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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended June 28, 1997 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period From _____ to _____
Commission File Number: 21859
FACTORY CARD OUTLET CORP.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3652087
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
745 Birginal Drive,
Bensenville, Illinois 60106
(Address of principal executive offices (Zip Code)
(630) 238-0010
----------------------------------------------------
(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 September 19, 1997 was approximately $ 39,476,800, computed on
the basis of the last reported sale price per share ($ 8.00 ) 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
September 19, 1997 was 7,237,235.
Documents Incorporated by Reference:
- --------------------------------------------------------------------------------
Document Incorporated by
Part of Form 10-K Reference
- --------------------------------------------------------------------------------
Part III (Items 10, Portions of the Registrant's Definitive Proxy Statement to
11, 12 and 13) be used in connection with its 1997 Annual Meeting of
Stockholders.
- --------------------------------------------------------------------------------
1997 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Page
Item 1 Business.......................................................... 1
Item 2 Properties........................................................ 6
Item 3 Legal Proceedings................................................. 7
Item 4 Submission of Matters to a Vote of Security Holders............... 7
PART II
Item 5 Market for the Registrant's Common Stock and
Related Security Holder Matters................................... 7
Item 6 Selected Financial Data........................................... 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
Item 8 Financial Statements and Supplementary Data....................... 17
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 17
PART III
Item 10 Directors and Executive Officers of the Registrant................ 17
Item 11 Executive Compensation............................................ 17
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................................... 17
Item 13 Certain Relationships and Related Transactions.................... 17
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual 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;
consolidation and relocation of distribution facilities; inventory shrinkage;
ability to meet future capital needs; governmental regulations and other factors
both referenced and not referenced in this Annual Report on Form 10-K. When used
in this Annual Report on Form 10-K, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements.
PART I
ITEM 1. BUSINESS
General
Factory Card Outlet Corp. is a rapidly growing chain of company-owned
superstores offering a vast assortment of party supplies, greeting cards, gift
wrap and other special occasion merchandise at everyday value prices. As of
September 26, 1997, the Company operated 159 stores in 20 states. Based on the
published number of stores of the Company's competitors as compiled by the
Company from various business publications and other publicly available
information, the Company believes it is the largest chain of company-owned
stores in the party supply and special occasion industry. The Company opened 35,
32 and 25 superstores in fiscal 1997, 1996 and 1995, respectively, and plans to
open approximately 50 superstores in each of the next two years, including 21
opened through September 26, 1997.
The Company's superstores provide customers with a value-oriented,
"one-stop" shopping destination for party 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 between 11,500 and 12,500 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 $8.8 billion in 1996 according to an industry 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 party 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 increasing
number of school-age children and the growing popularity of at-home entertaining
by Baby-Boomers, are launching the industry's superstore growth.
Growth Strategy
The Company intends to open approximately 50 superstores in each of the
next two years. This rapid expansion plan is designed to build on the Company's
position as the largest chain of company-owned and operated superstores in the
party 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
it 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 will meet its profitability criteria.
1
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 Strategy
The key elements of the Company's business strategy are as follows:
Extensive 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 complete special occasions 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, graduation, weddings and baby showers;
and other family, religious and special occasions. The following four major
product categories comprise the Company's merchandise offering:
o 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.
o 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 deep discounts and boxed holiday cards (Christmas,
Hanukkah and Kwanzaa) are sold at 50% off manufacturers' suggested retail
prices.
o Giftwrap -- The Company believes its stores have become a destination for
shoppers seeking a wide selection of giftwrap and giftwrap accessories and
that it sells 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.
2
o 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 balloons, 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 11,500 to 12,500 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 our
merchandise. The direct mail pieces are printed in 4-color, and range from four
to eight pages depending on the season. During fiscal 1998, the Company will
test an increase in the number of circulars per store, while continuing to
support all holidays and special events. The Company also uses radio to support
major holiday selling seasons. In addition, the Company will test television in
selected markets during fiscal 1998.
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 two years, the Company has invested significant resources
in people, systems, and infrastructure to support its growth and make it more
efficient. The recently installed state-of-the-art POS system is supplying
management with vital sales information which is being used to enhance
merchandise planning and buying programs, better manage inventories and maximize
sales. Finally, the Company will consolidate its existing distribution
facilities into a new distribution center. Factory Card Outlet is the only
special occasion superstore chain to have a full-scale distribution facility.
When coupled with a large store base and central purchasing capabilities,
management believes that this facility will provide the Company with substantial
purchasing and distribution efficiencies, along with greater financial controls
over the movement of inventory, as compared to its competitors.
Store Locations. As of September 26, 1997, the Company operated 159 stores
in 20 states, all of which are leased. The Company's store leases typically have
an average initial term of 10 years with two five-year renewal options.
3
Set forth below is a list of the Company's store locations by state as of
September 26, 1997:
Number Number
Location of Stores Location of Stores
-------- --------- -------- ---------
Delaware (1) Missouri (7)
Wilmington................... 1 St. Louis Metro............. 4
Florida (3) Springfield................. 1
Daytona Beach................ 1 Cape Girardeau.............. 1
Orlando...................... 1 Columbia.................... 1
Tampa........................ 1 Nebraska (5)
Illinois (40) Omaha Metro................. 3
Chicago Metro................ 30 Lincoln..................... 1
Mt. Vernon................... 1 Grand Island................ 1
Bloomington.................. 1 New York (5)
Rockford..................... 1 Buffalo..................... 3
Fairview Heights............. 1 Rochester................... 1
Moline....................... 1 Olean....................... 1
Champaign.................... 1 North Carolina (2)
Kankakee..................... 1 Charlotte................... 1
Springfield.................. 1 Raleigh..................... 1
Peoria....................... 1 Ohio (15)
Dekalb....................... 1 Cincinnati Metro............ 4
Indiana (17) Cleveland Metro............. 4
Indianapolis................. 5 Columbus Metro.............. 3
Highland..................... 1 Mansfield................... 1
Merrillville................. 1 Akron....................... 1
Evansville................... 2 Wheeling.................... 1
Ft. Wayne.................... 1 Wooster..................... 1
Mishawaka.................... 1 Pennsylvania (3)
LaFayette.................... 2 Hanover..................... 1
Clarksville.................. 1 Erie........................ 1
Bloomington.................. 1 State College............... 1
Richmond..................... 1 South Carolina (2)
Anderson..................... 1 Columbia.................... 1
Iowa (6) Charleston.................. 1
Des Moines Metro............. 2 Tennessee (4)
Cedar Rapids................. 1 Chattanooga................. 2
Waterloo..................... 1 Nashville................... 2
Davenport.................... 1 Texas (5)
Dubuque...................... 1 Houston..................... 2
Kentucky (4) Tyler....................... 1
Louisville Metro............. 2 Fort Worth.................. 1
Florence..................... 1 Texarkana................... 1
Owensboro.................... 1 Virginia (9)
Maryland (13) Washington, D.C. Metro (Va.) 4
Baltimore Metro.............. 7 Richmond.................... 2
Washington, D.C. Metro (Md.). 4 Fredericksburg.............. 1
Annapolis.................... 1 Lynchburg................... 1
Salisbury.................... 1 Norfolk..................... 1
Michigan (1) Wisconsin (13)
Benton Harbor................ 1 Milwaukee Metro............. 6
Minnesota (4) Madison Metro............... 2
Minneapolis.................. 2 Appleton.................... 1
Rochester.................... 1 Oshkosh..................... 1
Mankato...................... 1 Eau Claire.................. 1
Janesville.................. 1
Wausau...................... 1
---
Total......................... 159
===
4
Product Sourcing
The Company purchases most of its inventory through its central purchasing
system, which allows it 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 11%,
and the largest ten suppliers representing approximately 46% of the Company's
aggregate purchases in fiscal 1997. 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 1, 1998 (with automatic one-year renewals
after the initial 2 1/2 year term unless the parties cannot agree on pricing and
other terms). 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 in 1996 installation
of a fully integrated retail management software package that automated the
areas of finance, merchandising and distribution and implemented a POS system in
all stores by April 1997. The POS system will provide critical sales information
to the Company's stores and central office and will be utilized in the Company's
business operations and controls, performance monitoring programs, decision
support and business planning. Management believes that the POS system will
result in improvements in central office operations, particularly in the areas
of merchandise planning and automated replenishment, inventory control and
performance measurement.
