UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997
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 no.)
745 Birginal Drive
Bensenville, Illinois 60106
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (630) 238-0010
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
The number of shares of common stock outstanding at May 6, 1997 was 7,230,207.
<PAGE>
Factory Card Outlet Corp.
Form 10-Q
For the Quarter Ended March 29, 1997
Index
Part I. Financial Information Page No.
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of
March 29, 1997 and June 29, 1996. 3
Consolidated Statements of Income for the
three fiscal months and nine fiscal months ended
March 29, 1997 and March 30, 1996. 4
Consolidated Statements of Cash Flows
for the nine fiscal months ended March 29, 1997
and March 30, 1996. 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Part II. Other Information 13
Signatures 14
2
<PAGE>
PART I - FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 29, June 29,
ASSETS 1997 1996
------------- --------------
<S> <C> <C>
Current assets:
Cash $ 237,831 $ 202,344
Accounts receivable 173,628 248,888
Due from related parties - 187,711
Inventories 53,645,286 41,803,820
Prepaid expenses 1,299,229 603,647
Deferred income taxes 787,341 302,490
------------------------------
Total current assets 56,143,315 43,348,900
Fixed assets, net 24,882,633 14,923,891
Deferred financing costs - 244,405
Deferred income taxes 312,052 312,052
Other assets 461,088 250,594
--------------------------------
Total assets $ 81,799,088 $ 59,079,842
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 1,721,680 $ 676,012
Accounts payable 13,917,301 12,125,070
Due to related parties 2,000,579 3,679,887
Income taxes payable - 282,771
Accrued expenses 4,219,217 2,980,656
--------------------------------
Total current liabilities 21,858,777 19,744,396
Revolving credit note payable 3,060,000 13,127,155
Subordinated debentures, net of discount - 4,720,865
Long-term debt 27,821 664,223
Capital lease obligations 3,010,633 137,561
Deferred rent liabilities 4,214,994 3,561,851
--------------------------------
Total liabilities 32,172,225 41,956,051
--------------------------------
Stockholders' equity:
Preferred stock - Series A, B and C convertible, $.01 par value. Authorized:
Series A - 20,000 shares, Series B - 34,750 shares and Series C - 30,000
shares at June 29, 1996. Issued and outstanding: Series A - 20,000 shares and Series B -
32,416 shares at June 29, 1996. Authorized: 10,000,000 shares at March 29, 1997.
No preferred stock issued or outstanding at March 29, 1997. - 14,456,506
Common stock no par value at June 29, 1996 and $.01 par value at March 29, 1997.
Voting Class - authorized 50,000,000 shares; 933,720 shares issued and
outstanding at June 29, 1996 and 7,228,199 at March 29, 1997, non-voting
class- authorized 205,000 shares, no shares issued or outstanding 72,282 -
Additional paid-in capital 50,700,957 3,050,211
Accumulated deficit (953,579) (382,926)
Less: cost of common stock held in treasury, 21,529 shares at March 29, 1997 (192,797) -
--------------------------------
Total stockholders' equity 49,626,863 17,123,791
--------------------------------
Total liabilities and stockholders' equity $ 81,799,088 $ 59,079,842
================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Fiscal Months Ended Nine Fiscal Months Ended
------------------------------- ------------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 30,932,114 $ 21,706,608 $ 93,656,807 $ 63,632,151
Cost of sales and occupancy 19,452,183 13,989,021 59,698,404 40,611,718
------------- --------------- -------------- -------------
Gross profit 11,479,931 7,717,587 33,958,403 23,020,433
Selling, general and administrative expenses 10,957,448 7,971,849 33,128,262 24,345,974
------------- --------------- -------------- -------------
Income (loss) from operations 522,483 (254,262) 830,141 (1,325,541)
Interest expense 104,607 479,627 1,273,587 970,151
------------- --------------- -------------- -------------
Income (loss) before taxes and extraordinary item 417,876 (733,889) (443,446) (2,295,692)
Income tax (benefit) 175,508 (271,944) (185,679) (852,070)
------------- --------------- -------------- -------------
Income (loss) before extraordinary item 242,368 (461,945) (257,767) (1,443,622)
Extraordinary item-loss on early retirement of debt,
net of income tax benefit of $226,572 - - (312,886) -
------------- --------------- -------------- -------------
Net income (loss) $ 242,368 $ (461,945) $ (570,653) $ (1,443,622)
============= =============== ============== =============
Net income (loss) per common and common equivalent share:
Before extraordinary item $ 0.03 $ (0.09) $ (0.04) $ (0.29)
