decreased $11.4 million, or 22.8%, to $38.7 million
during the transition period from $50.1 million during fiscal year 1997. As a
percentage of net sales, gross profit was 35.0% during the transition period
compared to 37.4% in fiscal year 1997. Gross profit as a percentage to net
sales decreased primarily from the seasonality of the seven-month transition
period compared with the full prior year, additional seasonal promotions and a
lower capitalized inventory overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $6.3 million, or 13.9%, to $38.9 million
during the transition period from $45.2 million for fiscal year 1997. As a
percentage of net sales, selling, general and administrative expenses increased
to 35.2% for the transition period from 33.8% for fiscal year 1997. The increase
resulted from the expansion of the Company's direct mail advertising program and
a test of television advertising in selected markets and the cost to open seven
more superstores during the transition period. These increases were partially
offset by the leveraging of corporate administrative costs.
Interest Expense. Interest expense was $1.3 million, or 1.1% of sales, for the
transition period compared to $1.4 million, or 1.0% of sales, for fiscal year
1997. Interest expense as a percentage to sales increased as a result of higher
borrowing levels to support the opening of 42 new superstores and increased
inventory levels.
Provision for Income Taxes. During the transition period, the Company had a
taxable loss resulting in an effective tax benefit rate of 40.0% compared to
taxable income for fiscal year 1997 resulting in an effective tax rate of 42.0%.
The effective tax rate decreased as a result of state tax savings.
16
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales. Net sales increased $39.3 million, or 41.5%, to $133.9 million
in fiscal 1997 from $94.6 million in fiscal 1996. The increase resulted from
(i) net sales of $18.8 million from 35 new stores opened during the year, (ii)
net sales of $10.2 million from stores opened prior to fiscal 1997 not included
in the comparable store base, and (iii) a comparable store sales increase of
$10.3 million, or 11.5%. This comparable store increase resulted from the
expansion of the Company's party merchandise selection and an improved seasonal
merchandise selection, especially during Halloween and Christmas, and to its new
targeted direct mail advertising program first implemented during April 1996.
Gross Profit. Gross profit increased $14.7 million, or 41.5%, to $50.1
million in fiscal 1997 from $35.4 million in fiscal 1996. As a percentage of
net sales, gross profit was 37.4% in fiscal 1997 compared to 37.5% in fiscal
1996. Gross profit as a percentage to net sales decreased slightly primarily
from a decrease in capitalized inventory overhead costs partially offset by a
decrease in store occupancy costs leveraged against higher comparable store
sales increases in fiscal 1997 compared to fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.5 million, or 34.1%, to $45.2 million in
fiscal 1997 from $33.7 million in fiscal 1996. Approximately $9.6 million of
this increase resulted from the opening and operation of 35 new superstores in
fiscal 1997. The remaining balance of the increase resulted primarily from
first-year salaries and other associated costs of new management team members
and costs associated with being a publicly traded company (the Company went
public on December 13, 1996 ). As a percentage of net sales, selling, general
and administrative expenses decreased to 33.8% in fiscal 1997 from 35.7% in
fiscal 1996.
Interest Expense. Interest expense was $1.4 million in fiscal 1997 compared
to $1.5 million in fiscal 1996. This decrease resulted from a reduction in debt
from applying proceeds received from the Company's initial public offering
partially offset by the increased borrowings to support the opening of 35 new
superstores and increased inventory levels.
Provision for Income Taxes. The Company's effective tax rate in fiscal 1997
was 42.0% compared to 62.7% in fiscal 1996, resulting from decreases in
nondeductible expenses relative to taxable income.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales. Net sales increased $31.4 million, or 49.7%, to $94.6 million in
fiscal 1996 from $63.2 million in fiscal 1995. The increase resulted from (i)
net sales of $18.1 million from 32 new stores opened during the year, (ii) net
sales of $9.9 million from stores opened prior to fiscal 1996 not included in
the comparable store base, and (iii) a comparable store sales increase of $3.4
million, or 6.0%. This comparable store increase resulted from the expansion of
the Company's party merchandise selection.
17
Gross Profit. Gross profit increased $12.0 million, or 51.3%, to $35.4
million in fiscal 1996 from $23.4 million in fiscal 1995. As a percentage of
net sales, gross profit was 37.5% in fiscal 1996 compared to 37.1% in fiscal
1995. Gross profit as a percentage to net sales increased due to higher
inventory overhead costs that were capitalized and due to a decrease to near
historical levels of inventory shrinkage in fiscal 1996 compared with fiscal
1995. Partially offsetting these improvements were increases in distribution
costs associated with servicing new market areas and operating a second
distribution facility for most of fiscal 1996. In addition, store occupancy
costs increased as the rate of new store openings increased.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.4 million, or 51.2%, to $33.7 million in
fiscal 1996 from $22.3 million in fiscal 1995. Approximately $8.4 million of
this increase resulted from the opening and operation of 32 new superstores in
fiscal 1996. The remaining increase resulted primarily from (i) $1.8 million to
develop the current management team (including recruitment, relocation, partial
year salaries and benefits, and other associated expenses) and (ii)
approximately $878,000 for system improvements to support the Company's
continued expansion strategy (including consulting fees related to systems,
distribution, and improvements in store backroom operations, and increases in
depreciation related to systems). As a percentage of net sales, selling,
general, and administrative expenses increased to 35.7% in fiscal 1996 from
35.3% in fiscal 1995.
Interest Expense. Interest expense was $1.5 million in fiscal 1996 compared
to approximately $412,000 in fiscal 1995. This increase resulted from increased
borrowings to support the opening of 32 new superstores.
Provision for Income Taxes. The Company's effective tax rate in fiscal 1996
was 62.7% compared to 46.7% in fiscal 1995, resulting from increases in
nondeductible expenses relative to taxable income.
Inflation
Management does not believe that inflation has had a material effect on its
financial condition or results of operations during the transition period and
the past three fiscal years. However, there can be no assurance that inflation
will not have a material adverse effect on the Company's future financial
condition or results of operations.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a temporary
inability to process transactions or engage in similar normal business
activities.
The Company is reviewing its critical information systems and technology
for Year 2000 compliance and has initiated plans to remedy any deficiencies in a
timely manner. The Company believes the cost of such remedial corrective
actions will range between $100,000 to $250,000.
18
Liquidity and Capital Resources
The Company's cash needs are primarily for working capital to support its
opening of new superstores and its inventory requirements. In recent years, the
Company has financed its expanding operations primarily through proceeds from
its initial public offering effective December 1996, borrowings under revolving
credit facilities, proceeds from issuances of convertible preferred stock and
subordinated debenture, and internally generated funds.
At the end of the transition period and fiscal 1997 and 1996, the Company's
working capital was $50.2 million, $35.5 million and $23.6 million,
respectively. During the transition period and fiscal 1997, 1996 and 1995, cash
used in operations was $12.4 million, $4.9 million, $5.1 million, and $4.1
million, respectively. In each of these periods, $17.6 million, $13.6 million,
$16.8 million, and $9.1 million, respectively, of cash used in operations was
used to increase inventory levels to support both new and existing stores.
Net cash used in investing activities during the transition period and
fiscal 1997, 1996, and 1995, respectively, was $12.3 million, $10.1 million,
$7.1 million, and $6.9 million. These costs were primarily a result of opening
new superstores, investing in equipment for the new distribution center and
investing in systems. During the next 12 months, the Company expects to spend
approximately $11.6 million on capital expenditures, which includes $8.6 million
for new superstore openings, $1.6 million for store remodels and expansions,
$0.9 million for new office facility and corporate system additions, and $0.5
million for the new distribution facility fixtures and equipment.
Net cash provided by financing activities during the transition period and
fiscal 1997, 1996, and 1995 was $24.8 million, $14.8 million, $11.9 million, and
$11.1 million, respectively. At the end of the transition period and fiscal
1997 and 1996, the outstanding balance under the Company's revolving credit
facility was $29.7 million, $3.8 million and $13.1 million, respectively.
On January 30, 1998, the Company entered into a Loan and Security Agreement
("Loan and Security Agreement") with BankBoston Retail Finance Inc. providing a
$40,000,000 revolving line of credit which can be increased at the Company's
discretion up to $60,000,000, in $5,000,000 increments. Advances under the Loan
and Security Agreement, which expires January 31, 2001, are limited based on
inventory levels subject to certain reserves as defined in the Loan and Security
Agreement. Interest is accrued at an annual rate equal to the BankBoston, N.A.
prime rate or, at the Company's option, a rate based on the London Interbank
Offered Rate ("LIBOR") plus additional basis points (175 or 200 basis points)
dependent on the Company's trailing twelve-month net income. Interest is
payable monthly or upon the expiration of an advance issued under the Company's
LIBOR option. A fee of 0.25% per year is assessed monthly on the unused portion
of the line of credit. Borrowings under the Loan and Security Agreement are
secured by all of the Company's assets. The Loan and Security Agreement
contains one restrictive financial covenant requiring a minimum net worth of
$42,700,000.
