ITEM 1. BUSINESS
General
Factory Card Outlet Corp. ("FCO") and its subsidiary, Factory Card Outlet of America Ltd. (collectively, with FCO, the "Company"), are a chain of company- owned stores offering a wide selection of greeting cards, giftwrap, balloons, everyday and seasonal party supplies and other special occasion merchandise at everyday value prices. As of March 27, 2001, the Company operated 175 stores in 20 states. Based on the published number of stores of the Company's competitors as compiled by the Company from various business publications and other publicly available information, the Company believes it is one of the largest chains of company-owned stores in the greeting card, party supply and special occasion industry. The Company opened 33 and 58 stores in fiscal 1998 and 1997, respectively. The Company currently has no plans to open any additional stores in fiscal 2001 and the Company closed 28 stores in fiscal 1999 and 7 stores in fiscal 2000.
The Company's stores provide customers with a value-oriented, "one-stop" shopping destination for greeting card, party supply and special occasion merchandise for all major holidays and celebratory events, including birthdays, graduations, weddings, baby showers and other family, religious and special occasions. The Company's newer stores average approximately 12,000 square feet, with approximately 80% of the space devoted to selling space, and are designed to provide ease of shopping within an attractive, spacious and festive environment.
Proceedings Under Chapter 11 of the Bankruptcy Code
On March 23, 1999, the Company filed petitions for reorganization under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The petitions were filed in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are currently assigned case numbers 99- 685 (PJW) and 99-686 (PJW) (the "Chapter 11 Cases"). The Chapter 11 Cases have been procedurally consolidated for administrative purposes. The Company is currently operating its business and managing its properties as a debtor in possession pursuant to the Bankruptcy Code.
Subsequent to the commencement of the Chapter 11 Cases, the Company sought and obtained several orders from the Bankruptcy Court that were intended to stabilize their business and enable the Company to continue business operations as a debtor in possession. The most significant of these orders (1) approved a $50 million debtor in possession loan agreement, the revolving credit and guarantee agreement, among FCO, as borrower, Foothill Capital Corporation, as agent, and Paragon Capital LLC, as oversight agent, each for itself and any other lenders party thereto (the "Loan Agreement"), (2) permitted the Company to operate their consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases, and (3) authorized payment of prepetition wages, vacation pay and employee benefits and reimbursement of employee business expenses.
The Loan Agreement was entered into on March 23, 1999. The Loan Agreement originally provided FCO with a revolving line of credit for loans and letters of credit in an aggregate amount not to exceed $50 million, including the ability to issue up to $10 million of letters of credit, to be used for its ongoing working capital needs and for general corporate purposes. However, as $50 million was in excess of FCO's working capital needs, the aggregate amount of the loan was reduced to $32.5 million by an amendment dated March 19, 2001. The amendment also extended the term of the loan from March 23, 2001 to the earlier of July 31, 2001 or the effective date of the Company's plan of reorganization. The lenders under the Loan Agreement were granted a security interest in substantially all of FCO's assets as security for FCO's obligations under the Loan Agreement. All obligations under the Loan Agreement are afforded "super-priority" administrative expense status in the Chapter 11 Cases.
On April 6, 1999, a statutory committee of unsecured creditors (the "Creditors' Committee") was appointed by the Office of the United States Trustee to represent the interests of the Company's unsecured creditors in the Chapter 11 Cases. The Creditors' Committee has the right to review and object to certain business transactions and may participate in the formulation of the Company's long term business plan and plan of reorganization. The Company is required to reimburse certain fees and expenses of the Creditors' Committee, including fees for attorneys and other professionals, to the extent allowed by the Bankruptcy Court.
On July 12, 2000, the Bankruptcy Court directed the United States Trustee to appoint an additional committee consisting of equity security holders (the "Equity Committee"). The Company is required to pay the aggregate fees and expenses of the Equity Committee's professionals up to $250,000, subject to the Equity Committee's right to seek an increase in said amount upon a showing that the Equity Committee, through its members and/or its professionals, has conferred a tangible benefit on the Company's estates.
The Company has the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Company agrees to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Company is relieved from its obligations to perform further under the contract or lease but is subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases are treated as general unsecured claims in the Chapter 11 Cases. The Company obtained approval from the Bankruptcy Court to close and conduct closing sales at 27 stores. Subsequent to the closing of such stores, the Company sought and obtained approval from the Bankruptcy Court to reject 26 of the closed store leases and assume and assign one of such leases. On August 24, 2000 and January 31, 2001, an additional 5 and 2 store leases, respectively, were rejected. The Company will continue to analyze, and may assume or reject, additional leases and other existing contracts. The time within which the Company must assume or reject unexpired leases of real property, with the exception of one lease, currently expires on June 29, 2001. The time within which the Company must assume that one lease expires on May 31, 2001. The Company, however, may request that the Bankruptcy Court grant an extension of the time within which it must assume or reject unexpired leases of real property.
The Bankruptcy Code provides that the Company has an exclusive period during which only it may propose, file and solicit acceptances of a plan of reorganization. The exclusive period for the Company to propose a plan of reorganization was set to expire on March 30, 2001. However, by motion, dated March 29, 2001, the Company requested an extension of such exclusive period to and including July 31, 2001. The motion to extend the exclusive period is currently scheduled to be heard by the Bankruptcy Court on April 30, 2001. If the Company fails to file a plan of reorganization during the exclusive period or, after such plan has been filed, if the Company fails to obtain acceptance of such plan from the requisite impaired classes of creditors and equity security holders during the exclusive period, any party in interest, including a creditor, an equity security holder, a committee of creditors or equity security holders, or an indenture trustee, may file their own plan of reorganization for the Company.
On February 2, 2001, the Company, the Creditors' Committee and Factory Card Holdings, Inc. ("FCH") entered into a letter of intent which provided the basic parameters of an FCH investment in the Company and the chapter 11 plan of reorganization that would result therefrom. Subsequent to the execution of the letter of intent, FCH completed its due diligence. The Company, the Creditors' Committee and FCH then proceeded to negotiate the specific terms of the definitive transaction documents and the plan of reorganization. Those negotiations culminated in the execution of that certain Agreement on Plan of Reorganization of Factory Card Outlet Corp., dated as of March 26, 2001 (the "FCH Agreement"). The FCH Agreement, which is subject to, among other things, confirmation of a plan of reorganization that would have to be voted upon by creditors, provides for an investment of at least $10 million in the Company upon its emergence from chapter 11, at least $6 million of which would be in the form of equity.