Extraordinary item - - (0.05) -
------------- --------------- -------------- -------------
Net income (loss) per common and common equivalent share $ 0.03 $ (0.09) $ (0.09) $ (0.29)
============= =============== ============== =============
Weighted average common and common equivalent shares
outstanding 7,914,794 5,049,869 6,103,766 5,049,869
============= =============== ============== =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Fiscal Months Ended
March 29, March 30,
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (570,653) $ (1,443,622)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets 2,515,402 1,842,365
Amortization of deferred financing costs and debt discount 877,077 61,280
Amortization of organization costs - 6,644
Deferred income taxes (419,388) (852,070)
Loss on the disposal of equipment and vehicles 19,958 -
Stock option compensation 213,855 -
Change in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable 262,971 (231,228)
Inventories (11,841,466) (14,050,360)
Prepaid expenses (695,582) (683,977)
Other assets (15,752) (56,483)
Increase (decrease) in liabilities:
Accounts payable 1,214,023 4,552,043
Accrued expenses 1,238,561 1,397,671
Deferred rent liabilities 653,143 555,906
Income taxes (348,233) (118,009)
--------------- --------------
Net cash used in operating activities (6,880,084) (9,019,840)
--------------- --------------
Net cash used in investing activities - purchase of fixed assets (7,751,774) (5,465,226)
--------------- --------------
Cash flows from financing activities:
Borrowings under revolving credit note 38,176,737 25,805,000
Repayment of borrowings under revolving credit note (48,243,892) (15,745,000)
Payments of long-term debt (1,655,094) (355,109)
Proceeds from issuance of subordinated debentures 2,910,836 3,902,500
Proceeds from term loan - 400,000
Proceeds from issuance of Series C convertible preferred stock 8,638,337 -
Proceeds from issuance of common stock 22,940,171 -
Retirement of subordinated debentures (8,000,000) -
Purchase of treasury stock (180,000) -
Proceeds from exercise of employee stock options 96,250 -
--------------- --------------
Net cash provided by financing activities 14,683,345 14,007,391
--------------- --------------
Net increase (decrease) in cash 35,487 (477,675)
Cash at beginning of the period 202,344 515,212
--------------- --------------
Cash at end of the period $ 237,831 $ 37,537
=============== ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements included herein 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 card, gift wrap, and
other special occasion merchandise at everyday value prices in 18 states,
primarily in the Midwest and mid-Atlantic regions of the United States. These
financial statements have been prepared by management without audit and should
be read in conjunction with the consolidated financial statements and notes
thereto for the fiscal year 1996. Due to the seasonality of the Company's
business, the results for the interim periods are not necessarily indicative of
the results for the year. The accompanying consolidated financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. In the opinion of management,
all such adjustments are of a normal and recurring nature, except for the
extraordinary item related to the early extinquishment of debt (refer to Note
(4) Debt - Secured Subordinated Debt).
(2) Management Estimates
The preparation of these consolidated 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 expenses during
the reported period and related disclosures. Significant estimates made as of
and for the three and nine month periods ended March 29, 1997 and March 30, 1996
include provisions for shrinkage, capitalized overhead costs related to
inventory and markdowns of merchandise inventories. Actual results could differ
from those estimates.
(3) 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 the exercise of warrants and
common stock options. Stock options issued during the twelve-month period prior
to the Company's initial public offering have been included in the calculation
as if they were outstanding for all periods presented, even if antidilutive
using the treasury stock method.
(4) Debt
Secured Subordinated Debt
On July 2, 1996, the Company issued $3,000,000 of secured subordinated
debentures bearing annual interest at 12.5%. For the first nine 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 is 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 excercisable until July 1, 2001, at
$0.0025 per share.
This secured subordinated debt issued in July 1996, along with all subordinated
debt outstanding at June 29, 1996, 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.