Prior to the new agreement with BankBoston Retail Finance Inc. the Company
borrowed funds under a Loan and Security Agreement with Bank One Chicago, NA
("Bank One Agreement"). The Bank One Agreement allowed for borrowings of the
lesser of $35,000,000 or a predetermined advance rate (not to exceed 50%)
against net inventory as determined by an appraisal. Interest was payable at an
annual rate equal to the bank's prime rate or, at the Company's option, LIBOR
plus additional basis points (ranging
19
from 125 to 225 points) dependent on the Company's effective debt ratio. In
addition, a fee of 0.25% per year was assessed quarterly on the unused portion
of the facility. The Bank One Agreement contained restrictive covenants
including, among others, the maintenance of minimum ratios of fixed charges to
earnings and maximum ratios of liabilities to net worth and debt to earnings.
The Bank One Agreement was terminated upon the closing of the BankBoston Loan
and Security Agreement.
In December 1996, the Company completed an initial public offering of
2,550,000 shares of its common stock. An additional 394,050 shares of common
stock were sold as a result of the exercise by the underwriters of an over-
allotment option in January 1997. The net proceeds of the offering, which were
$22.9 million after deducting associated expenses, were used to retire all
outstanding subordinated debentures, a term loan and the outstanding borrowings
under the revolving credit facility.
In October 1996, the Company entered into two capital lease agreements for
point-of-sale (POS) computer equipment and related software having a total cost
of $2.1 million. During February 1997, financing for $2.4 million of additional
POS equipment was incorporated into one of the leases. During July and August
1997, financing for $1.9 million of additional POS equipment was also
incorporated. These leases have terms of four and five years.
The Company does not intend to pay cash dividends in the foreseeable future
and under its current Loan and Security Loan Agreement is restricted from paying
dividends on its capital stock. The Company believes that its cash generated
from operations and its borrowing capacity under the revolving credit facility
will be adequate to fund its cash requirements for at least the next 12 months.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
In accordance with general instruction G(3) of Form 10-K, except as set
forth below, the information called for by items 10, 11, 12 and 13 of Part III
is incorporated by reference to the Company's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on June 26, 1998.
20
ITEM 10. CHAIRMAN AND EXECUTIVE OFFICERS OF THE REGISTRANT
The chairman and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Stewart M. Kasen 58 Chairman of the Board
Charles R. Cumello 53 President and Chief Executive Officer
Glen J. Franchi 44 Executive Vice President, Treasurer and
Chief Operating Officer
Carol A. Travis 47 Vice President and Secretary
Gary Rada 44 Senior Vice President and General
Merchandising Manager
Thomas W. Stoltz 37 Vice President, Finance
Robert Krentzman 49 Vice President, MIS
Vincent G. Brown 57 Vice President, Real Estate
Joseph M. Cabon 51 Vice President, Distribution
Robert J. Kendzior 46 Vice President, Marketing
Matthew F. Ellis 48 Senior Vice President, Human Resources
Mr. Kasen has been Chairman of the Board of Directors of the Company since
April 1997 and became a Director in September 1996. From 1989 to May 1996, Mr.
Kasen was an officer of Best Products Co., Inc., a chain of catalog showrooms,
serving as its Chairman, President and Chief Executive Officer from 1991 to
1996, and its President and Chief Operating Officer from 1989 to 1991. Mr.
Kasen assisted Best Products through a petition in bankruptcy under Chapter 11
which was filed in January 1991. Best Products' plan of reorganization was
confirmed in June 1994, and it filed a petition for bankruptcy under Chapter 11
again on September 24, 1996. Mr. Kasen also serves as a director of Markel
Corporation, O'Sullivan Industries Holdings Inc., K2 Inc., Elder-Beerman Stores
Corp., and The Bibb Company. The Bibb Company filed a petition in bankruptcy
under Chapter 11 in July 1996. The Bibb Company's Plan of reorganization was
confirmed in September 1996. Mr. Kasen is a member of the Executive Committee
and the Compensation Committee.
Mr. Cumello has been President and Chief Executive Officer of the Company
since April 1997, and President of the Company since October 1995. He has been
a Director of the Company since May 1995. From April 1995 to October 1995, Mr.
Cumello was the President and Chief Operating Officer of the Company's operating
subsidiary. Prior to joining the Company, from 1991 to 1994, Mr. Cumello was
President and Chief Executive Officer of Waldenbooks, a division of Kmart
Corporation; and from 1986 to 1991, he was President of Reader's Market, a
division of Waldenbooks. From 1980 to 1986, Mr. Cumello served as Executive
Vice President and Chief Financial Officer of Waldenbooks. Mr. Cumello is a
member of the Executive Committee.
21
Mr. Franchi has been Executive Vice President and Treasurer of the Company
since March 1995, and has been Chief Operating Officer of the Company's
operating subsidiary since 1997. From November 1990 to March 1995, Mr. Franchi
served as the Chief Operating Officer of the Company's operating subsidiary, and
from 1995 to 1997 served as Chief Administrative Officer. Prior to joining the
Company, from 1977 to 1989, Mr. Franchi held various management and senior
financial positions with Carson Pirie Scott Co., a chain of retail department
stores.
Mrs. Travis has been with the Company since it was originally founded in
1985, serving as Secretary of the Company since May 1994 and as Vice President
since June 1994.
Mr. Rada has been Senior Vice President and General Merchandise Manager
since January 1998. From 1996 to 1998, Mr. Rada served as the Vice President of
General Merchandise for Bruno's, a Birmingham, Alabama supermarket and drug
chain, which in February 1998 filed a voluntary petition for bankruptcy under
Chapter 11. Prior to joining Bruno's, Mr. Rada spent 25 years in various
management and merchandising positions with American Stores, including American
Drug Stores, most recently as Vice President of Grocery and General Merchandise
at Jewel Food Stores.
Mr. Stoltz has been Vice President, Finance since August 1996. From 1994
to 1996, Mr. Stoltz served as Corporate Controller of Dollar General
Corporation, a specialty retailer. Mr. Stoltz also served as Interim Chief
Financial Officer of Dollar General from 1995 to 1996. Prior to his tenure with
Dollar General, Mr. Stoltz served as Director of Operations Accounting with Food
Lion, Inc. from 1989 to 1994. Mr. Stoltz is a Certified Public Accountant.
Mr. Krentzman has been Vice President, MIS since September 1995. Prior to
that, from 1994 to September 1995, Mr. Krentzman served as Director of MIS.
From 1990 to 1994, Mr. Krentzman was Director, MIS, for Reader's Market, a
division of Waldenbooks.
Mr. Vincent Brown has been Vice President, Real Estate since September
1995. From April until September 1995, Mr. Brown was Director of Franchising
for A&W Restaurants, Inc. Prior to that, from 1989 to 1995, Mr. Brown was Vice
President, Real Estate for Fayva, a division of J. Baker, Inc. Before joining
J. Baker, Inc., Mr. Brown spent 21 years with Dunkin' Donuts, Inc., a unit of
Allied Domecq plc, in various management positions, most recently as Vice
President, Corporate Development.
Mr. Cabon has been Vice President, Distribution since April 1995. From
December 1993 to January 1995, Mr. Cabon was employed as a consultant in retail
distribution. Prior to that, from October 1992 through December 1993, Mr. Cabon
was Vice President, Logistics for One Price Clothing, a specialty retailer.
From August 1990 to April 1992, Mr. Cabon was Vice President, Logistics for
Rent-a-Center, and from April 1990 to August 1990, Mr. Cabon was Vice President,
Logistics for E&B Marine.
Mr. Kendzior has been Vice President, Marketing, since November 1995. From
1978 to 1995, Mr. Kendzior was employed by Dunkin' Donuts of America, serving
from 1993 to 1995 as Vice President, Marketing and, from 1991 to 1993, as
Director of Field Marketing.