5
Competition
The party supplies and greeting cards retailing business is highly
competitive. The Company currently competes against a diverse group of
retailers, ranging from other party supply and greeting card retailers
(including Party City Corporation) 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 2,623 employees as of September 19, 1997, comprised of 685
full-time and 1,938 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 two distribution center and corporate office facilities in
Bensenville, Illinois and Elk Grove Village, Illinois, with the lease terms
expiring in September 2002 and July 1998, respectively. The Company has a
10-year lease for an office and distribution center in Naperville, Illinois
which will integrate and replace the Company's existing headquarters and
distribution centers. The estimated commencement date under this lease is by the
end of November 1997. The Company expects to be operating this new distribution
center, which consists of approximately 440,000 square feet, including office
space, by March 1998.
6
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 Annual Report on Form
10-K, the Company is aware of no material existing or threatened litigation to
which it is or may be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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. 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.
================================================================================
HIGH LOW
================================================================================
YEAR ENDED JUNE 28, 1997
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- --------------------------------------------------------------------------------
Second Quarter (beginning December 13, 1996)............ $ 9 1/8 $ 9
- --------------------------------------------------------------------------------
Third Quarter........................................... 11 8 1/2
- --------------------------------------------------------------------------------
Fourth Quarter.......................................... 10 1/4 5 3/8
- --------------------------------------------------------------------------------
================================================================================
On September 19, 1997, the last sale price of the Common Stock reported on
the NASDAQ National Market was $8.00 per share. At September 19, 1997, 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 Business Loan Agreement between the Company
and Bank One Chicago, NA 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."
Unregistered Securities
Within the past three years, the Company has sold the following securities
which were not registered under the Securities Act:
7
On August 2, 1996, the Company sold 25,639 shares of Series C Convertible
Preferred Stock in a private placement to 18 accredited investors for an
aggregate price of $9,871,015 based upon an exemption from registration under
Section 4(2) of the Securities Act. Fine Art, one of the aforementioned
accredited investors, purchased 2,600 shares of Series C Convertible Preferred
Stock for a price of $1,001,000 and agreed to satisfy this price by providing
the Company with credits against trade payables. The full purchase price has
been credited against trade payables. Another vendor also purchased 260 shares
of Series C Convertible Preferred Stock for a price of $100,100 and satisfied
this price against trade payables.
On July 2, 1996, the Company issued a warrant for the right to purchase
76,223 shares of the Company's non-voting Common Stock to Petra Capital, L.L.C.
("Petra") in connection with the issuance of $3,000,000 of subordinated
debentures to Petra, in each case, based upon an exemption from registration
under Section 4(2) of the Securities Act.
On June 28, 1996, the Company issued a warrant for the right to purchase
24,361 shares of the Company's non-voting Common Stock to Sirrom Capital
Corporation ("Sirrom") in connection with the issuance of $1,000,000 of
subordinated debentures to Sirrom, in each case, based upon an exemption from
registration under Section 4(2) of the Securities Act.
On November 15, 1995, the Company issued a warrant for the right to
purchase 95,010 shares of the Company's non-voting Common Stock to Sirrom in
connection with the issuance of $4,000,000 of subordinated debentures to Sirrom,
in each case, based upon an exemption from registration under Section 4(2) of
the Securities Act.
On October 6, 1994, the Company issued 64,256 shares of Common Stock to
The Card Mart in exchange for shares of preferred stock of FCOA-Baltimore, which
merged with and into the Company's operating subsidiary based upon an exemption
from registration under Section 4(2) of the Securities Act.
On July 15, 1994, the Company sold 32,416 shares of Series B Convertible
Preferred Stock in a private placement to 13 accredited investors for an
aggregate price of $12,123,584 based upon an exemption from registration under
Section 4(2) of the Securities Act.
On July 15, 1994, the Company sold 66,264 shares of Common Stock to the
following: (i) 60,240 shares of Common Stock were issued to three accredited
investors in lieu of interest on their investment in the Subordinated Debentures
Due 1993; and (ii) 6,024 shares of Common Stock were issued to one accredited
investor in lieu of interest on a Bridge Loan, in each case, based on an
exemption from registration under Section 4(2) of the Securities Act.
At various times within the past three fiscal years, the Company has
issued to certain officers, directors, employees and consultants, options to
purchase an aggregate of 850,148 shares of Common Stock at varying exercise
prices. These options were granted pursuant to the 1989 Stock Option Plan based
on an exemption from registration under Rule 701 of the Securities Act.
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 June 28, 1997 and June 29, 1996, and for each of the fiscal years in the
three-year period ended June 28, 1997, and the report thereon, are included
elsewhere in this Annual Report on Form 10-K. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.
9
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands, except per share and operating data)
Fiscal Year
---------------------------------------------------------
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 from operations ..................... 4,887 1,717 1,101 1,238 1,108
Interest expense .............................. 1,402 1,529 411 497 311
----------- -------- -------- -------- ---------
Income before taxes ........................ 3,485 188 690 741 797
Income tax (benefit) .......................... 1,462 118 322 292 (68)
----------- -------- -------- -------- ---------
Net Income before extraordinary item ......... 2,023 70 368 449 865
Extraordinary item ......................... (313) -- -- -- --
----------- -------- -------- -------- ---------
Net Income ................................... $ 1,710 $ 70 $ 368 $ 449 $ 865
=========== ======== ======== ======== =========
Net income (loss) per common
and common equivalent share before
extraordinary item ......................... $ 0.31 $ 0.01 $ 0.08 $ 0.13 $ 0.26
Extraordinary item ............................ (0.05) -- -- -- --
----------- -------- -------- -------- ---------
Net income (loss) per common
and common equivalent share ................ $ 0.26 $ 0.01 $ 0.08 $ 0.13 $ 0.26
=========== ======== ======== ======== =========
Weighted average common and common
equivalent shares outstanding .............. 6,562 5,050 4,839 3,397 3,383
=========== ======== ======== ======== =========
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 ............................... $ 35,600 $ 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 of a period, then it
will be included in the comparable store calculation in its 13th month of
operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
(2) Includes only stores open during the entire period.
(3) Total debt is defined as total current and long-term debt.
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 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 its
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 11,500 to 12,500 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.