The Company and FCH anticipate that they will file their Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Proposed by the Company and Factory Card Holdings, Inc. (the "Plan") and their
Joint Disclosure Statement of the Company and Factory Card Holdings, Inc. pursuant to Section 1125 of the Bankruptcy Code (the "Disclosure Statement") by mid April 2001. The Plan will provide that general unsecured creditors, whose claims are estimated to approximate $44 million, will receive a total cash distribution approximating $6 million, of which $5 million will be payable over a period of five years. The $5 million distribution will be subject to downward adjustment under certain circumstances. An additional distribution of up to $5 million will be available in the event that FCH were successful in raising proceeds from a public offering or other disposition of the Company's assets within a seven year period from the Company's emergence from chapter 11. The holders of the Company's outstanding common stock will not receive any distribution because the Plan will not result in creditors recovering the full amount of their claims. Consequently, the existing stock is expected to be cancelled.
The Company and FCH will seek Court approval of the Disclosure Statement after it is filed. Upon Court approval, the Disclosure Statement, along with the Plan, will be sent to impaired creditors for their consideration and approval. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that (1) with respect to each impaired class of creditors and equity security holders, each holder in such class will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation, (2) each impaired class of creditors and equity security holders has accepted the plan by the requisite vote (except as provided in the following sentence), and (3) confirmation of the plan is not likely to be followed by a liquidation or a need for further financial reorganization of the Company or any successors to the Company unless the plan proposes such liquidation or reorganization. If any impaired class of creditors or equity security holders does not accept a plan and assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan notwithstanding the non- acceptance of the plan by an impaired class of creditors or equity security holders if certain requirements of the Bankruptcy Code are met with respect to the non-accepting class. As the holders of the Company's outstanding common stock will not receive any distribution under the Plan and, consequently, will be deemed to have rejected the Plan, the Company and FCH currently intend to request confirmation of the Plan under the cram down provisions of the Bankruptcy Code.
In September 1999 the Company announced that it received notification that the NASDAQ's staff had delisted the Company's common stock from the NASDAQ National Market effective September 1, 1999.
Business
The key elements of the Company's business are as follows:
Merchandise Offering. The Company offers a wide selection of greeting cards, giftwrap, balloons, everyday and seasonal party supplies and special occasion merchandise. With over 23,000 SKUs in each of its stores, the Company's stores provide a single destination for a customer's special occasion product needs. The stores offer product selections for all major holidays and seasonal events, such as Valentine's Day, St. Patrick's Day, Passover, Easter, Secretary's Day, Mother's Day, Father's Day, Grandparent's Day, Fourth of July, Rosh Hashanah, Halloween, Thanksgiving, Christmas, Hanukkah, Kwanzaa and New Year's; celebratory events, including birthdays, graduations, weddings and baby showers; and other family, religious and special occasions. The following five major product categories comprise the Company's merchandise offering:
. Greeting Cards--The Company's stores feature approximately 4,000 titles of high quality, everyday and seasonal greeting cards for all occasions, all sold at an everyday low price. Boxed everyday and holiday cards are regularly sold at substantial discounts off manufacturers' suggested retail prices.
. Giftwrap--The Company believes its stores have become a destination for shoppers seeking a wide selection of giftwrap and giftwrap accessories and sells most of these items at lower prices than competitors. Items include glossy, printed, solid and foil giftwrap, solid and printed ribbons, bows, gift bags, gift boxes, tissue paper and gift tags.
. Balloons--Balloons are increasingly popular for all occasions. The Company's stores offer value in mylar and latex balloons and carry popular licensed designs along with a large selection for any occasion.
. Party Supplies--The Company stocks a broad selection of party supply merchandise for everyday and special occasions in a wide variety of attractive patterns and distinctive colors. Party supplies include tableware, tablecovers, cutlery, invitations, party favors, milestone birthday items, pinatas, banners, decorations, candles, decor and other related party items.
. Other Special Occasion Merchandise--The Company complements its major product lines by offering many other special occasion items in order to provide a "one-stop" shopping destination for customers. These items include candy, birthday and wedding items, candles and candle holders, stationery, gifts, novelty items and seasonal products.
Everyday Value Pricing. The Company's strategy of everyday value pricing is designed to provide customers with consistent value on purchases. The Company typically sells merchandise at discounts of 20% to 60% off manufacturers' suggested retail prices. In addition, the stores feature a "power aisle" offering a wide selection of opportunistic buys and manufacturers' seasonal over-runs, all priced at deep discounts and frequently changed to create continued customer interest.
Attractive, Spacious and Festive Superstore Format. The Company's stores have an attractive and festive atmosphere within a spacious "easy to shop" store. The superstores are designed to provide a comfortable shopping experience, with bright lighting, wide carpeted aisles and fixtures that offer customers easy access to merchandise. The Company has increased the size of its new stores to approximately 12,000 square feet. Management is currently evaluating the size of the Company's stores to determine if 12,000 square feet is optimal.
Targeted Advertising. The Company utilizes a Company-wide direct mail program to reach targeted customers and highlight the breadth and value of its merchandise. The direct mail pieces are printed in 4-color and range from four to eight pages depending on the season. The Company plans to continue this direct mail program and support all holidays and special events. The Company also uses radio advertising to support select major holiday selling seasons.
Distribution Center and Office Complex. The Company completed the consolidation of its distribution facilities and offices into a new distribution center and office complex in Naperville, Illinois in February 1998. The newly-constructed, three-story office building and 300,000 square- foot distribution center is on 39 acres. The lease agreement provides for the expansion of the warehouse to 600,000 square feet, as needed. The Company believes it is one of a few special occasion store chains to have a distribution facility. Management believes the distribution facility can provide the Company purchasing and distribution efficiencies.
Store Locations. As of March 27, 2001, the Company operated 175 stores in 20 states, all of which are leased. The Company's store leases typically have an average initial term of 10 years with two five-year renewal options.
Set forth below is a list of the Company's store locations by state as of March 27, 2001:
Product Sourcing
The Company has historically been able to take advantage of volume purchase discounts due to its size and the use of its distribution center. The Company purchases its inventory from more than 300 vendors world-wide, with the largest supplier, Creative Expressions, Inc., representing approximately 11.1% and the ten largest suppliers representing approximately 39.8% of the Company's aggregate purchases for the fiscal year ended February 3, 2001. A small portion of the Company's merchandise is imported from foreign manufacturers or their agents, principally from the Far East. As is customary in its industry, the Company does not have long term contracts with any suppliers.
Although the Company believes that its well-established relationships with overseas suppliers have historically provided it with an advantage over many of its competitors by enabling the Company to offer an extensive selection of distinctive products at higher gross margins, the Company's liquidity problems and the Chapter 11 Cases could have a material adverse effect on the Company and its relationships with its suppliers.