Mr. Ellis has been Senior Vice President, Human Resources since October,
1997, serving as Vice President, Human Resources from August 1996 to October
1997. Prior to that, from 1989 to 1996, Mr. Ellis was Vice President, Human
Resources of Today's Man, Inc., which in February 1996 filed a voluntary
petition for bankruptcy under Chapter 11. Prior to Today's Man, Mr. Ellis was
the Senior Vice President, Human Resources for Kislak Corporation, a financial
services organization, Vice President, Human Resources for Waldenbooks, a
bookstore chain, and Vice President, Human Resources for CVS, a retail drug
chain.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Transition 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 January 31, 1998 and June 28, 1997
Consolidated Statements of Income for the transition period ended
January 31, 1998 and fiscal years ended June 28, 1997, June 29, 1996
and July 1, 1995
Consolidated Statements of Stockholders' Equity for the transition
period ended January 31, 1998 and fiscal years ended June 28, 1997,
June 29, 1996 and July 1, 1995
Consolidated Statements of Cash Flows for the transition period ended
January 31, 1998 and fiscal years ended June 28, 1997, June 29, 1996
and July 1, 1995
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 January 31, 1998 and June 28, 1997
Condensed Financial Information of Factory Card Outlet Corp. -
Statements of Income for the transition period ended January 31, 1998
and fiscal years ended June 28, 1997, June 29, 1996, and July 1, 1995
Condensed Financial Information of Factory Card Outlet Corp. -
Statements of Cash Flows for the transition period ended January 31,
1998 and fiscal years ended June 28, 1997, June 29, 1996, and July 1,
1995
Notes to Condensed Financial Information of Factory Card Outlet Corp.
23
3. List of Exhibits.
The following exhibits are included as part of this Transition 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.
10.4 (1) Lease Agreement between the Company and Prudential Insurance Company
of America, dated September 25, 1992.
10.5 (1) Lease Agreement between the Company and Elk Grove Village Industrial
Park Ltd., dated July 17, 1995.
10.5.1(1) Industrial Building Lease dated as of October 28, 1996 by and between
Centerpoint Realty Services Corporation and FCO.
10.6.1 (1) 1989 Stock Option Plan of the Company, as amended.
10.6.2 (1) 1996 Employee Stock Purchase Plan of the Company.
10.6.3 (1) Incentive Savings Plan of the Company.
10.7 (1) Business Purpose Revolving Promissory Note dated November 1, 1996
from the Company and FCO to Bank One.
10.7.1 (1) Business Loan Agreement dated as of November 1, 1996 among the
Company, FCO and Bank One.
10.7.2 (2) Commitment letter dated September 9, 1997 from Bank One.
10.8 (1) Loan Agreement dated as July 2, 1996 by and between FCO and Petra
Capital, L.L.C. ("Petra")
10.8.1 (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.
24
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.
10.12 (3) 1997 Outside Director Stock Option Plan
21.1(1) List of the subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
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.
(b) Reports on Form 8-K.
None.
25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Stewart M. Kasen and Charles R. Cumello,
and each of them, each 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.
Dated: April 24, 1998 FACTORY CARD OUTLET CORP.
/s/ Charles R. Cumello
-----------------------
By: Charles R. Cumello, President, Chief
Executive Officer and Director
26
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.
Signatures Title Date
/s/ Stewart M. Kasen Chairman of the Board April 24, 1998
- ---------------------------------
Stewart M. Kasen
- -------------------------------------------------------------------------------------------------
/s/ Charles R. Cumello President and Director April 15, 1998
- --------------------------------- (principal executive officer)
Charles R. Cumello
- -------------------------------------------------------------------------------------------------
/s/ Glen J. Franchi Executive Vice President, Treasurer April 24, 1998
- --------------------------------- and Chief Operating Officer
Glen J. Franchi (principal financial officer)
- -------------------------------------------------------------------------------------------------
/s/ Thomas W. Stoltz Vice President-Finance April 24, 1998
- --------------------------------- (principal accounting officer)
Thomas W. Stoltz
- -------------------------------------------------------------------------------------------------
/s/ Michael I. Barach
- --------------------------------- Director April 14, 1998
Michael I. Barach
- -------------------------------------------------------------------------------------------------
/s/ Dr. Robert C. Blattberg Director April 24, 1998
- ---------------------------------
Dr. Robert C. Blattberg
- -------------------------------------------------------------------------------------------------
/s/ Bart A. Brown Director April 14, 1998
- ---------------------------------
Bart A. Brown, Jr.
- -------------------------------------------------------------------------------------------------
/s/ Richard A. Doppelt Director April 17, 1998
- ---------------------------------
Richard A. Doppelt
- -------------------------------------------------------------------------------------------------
/s/ William E. Freeman Director April 17, 1998
- ---------------------------------
William E. Freeman
- -------------------------------------------------------------------------------------------------
/s/ J. Bayard Kelly Director April 24, 1998
- ---------------------------------
J. Bayard Kelly
- -------------------------------------------------------------------------------------------------
/s/ James L. Nouss, Jr. Director April 24, 1998
- ---------------------------------
James L. Nouss, Jr.
- -------------------------------------------------------------------------------------------------
27
INDEX TO FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
Page
----
Independent Auditors' Report........................................................................... F-2
Consolidated Balance Sheets as of January 31, 1998 and June 28, 1997................................... F-3
Consolidated Statements of Income for the transition
period ended January 31, 1998 and fiscal years ended June 28, 1997,...............................
June 29, 1996, and July 1, 1995................................................................... F-4
Consolidated Statements of Stockholders' Equity for the transition
period ended January 31, 1998 and fiscal years ended June 28, 1997,...............................
June 29, 1996, and July 1, 1995................................................................... F-5
Consolidated Statements of Cash Flows for the transition
period ended January 31, 1998 and fiscal years ended June 28, 1997,...............................
June 29, 1996, and July 1, 1995................................................................... F-6
Notes to Consolidated Financial Statements............................................................. F-7
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
We have audited the consolidated balance sheets of Factory Card Outlet Corp.
and subsidiary as of January 31, 1998 and June 28, 1997 and the related
statements of income, stockholders' equity and cash flows for the transition
period ended January 31, 1998 and each of the fiscal years in the three-year
period ended June 28, 1997. These consolidated financial statements are the
responsibility of the management of Factory Card Outlet Corp. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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 January 31, 1998 and June 28, 1997, and the
results of their operations and their cash flows for the transition period ended
January 31, 1998 and each of the fiscal years in the three-year period ended
June 28, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
March 6, 1998
F-2
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
January 31, June 28,
1998 1997
------------ -----------
ASSETS
Current assets:
Cash $ 30,373 $ 51,180
Receivables 2,008,604 947,583
Inventories 72,911,489 55,358,616
Prepaid expenses 1,773,130 1,182,198
Deferred income taxes 331,307 207,333
------------ -----------
Total current assets 77,054,903 57,746,910
Fixed assets, net 38,507,001 27,451,639
Deferred income taxes 493,353 -
Other assets 188,010 503,058
------------ -----------
Total assets $116,243,267 $85,701,607
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 1,820,809 $ 1,138,654
Accounts payable 17,307,927 14,361,283
Due to related parties 2,942,979 3,192,596
Income taxes payable - 503,544
Accrued expenses 4,753,764 3,091,532
------------ -----------
Total current liabilities 26,825,479 22,287,609
Revolving credit note payable 29,700,000 3,775,400
Long-term debt 7,001 20,602
Capital lease obligations 2,660,835 2,755,510
Deferred rent liabilities 5,315,820 4,411,584
Deferred income taxes - 177,467
------------ -----------
Total liabilities 64,509,135 33,428,172
------------ -----------
Stockholders' equity:
Common stock -$.01 par value at
January 31, 1998 and June 28, 1997.
Voting class - authorized
15,000,000 shares; 7,335,519 and
7,231,211 shares
issued and outstanding at January 31,
1998 and June 28, 1997, respectively.
Non-voting class - authorized
205,000 shares, no shares issued
or outstanding. 73,355 72,312
Additional paid-in capital 51,222,520 50,950,900
Retained earnings 438,257 1,327,532
Less: cost of common stock held in
treasury, 8,697 shares at June 28,
1997. - (77,309)
------------ -----------
Total stockholders' equity 51,734,132 52,273,435
------------ -----------
Total liabilities and
stockholders' equity $116,243,267 $85,701,607
============ ===========
See accompanying notes to consolidated financial statements.