During fiscal 1997, the Company achieved record sales and earnings levels
of $133.9 million and $1.7 million, respectively. The Company successfully
completed an initial public offering on December 13, 1996 by issuing nearly 3
million shares of common stock and received about $23 million in net proceeds.
The Company was able to retire substantially all of its outstanding debt with
the proceeds at that time.
The Company has opened 35, 32, and 25 new stores during fiscal 1997, 1996,
and 1995 respectively, and expects to open approximately 50 new superstores in
each of the next two twelve-month periods. In addition, the Company has
remodeled, expanded and/or relocated 15 stores since fiscal 1995.
11
Average store sales volumes have grown substantially over the past three
years from $734,000 to $1.1 million. 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 will continue to refine and expand its targeted direct mail
advertising program by increasing its direct mail pieces from 8 during fiscal
1997 to 11 during fiscal 1998. The Company will also test television ads for the
first time 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 was strong
and profitable during fiscal year 1997. The Company's 83 superstores that were
open for all of fiscal year 1997 were, on average, just over three years of age.
These superstores averaged $1.1 million in sales, a 15.0% EBITDA, and a 41.0%
ROI. Of the 83 superstores, 28 were 11,500 square feet or greater in size. These
superstores, which represent the current store-size model, averaged $1.3 million
in sales, a 15.7% EBITDA, and a 48.3% 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 $424,000 and is
comprised of $185,000, net of landlord allowances, for leasehold improvement
fixtures and equipment, $175,000 in net inventories, and $64,000 in pre-opening
costs which are expensed upon the store's grand opening.
The Company has realized consistent gross profit percentages over the past
three years. Inventory shrinkage results stabilized around 2% for fiscal years
1997 and 1996, following high shrinkage results during fiscal 1995 (7%).
Subsequent to fiscal 1995, the Company implemented improved internal controls
and a comprehensive loss prevention program which led to the improved shrinkage
results.
The Company has executed a lease, and construction is in progress, on an
approximately 440,000 square foot distribution center and home office facility,
which the Company anticipates to occupy by March 1998. This new facility will
consolidate and streamline the Company's distribution functions, greatly
enhancing its operation's productivity.
The Company has been notified by Party Express, the party goods division
of Hallmark, that as of November 30, 1997, it will no longer ship party goods,
which include many Disney and Warner Bros. licensed products to Factory Card
Outlet. The Company believes that this decision will not have a material impact
on its earnings for the next 12 months, but could impact earnings beyond that
time. The Company is continuing discussions with Hallmark, Disney and Warner
Bros. in an attempt to resolve this situation or to allow Factory Card Outlet to
acquire the licensed product through other sources.
The Company has announced its intentions to change its fiscal year-end
from June to January. The Company believes this will better enable investors to
view the Company's progress in line with other retailers. In addition to greater
comparability, this change will spread the Company's peak seasons more evenly
between reporting quarters.
12
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
Fiscal Year
-----------
1997 1996 1995
------ ------ ------
Net sales ........................................... 100.0% 100.0% 100.0%
Cost of sales and occupancy ......................... 62.6 62.5 62.9
------ ------ ------
Gross profit ..................................... 37.4 37.5 37.1
Selling, general, and administrative expenses ....... 33.8 35.7 35.3
------ ------ ------
Income from operations ........................... 3.6 1.8 1.8
Interest expense .................................... 1.0 1.6 0.7
------ ------ ------
Income before taxes and extraordinary item ....... 2.6 0.2 1.1
Income tax .......................................... 1.1 0.1 0.6
------ ------ ------
Income before extraordinary item ................. 1.5 0.1 0.5
Extraordinary item on early retirement of debt,
net of income tax benefit ........................ 0.2 0.0 0.0
------ ------ ------
Net income .......................................... 1.3% 0.1% 0.5%
====== ====== ======
Number of stores open at end of period .............. 140 107 78
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. 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 $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.
13
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 $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%. Fiscal 1996 was the first year since fiscal 1993 that the
Company did not achieve double-digit comparable store sales growth. This
resulted from lower inventory levels in stores during much of the first nine
months of the fiscal year due to management transitions in the merchandising
area and late receipt of merchandise related to the Company's expansion of its
product offering during the third quarter.
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.
14
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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", is effective for both interim and annual periods after December 15,
1997. The Company will adopt the new standard, as required, in the quarter
ending December, 1997. For the fiscal year ended June 28, 1997, SFAS 128 would
not have a material impact on the Company's earnings per share calculation.
SFAS No. 130, "Reporting Comprehensive Income", is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company will adopt SFAS No. 130 effective February 1, 1998, and
is evaluating the effects, if any, on the financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
enterprises report financial and descriptive information about reportable
operating segments in annual financial statements and interim financial reports
issued to stockholders. The Company has determined that SFAS No. 131 will not
create a required change in the way the Company presently reports its results in
financial statements to stockholders.
Inflation
Management does not believe that inflation has had a material effect on
its financial condition or results of operations during 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.
15
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 on December 13, 1996, borrowings under the
Business Loan Agreement between the Company and Bank One, Chicago, NA, dated as
of November 1, 1996, proceeds from issuances of convertible preferred stock and
subordinated debentures, and internally generated funds.
At the end of fiscal 1997 and 1996, the Company's working capital was
$35.6 million and $23.6 million, respectively. During fiscal 1997, 1996 and
1995, cash used in operations was $4.9 million, $5.1 million, and $4.1 million,
respectively. In each of these periods, $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 fiscal 1997, 1996, and 1995,
respectively, was $10.1 million, $7.1 million, and $6.9 million. These costs
were primarily a result of opening new superstores and investing in systems.
During the next 12 months, the Company expects to spend approximately $16 to $17
million on capital expenditures, which includes approximately $11 million for
new superstore openings, approximately $2 million for the new distribution
facility fixtures and equipment, approximately $1 million for new office
facility additions, approximately $1 million for corporate system additions, and
approximately $1 million for store remodels.
Net cash provided by financing activities during fiscal 1997, 1996, and
1995 was $14.8 million, $11.9 million, and $11.1 million, respectively. For
fiscal 1997 and 1996, the outstanding balance under the Company's Business Loan
Agreement with Bank One at year end was $3.8 million and $13.1 million,
respectively.
On November 1, 1996, the Company entered into the Business Loan Agreement,
which provides for a line of credit facility and allows for borrowings by the
Company in an amount not to exceed the lesser of $25 million or 50% of
merchandise inventories at cost. The line of credit facility expires on October
1, 1998. Borrowings outstanding under the line of credit facility bear interest
on the average daily outstanding balance, paid monthly, at Bank One's prime rate
or, at the Company's option, at 2.75% over the London Interbank Offered Rate (
LIBOR ). The Company is required to pay an annual commitment fee of 0.25% on the
unused portion of the line of credit facility ( except that if the unused
portion exceeds $20.0 million the fee increases to 0.40% on the unused portion )
and to comply with certain covenants. The line of credit facility is secured by
a senior lien on substantially all of the Company's assets.
On September 9, 1997, the Company received a commitment letter from Bank
One to increase its existing line of credit facility from $25 million to the
lesser of $35 million or a predetermined advance rate ( not to exceed 50% )
against net inventory as determined by an appraisal. Interest will be payable at
an annual rate equal to Bank One's prime rate or, at the Company's option, a
rate based on LIBOR plus additional basis points variable on the Company's
effective debt ratio. In addition, a fee of 0.25% per year will be assessed
quarterly on the unused portion of the facility. This commitment letter also
contains 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 terms of the commitment letter are subject
to the negotiation and execution of definitive loan documents and to
satisfactory appraisal results.