Management Information Systems
The Company believes that its management information systems are an important factor in supporting its business and enhancing its competitive position in the industry. Over the past three years, the Company has invested significant resources in systems and infrastructure to support its business and make it more efficient. The Company uses a management information and control system, which is based on the JDA Merchandise Management System software package ("JDA") and supports the complete range of retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to the Company's headquarters through personal computers, which interface with an IBM AS/400 and provide the stores with the ability to enter store orders and payroll information and send and receive electronic mail. These personal computers are also tied into the Company's point-of-sale system ("POS system"). The POS system provides sales information to the Company's stores and central office and is used to enhance merchandise planning and buying programs. While the POS system provides sales information, the Company intends to focus its future systems development efforts on enhancing inventory management tools.
Competition
The greeting card, party supply and special occasion industry is highly competitive. The Company currently competes against a diverse group of retailers, ranging from other party supply and greeting card retailers to designated departments in drug stores, general mass merchandisers, supermarkets and department stores of local, regional and national chains. In addition, a trend toward discounting the cost of party supplies and greeting cards is developing and the Company may encounter additional competition from new entrants in the future. Some of the Company's competitors have substantially greater financial resources and experience than the Company.
Trademarks
The Company has registered trademarks under the name of "Factory Card Outlet"(R) and "Partymania"(R) and the "Partymania"(R) design on the Principal Register of the United States Patent and Trademark Office.
Government Regulation
Each of the Company's stores must comply with regulations adopted by Federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors, and difficulties or failures in obtaining the required licenses or approvals, can delay and sometimes prevent, the opening of a new store. In addition, the Company must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other
working conditions. The Company also must comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that stores be accessible to customers with disabilities.
Employees
The Company had approximately 2,950 employees as of March 3, 2001, comprised of approximately 1,150 full-time and approximately 1,800 part-time employees. The number of store employees increases during peak selling seasons. The Company's employees are not covered by a collective bargaining agreement. The Company believes its relations with its employees are generally good.
ITEM 2.
ITEM 2. PROPERTIES
In addition to the Company's stores, all of which are leased, the Company also leases a distribution center in Naperville, Illinois, with the initial lease term expiring in February 2007. The Company has the option to renew the initial term of the lease for an additional period of 5 years. This facility consists of a three-story office building and 300,000 square-foot distribution center that sits on 39 acres of land.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company commenced the Chapter 11 Cases on March 23, 1999. Additional information relating to the Chapter 11 Cases is set forth in Part 1, Item 1 of this Annual Report on Form 10-K under the caption "Proceedings under Chapter 11 of the Bankruptcy Code": and in Note 1 of the Notes to Consolidated Financial Statements under the caption "Reorganization and Chapter 11 Filing."
Prior to the commencement of the Chapter 11 Cases, several court cases were commenced by creditors of the Company relating to unpaid amounts due to such creditors. These actions are now stayed as a result of Chapter 11 Cases. As of the date of this Annual Report on Form 10-K, the Company is aware of no material existing or threatened litigation to which it is or may be a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock traded on the NASDAQ National Market under the symbol "FCPY" until March 26, 1999, when the symbol was changed to "FCPYQ" as a result of the commencement of the Chapter 11 Cases. The common stock was delisted on September 1, 1999. The common stock now trades on the OTC Bulletin Board, an electronic quotation service for NASD Market Makers. There can be no assurance that the common stock will continue to trade on the OTC Bulletin Board. The following table sets forth the high and low closing sale prices of the Company's Common Stock as reported on the NASDAQ National Market for the periods indicated. After September 1, 1999, the prices presented are bid prices, which represent bid prices quoted by broker-dealers and do not necessarily reflect prices from actual transactions.
On March 27, 2001, the last bid price of the common stock reported on the OTC Bulletin Board was $0.02 At February 27, 1999, the approximate number of holders on record of the Common Stock was 114.
Dividends
The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. The Company expects earnings will be retained for the continued development of the Company's business. In addition, the Loan Agreement between the Company and its lenders restricts the ability of the Company to pay cash dividends on its capital stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the fiscal years in the two-year period ended June 28, 1997 and the seven month transition period ended January 31, 1998, are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of February 3, 2001 and January 29, 2000, and for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, and the report thereon, are included elsewhere in this Annual Report on Form 10-K. In addition, selected consolidated financial and operating data is presented as of and for the 53- week period ended January 31, 1998. This data was derived from the unaudited consolidated financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (Dollar amounts in thousands, except per share data)
- -------- (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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a chain of company-owned stores offering a wide selection of greeting cards, giftwrap, balloons, everyday and seasonal party supplies and special occasion merchandise at everyday value prices. As of March 27, 2001, the Company operated 175 stores in 20 states. The Company currently has no plans to open any additional stores in 2001 and the Company closed 7 stores in 2000, all due to reorganization and 28 stores in fiscal 1999, 27 due to reorganization and one due to a natural disaster.
Chapter 11 Filing
On March 23, 1999, the Company filed a petition for reorganization under chapter 11 of the Bankruptcy Code. The Company is currently operating its business and managing its properties as a debtor in possession pursuant to the Bankruptcy Code. See "Item 1. Business--Proceedings Under Chapter 11 of the Bankruptcy Code" and Note 1 of Notes to the Consolidated Financial Statements.
Other Items
In August 2000 and January 2001, the Company closed and conducted closing sales at 5 stores and 2 stores, respectively, that were in markets the Company did not intend to continue to operate in or were underperforming or unprofitable. During the fiscal year ended February 3, 2001, the Company recorded a provision for reorganization costs relating to the store closings of approximately $1.6 million. This provision included the write-down of fixed assets, estimated lease rejection claims and the loss on the disposition of merchandise inventory. In addition to the provision for the store closings, reorganization costs for professional fees and other costs related to the Company's reorganization were $6.4 million during the fiscal year ended February 3, 2001.
In April 1999, the Company obtained approval from the Bankruptcy Court to close and conduct closing sales at 27 stores that were in markets the Company did not intend to continue to operate in or were underperforming or unprofitable. During the fiscal year ended January 29, 2000, the Company recorded a provision for reorganization costs relating to the store closings of approximately $10.8 million. This provision included the write-down of fixed assets, estimated lease rejection claims and the loss on the disposition of merchandise inventory. In addition to the provision for the store closings, reorganization costs for professional fees and other costs related to the Company's reorganization were $8.2 million during the fiscal year ended January 29, 2000.