F-3
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Income
TRANSITION
PERIOD FISCAL YEARS ENDED
ENDED ----------------------------------------------------
JANUARY 31, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
--------------- --------------- -------------- -------------
Net sales $ 110,699,590 $ 133,945,916 $ 94,589,013 $ 63,174,091
Cost of sales and occupancy 71,984,300 83,831,969 59,139,402 39,756,651
--------------- --------------- -------------- -------------
Gross profit 38,715,290 50,113,947 35,449,611 23,417,440
Selling, general and administrative
expenses 38,928,797 45,226,940 33,732,517 22,316,263
--------------- --------------- -------------- -------------
Income (loss) from operations (213,507) 4,887,007 1,717,094 1,101,177
Interest expense 1,269,474 1,401,596 1,528,969 411,553
--------------- --------------- -------------- -------------
Income (loss) before taxes and (1,482,981) 3,485,411 188,125 689,624
extraordinary item
Income taxes (benefit) (593,706) 1,462,067 117,884 322,100
--------------- --------------- -------------- -------------
Income (loss) before (889,275) 2,023,344 70,241 367,524
extraordinary item
Extraordinary item - loss on early
retirement of debt, net of
income tax benefit of $226,572 - (312,886) - -
--------------- --------------- -------------- -------------
Net income (loss) $ (889,275) $ 1,710,458 $ 70,241 $ 367,524
=============== =============== ============= =============
Earnings (loss) per share - basic
Before extraordinary item $ (0.12) $ 0.35 $ 0.02 $ 0.09
Extraordinary item - (0.05) - -
--------------- --------------- -------------- -------------
Net income (loss) per share -
basic $ (0.12) $ 0.30 $ 0.02 $ 0.09
=============== =============== ============= =============
Weighted average shares outstanding 7,261,542 5,739,962 4,068,409 3,999,914
=============== =============== ============= =============
Earnings (loss) per share - diluted
Before extraordinary item $ (0.12) $ 0.30 $ 0.01 $ 0.07
Extraordinary item - (0.04) - -
--------------- --------------- -------------- -------------
Net income (loss) per share -
diluted $ (0.12) $ 0.26 $ 0.01 $ 0.07
=============== =============== ============= =============
Weighted average shares outstanding 7,261,542 6,686,243 5,249,479 5,180,984
=============== =============== ============= =============
See accompanying notes to consolidated financial statements.
F-4
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock
---------------------------------- --------------------------------------
Shares Amount Shares Amount
-------- ----------- --------- ------------
Balance at June 30, 1994 20,000 $ 3,077,248 803,200 $ 2,000,000
Net income - - - -
Issuance of Series B
convertible preferred stock 32,416 11,379,258 - -
Common stock issued
in lieu of interest - - 66,264 236,750
Acquisition of subsidiary's
minority interest - - 64,256 400,000
------- ----------- --------- ------------
Balance at July 1, 1995 52,416 14,456,506 933,720 2,636,750
Net income - - - -
Additional paid-in capital
attributable to common
stock warrants - - - 413,461
------- ----------- --------- ------------
Balance at June 29, 1996 52,416 14,456,506 933,720 3,050,211
Net income - - - -
Issuance of Series C
convertible preferred stock 25,639 9,739,437 - -
Additional paid-in capital
attributable to common
stock warrants - - - 264,012
Conversion of all convertible
preferred stock to
common stock (78,055) (24,195,943) 3,134,674 24,195,943
Redesignation of common stock
from no par value
to $.01 par value - - - (27,469,483)
Issuance of common stock -
initial public offering - - 2,944,050 29,441
Exercise of stock options
and warrants - - 218,767 2,188
Income tax benefit from
stock options exercised - - - -
Purchase of treasury stock
at cost - - - -
Issuance of treasury stock - - - -
Additional paid-in capital
from compensation
stock options - - - -
------- ----------- --------- ------------
Balance at June 28, 1997 - - 7,231,211 72,312
Net loss - - - -
Sale of treasury stock to
employee stock
purchase plan - - - -
Exercise of stock options
and warrants - - 104,308 1,043
Income tax benefit from
stock options exercised - - - -
Additional paid-in capital from
compensation stock options - - - -
------- ----------- --------- ------------
Balance at January 31, 1998 - $ - 7,335,519 $ 73,355
======= =========== ========= ============
Additional Retained Treasury stock Total
paid-in earnings ---------------------------- stockholders'
capital (deficit) Shares Amount equity
--------------- ----------- ------- -------- -----------
Balance at June 30, 1994 $ - $ (820,691) - $ - $ 4,256,557
Net income - 367,524 - - 367,524
Issuance of Series B
convertible preferred stock - - - - 11,379,258
Common stock issued
in lieu of interest - - - - 236,750
Acquisition of subsidiary's
minority interest - - - - 400,000
----------- ---------- ----------- ------------ -----------
Balance at July 1, 1995 - (453,167) - - 16,640,089
Net income - 70,241 - - 70,241
Additional paid-in capital
attributable to common
stock warrants - - - - 413,461
----------- ---------- ----------- ------------ -----------
Balance at June 29, 1996 - (382,926) - - 17,123,791
Net income - 1,710,458 - - 1,710,458
Issuance of Series C
convertible preferred stock - - - - 9,739,437
Additional paid-in capital
attributable to common
stock warrants - - - - 264,012
Conversion of all convertible
preferred stock to
common stock - - - - -
Redesignation of common stock
from no par value
to $.01 par value 27,469,483 - - - -
Issuance of common stock -
initial public offering 23,093,418 - - - 23,122,859
Exercise of stock options
and warrants 114,359 - 1,529 (12,797) 103,750
Income tax benefit from
stock options exercised 77,414 - - - 77,414
Purchase of treasury stock
at cost (12,377) - 20,000 (180,000) (192,377)
Issuance of treasury stock - - (12,832) 115,488 115,488
Additional paid-in capital
from compensation
stock options 208,603 - - - 208,603
----------- ---------- ----------- ------------ -----------
Balance at June 28, 1997 50,950,900 1,327,532 8,697 (77,309) 52,273,435
Net loss - (889,275) - - (889,275)
Sale of treasury stock to
employee stock
purchase plan (45,206) - (8,697) 77,309 32,103
Exercise of stock options
and warrants 225,754 - - - 226,797
Income tax benefit from
stock options exercised 56,653 - - - 56,653
Additional paid-in capital from
compensation stock options 34,419 - - - 34,419
----------- ---------- ----------- ------------ -----------
Balance at January 31, 1998 $51,222,520 $ 438,257 - $ - $51,734,132
=========== ========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
F-5
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
TRANSITION
PERIOD FISCAL YEARS ENDED
ENDED ---------------------------------------
JANUARY 31, JUNE 28, JUNE 29, JULY 1,
1998 1997 1996 1995
-------------- ------------ ------------ -----------
Cash flows from operating activities:
Net income (loss) $ (889,275) $ 1,710,458 $ 70,241 $ 367,524
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization of fixed assets 3,087,148 3,523,449 2,544,310 1,446,370
Amortization of deferred financing costs and debt discount - 337,619 221,948 -
Extraordinary loss on early retirement of debt - 312,886 - -
Amortization of organization costs - - 6,644 7,393
Accrual of stock on subordinated debentures and bridge loan - - - 11,849
Deferred income taxes (794,794) 584,676 (148,831) (55,266)
Loss (gain) on the disposal of equipment and vehicles 190,711 358,818 37,439 (2,210)
Stock option compensation 34,419 208,603 - -
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,004,369) (510,984) (314,603) 48,600
Inventories (17,552,873) (13,554,796) (16,790,598) (9,131,663)
Prepaid expenses (590,932) (572,459) (215,157) (78,267)
Other assets 315,048 (1,601,572) (139,480) 21,390
Increase (decrease) in liabilities:
Accounts payable 2,697,027 2,850,022 7,661,297 1,823,227
Accrued expenses 1,662,232 110,876 1,138,558 790,944
Deferred rent liabilities 904,236 849,733 588,833 917,606
Income taxes payable (503,544) 524,758 241,072 (287,109)
------------- ------------ ------------ -----------
Net cash used in operating activities (12,444,966) (4,867,913) (5,098,327) (4,119,612)
------------- ------------ ------------ -----------
Net cash used in investing activities - purchase of fixed
assets, net (12,336,698) (10,105,930) (7,071,427) (6,864,952)
------------- ------------ ------------ -----------
Cash flows from financing activities:
Borrowings under revolving credit note 77,165,500 70,457,137 36,976,955 7,550,000
Repayment of borrowings under revolving credit note (51,240,900) (79,808,892) (29,649,800) (6,550,000)
Payment of bridge loan - - - (1,500,000)
Proceeds from issuance of subordinated debentures - 2,910,836 4,667,973 -
Retirement of subordinated debentures - (8,000,000) - (450,000)
Payment of long-term debt (1,422,643) (2,524,459) (538,242) (432,447)
Proceeds from term loan - - 400,000 1,100,000
Proceeds from issuance of Series B convertible preferred stock - - - 11,379,258
Proceeds from issuance of Series C convertible preferred stock - 8,638,337 - -
Proceeds from issuance common stock - 23,122,859 - -
Proceeds from exercise of employee stock options 226,797 103,750 - -
Purchase of treasury stock - (180,000) - -
Sale of treasury stock to employee stock purchase plan 32,103 103,111 - -
------------- ------------ ------------ -----------
Net cash provided by financing activities 24,760,857 14,822,679 11,856,886 11,096,811
------------- ------------ ------------ -----------
Net (decrease) increase in cash (20,807) (151,164) (312,868) 112,247
Cash at beginning of year 51,180 202,344 515,212 402,965
------------- ------------ ------------ -----------
Cash at end of year $ 30,373 $ 51,180 $ 202,344 $ 515,212
============= ============ ============ ===========
See accompanying notes to consolidated financial statements.