16
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 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 three, four and five years.
The Company does not intend to pay cash dividends in the foreseeable
future and under its current Business 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 proposed line of credit
facility will be adequate to fund its cash requirements for at least the next 12
months.
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. DISAGREEMENTS 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
1997 Annual Meeting of Stockholders.
17
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The 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 and Treasurer
Carol A. Travis 46 Vice President and Secretary
Martin J. Merksamer 49 Vice President and General Merchandising Manager
Thomas W. Stoltz 36 Vice President, Finance
Robert Krentzman 48 Vice President, MIS
Vincent G. Brown 56 Vice President, Real Estate
Joseph M. Cabon 50 Vice President, Distribution
Robert J. Kendzior 45 Vice President, Marketing
Matthew F. Ellis 47 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., and The Bibb Company. The Bibb
Company filed a petition in bankruptcy under Chapter 11 in July 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.
18
Mr. Franchi has been Executive Vice President and Treasurer of the Company
since March 1995. From November 1990 to March 1995, Mr. Franchi served as the
Chief Operating Officer of the Company's operating subsidiary. 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.
Ms. 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. Merksamer has been Vice President and General Merchandise Manager
since May 1996. From September 1995 to May 1996, Mr. Merksamer was the Senior
Vice President for Merchandising and Marketing for Handy Andy Home Improvement
Centers, Inc. ("Handy Andy"). From February 1995 to September 1995, Mr.
Merksamer served as Vice President, Merchandising, for Handy Andy. In November
1995, Handy Andy accepted an involuntary petition for bankruptcy under Chapter
11 of the United States Bankruptcy Code ("Chapter II"). Prior to joining Handy
Andy in 1995, from April 1993 to September 1995, Mr. Merksamer was involved in
the planning of a start-up business venture and, from 1991 to 1993, he was Vice
President of Merchandising and Marketing of The Business Super Store. From 1987
to 1991, Mr. Merksamer was Vice President, Merchandising, for The Office Club,
Inc.
Mr. Stoltz has been Vice President, Finance since August 1996. From 1994
to 1996, Mr. Stoltz served as Corporate Comptroller 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. In January 1995, Mr. Cabon filed a petition for
bankruptcy under Chapter 7 of the United States Bankruptcy Code, and that same
month received a discharge from indebtedness in connection therewith.
19
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 Vice President, Human Resources since August 1996.
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 Sr.
VP-Human Resources for Kislak Corporation, a financial services organization,
VP-Human Resources for Waldenbooks, a bookstore chain, and VP-Human Resources
for CVS, a retail drug chain.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual 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.
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets -- June 29, 1996 and June 28, 1997
Consolidated Statements of Income for the fiscal years ended July 1,
1995, June 29, 1996, and June 28, 1997
Consolidated Statements of Stockholders' Equity for the fiscal years
ended July 1, 1995, June 29, 1996, and June 28, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
July 1, 1995, June 29, 1996, and June 28, 1997
Notes to Consolidated Financial Statements for the fiscal years
ended July 1, 1995, June 29, 1996, and June 28, 1997
20
2. Financial Statement Schedules
The following financial statement schedule is filed as a separate
section of this Report commencing on page S-1.
Report of KPMG Peat Marwick LLP, Independent Auditors
Condensed Financial Information of Factory Card Outlet Corp. -
Balance Sheets -- June 28, 1997 and June 29, 1996
Condensed Financial Information of Factory Card Outlet Corp. -
Statements of Income for the 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 fiscal years ended June 28, 1997,
June 29, 1996, and July 1, 1995
Notes to Condensed Financial Information of Factory Card Outlet
Corp.
3. List of Exhibits.
The following exhibits are included as part of this Annual Report on Form
10-K or incorporated herein by reference.
================================================================================
Exhibit No. Description
- ----------- -----------
- --------------------------------------------------------------------------------
3.1(1) Form of Amended and Restated Certificate of Incorporation of the
Company.
- --------------------------------------------------------------------------------
3.2 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.
- --------------------------------------------------------------------------------
10.1.1(1) Loan Agreement, dated as of October 1, 1995, between Factory Card
Outlet of America Ltd. ("FCO") 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 Loan Agreement dated as of November 10, 1995 among the
Company, FCO and Bank One, Chicago, N.A. ("Bank One"), as amended.
================================================================================
21
================================================================================
Exhibit No. Description
- ----------- -----------
- --------------------------------------------------------------------------------
10.7.1(1) Business Purpose Revolving Promissory Note dated November 1, 1996
from the Company and FCO to Bank One.
- --------------------------------------------------------------------------------
10.7.2(1) Promissory Note dated as of May 1, 1995 from the Company and FCO to
Bank One.
- --------------------------------------------------------------------------------
10.7.3(1) Business Loan Agreement dated as of November 1, 1996 among the
Company, FCO and Bank One.
- --------------------------------------------------------------------------------
10.7.4 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
21.1(1) List of the subsidiaries of the Company.
- --------------------------------------------------------------------------------
23.1 Consent of KPMG Peat Marwick LLP.
- --------------------------------------------------------------------------------
24.1 Power of Attorney (contained on the signature page of this
Resignation Statement).
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule.
================================================================================
22
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.
(b) Reports on Form 8-K.
On June 6, 1997, the Company filed a Form 8-K discussing the lowering of
its performance expectations for fiscal year 1997.
On September 3, 1997, the Company filed a Form 8-K announcing its
intention to change its fiscal year-end from June to January.
23
POWER OF ATTORNEYS
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: September 26, 1997 FACTORY CARD OUTLET CORP.
/s/ Charles R. Cumello
-------------------------------------
By: Charles R. Cumello, President, Chief
Executive Officer and Director
24
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
- ----------------------------------- September 25, 1997
Stewart M. Kasen Chairman of the Board
- ---------------------------------------------------------------------------------------------------------
/s/ Charles R. Cumello
- ------------------------------------ September 25, 1997
Charles R. Cumello President and Director
(principal executive officer)
- ---------------------------------------------------------------------------------------------------------
/s/ Glen J. Franchi
- ----------------------------------- September 25, 1997
Glen J. Franchi Executive Vice President and Treasurer
(principal financial and accounting
officer)
- ---------------------------------------------------------------------------------------------------------
- ----------------------------------- September __, 1997
Michael I. Barach Director
- ---------------------------------------------------------------------------------------------------------
/s/ Dr. Robert C. Blattberg
- ----------------------------------- September 26, 1997
Dr. Robert C. Blattberg Director
- ---------------------------------------------------------------------------------------------------------
/s/ Bart A. Brown, Jr.
- ----------------------------------- September 25, 1997
Bart A. Brown, Jr. Director
- ---------------------------------------------------------------------------------------------------------
- ----------------------------------- September __, 1997
Richard A. Doppelt Director
- ---------------------------------------------------------------------------------------------------------
/s/ William E. Freeman
- ----------------------------------- September 25, 1997
William E. Freeman Director
- ---------------------------------------------------------------------------------------------------------
/s/ J. Bayard Kelly
- ----------------------------------- September 25, 1997
J. Bayard Kelly Director
- ---------------------------------------------------------------------------------------------------------
- ----------------------------------- September __, 1997
James L. Nouss, Jr. Director
=========================================================================================================
25
INDEX TO FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
Page
----
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets as of June 28, 1997 and June 30, 1996........... F-3
Consolidated Statements of Income for the fiscal years ended June 28, 1997,.