During the fiscal year ended January 30, 1999, as a result of the reassessment of previous operating strategies, the Company recorded several items which impacted the consolidated statement of operations. Cost of sales and occupancy included a $11.3 million provision for certain merchandise which was discontinued from the Company's ongoing inventory assortment, as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past holidays. Selling, general and administrative expenses included $3.6 million of charges consisting of: (1) a $2.1 million charge for lease termination costs relating to executed leases for new stores which the Company no longer plans to open; (2) a $0.7 million charge for employee severance and the write-off of new store design costs; and (3) $0.8 million of additional depreciation expense resulting from the change in the depreciable lives of certain technology equipment from ten to five years. The provision for income taxes for the fiscal year ended January 30, 1999 resulted from the establishment of a valuation allowance of $11.3 million to fully reserve for the Company's net deferred tax assets at January 30, 1999. See Note 8 "Income Taxes" in the Notes to Consolidated Financial Statements.
During the first quarter of fiscal 1998, the Company consolidated its distribution facilities and offices into a new distribution center in Naperville, Illinois. The three-story office building and 300,000 square-foot distribution center resides on 39 acres of land.
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:
53-Weeks Ended February 3, 2001 (Fiscal 2000) Compared to 52-Weeks Ended January 29, 2000 (Fiscal 1999)
Net Sales. Net sales increased $8.4 million, or 3.9%, to $226.1 million in Fiscal 2000 from $217.7 million in Fiscal 1999. The increase resulted primarily from better flow of merchandise to the stores. Fiscal 1999 sales were negatively impacted by the reduced flow of merchandise resulting from issues associated with the Company's liquidity and the Chapter 11 Cases. All sales categories, with the exception of giftwrap, enjoyed net sales increases in the current fiscal year. Comparable store sales increased $10.7 million or 5.0%. The Company includes stores opened 13 or 14 months after their opening date in the calculation of comparable store sales. If the opening date of a store falls in the first 14 days of a period, the store is included in the comparable store calculation in its 13th month of operation; otherwise, a store is included in the comparable store calculation in its 14th month of operation.
Gross Profit. Cost of sales includes distribution costs. Gross profit increased $7.4 million, or 7.7%, to $103.8 million in Fiscal 2000 from $96.4 million in Fiscal 1999. As a percentage of net sales, gross profit was 45.9% in Fiscal 2000 and 44.3% in Fiscal 1999. The higher gross profit percentage resulted from the realization of better margins in the basic party and balloon categories and from a sales price increase in cards from 39 cents to 49 cents in April 2000, partially offset by higher shrink experience in Fiscal 2000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, store occupancy, advertising, depreciation, other store operating and corporate administrative expenses. Store occupancy expenses are included in selling, general and administrative expenses for all information presented. Selling, general and administrative expenses decreased $0.7 million, or 0.7%, to $101.2 million in Fiscal 2000 from $101.9 million in Fiscal 1999. The decrease resulted primarily from operating 7 fewer stores in Fiscal 2000. As a percentage of net sales, selling, general and administrative expenses decreased to 44.7% in Fiscal 2000 from 46.8% in Fiscal 1999.
Interest Expense. Interest expense was $3.3 million in Fiscal 2000 compared to $3.0 million in Fiscal 1999. This increase resulted from increases in borrowing levels partially offset by lower interest rates.
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management believes that it is not likely that deferred tax assets created by net operating losses in Fiscal 2000 will be realized through future taxable income. Therefore, the Company has increased its valuation allowance, which was established in Fiscal 1999, to fully reserve for the potential tax benefits resulting from these net operating losses. As a result, the effective tax rate for Fiscal 2000 and Fiscal 1999 was zero.
52-Weeks Ended January 29, 2000 Compared to 52-Weeks Ended January 30, 1999 (Fiscal 1998)
Net Sales. Net sales decreased $8.8 million, or 3.9%, to $217.7 million in Fiscal 1999 from $226.5 million in Fiscal 1998. The decrease resulted primarily from liquidation of merchandise and closure of 27 stores starting in April 1999. These store closures resulted in decreased sales of $22.8 million in Fiscal 1999. Offsetting the decrease was a comparable store sales increase of $1.4 million or 0.7% and new store sales of $12.6 million.
Gross Profit. Cost of sales includes distribution costs. Gross profit increased $4.9 million, or 5.4%, to $96.4 million in Fiscal 1999 from $91.5 million in Fiscal 1998. As a percentage of net sales, gross profit was 44.3% during Fiscal 1999 and 40.4% for Fiscal 1998. The higher gross profit percentage resulted primarily from the $11.3 million inventory provision recorded in Fiscal 1998 discussed above under "Other Items".
Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, store occupancy, advertising, depreciation, other store operating and corporate administrative expenses. Store occupancy expenses are included in selling, general and administrative expenses for all information presented. Selling, general and administrative expenses decreased $12.9 million, or 11.3%, to $101.9 million in Fiscal 1999 from $114.8 million in Fiscal 1998. The decrease resulted from operating 28 fewer stores in Fiscal 1999. Additionally, a portion of the decrease can be attributed to charges taken in Fiscal 1998 discussed above in "Other Items". As a percentage of net sales, selling, general and administrative expenses decreased to 46.8% in Fiscal 1999 from 50.7% in Fiscal 1998.
Interest Expense. Interest expense was $3.0 million in Fiscal 1999 compared to $4.6 million in Fiscal 1998. This decrease resulted from lower borrowing levels needed to support 28 fewer stores.
Reorganization Items, net. See discussion above in "Other Items".
Income Taxes (Benefit). Management believes that it is not likely that deferred tax assets created by net operating losses in Fiscal 1999 will be realized through future taxable income. Therefore, the Company has increased its valuation allowance which was established in Fiscal 1998, to fully reserve for the potential tax benefits resulting from these net operating losses. As a result, the effective tax rate in Fiscal 1999 was zero.
Liquidity and Capital Resources
Current Sources and Uses of Cash
Cash flow used in operating activities was $1.7 million in Fiscal 2000 compared to $8.7 million of cash flow provided in Fiscal 1999. The items most significantly influencing this change were the decreases in the noncash portion of reorganization items and the increases in liabilities subject to compromise offset by the decreases in accounts payable.
Cash flow used in investment activities was $2.2 million in Fiscal 2000 and $2.0 million in Fiscal 1999. The Company's capital expenditures were primarily related to investments in information technology systems.
Cash flow provided by financing activities was $2.5 million in Fiscal 2000, while cash flow used in financing activities was $8.5 million in Fiscal 1999 and are attributable in both years to the level of borrowings and repayments.
On March 23, 1999, the Company filed the Chapter 11 Cases to address certain operational and liquidity disruptions. The Company's liquidity position for the remainder of fiscal 2001 will be impacted primarily by the success of initiatives undertaken to improve store level cash flows and the effects of the Chapter 11 Cases. The Company's uses of capital for the remainder of fiscal 2001 are expected to include working capital for operating expenses and satisfaction of current liabilities, expenditures related to maintaining and refurbishing existing stores, interest payments on outstanding borrowings and costs associated with the Chapter 11 Cases. The Company's long-term liquidity and the adequacy of the Company's capital resources cannot be determined until a plan of reorganization has been approved and confirmed in connection with the Chapter 11 Cases.