F-6
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization and Basis of Presentation
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"). The Company is a chain of company-owned
superstores offering an extensive selection of party supplies, greeting
cards, gift wrap, and other special occasion merchandise at everyday value
prices in 22 states as of January 31, 1998.
All intercompany balances and transactions have been eliminated in
consolidation.
Transition Period and Fiscal Years
In January 1998, the Company changed its fiscal year-end to the
Saturday closest to January 31 which will be its fiscal year-end in the
future. Prior to January 1998, the Company's fiscal year ended on the
Saturday closest to June 30. The years ended June 28, 1997, June 29, 1996,
and July 1, 1995, referred to as fiscal 1997, 1996, and 1995, respectively,
each consist of a 52-week period. The seven-month period from the last
fiscal year end of June 28, 1997 through January 31, 1998 is referred to as
the transition period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
Inventories
Inventories are stated at the lower of average cost or net realizable
value. All inventory is merchandise inventory. Cost has been determined by
the retail method of accounting for inventories. In determining the cost of
inventory, the Company includes costs incurred to purchase, store and
distribute goods prior to sale.
F-7
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization of
fixed assets is computed as follows:
Method Estimated Useful Life
---------------------------------------------------------------------------
Fixtures and equipment Straight-line 3 to 10 years
Leasehold improvements Straight-line Remaining initial term of the leases
---------------------------------------------------------------------------
Amortization related to capital leases is included in depreciation and
amortization. Software costs are capitalized and amortized on a straight-
line basis over a three- or five-year period. Unamortized software costs
included in fixtures and equipment were $2,008,129 and $2,070,221 as of
January 31, 1998 and June 28, 1997, respectively. Amortization of these
software costs was $563,631, $545,310, $337,187 and $37,059 for the
transition period ended January 31, 1998 and fiscal years ended June 28,
1997, June 29, 1996 and June 30, 1995 respectively.
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 measured using enacted tax rates and laws
that are expected to be in effect when the differences are expected to
reverse. The Company has elected to change its tax year-end to January
beginning with the transition period to be consistent with its financial
reporting fiscal year-end.
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 due 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 life of the lease as
reductions of rent expense.
Store Preopening Expenses
Store preopening costs, which include advertising, labor and supply
costs, are expensed within the fiscal year of the related store's grand
opening. Prepaid expenses at January 31, 1998 and June 28, 1997, include
$339,440 and $264,326, respectively, of preopening costs for stores which
have not had a grand opening.
F-8
Advertising Expenses
The Company expenses advertising costs when the advertising occurs.
Advertising production costs incurred before the advertising takes place
are recorded as prepaid assets. At January 31, 1998 and June 28, 1997, no
amounts were reported as prepaid. For the transition period and fiscal
years ended June 28, 1997, June 29, 1996, and July 1, 1995, advertising
expense was $4,681,637, $4,006,355, $2,471,996 and $1,464,354,
respectively.
Earnings per Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" in the transition period. In
accordance with this statement, earnings per share - basic were computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Earnings per share - diluted includes the
effect of stock options and warrants. The Company also complies with
certain requirements of the Securities and Exchange Commission with respect
to the calculation of earnings per share for initial public offerings. The
reconciliation of earnings per share - basic to earnings per share -
diluted is as follows:
Income Per
(Loss) Shares Share
------------- ----------- ---------
For the transition period -
Earnings per share - basic and diluted:
- ---------------------------------------
Net (loss) available to common
stockholders $ (889,275) 7,261,542 $ (0.12)
============= ========== =========
For the 1997 fiscal year -
Earnings per share - basic:
- ---------------------------
Net income $ 1,710,458 5,739,962 $ 0.30
Effect of Dilutive Securities
Stock Options 870,057
Warrants 76,224
----------
Earnings per share - diluted:
- -----------------------------
Net income available to common
stockholders and assumed
conversions $ 1,710,458 6,686,243 $ 0.26
============= ========== =========
For the 1996 fiscal year -
Earnings per share - basic:
- ---------------------------
Net income $ 70,241 4,068,409 $ 0.02
Effect of Dilutive Securities
Stock Options 985,474
Warrants 195,596
----------
Earnings per share - diluted:
- -----------------------------
Net income available to common
stockholders and assumed
conversions $ 70,241 5,249,479 $ 0.01
============= ========== =========
For the 1995 fiscal year -
Earnings per share - basic:
- ---------------------------
Net income $ 367,524 3,999,914 $ 0.09
Effect of Dilutive Securities
Stock Options 985,474
Warrants 195,596
----------
Earnings per share - diluted:
- -----------------------------
Net income available to common
stockholders and assumed conversions $ 367,524 5,180,984 $ 0.07
============= ========== =========
F-9
Options to purchase common stock outstanding during the periods
presented above that were not included in the computation of diluted
earnings per share - diluted because the option price was greater than the
average market price of the common shares were as follows:
Period Shares
------ ------
For the transition period 85,160
For the fiscal year ended 1997 68,660
Employee Stock Plans
Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." In accordance with the provisions of SFAS
No. 123, the Company elected application of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its recognition of compensation
cost related to employee stock option and stock purchase plans. As
prescribed by SFAS No. 123, note 7 contains a summary of the pro forma
effects on reported net income and earnings per share for the transition
period ended January 31, 1998 and fiscal 1997 as if the Company had elected
to recognize compensation cost based on the fair value of the options at
grant date.
Reclassifications
Certain prior year amounts have been reclassified to conform with
current year presentation.
(2) Fixed Assets
January 31, June 28,
1998 1997
- ----------------------------------------------------------------------
Furniture and equipment $39,334,847 $28,521,452
Leasehold improvements 11,084,183 7,942,895
- ----------------------------------------------------------------------
Total fixed assets 50,419,030 36,464,347
- ----------------------------------------------------------------------
Less accumulated depreciation and
amortization 11,912,029 9,012,708
- ----------------------------------------------------------------------
Fixed assets, net $38,507,001 $27,451,639
- ----------------------------------------------------------------------
(3) Debt
Revolving Credit Agreement
On January 30, 1998, the Company entered into a Loan and Security
Agreement ("Agreement") with BankBoston Retail Finance Inc. providing a
$40,000,000 revolving line of credit which can be increased at the
Company's discretion up to $60,000,000, in $5,000,000 increments. Advances
under the Agreement, which expires January 31, 2001, are limited based on
inventory levels subject to certain reserves as defined in the Agreement.
Interest is accrued at an annual rate equal to the BankBoston, N.A. prime
rate or, at the Company's option, the London Interbank Offered Rate
("LIBOR") plus additional basis points (175 or 200 basis points) dependent
on the Company's trailing twelve-month net income. Interest is payable
monthly or upon the expiration of an advance issued under the Company's
LIBOR option. A fee of 0.25% per year is assessed monthly on the unused
portion of the line of credit. Borrowings under the Agreement are secured
by all of the Company's assets. This Agreement contains one restrictive
financial covenant requiring a minimum net worth of $42,700,000. The
Company had no borrowings under this Agreement during the transition
period.
F-10
Prior to the BankBoston Agreement, the Company had a revolving credit
agreement with Bank One which permitted the Company to borrow up to a
maximum $35,000,000. Advances under the agreement, which was to expire on
October 1, 1998, were limited based on inventory levels as defined in the
agreement. Amounts outstanding under this and preceding agreements totaled
$29,700,000 at January 31, 1998 and $3,775,400 at June 28, 1997. The
average borrowings under the agreement were $18,745,243 during the
transition period and $6,079,600 during fiscal year 1997. Interest was
payable monthly at an annual rate equal to the bank's prime rate or, at the
Company's option, 2.75% over (LIBOR). The bank's prime rate was 8.5% at
January 31, 1998 and June 28, 1997. The 30-day LIBOR rate was 5.60% at
January 31, 1998 and 5.69% at June 28, 1997. A fee of 0.25% per year was
assessed on the unused portion of the line, however if the unused portion
exceeds $20,000,000 the fee increased to 0.40%. Borrowings under the
revolving credit term note were secured by all business assets of the
Company. This agreement contained restrictive covenants, the more
significant of which required the maintenance of minimum ratios of total
liabilities to net worth and minimum levels of tangible net worth and net
working capital. The Company was in compliance with all restrictive
covenants at January 31, 1998. The Bank One credit agreement was terminated
upon the closing of the BankBoston Agreement.