June 29, 1996 and July 1, 1995......................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended..
June 28, 1997, June 29, 1996 and July 1, 1995.......................... F-5
Consolidated Statements of Cash Flows for the 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 June 28, 1997 and June 29, 1996, and the related
statements of income, stockholders' equity and cash flows for 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 June 28, 1997 and June 29, 1996, and the
results of their operations and their cash flows for 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
August 8, 1997, except as to Note 14,
"Subsequent Events," which is as
of September 9, 1997
F-2
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
June 28, June 29,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash $ 51,180 $ 202,344
Receivables 947,583 248,888
Due from related parties -- 187,711
Inventories 55,358,616 41,803,820
Prepaid expenses 1,322,420 603,647
Deferred income taxes 207,333 302,490
------------ ------------
Total current assets 57,887,132 43,348,900
Fixed assets, net 26,063,766 14,923,891
Deferred financing costs -- 244,405
Deferred income taxes -- 312,052
Other assets 1,750,709 250,594
------------ ------------
Total assets $ 85,701,607 $ 59,079,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 1,138,654 $ 676,012
Accounts payable 14,361,283 12,125,070
Due to related parties 3,192,596 3,679,887
Income taxes payable 503,544 282,771
Accrued expenses 3,091,532 2,980,656
------------ ------------
Total current liabilities 22,287,609 19,744,396
Revolving credit note payable 3,775,400 13,127,155
Subordinated debentures, net of discount -- 4,720,865
Long-term debt 20,602 664,223
Capital lease obligations 2,755,510 137,561
Deferred rent liabilities 4,411,584 3,561,851
Deferred income taxes 177,467 --
------------ ------------
Total liabilities 33,428,172 41,956,051
------------ ------------
Stockholders' equity:
Preferred stock-Series A, B and C convertible, $.01 par value. Authorized:
10,000,000 shares at June 28, 1997 and 20,000 Series A shares, 34,750 Series B shares,
and 30,000 Series C shares at June 29, 1996.
No preferred stock issued or outstanding at June 28, 1997. -- 14,456,506
Issued and outstanding: 20,000 Series A, 32,416 Series B shares at June 29, 1996
Common stock - $.01 par value at June 28, 1997 and no par value at June
29, 1996. Voting class - authorized 50,000,000 shares; 7,231,211 shares
issued and outstanding at June 28, 1997 and 933,720 at June 29, 1996.
Non-voting class - authorized 205,000 shares, no shares issued or outstanding. 72,312 3,050,211
Additional paid-in capital 50,950,900 --
Retained earnings (deficit) 1,327,532 (382,926)
Less: cost of common stock held in treasury, 8,697 shares at June 28, 1997. (77,309) --
------------ ------------
Total stockholders' equity 52,273,435 17,123,791
------------ ------------
Total liabilities and stockholders' equity $ 85,701,607 $ 59,079,842
============ ============
See accompanying notes to consolidated financial statements.
F-3
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Income
Years ended
----------------------------------------
June 28, June 29, July 1,
1997 1996 1995
------------- ----------- -----------
Net sales $ 133,945,916 $94,589,013 $63,174,091
Cost of sales and occupancy 83,831,969 59,139,402 39,756,651
------------- ----------- -----------
Gross profit 50,113,947 35,449,611 23,417,440
Selling, general and administrative expenses 45,226,940 33,732,517 22,316,263
------------- ----------- -----------
Income from operations 4,887,007 l,717,094 1,101,177
Interest expense 1,401,596 1,528,969 411,553
------------- ----------- -----------
Income before taxes and extraordinary item 3,485,411 188,125 689,624
Income taxes 1,462,067 117,884 322,100
------------- ----------- -----------
Income before extraordinary item 2,023,344 70,241 367,524
Extraordinary item- loss on early retirement of debt,
net of income tax benefit of $226,572 (312,886) -- --
------------- ----------- -----------
Net income $ 1,710,458 $ 70,241 $ 367,524
============= =========== ===========
Net income per common and common equivalent share:
Before extraordinary item $ 0.31 $ 0.01 $ 0.08
Extraordinary item (0.05) -- --
------------- ----------- -----------
Net income per common and common equivalent share $ 0.26 $ 0.01 $ 0.08
============= =========== ===========
Weighted average common and common equivalent shares
outstanding 6,562,013 5,049,869 4,838,570
============= =========== ===========
See accompanying notes to consolidated financial statements.
F-4
FACTORY CARD OUTLET CORP.
AND SUBSIDARY
Consolidated Statements of Stockholders' Equity
Preferred stock Common stock Additional
------------------------ ----------------------- paid-in
Shares Amount Shares Amount capital
------ ------------ ------- ----------- ------------
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) 27,469,483
Issuance of common stock-
initial public offering -- -- 2,944,050 29,441 23,093,418
Exercise of stock options and warrants -- -- 218,767 2,188 114,359
Income tax benefit from stock
options exercised -- -- -- -- 77,414
Purchase of treasury stock at cost -- -- -- -- (12,377)
Issuance of treasury stock -- -- -- -- --
Additional paid in capital from
compensation stock options -- -- -- -- 208,603
-------- ------------ ----------- ----------- ------------
Balance at June 28, 1997 -- $ -- 7,231,211 $ 72,312 $ 50,950,900
======== ============ =========== =========== ============
Retained Treasury stock Total
earnings ------------------------ stockholders'
(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 -- -- -- --
Issuance of common stock-
initial public offering -- -- -- 23,122,859
Exercise of stock options and warrants -- 1,529 (12,797) 103,750
Income tax benefit from stock
options exercised -- -- -- 77,414
Purchase of treasury stock at cost -- 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
------------ --------- ---------- ------------
Balance at June 28, 1997 $ 1,327,532 8,697 $ (77,309) $ 52,273,435
============ ========= ========== ============
See accompanying notes to consolidated financial statements.
F-5
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended
-------------------------------------------
June 28, June 29, July 1,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,710,458 $ 70,241 $ 367,524
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of fixed assets 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 584,676 (148,831) (55,266)
Loss (gain) on the disposal of equipment and vehicles 358,818 37,439 (2,210)
Stock option compensation 208,603 -- --
Change in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (510,984) (314,603) 48,600
Inventories (13,554,796) (16,790,598) (9,131,663)
Prepaid expenses (572,459) (215,157) (78,267)
Other assets (1,601,572) (139,480) 21,390
Increase (decrease) in liabilities:
Accounts payable 2,850,022 7,661,297 1,823,227
Accrued expenses 110,876 1,138,558 790,944
Deferred rent liabilities 849,733 588,833 917,606
Income taxes payable 524,758 241,072 (287,109)
------------ ------------ ------------
Net cash used in operating activities (4,867,913) (5,098,327) (4,119,612)
------------ ------------ ------------
Net cash used in investing activities - purchase of fixed assets, net (10,105,930) (7,071,427) (6,864,952)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under revolving credit note 70,457,137 36,976,955 7,550,000
Repayment of borrowings under revolving credit note (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)
Payments of long-term debt (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 of common stock 23,122,859 -- --
Proceeds from exercise of employee stock options 103,750 -- --
Purchase of treasury stock (180,000) -- --
Sale of treasury stock to employee stock purchase plan 103,111 -- --
------------ ------------ ------------
Net cash provided by financing activities 14,822,679 11,856,886 11,096,811
------------ ------------ ------------
Net (decrease) increase in cash (151,164) (312,868) 112,247
Cash at beginning of year 202,344 515,212 402,965
------------ ------------ ------------
Cash at end of year $ 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. (the "Company") and its wholly owned subsidiary,
Factory Card Outlet of America, Ltd. ("FCO"). FCO 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 18 states as of June 28, 1997.