As a debtor in possession under the Bankruptcy Code, actions to collect prepetition indebtedness are stayed and certain contractual obligations may not be enforced against the Company. With the approval of the Bankruptcy Court, certain of these obligations may be paid prior to the confirmation of the reorganization plan. To date, the Company has received approval to pay customary obligations associated with the daily operation of its business, including the timely payment of new inventory shipments, employee wages and other obligations. As permitted under the Bankruptcy Code, the Company received Bankruptcy Court approval to reject 13 real estate leases for stores that were never opened and to close and conduct closing sales at 27 stores in fiscal 1999. The Company has not completed its review of all of its prepetition contracts and leases for assumption or rejection. The ultimate amount of, and settlement terms for, such liabilities are subject to an approved plan of reorganization and, accordingly, the timing and form of settlement are not presently determinable.
The Company is a party to the Loan Agreement dated as of March 23, 1999, as amended, which was entered into subsequent to the commencement of the Chapter 11 Cases and will terminate upon the earlier of July 31, 2001 or the effective date of the Company's plan of reorganization. The Loan Agreement provides the Company with a revolving line of credit for loans and letters of credit in an aggregate amount not to exceed $32.5 million outstanding at any one time, including a sublimit of $10.0 million for the issuance of letters of credit. The Company intends to use all amounts borrowed under the Loan Agreement for its ongoing working capital needs and for other general corporate purposes of the Company.
The Loan Agreement contains certain restrictive covenants, which, among other things, require the Company to maintain certain inventory levels and achieve specified operating results. The restrictive covenants also limit the Company's capital expenditures, asset sales and dividends and the ability of the Company to grant liens and incur additional indebtedness. The Company was in compliance with or had obtained waivers for all such convenants as of February 3, 2001.
As of March 27, 2001, the Company had $26.0 million of borrowings outstanding under the Loan Agreement and had utilized approximately $0.6 million of the Loan Agreement to issue letters of credit. The Company believes that its cash flow from operations and borrowings under the Loan Agreement will provide it with sufficient liquidity to conduct its operations while the Chapter 11 Cases are pending. The Company will be exploring opportunities to obtain long-term financing to support the Company's business plan after it emerges from Chapter 11; however, there can be no assurance that the Company will be able to obtain such financing on satisfactory terms, if at all.
The Company's present plans call for total capital expenditures of not more than $3.0 million in the fiscal year ending February 2, 2002. The Company had no material commitments in connection with these planned capital expenditures at February 3, 2001.
The Company does not intend to pay cash dividends in the foreseeable future and its current Loan Agreement restricts it from paying dividends on its capital stock.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks from changes in interest rates. The interest rate on the Company's revolving credit facilities, which represent a significant portion of the Company's outstanding debt, is variable based on the prime rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Report commencing on page and is incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
In accordance with general instruction G(3) of Form 10-K, except as set forth below, the information called for by items 10, 11, 12 and 13 of Part III will be filed by an amendment to this Form 10-K on or prior to 120 days after the end of the Company's fiscal year.
ITEM 10.
ITEM 10. CHAIRMAN AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
- -------- (1) All the Officers, other than William Freeman, James Constantine, Glen Franchi, Gary Rada and Carol Travis, only hold their respective positions in the Company's operating subsidiary.
William E. Freeman has been Chairman, President and Chief Executive Officer since October 1999. He is a co-founder of the Company, and has been a director of the Company since forming the investor group that acquired it in July 1989. Mr. Freeman was Chairman of the Board of Directors of the Company from April 1994 to April 1997. From May 1994 to October 1995, he was Chief Executive Officer of the Company's operating subsidiary, and from May 1994 to September 1996, he was Chief Executive Officer of the Company. From 1989 to 1994, he was President of the Company.
James D. Constantine has been Senior Vice President and Chief Financial Officer since February 2000. Prior to joining the Company, he was Senior Assistant Treasurer for Sears, Roebuck and Co. and held various managerial positions from 1981 to 1999. From 1974 to 1981 he held various managerial positions with Deloitte & Touche LLP.
Glen J. Franchi has been Executive Vice President and Treasurer of the Company since March 1995. He has been the Chief Operating Officer of the Company's operating subsidiary since November 1990. Prior to joining the Company, from 1977 to 1989, he held various management and senior financial positions with Carson Pirie Scott Co., a chain of retail department stores.
Gary W. Rada has been Executive Vice President since October 1999. From January 1998 to October 1999, he served as Senior Vice President and General Merchandise Manager. From 1997 to 1998, he served as the Vice President of General Merchandise for Bruno's, a Birmingham, Alabama supermarket and drug chain, which filed a voluntary Chapter 11 petition in February 1998. Prior to joining Bruno's, he held various management and merchandising positions with American Stores, including Merchandise Manager at American Drug Stores and Vice President of General Merchandise and Grocery Merchandising at Jewel Food Stores.
Carol A. Travis has been with the Company since it was originally founded in 1985, serving as Secretary of the Company since May 1994 and as Vice President since June 1994. She has been a Vice President of the Company's operating subsidiary since August 1987.
Timothy F. Gower has been Senior Vice President, Retail Store Operations since October 1999. From April 1998 to October 1999, he served as Vice President, Retail Store Operations. Prior to that, from August
1997 to March 1998, he served as Vice President of Store Operations for Zellers Inc., Canada's largest discount store chain. Prior to joining Zellers, he held various store operations positions with Office Max and F&M SuperDrug Stores.
Robert Krentzman has been Vice President, Information Technology since September 1995. From March 1994 to September 1995, he served as Director of Management Information Systems. From 1990 to 1994, he was Director, Management Information Systems, for Reader's Market, a division of Waldenbooks.
Joseph M. Cabon has been Vice President, Distribution since April 1995. From December 1993 to January 1995, he was employed as a consultant in retail distribution. From October 1992 through December 1993, he was Vice President, Logistics for One Price Clothing, a specialty retailer. In January 1995, he filed a bankruptcy petition under chapter 7 of the United States Bankruptcy Code, and that same month received a discharge from indebtedness in connection therewith.
William A. Beyerl has been Vice President, Human Resources since December 1999. From June 1999 to December 1999 he served as Director of Human Resources. From September 1997 to June 1999, he served as Director of Store Operations. From 1991 to 1997, he served as Director of Human Resources for Today's Man, a specialty menswear retailer on the East Coast. Prior to joining Today's Man, he held various management positions with Bradlees Department Stores and Gimbel's Department Stores.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report on Form 10-K.