6
<PAGE>
Revolving Credit Facility
In September 1996, the Company entered into a new revolving credit agreement
with its bank which permits the company to borrow up to a maximum $25,000,000.
Advances under the new agreement, which expires October 1, 1998, are limited
based on inventory levels as defined in the agreement. 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. A fee of 0.25% per year is
assessed on the unused portion of the line, except that, 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.
Lease Commitments
The Company entered into two capital lease agreements for computer equipment and
related software in October 1996. During February 1997, financing for additional
computer equipment was incorporated into one of the lease agreements. The cost
of the equipment under these leases totaled $4,851,000. Payments under these
leases will be made over the next four years.
In October 1996, the Company completed the negotiation of a ten-year operating
lease for a new distribution and administrative center commencing in the first
quarter of calendar 1998. Future minimum lease payments under this lease will
total $19,727,400.
(5) Stockholders' Equity
Equity Offering
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 secured
subordinated debt, a term loan and the outstanding borrowings under the
revolving credit facility totalling 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 $22,940,200.
Convertible Preferred Stock
In August 1996, 25,639 shares of Series C Convertible Preferred Stock , $0.01
par value, were issued in the amount of $9,730,000. The redemption and other
provisions of this series of preferred stock were identical to that of series A
and B Convertible Preferred Stock.
On December 12, 1996, each share of Convertible Preferred Stock was converted
into 10 shares of common stock and each share of non-voting common stock was
converted into one share of common stock. Immediately thereafter, each share of
existing common stock was converted into 4.016 shares of common stock. Upon this
conversion, all rights and designations of the Convertible Preferred Stock and
non-voting common stock were canceled. In addition, the common stock was
redesignated from no par value to $.01 par value per share.
7
<PAGE>
Stock Options
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 in the three and nine month periods ended March 29, 1997 of
$34,800 and $213,900, respectively. Of the amount recognized during the nine
months ended March 29, 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). The chairman
and president of Avalon each own 100 shares of the Company's Series B preferred
stock (or 0.3% of issued and outstanding Series B preferred stock) and each have
options to purchase 4,016 shares of the Company's common stock (or 0.8% of
weighted average common shares).
(6) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three Fiscal Months Ended Nine Fiscal Months Ended
-------------------------------------- -----------------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
-------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Cash paid during the period ended for:
Interest $ 134,229 $ 336,615 $ 1,295,769 $ 780,351
Income taxes 7,819 1,126 379,840 114,732
</TABLE>
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred, primarily for point of sale computer
equipment, and notes payable on vehicle purchases were $2,933,101 and
$4,937,432 in the three and nine month periods ended March 29, 1997 and
$11,577 in the three and nine month periods ended March 30, 1996.
In August, 1996, the Company exchanged Series C Preferred Stock for
consideration of trade accounts payable of $1,101,100.
Additional paid-in capital of $264,012 was recognized for the common stock
warrants issued in July, 1996.
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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, 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 demands;
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; and government
regulation. Additional detailed information concerning a number of factors that
could cause actual results to differ materially from the information contained
herein is readily available in the Company's Registration Statement on Form S-1
(Registration No. 333-13827) dated December 12, 1996, as filed with the
Securities and Exchange Commission, starting with the section on RISK FACTORS.
Due to the importance of the spring and fall selling seasons, the second
and fourth fiscal quarters have historically contributed, and the Company
expects they will continue to contribute, disproportionately to the Company's
profitability for the entire fiscal year. As a result, the Company's quarterly
results of operations may fluctuate. In addition, results of a period shorter
than a full year may not be indicative of results expected for the entire year.