All intercompany balances have been eliminated in
consolidation.
Fiscal Years
The Company's fiscal year ends 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.
In January of 1998, the Company will change its fiscal
year-end to the Saturday closest to January 31 and will use January as its
fiscal year-end in the future.
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
$2,070,221 and $1,310,047 as of June 28, 1997 and June 29, 1996,
respectively. Amortization of these software costs was $545,310 and
$337,187 for the fiscal years ended June 28, 1997 and June 29, 1996,
respectively.
Income Taxes
The Company and its wholly owned subsidiary, FCO, file a
consolidated Federal income tax return. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between 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.
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 June 28, 1997 and June 29, 1996,
include $264,326 and $57,242, 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 June 29, 1996 and July 1, 1995,
no amounts were reported as prepaid. For the fiscal years ended June 28,
1997, June 29, 1996, and July 1, 1995, advertising expense was $4,006,355,
$2,471,996 and $1,464,354, respectively.
Earnings per Share
Earnings per share were computed by dividing net income by the
weighted average number of common shares and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares
consist of common shares issuable upon the conversion of the preferred
stock and common stock options. For the fiscal 1996 and 1995 computations,
stock options issued during the twelve-month period prior to the Company's
initial public offering in December 1996 have been included in the
calculation as if they were outstanding for the entire period using the
treasury stock method and the initial public offering price.
Employee Stock Plans
Effective June 30, 1996, the Company adopted Statement of
Financial Accounting Standards (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 of
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 fiscal 1997 and fiscal 1996 as if the
Company had elected to recognize compensation cost based on the fair value
of the options at grant date.
(2) Fixed Assets
1997 1996
------------------------------------------------------------------------
Fixtures and equipment $27,116,760 $16,337,565
Leasehold improvements 7,942,895 4,578,763
------------------------------------------------------------------------
Total fixed assets 35,059,655 20,916,328
Less accumulated depreciation and amortization 8,995,889 5,992,437
------------------------------------------------------------------------
Fixed assets, net $26,063,766 $14,923,891
------------------------------------------------------------------------
F-9
(3) Debt
Revolving Credit Agreement
The Company has a revolving credit agreement with its bank
which permits the Company to borrow up to a maximum $25,000,000. Advances
under the agreement, which expires October 1, 1998, are limited based on
inventory levels as defined in the agreement. Amounts outstanding under
this and preceding agreements totaled $3,775,400 and $13,127,155 at June
28, 1997 and June 29, 1996, respectively. The average borrowings under the
agreement were $6,079,600 and $11,215,500 during fiscal years 1997 and
1996, respectively. Interest is payable monthly at an annual rate equal to
the bank's prime rate or, at the Company's option, 2.75% over the London
Interbank Offered Rate (LIBOR). The bank's prime rate was 8.5% at June 28,
1997 and 8.25% at June 29, 1996. The 30-day LIBOR rate was 5.69% at June
28, 1997. A fee of 0.25% per year is assessed on the unused portion of the
line, however if the unused portion exceeds $20,000,000 the fee increases
to 0.40%. Borrowings under the revolving credit term note are secured by
all business assets of the Company. This agreement contains restrictive
covenants, the more significant of which require the maintenance of
minimum ratios of total liabilities to net worth and minimum levels of
tangible net worth and net working capital. The Company is in compliance
with all restrictive covenants at June 28, 1997.
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.
F-10
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.
Long-term debt
Long-term debt consists principally of motor vehicle and
equipment loans.
1997 1996
- ---------------------------------------------------------------------------------------
Term Loan $ -- $ 1,099,152
Various installment notes payable, due in monthly installments
through fiscal 2001, each including interest at rates ranging
from 2.9% to 11.36%, secured by motor vehicles 67,870 118,276
- ---------------------------------------------------------------------------------------
Total long-term debt 67,870 1,217,428
Less current maturities of long-term debt 47,269 553,205
- ---------------------------------------------------------------------------------------
Long-term portion $20,601 $ 664,223
=======================================================================================
On May 1, 1995 the Company entered into a term loan agreement
with a bank for $1,500,000. The term loan was secured by computer
equipment and software. Interest on the amount borrowed was calculated at
a fixed rate of 8.08%. This term loan was repaid in December 1996.
Maturities of long-term debt are as follows:
Fiscal year Amount
- --------------------------------------------------------------------------------
1998 $47,269
1999 16,432
2000 4,169
- --------------------------------------------------------------------------------
Total $67,870
================================================================================
On April 20, 1994, the Company entered into a term loan
agreement for $1,500,000 with one of the Company's shareholders. This term
loan matured and was repaid on July 20, 1994. Interest on this loan
accrued at a rate of 12% on the outstanding and unpaid principal amount
and was paid in common stock. In addition, the Company paid a facility fee
at maturity, as specified in the term loan agreement.
Subordinated debentures issued during fiscal year 1991, held
by shareholders and directors of the Company, matured on July 20, 1994.
Interest on the debentures accrued at the rate of 8.032 shares of common
stock per quarter for each $1,000 of debentures. Common stock totaling
$236,750 was issued upon maturity of the debentures in fiscal 1995.
F-11
(4) Lease Commitments
The Company, through its FCO subsidiary, 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 FCO and/or 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 $4,430,927 and $416,879 at June 28, 1997 and
June 29, 1996, respectively. Accumulated amortization related to such
fixed assets was $329,930 and $77,628 at June 28, 1997 and June 29, 1996,
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 June 28, 1997:
Capital Operating
Fiscal year leases leases
- --------------------------------------------------------------------------------
1998 $1,471,268 $ 15,383,502
1999 1,416,647 15,056,418
2000 1,334,849 14,758,130
2001 345,232 14,453,526
Thereafter -- 61,603,258
- --------------------------------------------------------------------------------
Total minimum lease payments 4,567,996 121,254,834
Less amount representing interest 721,101 --
- --------------------------------------------------------------------------------
Present value of net minimum lease payments (including
long-term obligations of $2,755,510) $3,846,895 $ --
================================================================================
Rent expense charged to operations under operating leases
amounted to $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, consists of:
Current Deferred Total
- -----------------------------------------------------------------------------
Fiscal year 1997:
Federal $ 796,758 $ 458,930 $1,255,688
State and local 80,634 125,745 206,379
- -----------------------------------------------------------------------------
$ 877,392 $ 584,675 $1,462,067
=============================================================================
Fiscal year 1996:
Federal $ 257,675 $(155,355) $ 102,320
State and local 9,040 6,524 15,564
- -----------------------------------------------------------------------------
$ 266,715 $(148,831) $ 117,884
=============================================================================
- -----------------------------------------------------------------------------
Fiscal year 1995:
Federal $ 321,114 $ (52,958) $ 268,156
State and local 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:
================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------
Computed "expected" tax expense 34.0% 34.0% 34.0%
Increase in income taxes resulting from:
State and local income taxes, net of
Federal income tax benefit 4.4 4.6 5.4
Non-deductible meals and entertainment .8 15.8 2.1
Non-deductible life insurance premiums .5 6.8 1.8
Non-deductible penalty -- -- 1.7
Other, net 2.3 1.5 1.7
- --------------------------------------------------------------------------------
Income tax expense 62.7% 42.0% 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:
================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets related to:
Alternative minimum tax credit $ 456,900 $ 382,682 $ 158,393
Deferred rent liabilities 749,651 542,593 444,325
Accrued expenses 92,762 209,652 149,634
Inventories 114,570 92,837 --
Debt discount and deferred financing costs -- 60,211 --
- --------------------------------------------------------------------------------
Total gross deferred tax assets 1,413,883 1,287,975 752,352
- --------------------------------------------------------------------------------
Deferred tax liabilities related to:
Fixed assets 1,384,017 673,433 284,140
Other -- -- 2,501
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,384,017 673,433 286,641
- --------------------------------------------------------------------------------
Net deferred tax asset $ 29,866 $ 614,542 $ 465,711
================================================================================
Management believes that, with respect to deferred tax assets,
no valuation allowance was necessary at June 28, 1997 and June 29, 1996.