1. The following financial statements of the Company are filed as a separate section of this Report commencing on page.
Independent Auditors' Report
Consolidated Balance Sheets as of February 3, 2001 and January 29,
Consolidated Statements of Operations for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999
Consolidated Statements of Stockholders' Deficit for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is filed as a separate section of this Report commencing on page S-1.
Independent Auditors' Report
Condensed Financial Information of Factory Card Outlet Corp.--Balance Sheets as of February 3, 2001 and January 29, 2000
Condensed Financial Information of Factory Card Outlet Corp.-- Statements of Operations for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999
Condensed Financial Information of Factory Card Outlet Corp.-- Statements of Cash Flows for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999
Notes to Condensed Financial Information of Factory Card Outlet Corp.
3. List of Exhibits.
The following exhibits are included as part of this Annual Report on Form 10-K or incorporated herein by reference.
- -------- 1. Incorporated by reference to the Company's Registration Statement as amended on Form S-1 Number 333-13827 as filed with the Commission on December 12, 1996. 2. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997. 3. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997. 4. Incorporated by reference to the Company's Current Report on Form 8-K filed on July 22, 1998. 5. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998. 6. Incorporated by reference to the Company's Current Report on Form 8-K filed on April 28, 1999.
(b) Reports on Form 8-K.
Company's Current Report on Form 8-K filed on April 4, 2001.
Company's Current Report on Form 8-K filed on February 2, 2001.
Company's Current Report on Form 8-K filed on October 13, 2000.
7. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints William E. Freeman and James D. Constantine with full power to act without the other, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this report on Form 10-K, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person hereby, ratifying and confirming that each of said attorneys-in-fact and agents or his substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Factory Card Outlet Corp.
/s/ William E. Freeman By: _________________________________ William E. Freeman, Chairman, President and Chief Executive Officer
Dated: April 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Factory Card Outlet Corp.:
We have audited the consolidated balance sheets of Factory Card Outlet Corp. and subsidiary as of February 3, 2001 and January 29, 2000 and the related consolidated statements of operations, stockholders' deficit and cash flows for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999. These consolidated financial statements are the responsibility of the management of Factory Card Outlet Corp. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Factory Card Outlet Corp. and subsidiary as of February 3, 2001 and January 29, 2000, and the results of their operations and their cash flows for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, in March 1999 the Company filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code. In addition, the Company's results reflect continued net loses. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chicago, Illinois March 21, 2001
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollar amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Dollar amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
See accompanying notes to consolidated financial statements.
FACTORY CARD OUTLET CORP. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
(1) Reorganization and Chapter 11 Filing
On March 23, 1999 Factory Card Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America, Ltd. (collectively, the "Company") filed petitions for reorganization under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The petitions were filed in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") and are currently assigned case numbers 99-685 (PJW) and 99-686 (PJW) (the "Chapter 11 Cases"). The Chapter 11 Cases have been procedurally consolidated for administrative purposes. The Company is currently operating its business and managing its properties as a debtor in possession pursuant to the Bankruptcy Code. The Company's liabilities, as of the petition date, are generally subject to settlement in a plan of reorganization, which must be voted on by certain of its creditors and confirmed by the Bankruptcy Court. Until a reorganization plan has been confirmed, the Company is prevented from making payments on prepetition debt unless permitted by the Bankruptcy Code or approved by the Bankruptcy Court. The Company will review all unexpired prepetition executory contracts and leases to determine whether they should be assumed or rejected. Parties affected by the rejection of contracts and leases may file claims against the Company.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations and the realization of assets and the satisfaction of liabilities in the normal course of business. The commencement of the Chapter 11 Cases, and net losses resulting in a deficit, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not give effect to adjustments, some of which could be material, to the carrying values of assets and liabilities which may be necessary as a consequence of a plan of reorganization. The continuation of the Company's business as a going concern is contingent upon, among other things, the ability to (1) formulate a plan of reorganization that will be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels of future profitable operations, (3) maintain adequate financing and (4) provide sufficient cash from operations to meet future obligations.
The Bankruptcy Code provides that the Company has an exclusive period during which only it may propose, file and solicit acceptances of a plan of reorganization. The exclusive period for the Company to propose a plan of reorganization currently expires on March 30, 2001. If the Company fails to file a plan of reorganization during the exclusive period or, after such plan has been filed, if the Company fails to obtain acceptance of such plan from the requisite impaired classes of creditors and equity security holders during the exclusive period, any party in interest, including a creditor, an equity security holder, a committee of creditors or equity security holders, or an indenture trustee, may file their own plan of reorganization for the Company. The Company plans to develop a plan of reorganization for submission to the Bankruptcy Court.
On February 2, 2001, the Company and the Creditors' Committee appointed in its Chapter 11 case entered into a non-binding term sheet with Factory Card Holdings, Inc. ("FCH") regarding a potential transaction which would provide the Company with funding to enable it to emerge from Chapter 11. Because the proposal would not result in creditors recovering the full amount of their claims, the term sheet does not contemplate holders of the Company's outstanding common stock receiving any distribution.
(2) Summary of Significant Accounting Policies
Basis of Presentation
All intercompany balances and transactions have been eliminated in consolidation.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Organization
The consolidated financial statements include the accounts of Factory Card Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. The Company is a chain of company-owned stores offering a wide selection of selection of greeting cards, giftwrap, balloons, everyday and seasonal party supplies and other special occasion merchandise at everyday value prices.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and related disclosures. Actual results could differ from those estimates.
Fiscal Years
The Company's fiscal year ends on the Saturday closest to January 31. The years ended February 3, 2001, January 29, 2000 and January 30, 1999 are referred to as fiscal 2000, 1999 and 1998, respectively. Fiscal 2000 is a 53 week period and fiscal 1999 and 1998 are 52 week periods.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or estimated net realizable value utilizing the retail method. In determining the cost of inventory, the Company includes costs incurred to purchase, store and distribute goods prior to sale. The company purchases its inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 11% and the ten largest suppliers representing approximately 40% of the Company's aggregate purchases in fiscal year 2000. Similarly, in fiscal year 1999 the company's largest supplier represented approximately 11% and the ten largest suppliers represented approximately 40% of the Company's aggregate purchases. In fiscal year 1998 the company's largest supplier represented approximately 9% and the ten largest suppliers represented approximately 42% of the Company's aggregate purchases.
At February 3, 2001 and January 29, 2000, the Company has provisions of $1,857 and $4,166, respectively, for certain merchandise which is to be discontinued from its ongoing inventory assortment, as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past holidays.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization is computed on a straight line basis over three to ten years for fixtures and equipment and over the initial term of the lease for leasehold improvements. Amortization related to capital leases is also included in depreciation and amortization. During fiscal 1998, the Company changed its estimate of the depreciable lives of certain technology equipment from ten to five years, resulting in additional depreciation expense of $771.