Secured Subordinated Debentures
On July 2, 1996, the Company issued $3,000,000 of secured subordinated
debt bearing annual interest at 12.5%. For the first seven months of the
agreement, interest was payable at a rate of 7.5% with the remaining 5%
interest accruing until February 1, 1997, when all unpaid interest was due
and payable. At the time of issuance, the lender received a warrant for
the right to purchase 76,223 shares of non-voting common stock exercisable
until July 1, 2001 at $0.0025 per share.
On November 15, 1995, the Company entered into a $4,000,000
subordinated debt agreement bearing interest at 12.5%. For the first 18
months of the agreement, interest was payable at a rate of 7.5% with the
remaining 5% interest accruing until May 1, 1997, when all unpaid interest
was due and payable. At the time of issuance, the lender received a
warrant for the right to purchase 95,010 shares of the Company's nonvoting
common stock exercisable until November 30, 2000, at $0.0025 per share.
In June 1996, the $4,000,000 subordinated debt agreement issued on
November 15, 1995 was amended to increase the borrowings by $1,000,000.
The additional borrowings bore interest at 12.5%, which was payable
monthly. The lender also received a warrant to purchase 24,361 shares of
the Company's nonvoting common stock exercisable until July 31, 2001, at
$0.0025 per share.
The fair market value of the warrants issued under the subordinated
debt agreements was $677,473 and was recorded as additional paid in capital
on common stock and as a discount on the face amount of the debt.
Amortization of the discount and the related financing costs recognized was
$205,304 and $132,315, respectively, during the fiscal year ended June 28,
1997 and $134,326 and $87,622, respectively, for the fiscal year ended June
29, 1996.
All subordinated debt outstanding was retired in December 1996. As a
result, the Company recognized an extraordinary loss of $312,886, net of
the income tax benefit of $226,572, associated with the early retirement of
this subordinated debt.
F-11
(4) Lease Commitments
The Company conducts substantially all of its operations using leased
premises. Store and office leases 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 and included in
fixed assets was $7,928,216 and $5,835,619 at January 31, 1998 and June 28,
1997, respectively. Accumulated amortization related to such fixed assets
was $759,341 and $346,749 at January 31, 1998 and June 28, 1997,
respectively. Fixed assets held under capital leases consist principally
of point of sale systems and equipment, and 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 January 31, 1998 based on the Company's new fiscal year end:
Capital Operating
Fiscal year ending: Leases Leases
- ------------------------------------------------------------------------------------
1999 $ 2,194,528 $ 22,326,206
2000 2,066,967 22,240,289
2001 873,761 21,731,013
2002 - 21,601,746
Thereafter - 95,200,311
- ------------------------------------------------------------------------------------
Total minimum lease payments 5,135,256 183,099,565
Less amount representing interest 679,935 -
- ------------------------------------------------------------------------------------
Present value of net minimum lease
payments (including long-term lease
obligations of $2,660,835) $ 4,455,321 $ 183,099,565
- ------------------------------------------------------------------------------------
Rent expense charged to operations under operating leases amounted to
$11,389,874 during the transition period and $13,860,447, $10,213,885 and
$5,904,484 in fiscal years 1997, 1996 and 1995, respectively.
F-12
(5) Income Taxes
Income tax expense (benefit), excluding the tax benefit related to the
extraordinary item in fiscal year 1997, consists of:
Current Deferred Total
- ------------------------------------------------------------
Transition period:
Federal $193,353 $(578,136) $ (384,783)
State (48,917) (160,006) (208,923)
- ------------------------------------------------------------
$144,436 $(738,142) $ (593,706)
============================================================
Fiscal year 1997:
Federal $796,758 $ 458,930 $1,255,688
State 80,634 125,745 206,379
- ------------------------------------------------------------
$877,392 $ 584,675 $1,462,067
============================================================
Fiscal year 1996:
Federal $257,675 $(155,355) $ 102,320
State 9,040 6,524 15,564
- ------------------------------------------------------------
$266,715 $(148,831) $ 117,884
============================================================
Fiscal year 1995:
Federal $321,114 $ (52,958) $ 268,156
State 56,252 (2,308) 53,944
- ------------------------------------------------------------
$377,366 $ (55,266) $ 322,100
============================================================
Income tax expense differs from the amounts computed by applying the
Federal income tax rate of 34% to income before income taxes as a result of
the following:
--------------------------------------
Fiscal Years
Transition ----------------------
Period 1997 1996 1995
--------------------------------------
Computed "expected" tax expense (benefit) (34.0)% 34.0% 34.0% 34.0%
Increase (decrease) in income taxes
resulting from:
State net operating loss carrybacks
and carryforwards (10.7) - - -
State and local income taxes, net of
Federal income tax benefit 1.5 4.4 4.6 5.4
Non-deductible meals and entertainment 1.3 .8 15.8 2.1
Non-deductible life insurance premiums .1 .5 6.8 1.8
Non-deductible penalty - - - 1.7
Other, net 1.8 2.3 1.5 1.7
--------------------------------------
Income tax expense (benefit) (40.0)% 42.0% 62.7% 46.7%
======================================
F-13
Deferred income taxes reflect the net tax effect of 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:
Transition Fiscal Year
Period 1997
----------- ------------
Deferred tax assets related to:
Alternative minimum tax credit $ 564,135 $ 456,900
Deferred rent liabilities 972,693 749,651
Accrued expenses 149,452 92,762
Inventories 24,672 114,570
Debt discount and deferred financing - -
costs
Net operating loss carryforward 927,729 -
----------- ------------
Total gross deferred tax assets 2,638,681 $1,413,883
----------- ------------
Deferred tax liabilities related to:
Fixed assets 1,814,021 1,384,017
----------- ------------
Total gross deferred tax liabilities 1,814,021 1,384,017
----------- ------------
Net deferred tax asset $ 824,660 $ 29,866
=========== ============
Management believes that, with respect to all deferred tax assets, no
valuation allowance was necessary at January 31, 1998 and June 28, 1997. At
January 31, 1998, the Company had $136,164 of deferred state tax assets
attributable to net operating loss carryforwards. Due to the Company's election
to change its Federal tax year-end, the $791,565 of Federal net operating loss
carryforward must be utilized over the next six years. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon these criteria, management has
determined that it is more likely than not the Company will realize the benefits
of these deductible differences.
F -14
(6) Stockholders' Equity
Convertible Preferred Stock - Series A, B and C
Series A Convertible Preferred Stock, $.01 par value, was issued on
July 10, 1989. Each share of this stock was convertible at the holders'
discretion into 40.16 shares of common stock. Prior to the Series B
Convertible Preferred Stock offering outlined below, the Series A
Convertible Preferred Stock was redeemable at the holders' election at a
price equal to the liquidation amount defined in the stock purchase
agreement plus 9% compounded annually from July 10, 1989, reduced by any
prior distribution amounts. Upon issuance of the Series B Convertible
Preferred Stock, accretion related to the Series A Convertible Preferred
Stock ceased and the redemption amount was fixed at $3,077,248.
Effective as of July 15, 1994, the Company entered into a stock
purchase agreement whereby it issued its Series B Convertible Preferred
Stock, $.01 par value per share. Each share of Series B Convertible
Preferred Stock was convertible at the holder's discretion into 40.16
shares of common stock. The Company could require the conversion of all of
the outstanding shares of Series B Convertible Preferred Stock into shares
of the Company's common stock in the event of an underwritten public
offering of shares of the Company's common stock within the guidelines set
forth in the stock purchase agreement.
On August 2, 1996, 25,639 shares of Series C Convertible Preferred
Stock, $0.01 par value, were issued in the amount of $9,739,437, net of
related issue costs. The conversion, redemption and other provisions of
this series of preferred stock were identical to those of the Series A and
Series B Convertible Preferred Stock.
On December 12, 1996, each share of Convertible Preferred Stock was
converted into 40.16 shares of common stock. Upon conversion, all rights
and designations of the Convertible Preferred Stock were canceled.
F-15
Preferred Stock
Preferred stock may be issued from time to time in one or more series
at the discretion of the Company's Board of Directors. Different series of
preferred stock shall not be construed to constitute different classes of
shares for the purposes of voting by classes unless expressly provided.
All preferred stock rights are granted at the discretion of the Board of
Directors.
Common Stock
In December 1996, the Company completed an initial public offering of
2,550,000 shares of its common stock. The proceeds were used to retire the
Company's secured subordinated debt, a term loan and the outstanding
borrowings under the revolving credit facility totaling approximately
$19,146,000. In January 1997, an additional 394,050 shares of common stock
were sold pursuant to an underwriters' over-allotment option. Net proceeds
to the Company from the offering, after deducting associated expenses,
totaled $23,122,859.