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.
Acquisition of Subsidiary's Minority Interest
In September 1992, the Company entered into an agreement with
The Card Mart ("Card Mart"), an entity in which a former director of the
Company had a partnership interest, to form FCOA-Baltimore. FCO managed
the operation of FCOA-Baltimore, a chain of specialty stores in the
Baltimore-Washington metropolitan area offering a discount price format
consistent with that of FCO's other stores. Because FCOA-Baltimore was a
controlled subsidiary, the consolidated financial statements of the
Company include the accounts of FCOA-Baltimore.
F-15
In October 1994, FCOA-Baltimore was merged with and into FCO.
In connection with the merger, Card Mart, the holder of all of the
FCOA-Baltimore preferred stock, received 64,256 shares of the Company's
common stock in exchange for its interest in FCOA-Baltimore. The
acquisition of this interest was accounted for as a purchase. No goodwill
was recognized for this transaction as the book value of the net assets
acquired approximated their fair market value.
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 June 28, 1997 shares of common stock were reserved for the
following purposes:
Exercise of outstanding stock options 1,023,841
Granting of additional stock options 133,004
Warrants convertible to common stock 76,224
---------
1,233,069
=========
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 (refer
to note 9).
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
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 during the fiscal
year ended June 28, 1997 of $208,603. 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
common 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).
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:
F-17
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Net income - As reported $ 1,710,458 $ 70,241
Pro forma 1,449,941 46,371
Net income per common and common
equivalent share - As reported 0.26 0.01
Pro forma 0.22 0.01
================================================================================
Pro forma net income reflects only options granted 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 fiscal years 1997 and 1996 was estimated using the Black
Scholes Option-Pricing Model with the following weighted-average
assumptions; 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; 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:
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
Number of Weighted-average Number of Weighted-average
shares exercise price per shares exercise price per share
share
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 739,346 $ 2.36 707,218 $ 2.38
Granted 432,083 3.58 72,288 2.49
Exercised (99,396) 1.17 - -
Forfeited (48,192) 3.11 (40,160) 3.05
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,023,841 2.97 739,346 2.36
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 568,560 2.85 394,672 1.89
- ----------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year 1.69 1.62
- ----------------------------------------------------------------------------------------------------------
Available for future grants at end of
year 133,004 212,446
- ----------------------------------------------------------------------------------------------------------
F-18
Information about options outstanding and exercisable at June 28,
1997 is as follows:
- -------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Number Weighted Average
Exercise Prices Outstanding as of Remaining Average Exercisable as of Exercise Price
June 28, 1997 Contractual Life Exercise June 28, 1997
Price
- -------------------------------------------------------------------------------------------------------------------
$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 $121,810, $86,043 and $53,661,
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 period. Through June 28, 1997, withholdings from employees for
purchases under the Plan totaled $161,471.
F-19
(10) Related-party Transactions
FCO made inventory purchases of $3,474,412 and $3,548,388 in
fiscal 1997 and 1996, 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 4.8% and 6.2% of FCO's
total inventory purchases in fiscal 1997 and 1996, respectively. At June
28, 1997, FCO had no outstanding amounts payable related to these
purchases. At June 29, 1996, FCO owed $186,167 for these purchases.
During fiscal 1996, FCO entered into a 30-month supply
agreement with Fine Art Developments, p.l.c. (Fine Art), a publicly owned
United Kingdom company, requiring FCO to purchase a minimum of 42% of its
greeting card purchases from Fine Art each year. During fiscal 1997 and
1996, FCO purchased $5,337,819 and $4,927,014 of its greeting card
purchases from Fine Art. At June 28,1997 and June 29, 1996, FCO owed
$3,192,596 and $3,493,720 to Fine Art for these purchases. In August 1996,
Fine Art purchased 2,600 shares of convertible preferred stock of the
Company.
During fiscal 1996, the Company made a loan in the amount of
$175,000 to its President and Chief Executive Officer to assist with
relocation expenses. The loan bears interest at the prime rate of the
Company's bank. The principal balance of the loan was repaid in August
1996.
(11) Supplemental Cash Flow Information
1997 1996 1995
- --------------------------------------------------------------------------------
Cash paid during the fiscal year for:
Interest $1,441,114 $1,173,344 $634,910
Income taxes 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 $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 June 28, 1997 and June
29, 1996 include trade accounts receivable, trade accounts payable,
revolving credit term note payable, subordinated debentures, and long-term
debt. The carrying value of trade accounts receivable, trade accounts
payable and revolving credit term note payable approximates fair value
because of the short maturity of these instruments. The fair value of the
Company's subordinated debentures, and long-term debt has been determined
based on discounted cash flows using current interest rates of similar
instruments and are not materially different from their financial
statement carrying values.
(13) Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," is effective for both interim and annual periods
ending after December 15, 1997. The Company will adopt the new standard,
as required, in the quarter ending December 1997. For the fiscal year
ending June 28, 1997, SFAS No. 128 would not have had a material impact on
the Company's earnings per share calculation.
SFAS No. 130, "Reporting Comprehensive Income," is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. The Company will adopt SFAS
No. 130 effective February 1, 1998, and is evaluating the effects, if any,
on the financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for
the way that public business enterprises report financial and descriptive
information about reportable operating segments in annual financial
statements and interim financial reports issued to stockholders. The
Company has determined that SFAS No. 131 will not require the Company to
change the way it presents its results in the financial statements to
stockholders.
F-21
(14) Subsequent Events
Lease Commitment
Subsequent to June 28, 1997, financing for additional computer
equipment was incorporated into an existing master lease agreement in the
amount of $1,914,000. Payments on the additional amounts financed will be
made over three years.
Bank Commitment Letter
On September 9, 1997, the Company received a commitment letter
from its Bank to increase its existing line of credit facility from
$25,000,000 to the lesser of $35,000,000 or a predetermined advance rate
(not to exceed 50%) against net inventory as determined by an appraisal.