Income Taxes
The Company files a consolidated Federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
bases of assets and liabilities and are determined using tax rates and laws that are expected to be in effect when the differences are expected to reverse.
Deferred Rent Liabilities
Certain of the Company's operating leases provide for scheduled increases in base rentals over their terms. For these leases, the Company recognizes the total rental amounts expected to be paid over the lease terms on a straight line basis and, accordingly, has established corresponding deferred rent liabilities for the differences between the amounts recognized and the amounts paid. The Company also receives certain lease incentives, primarily construction allowances. These allowances have been deferred and are amortized on a straight-line basis over the initial term of a lease as a reduction of rent expense. In fiscal 2000 and fiscal 1999, deferred rent liabilities were reclassified to liabilities subject to compromise.
Intangibles
Certain software costs are capitalized and amortized on a straight line basis over three years. Unamortized software costs which are included in fixed assets, net were approximately $1,257 and $1,315 as of February 3, 2001 and January 29, 2000, respectively. Amortization of these software costs was approximately $751, $875 and $917 for fiscal 2000, 1999 and 1998, respectively.
Revenue Recognition
The Company records revenue at the point of sale for retail stores. The Company provides for returns at the time of sale based upon projected merchandise returns.
Advertising Expenses
The Company expenses advertising costs when the advertising first occurs. Advertising production costs incurred before the advertising takes place are recorded as a prepaid expense. At February 3, 2001, and January 29, 2000, $839 and $694 of advertising production costs were included in prepaid expenses, respectively. In fiscal 2000, 1999 and 1998, advertising expense was $8,157, $7,897 and $8,335, respectively.
Loss per Share
Loss per share--basic was computed by dividing net loss by the weighted average number of common shares outstanding during the period. Loss per share-- diluted includes the effect of stock options and warrants.
Options to purchase common stock outstanding during the periods presented were not included in the computation of loss per share--diluted because the option price was greater than the average market price of the common shares during the respective periods.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Fixed Assets
The components of fixed assets, net are as follows:
(4) Debt
Subsequent to the commencement of the Chapter 11 Cases, the Company entered into a Revolving Credit and Guaranty Agreement in March 1999 and subsequent amendments (the "Loan Agreeement") which provides up to $32,500 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. Borrowings under the facility are limited by inventory levels and have an interest rate of 1% over prime (9.50% at February 3, 2001). The Loan Agreement expires on the earlier of July 31, 2001 or the effective date of the Company's plan of reorganization. Borrowings under the Loan Agreement are secured by substantially all of the Company's assets. Certain restrictive covenants apply, including maintenance of certain inventory levels, achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met or waived.
Proceeds from the Loan Agreement were used in March 1999 to repay all borrowings under the Company's previous revolving credit agreement and term loan. As a result, the Company recognized an extraordinary loss of $1,292 associated with the early retirement of the Company's previous revolving credit agreement and term loan.
(5) Lease Commitments
The Company conducts substantially all of its activities using leased premises. Store and office leases generally provide that real estate taxes, insurance, maintenance, and operating expenses are obligations of the Company. Certain store leases also provide for contingent rentals based on sales in excess of specified minimums.
The cost of fixed assets held under capital leases included in fixed assets was $8,584 and $8,608 at February 3, 2001 and at January 29, 2000 respectively. Accumulated amortization related to such fixed assets was $6,131 and $4,416 at February 3, 2001 and January 29, 2000, respectively. Fixed assets held under capital leases consist principally of technology, office and warehouse equipment.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments for capital and operating leases with initial or remaining terms in excess of one year as of February 3, 2001.
The Company currently has the right to assume or reject unexpired lease contracts. Future minimum lease payments exclude payment for leases that have been rejected pursuant to Bankruptcy Court orders. Certain lessors of rejected leases have filed claims for damages and an estimate for such potential claims has been included in liabilities subject to compromise. The lease obligations described above are subject to possible adjustment under the Chapter 11 Cases.
Rent expense charged to operations under operating leases was $24,684, $25,722 and $26,001 in fiscal 2000, 1999 and 1998, respectively.
(6) Liabilities Subject to Compromise
The components of liabilities subject to compromise at February 3, 2001 and January 29, 2000 are as follows:
In conjunction with the Chapter 11 Cases, differences between claims filed by potential creditors and amounts recorded by the Company are currently being identified and reconciled. Any differences will be resolved by negotiated agreement between the Company and the claimant or by the Bankruptcy Court. Additional claims may arise in conjunction with the termination of contractual obligations related to executory contracts and leases. As a result, recorded amounts may be adjusted in the future. A plan of reorganization may materially change the amount and terms of these prepetition liabilities.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Reorganization Items, net
In August 2000 and January 2001, the Company closed and conducted closing sales at five and two stores, respectively, that were in markets the Company did not intend to continue to operate in or were underperforming or unprofitable. During fiscal 2000, the Company recorded a provision for reorganization costs relating to these store closings of approximately $1,587. This provision included the write-down of fixed assets, estimated lease rejection claims and the loss on the disposition of merchandise inventory. In addition to the provision for the store closings, costs for professional fees and other costs related to the Company's reorganization were $6,411 in fiscal 2000.
In April 1999, the Company obtained approval from the Bankruptcy Court to close and conduct closing sales at 27 stores that were in markets the Company did not intend to continue to operate in or were underperforming or unprofitable. During fiscal 1999, the Company recorded a provision for reorganization costs relating to these store closings of approximately $10,837. This provision included the write-down of fixed assets, estimated lease rejection claims and the loss on the disposition of merchandise inventory. In addition to the provision for the store closings, costs for professional fees and other costs related to the Company's reorganization were $8,245 in fiscal 1999.
(8) Income Taxes
Income taxes (benefit), excluding the tax benefit related to the extraordinary item in fiscal 2000 are as follows:
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes (benefit) differs from the amounts computed by applying the Federal income tax rate of 34% to income (loss) before income taxes (benefit) as a result of the following:
Deferred income taxes on the balance sheet reflect the net tax effect of operating loss and alternative minimum tax credit carryforwards along with the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
In assessing the realization of deferred tax assets, management considers the likelihood that those assets will be realized through future taxable income. Because the realization of the deferred tax assets may be limited by events involving the Chapter 11 Cases or other events related to the ownership of the Company, the Company has recorded a valuation allowance related to the net deferred tax assets at February 3, 2001 and January 29, 2000.
At February 3, 2001, the Company had net operating loss ("NOL") carryforwards for Federal tax purposes of $51,918 which expire beginning in 2017. The utilization of NOL carryforwards may be significantly limited by future events related to direct and/or indirect ownership changes of the Company.