The voting, dividend, and liquidation rights of the holders of common
stock are subordinated to the rights of the holders of preferred stock of
any series. The holders of common stock are entitled to one vote for each
share, except for the holders of the non-voting class.
At January 31, 1998 shares of common stock were reserved for the
following purposes:
Exercise of outstanding stock options 1,173,749
Granting of additional stock options 130,749
Warrants convertible to common stock 76,224
---------
1,380,722
=========
Treasury Stock
In December 1996, the Company purchased 20,000 shares of its common
stock at a cost of $180,000. In April 1997, 12,382 of these shares were
sold to employees under the 1996 Employee Stock Purchase Plan and in July
1997 the remaining 7,618 shares were sold to employees under the 1996
Employee Stock Purchase Plan.
F-16
Dividend Restrictions
The Company must obtain the written consent of the holder of the
revolving credit note prior to declaring or paying dividends at any time.
(7) Stock Option Plan
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 shall 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.
The Company applies APB Opinion No. 25 in accounting for its plan. In
July 1996, the Company granted options to purchase 351,400 shares of common
stock to certain individuals, including employees and directors, at an
option price of $2.49 per share. Options to purchase 190,760 shares which
were granted to employees vest over four years, and 160,640 options were
fully vested in September 1996. Based on the estimated fair value of the
Company's common stock at the time of grant of these options of $3.30 per
share, the Company recognized compensation expense of $34,419 and $208,603
during the transition period and fiscal year ended June 28, 1997,
respectively. Of the amount recognized during the fiscal year ended June
28, 1997, $146,000 related to options which were fully vested in September
1996. The estimated fair value of the Company's common stock used in
accounting for these options was based on information from various sources
which included a valuation prepared by Avalon Group Ltd. (Avalon). At the
time of the valuation, the chairman and president of Avalon each owned 100
shares of the Company's Series B preferred stock (or 0.3% of issued and
outstanding Series B preferred stock) and each had options to purchase
4,016 shares of the Company's common stock (or 0.8% of weighted average
common shares).
Outside Director Stock Option Plan
On November 14, 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 is effective as of July 25, 1997 and expires on July 24,
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 on November 14, 1997 to eligible directors which become exercisable
at the rate of 8.33% per quarter through November 14, 2000.
F-17
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
-------------------------------------
Fiscal Years
Transition -----------------------
Period 1997 1996
-------------------------------------
Net income (loss) As reported (889,275) $1,710,458 $70,241
Pro forma (1,052,044) 1,449,941 46,373
Earnings per share - diluted As reported (0.11) 0.26 0.01
Pro forma (0.13) 0.22 0.01
=====================================
Pro forma net income reflects only options granted during the
transition period and in fiscal years 1997 and 1996. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting periods of
generally four years and compensation cost for options granted prior to
July 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted
during the transition period and fiscal years 1997 and 1996 was estimated
using the Black Scholes Option-Pricing Model with the following weighted-
average assumptions; Transition Period - expected dividend yield of 0.0%,
risk-free interest rate of 6.0%, volatility of 60% and an expected life of
approximately two years. Fiscal 1997 - expected dividend yield of 0.0%,
risk-free interest rate of 6.2%, volatility of 60% and an expected life of
approximately two years; Fiscal 1996 - expected dividend yield of 0.0%,
risk-free interest rate of 5.8%, volatility of 60% and an expected life of
approximately three years.
Stock option activity is as follows:
-----------------------------------------------------------------------------------------------
Fiscal Years Ended
Transition ---------------------------------------------------------------
Period 1997 1996
-----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
-average -average -average
Number exercise Number Exercise Number exercise
of price of price of price
Shares share Shares Per share Shares per share
-----------------------------------------------------------------------------------------------
Outstanding at beginning of period 1,023,841 $2.97 739,346 $2.36 707,218 $2.38
Granted 325,000 6.85 432,083 3.58 72,288 2.49
Exercised (102,348) 2.22 (99,396) 1.17 - -
Forfeited (72,744) 3.32 (48,192) 3.11 (40,160) 3.05
-----------------------------------------------------------------------------------------------
Outstanding at end of period 1,173,749 4.10 1,023,841 2.97 739,346 2.36
-----------------------------------------------------------------------------------------------
Exercisable at end of period 585,424 3.05 568,560 2.85 394,672 1.89
-----------------------------------------------------------------------------------------------
Weighted-average fair value of
options Granted during the period 2.89 1.69 1.62
-----------------------------------------------------------------------------------------------
Available for future grants at end
of period 130,749 133,004 212,446
===============================================================================================
F-18
Information about options outstanding and exercisable at January 31,
1998 and June 28, 1997 is as follows:
-------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted- Weighted-
Weighted- Average Average
Number Average Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
-------------------------------------------------------------------------------
January 31, 1998:
$ 0.62 to $ 0.62 155,680 1.44 $ 0.62 155,680 $ 0.62
2.49 to 2.49 523,485 7.72 2.49 281,320 2.49
3.30 to 6.50 116,924 6.68 5.71 104,014 5.66
6.75 to 6.88 298,000 9.71 6.83 - -
7.00 to 9.00 76,660 9.04 8.82 43,660 9.00
$11.00 to $11.00 3,000 8.99 11.00 750 11.00
-------------------------------------------------------------------------------
$ 0.62 to $11.00 1,173,749 7.38 $ 4.10 585,424 $ 3.05
===============================================================================
June 28, 1997:
$ 0.62 to $ 0.62 170,680 2.03 $ 0.62 170,680 $ 0.62
2.49 to 2.49 692,157 8.35 2.49 287,846 2.49
5.50 to 6.23 88,344 6.59 6.22 69,874 6.23
8.25 to 9.00 69,660 9.50 8.92 40,160 9.00
11.00 to 11.00 3,000 9.58 11.00 - -
-------------------------------------------------------------------------------
$ 0.62 to $11.00 1,023,841 7.23 $ 2.97 568,560 $ 2.85
===============================================================================
(8) Incentive Savings Plan
The Incentive Savings Plan (the Plan) is a defined contribution plan
sponsored by the Company for all eligible employees. Participants of the
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 Plan at
the rate of 33% of the first 6% of the participant's contribution. For
fiscal years ended 1997, 1996 and 1995, the Company's discretionary
matching contributions to the Plan were $95,026, $121,810, $86,043 and
$53,661 for the transition period and fiscal years ended 1997, 1996 and
1995, respectively. The 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.
(9) Employee Stock Purchase Plan
Effective December 12, 1996, the Company adopted an Employee Stock
Purchase 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 $5,500
per offering period, at a price per share equal to 90% of the fair market
value of the common stock as of the last day of any offering. Withholdings
from employees for purchases under the Plan totaled $73,297 during the
transition period and $161,471 during fiscal year 1997.
F-19
(10) Related-party Transactions
The Company made inventory purchases of $1,161,663, and $3,474,412
during the transition period and in fiscal 1997, respectively, from a
company which is beneficially owned by a stockholder of the Company who is
also a director of the Company. These purchases represented approximately
1.9% and 4.8% of the Company's total inventory purchases during the
transition period and in fiscal 1997, respectively. The Company had no
outstanding amounts payable related to these purchases at January 31, 1998
and June 28, 1997.
During fiscal 1996, the Company entered into a 42-month supply
agreement with Fine Art Developments, p.l.c. (Fine Art), a publicly owned
United Kingdom company, requiring the Company to purchase a minimum of 42%
of its greeting card purchases from Fine Art each year. During the
transition period and fiscal 1997, the Company purchased $3,489,490 and
$5,337,819 of its greeting card purchases from Fine Art. At January 31,
1998 and June 28, 1997, the Company owed $2,942,979 and $3,192,596 to Fine
Art for these purchases. In August 1996, Fine Art purchased 2,600 shares
of convertible preferred stock of the Company.
(11) Supplemental Cash Flow Information
--------------------------------------------------
Fiscal Years
Transition -----------------------------------
Period 1997 1996 1995
--------------------------------------------------
Cash paid during the period for the
following:
Interest $1,193,873 $1,441,114 $1,173,344 $634,910
Income taxes 856,815 350,014 26,276 688,574
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred and notes payable issued for
equipment and vehicle purchases were $1,996,522 in the transition period
and $4,961,429, $255,487 and $191,938 in fiscal years 1997, 1996 and 1995,
respectively.
In August 1996, the Company exchanged Series C preferred stock for
consideration of trade accounts payable of $1,101,100.
On December 12, 1996, all outstanding shares of Convertible preferred
stock were converted into 3,134,674 shares, or $24,195,943 of common stock.
F-20
(11) Supplemental Cash Flow Information (Continued)
Additional paid-in capital of $264,012 and $413,461 was recognized
for the common stock warrants issued during fiscal 1997 and 1996,
respectively.