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:
<TABLE>
<CAPTION>
Three Fiscal Months Ended Nine Fiscal Months Ended
----------------------------- ---------------------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales and occupancy 62.9 64.5 63.7 63.8
------------- ----------- ----------- ------------
Gross profit 37.1 35.5 36.3 36.2
Selling, general and administrative expenses 35.4 36.7 35.4 38.3
------------- ----------- ----------- ------------
Income (loss) from operations 1.7 (1.2) 0.9 (2.1)
Interest expense 0.3 2.2 1.4 1.5
------------- ----------- ----------- ------------
Income (loss) before taxes and extraordinary item 1.4 (3.4) (0.5) (3.6)
Income tax (benefit) 0.6 (1.3) (0.2) (1.3)
------------- ----------- ----------- ------------
Income (loss) before extraordinary item 0.8 (2.1) (0.3) (2.3)
Extraordinary item-loss on early retirement of
debt, net of income tax benefit of $226,572 - - (0.3) -
------------- ----------- ----------- ------------
Net income (loss) 0.8 % (2.1) % (0.6) % (2.3) %
============= =========== =========== ============
Number of stores open at end of period 131 104 131 104
</TABLE>
9
<PAGE>
THREE FISCAL MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
NET SALES. Net sales increased $9.2 million, or 42.4%, to $30.9 million
for the three month period ended March 29, 1997 from $21.7 million for the three
month period ended March 30, 1996. The increase resulted from (i) net sales of
$859,000 from new stores opened during the three month period, (ii) net sales of
$5.0 million from stores opened prior to fiscal 1997 not included in the
comparable store base, and (iii) a comparable store sales increase of $3.3
million, or 15.5%. 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 on its 13th month of operation; otherwise, a store
is included in the comparable store calculation in its 14th month of operation.
The strong sales performance reflected a higher in-stock position on basic
merchandise, an expanded selection of party merchandise and a shift in the
timing of the Easter season this year compared with last year.
GROSS PROFIT. Cost of sales includes merchandise, store occupancy,
purchasing and distribution costs. Gross profit increased $3.8 million, or
49.4%, to $11.5 million for the three month period ended March 29, 1997 from
$7.7 million for the three month period ended March 30, 1996. As a percentage of
net sales, gross profit was 37.1% for the three month period ended March 29,
1997 compared to 35.5% for the same period in the prior year. Gross profit as a
percentage of net sales increased as a result of increased purchase volume
rebates from vendors and the leveraging of occupancy and distribution costs
offset by a higher shrinkage reserve and higher freight costs associated with
new markets. The higher 1997 shrinkage reserve approximates the average
shrinkage results experienced by the Company over the last three years.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include labor, advertising, depreciation, other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $3.0 million, or 37.5%, to $11.0 million for
the three month period ended March 29, 1997 from $8.0 million for the three
month period ended March 30, 1996. Approximately $2.3 million of this increase
resulted from the operation of 27 additional new superstores. The remainder of
the increase in selling, general and administrative expenses resulted primarily
from higher salaries and benefits for additional corporate management and
administrative personnel. As a percentage of sales, net selling, general and
administrative expenses decreased to 35.4% in the three month period ending
March 29, 1997 from 36.7% in the three month period ended March 30, 1996
primarily due to the leveraging of store and other general and administrative
expenses against the increase in sales.
INTEREST EXPENSE. Interest expense was $105,000 in the three months ended
March 29, 1997 compared to $480,000 in the three months ended March 30, 1996.
This decrease resulted from the repayment of borrowings with the proceeds from
the initial public offering.
INCOME TAX. The income tax expense recognized for the three month period
ended March 29, 1997 was approximately $447,000 higher than the expense
recognized during the three month period ended March 30, 1996 due to a higher
net income before taxes for the period.
10
<PAGE>
NINE FISCAL MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
NET SALES. Net sales increased $30.1 million, or 47.3%, to $93.7 million
for the nine month period ended March 29, 1997 from $63.6 million for the nine
month period ended March 30, 1996. The increase resulted from (i) net sales of
$9.8 million from new stores opened during the nine month period, (ii) net sales
of $10.5 million from stores opened prior to fiscal 1997 not included in the
comparable store base, and (iii) a comparable store sales increase of $9.8
million, or 16.3%.