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Employee Benefit Plans
1989 Incentive Stock Option Plan
A stock option plan was approved by the stockholders of the Company in July 1989 to provide additional incentives and opportunities through stock ownership to employees, outside directors and consultants of the Company. Under the plan, incentive stock options may be granted for the purchase of the Company's common stock at an exercise price not less than 100% of the fair market value at the time of grant as determined by the Board of Directors. The term of each option is also determined by the Board of Directors, but can not be more than ten years from the date of grant. Options are exercisable in accordance with the plan and generally vest at the rate of 20% to 25% per year from the date of grant. There have been no Incentive Stock Options granted subsequent to the bankruptcy filing on March 23, 1999.
Outside Director Stock Option Plan
In November 1997, the Company's shareholders approved the 1997 Outside Director Stock Option Plan permitting stock option awards to directors who are not employees of the Company. The 1997 Outside Director Stock Option Plan was effective in July 1997 and expires in July 2007. Under the plan, options may be granted for the purchase of the Company's common stock at an exercise price not less than 100% of the fair market value of a share of common stock on the date of grant. The number of shares of common stock reserved in connection with this plan is 250,000, subject to certain adjustments. The Company granted 160,000 options in November 1997 to eligible directors which become exercisable at the rate of 8.33% per quarter through November 2000.
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standard ("SFAS") No. 123, the Company's net loss would not have been materially different.
The number of stock options outstanding at the end of fiscal 2000, 1999 and 1998 were 407,545, 540,664 and 1,017,505, respectively. Stock options exercisable at the end of the same fiscal years were 378,795, 438,639 and 679,937, respectively. Additionally, the range of exercise prices for options outstanding at February 3, 2001 and at January 29, 2000 was $9.00 to $1.63. There have been no Outside Director Stock Options granted subsequent to the bankruptcy filing on March 23, 1999.
On March 26, 2001, the Company and the Creditors' Committee appointed in its Chapter 11 case entered into agreement, subject to confirmation, on a Plan of Reorganization of Factory Card Outlet Corp. with Factory Card Holdings, Inc ("FCH"). The agreement would provide the Company with funding to enable it to emerge from Chapter 11. The Plan of Reorganization does not contemplate holders of the Company's outstanding common stock receiving any distribution because the Plan of Reorganization would not result in creditors recovering the full amount of their claims. Consequently, the existing stock and all incentive stock option plans would be cancelled if the Plan of Reorganization is confirmed.
Incentive Savings Plan
The Incentive Savings Plan (the "ISP Plan") is a defined contribution plan sponsored by the Company for all eligible employees. Participants in the ISP Plan may elect to contribute between 2% and 13% of their pre-tax base salary, subject to limitations imposed by the Internal Revenue Service. The Company makes a discretionary matching contribution to the ISP Plan at the rate of 33% of the first 6% of the participant's contribution. For fiscal 2000, 1999 and 1998, the Company's discretionary matching contributions to the ISP Plan were $199, $193 and $230, respectively. The ISP Plan also allows for a discretionary base contribution to
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be made by the Company only if it has current or accumulated net profits. No discretionary base contributions have been made by the Company to date.
Employee Stock Purchase Plan
In December 1996, the Company adopted an Employee Stock Purchase Plan (the "ESPP Plan") to provide eligible employees the opportunity to purchase shares of its common stock. Employees may purchase shares, through payroll deductions, up to 10% of the employee's compensation, not to exceed $5 per offering period, at a price per share equal to 90% of the fair market value of the common stock as of the last day of any offering. Withholdings from employees for purchases under the ESPP Plan were -0- in fiscal 2000 and 1999 and $70 in fiscal 1998.
(10) Fair Value of Financial Instruments
The Company's financial instruments at February 3, 2001 and January 29, 2000 include accounts payable and debt. The Company has assumed that the carrying value of trade accounts payable approximates fair value because of the short period in which these liabilities are settled. The Company believes the carrying value of the debt approximates fair value due to the variable rate of interest on this instrument. Such fair values are subject to possible adjustment in conjunction with the bankruptcy proceedings discussed in Note 1.
(11) Quarterly Financial Information (unaudited)
Following is a summary of unaudited quarterly information:
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Factory Card Outlet Corp.:
Under date of March 21, 2001 we reported on the consolidated balance sheets of Factory Card Outlet Corp. and subsidiary as of February 3, 2001 and January 29, 2000 and the related consolidated statements of operations, stockholders' deficit and cash flows for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in Item 14(a)(2) of this Form 10-K. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 of the Notes to the Consolidated Financial Statements, on March 23, 1999, the Company filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code. In addition, the Company's results reflect continued net losses. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chicago, Illinois March 21, 2001
S-1
Schedule I
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
BALANCE SHEETS (Dollar amounts in thousands, except per share data)
See accompanying notes to condensed financial information.
S-2
Schedule I
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF OPERATIONS (Dollar amounts in thousands)
See accompanying notes to condensed financial information.
S-3
Schedule I
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
See accompanying notes to condensed financial information.
S-4
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP. (Dollar amounts in thousands)
(1) Basis of Accounting
The Condensed Financial Information of Factory Card Outlet Corp. ("the Company") has been prepared pursuant to Securities and Exchange Commission rules and regulations and should be read in conjunction with the Consolidated Financial Statements and Notes thereto as of February 3, 2001 and January 29, 2000 and the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999. The Condensed Financial Information of the Company has been prepared on an unconsolidated basis. The Company's investment in and amounts due from its subsidiary are recorded on the equity basis.
(2) Chapter 11 Filing
On March 23, 1999, the Company and its subsidiary, Factory Card Outlet of America, Ltd., filed a petition for reorganization under chapter 11 of title 11 of the United States Code. The Company is currently operating its business and managing its properties as a debtor in possession pursuant to the Bankruptcy Code. See Note 1 to the Notes to Consolidated Financial Statements.
(3) Guarantees
The Company has guaranteed the credit and debt agreements between its subsidiary and various lenders. For information related to the agreements, see Notes 1 and 4 of Notes to Consolidated Financial Statements.
(4) Notes Receivable--Subsidiary
During fiscal 1997, the subsidiary issued a note to the Company. Interest is accrued quarterly based on the prime lending rate plus two percent per year (10.50% at February 3, 2001). The note and any accrued interest is due and payable on demand.
(5) Royalty and Licensing Agreement
In June 1997 the Company entered into a Royalty and Licensing Agreement ("Agreement") with its subsidiary. This Agreement grants its subsidiary the right to use trademarks and tradenames owned by the Company in exchange for a royalty fee of one and one-half percent of net sales from operations.
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