Accrued interest of $236,750 was repaid through the issuance of
$236,750 of common stock in fiscal 1995.
The Company exchanged FCOA-Baltimore preferred stock of $400,000 for
the Company's common stock of $400,000 in fiscal 1995.
(12) Fair Value of Financial Instruments
The Company's financial instruments at January 31, 1998 and June 28,
1997 include trade accounts receivable, trade accounts payable, revolving
credit term note payable, and long-term debt. The carrying value of trade
accounts receivable and trade accounts payable approximates fair value
because of the short maturity of these instruments. The Company believes
the carrying value of the revolving credit term note payable approximates
fair value due to the variable rate of interest on this instrument.
(13) Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
(dollars in thousands, except per share data)
First Second Seventh
quarter quarter Month
--------------------------------------------------
Transition period:
Total sales $35,315 $60,302 $15,083
Gross profit 11,742 23,238 3,735
Net income (loss) (2,152) 2,153 (890)
Net income (loss) per share - basic (0.30) 0.30 (0.12)
Net income (loss) per share - diluted (0.30) 0.27 (0.12)
First Second Third Fourth
quarter quarter quarter quarter
---------------------------------------------------------
Fiscal year 1997:
Total sales $25,032 $37,692 $30,932 $40,289
Gross profit 8,035 14,443 11,480 16,156
Income (loss) before extraordinary item (1,291) 791 242 2,281
Net income (loss) (1,291) 478 242 2,281
Net income (loss) per share - basic (0.32) 0.10 0.03 0.32
Net income (loss) per share - diluted (0.26) 0.09 0.03 0.29
Fiscal year 1996:
Total sales $16,817 $25,109 $21,707 $30,956
Gross profit 5,792 9,510 7,719 12,429
Net income (loss) (1,238) 256 (461) 1,513
Net income (loss) per share - basic (0.30) 0.06 (0.11) 0.37
Net income (loss) per share - diluted (0.25) 0.05 (0.09) 0.29
F-21
(14) Prior Year Transition Period Financial Data (Unaudited)
Following is an unaudited consolidated statement of income for the seven
fiscal months ended January 24, 1997:
(dollars in thousands, except share and per share data)
Seven Fiscal
Months
Ended
January 24,
1997
------------
Net sales $ 70,148
Cost of sales and occupancy 45,616
------------
Gross profit 24,532
Selling, general and administrative expenses 25,211
------------
Loss from operations (679)
Interest expense 1,189
------------
Loss before taxes and extraordinary item (1,868)
Income tax benefit (784)
------------
Loss before extraordinary item (1,084)
Extraordinary item (313)
------------
Net loss $ (1,397)
============
Loss per share - basic
Before extraordinary item $ (0.23)
Extraordinary item (0.07)
------------
Net loss $ (0.30)
============
Weighted average shares outstanding 4,658,423
============
Loss per share - diluted
Before extraordinary item $ (0.20)
Extraordinary item (0.06)
------------
Net loss $ (0.26)
============
Weighted average shares outstanding 5,473,929
============
F-22
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
Under date of March 6, 1998 we reported on the consolidated balance sheets
of Factory Card Outlet Corp. and subsidiary as of January 31, 1998 and June 28,
1997 and the related statements of income, stockholders' equity, and cash flows
for the transition period ended January 31, 1998 and each of the fiscal years in
the three-year period ended June 28, 1997, which are included in the 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 the 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 PEAT MARWICK LLP
Chicago, Illinois
March 6, 1998
S-1
Schedule I
----------
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Condensed Financial Information of Factory Card Outlet Corp.
Balance Sheets
January 31, June 28,
1998 1997
------------ -----------
ASSETS
Current assets:
Cash $ 17,488 $ 17,407
Due from subsidiary 13,362,148 13,694,429
Note receivable - subsidiary 34,954,203 32,728,546
------------ ------------
Total current assets 48,333,839 46,440,382
Investment in subsidiary 3,400,293 5,833,053
------------ ------------
Total assets $ 51,734,132 $ 52,273,435
============ ============
STOCKHOLDERS' EQUITY
Common stock -$.01 par value at January
31, 1998 and June 28, 1997.
Voting class - authorized
15,000,000 shares; 7,335,519 and
7,231,211 shares issued and
outstanding at January 31, 1998
and June 28, 1997, respectively.
Non-voting class - authorized
205,000 shares, no shares issued
or outstanding 73,355 72,312
Additional paid-in capital 51,222,520 50,950,900
Retained earnings 438,257 1,327,532
Less: cost of common stock held in - (77,309)
treasury, 8,697 shares at June 28, 1997. ------------ ------------
Total stockholders' equity $ 51,734,132 $ 52,273,435
============= =============
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 Income
Transition
Period Fiscal Years Ended
Ended ---------------------------------------------
January 31, June 28, June 29, July 1,
1998 1997 1996 1995
----------------- -------------- ------------- ------------
Royalty income $ 1,660,494 $ - $ - $ -
Interest income - external 83 338 363 342
Interest income - subsidiary note
receivable 1,990,553 1,713,059 - -
Equity in net income (loss) of
subsidiary (2,432,760) 715,800 69,878 367,182
-------------- ------------- ---------- -----------
Net revenue 1,218,370 2,429,197 70,241 367,524
Operating expenses 1,077,170 - - -
-------------- ------------- ---------- -----------
Income before taxes 141,200 2,429,197 70,241 367,524
Income tax expense 1,030,475 718,739 - -
-------------- ------------- ---------- -----------
Net income (loss) $ (889,275) $ 1,710,458 $ 70,241 $ 367,524
============== ============= ========== ===========
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
Transition
Period Fiscal Years Ended
Ended ---------------------------------------------
January 31, June 28, June 29, July 1,
1998 1997 1996 1995
----------- ------------ -------- ------------
Cash flows from operating activities:
Net income (loss) $ (889,275) $ 1,710,458 $ 70,241 $ 367,524
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in net loss (income) of subsidiary 2,432,760 (715,800) (69,878) (367,182)
Decrease (increase) in due from subsidiary 332,281 (53,831) - (11,379,258)
----------- ------------ -------- ------------
Net cash provided by (used in) operating activities 1,875,766 940,827 363 (11,378,916)
----------- ------------ -------- ------------
Cash used in investing activities -
Increase in note receivable from subsidiary (2,225,657) (32,728,546) - -
----------- ------------ -------- ------------
Cash flows from financing activities:
Proceeds from issuance of Series B convertible
preferred stock - - - 11,379,258
Proceeds from issuance of Series C convertible
preferred stock - 8,638,337 - -
Proceeds from issuance of common stock - 23,122,859 - -
Proceeds from exercise of employee stock options 297,142 103,750 - -
Purchase of treasury stock - (180,000) - -
Sale of treasury stock to employee stock purchase plan 52,830 103,111 - -
----------- ------------ -------- ------------
Net cash provided by financing activities 349,972 31,788,057 - 11,379,258
----------- ------------ -------- ------------
Net increase in cash 81 338 363 342
Cash at beginning of year 17,407 17,069 16,706 16,364
----------- ------------ -------- ------------
Cash at end of year $ 17,488 $ 17,407 $ 17,069 $ 16,706
=========== ============ ======== ============
Supplemental disclosures of cash flow information:
Noncash financing activities -
In August 1996, the Company exchanged Series C
Preferred stock for consideration of its subsidiary's
trade accounts payable - 1,101,100 - -
On December 12, 1996, all outstanding shares of
Convertible Preferred stock were converted into
3,134,674 shares of common stock - 24,195,943 - -
Additional paid-in capital recognized for
common stock warrants - 264,012 413,461 -
The Company exchanged FCOA - Baltimore preferred stock
for the Company's common stock in 1995 - - - 400,000
Accrued interest repaid through the issuance of
common stock in 1995 - - - 236,750
See accompanying notes to condensed financial information.
S-4
Schedule I
----------
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Notes to Condensed Financial Information of Factory Card Outlet Corp.
(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 January 31, 1998
and June 28, 1997 and for the transition period ended January 31, 1998 and
each of the years in the three year period ended June 28, 1997. 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) Guarantees
The Company has guaranteed the credit and debt agreements between its
subsidiary and various lenders. For information related to the agreements,
see Note 3 of "Notes to Consolidated Financial Statements".
(3) Notes Receivable - subsidiary
During fiscal year 1997, the subsidiary issued a note to the Company.
Interest is accrued quarterly based on the prime lending rate plus two
percent per year. The note and any accrued interest is due and payable on
demand.
(4) Royalty and Licensing Agreement
On June 29, 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. This fee is paid to the Company on a quarterly basis.
S-5