Interest will be payable at an annual rate equal to the bank's prime rate
or, at the Company's option, a rate based on LIBOR plus additional basis
points variable on the Company's effective debt ratio. In addition, a fee
of 0.25% per year will be assessed quarterly on the unused portion of the
facility. This commitment letter also contains 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 terms of the commitment letter are subject to the
negotiation and execution of definitive loan documents and to satisfactory
appraisal results.
(15) Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
- --------------------------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
- --------------------------------------------------------------------------------
(Dollars in thousands)
Year ended June 28, 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 (0.25) 0.09 0.03 0.29
Year ended June 29, 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 (0.26) 0.05 (0.09) 0.30
================================================================================
F-22
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
Under date of August 8, 1997, except as to Note 14 which is dated as of
September 9, 1997, we reported on the consolidated balance sheets of Factory
Card Outlet Corp. and subsidiary as of June 28, 1997 and June 29, 1996 and the
related statements of income, stockholders' equity, and cash flows for 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
August 8, 1997, except as to Note 14
of the Notes to the Consolidated
Financial Statements which is dated
as of September 9, 1997
S-1
Schedule I
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Condensed Financial Information of Factory Card Outlet Corp.
Balance Sheets
June 28, June 29,
ASSETS 1997 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 17,407 $ 17,069
Due from subsidiary 13,694,429 11,989,469
Note receivable - subsidiary 32,728,546 --
------------ ------------
Total current assets 46,440,382 12,006,538
Investment in subsidiary 5,833,053 5,117,253
------------ ------------
Total assets $ 52,273,435 $ 17,123,791
============ ============
STOCKHOLDERS' EQUITY
Preferred stock - Series A, B, and C convertible, $.01 par value
Authorized: 10,000,000 shares at June 28, 1997 and
20,000 Series A shares, 34,750 Series B shares and 30,000
Series C shares at June 29, 1996. No preferred stock
issued or outstanding at June 28,1997.
Issued and outstanding shares: 20,000 Series A and
32,416 Series B shares at June 29, 1996. $ -- $ 14,456,506
Common stock - $.01 par value at June 28,1997 and no par value at June 29,
1996. Voting class - authorized 50,000,000 shares; 7,231,211 shares issued
and outstanding at June 28, 1997 and 933,720 at June 29, 1996.
Non-voting class - authorized 205,000 shares, no shares
issued or outstanding 72,312 3,050,211
Additional paid-in capital 50,950,900 --
Retained earnings (deficit) 1,327,532 (382,926)
Less: cost of common stock held in treasury, 8,697 shares at
June 28, 1997. (77,309) --
------------ ------------
Total stockholders' equity $ 52,273,435 $ 17,123,791
============ ============
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
Fiscal Years Ended
-------------------------------
June 28, June 29, July 1,
1997 1996 1995
----------- ------- --------
Interest income - external $ 338 $ 363 $ 342
Interest income - subsidiary note receivable 1,713,059 -- --
Equity in net income of subsidiary 715,800 69,877 367,182
----------- ------- --------
Income before taxes 2,429,197 70,240 367,524
Income tax expense (718,739) -- --
----------- ------- --------
Net income $ 1,710,458 $70,240 $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
Fiscal Years Ended
------------------------------------------
June 28, June 29, July 1,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,710,458 $ 70,240 $ 367,524
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net income of subsidiary (715,800) (69,877) (367,182)
Increase in due from subsidiary (53,831) -- (11,379,258)
------------ ------------ ------------
Net cash provided by (used in) operating activities 940,827 363 (11,378,916)
------------ ------------ ------------
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 103,750 -- --
Purchase of treasury stock (180,000) -- --
Sale of treasury stock to employee stock purchase plan 103,111 -- --
------------ ------------ ------------
Net cash provided by financing activities 31,788,057 -- 11,379,258
Cash used in investing activities - Increase in note receivables
from subsidiary (32,728,546) -- --
------------ ------------ ------------
Net increase in cash 338 363 342
Cash at beginning of year 17,069 16,706 16,364
------------ ------------ ------------
Cash at end of year $ 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 1
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 June 28, 1997
and June 29, 1996 and for 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 investments in its
subsidiary is 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" in the
statements.
(3) Notes Receivable - Subsidiary
During fiscal year 1997, the Company entered into a note with its
subsidiary. 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.
S-5
EXHIBIT INDEX
================================================================================
Exhibit No. Description
- ----------- -----------
- --------------------------------------------------------------------------------
3.1(1) Form of Amended and Restated Certificate of Incorporation of the
Company.
- --------------------------------------------------------------------------------
3.2 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.
- --------------------------------------------------------------------------------
10.1.1(1) Loan Agreement, dated as of October 1, 1995, between FCO 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.
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10.6.1(1) 1989 Stock Option Plan of the Company, as amended.
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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 Loan Agreement dated as of November 10, 1995 among the
Company, FCO and Bank One, Chicago, N.A. ("Bank One"), as amended.
- --------------------------------------------------------------------------------
10.7.1(1) Business Purpose Revolving Promissory Note dated November 1, 1996
from the Company and FCO to Bank One.
- --------------------------------------------------------------------------------
10.7.2(1) Promissory Note dated as of May 1, 1995 from the Company and FCO to
Bank One.
- --------------------------------------------------------------------------------
10.7.3(1) Business Loan Agreement dated as of November 1, 1996 among the
Company, FCO and Bank One.
- --------------------------------------------------------------------------------
10.7.4 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").
================================================================================
================================================================================
Exhibit No. Description
- ----------- -----------
- --------------------------------------------------------------------------------
10.9.2(1) Stock Purchase Warrant dated November 15, 1995 by and between the
Company and Sirrom.
- --------------------------------------------------------------------------------
10.9.3(1) Secured Promissory Note dated November 15, 1995 by and between FCO
and Sirrom.
- --------------------------------------------------------------------------------
10.9.4(1) Security Agreement dated November 15, 1995 by and between FCO and
Sirrom.
- --------------------------------------------------------------------------------
10.9.5(1) Guaranty Agreement dated November 15, 1995 by and between the
Company and Sirrom.
- --------------------------------------------------------------------------------
10.9.6(1) First Amendment to Loan Agreement and Loan Documents dated June 28,
1996 by and between FCO and Sirrom.
- --------------------------------------------------------------------------------
10.9.7(1) Stock Purchase Warrant dated June 28, 1996 by and between the
Company and Sirrom.
- --------------------------------------------------------------------------------
10.9.8(1) Secured Promissory Note dated June 28, 1996 by and between FCO and
Sirrom.
- --------------------------------------------------------------------------------
10.9.9(1) Amended and Restated Stock Purchase Warrant dated July 30, 1996 by
and between the Company and Sirrom.
- --------------------------------------------------------------------------------
10.9.10(1) Amendment to Stock Purchase Warrant dated July 30, 1996 by and
between the Company and Sirrom.
- --------------------------------------------------------------------------------
10.10.1(1) Term Lease Master Agreement dated October 28, 1996 by and between
FCO and IBM Credit Corporation.
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10.10.2(1) Master Lease Agreement dated August 19, 1996 by and between FCO and
Symbol Lease, Inc.
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21.1(1) List of the subsidiaries of the Company.
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23.1 Consent of KPMG Peat Marwick LLP.
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24.1 Power of Attorney (contained on the signature page of this
Resignation Statement).
- --------------------------------------------------------------------------------
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.