GROSS PROFIT. Gross profit increased $11.0 million, or 47.8%, to $34.0
million for the nine month period ended March 29, 1997 from $23.0 million for
the nine month period ended March 30, 1996. As a percentage of net sales, gross
profit was 36.3% for the nine month period ended March 29, 1997 compared to
36.2% for the nine month period ended March 30, 1996. Gross profit as a
percentage of net sales increased as a result of increased purchase volume
rebates from vendors and the leveraging of occupancy costs offset by a higher
shrinkage reserve and lower capitalized inventory overhead costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.8 million, or 36.2%, to $33.1 million for
the nine month period ended March 29, 1997 from $24.3 million for the nine month
period ended March 30, 1996. Approximately $6.4 million of this increase
resulted from the operation of 27 additional new superstores. The remainder of
the increase in selling, general and administrative expenses resulted from
higher salaries and benefits for additional corporate management and
administrative personnel. As a percentage of sales, net selling, general and
administrative expenses decreased to 35.4% in the nine month period ending March
29, 1997 from 38.3% in the nine month period ended March 30, 1996 primarily due
to the leveraging of store operating, general and administrative expenses
against the increase in sales and lower preopening expense.
INTEREST EXPENSE. Interest expense was $1.3 million in the nine months
ended March 29, 1997 compared to $970,000 in the nine months ended March 30,
1996. This increase resulted from higher borrowings related to the continued
expansion of new superstores offset by lower interest in the third quarter as a
result of the repayment of debt with initial public offering proceeds.
INCOME TAX BENEFIT. The income tax benefit recognized for the nine month
period ended March 29, 1997 was $666,000 lower than the benefit recognized
during the nine month period ended March 30, 1996 due to a lower net loss before
extraordinary item for the period.
EXTRAORDINARY ITEM. During December 1996, substantially all debt,
including subordinated debt, was retired with the proceeds from the Company's
initial public offering. Unamortized financing costs and the remaining debt
discount associated with the retired subordinated debt were expensed creating an
extraordinary item of $313,000, net of tax.
11
<PAGE>
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. Net cash used in
operations for the nine months ended March 29, 1997 and March 30, 1996 was $6.9
million and $9.0 million, respectively. In these two periods, $11.8 million and
$14.1 million, respectively, of cash from operations was used to increase
inventory levels to support both new and existing stores.
Net cash used in investing activities during the nine months ended March
29, 1997 and March 30, 1996 was $7.8 million and $5.5 million, respectively.
These investments were primarily a result of opening new superstores and
investing in information systems. During the nine months ended March 29, 1997
and March 30, 1996, the Company spent $4.2 million and $3.9 million,
respectively, for capital expenditures for new superstores.
Net cash provided by financing activities during the nine months ended
March 29, 1997 and March 30, 1996 was $14.7 million and $14.0 million,
respectively. 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.
Prior to the initial public offering of common stock, the Company had
outstanding $8 million of subordinated debentures, $3.0 million of which was
issued in July 1996. The subordinated debentures bore interest at a rate of 12%
per annum, $7.0 million of which had interest that was currently payable at a
rate of 7.5%, with the remaining 5.0% interest accruing until February 1, 1997
and May 1, 1997, on $3.0 million and $4.0 million, respectively. All accrued
interest was paid at the time the subordinated debentures were retired in
December 1996. In connection with the subordinated debentures, the Company
issued warrants to the lenders representing the right to acquire 195,594 shares
of common stock at an exercise price of $.0025 per share. At the time of the
public offering, one of the lenders exercised its right and purchased 119,371
shares of common stock.
The Company issued Series C Convertible Preferred Stock in August, 1996
raising $9.7 million. The Series C Preferred Stock, along with all outstanding
preferred stock, were converted into shares of common stock upon the initial
public offering of common stock in December 1996.
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
computer equipment was incorporated into one of the leases. These leases have
terms of four and five years.
The Company has available for borrowing an amount equal to the lesser of
$25 million or 50% of merchandise inventories under a revolving credit facility
with a bank. The revolving credit facility bears interest on the average daily
outstanding balance at the bank's prime rate or, at the Company's option, at
2.75% over the London Interbank Offered Rate. The Company is also required to
pay a commitment fee on the unused portion of the facility. The Company believes
that the cash generated from operations and the available borrowings under the
revolving credit facility will be sufficient to finance its working capital and
capital expenditure requirements for at least the next 12 months.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Information with respect to changes in securities is set forth in the
Company's Registration Statement on the Form S-1 (Registration No.
333-13827) dated December 12, 1996, together with the Exhibits thereto,
which is hereby incorporated by reference herein.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports of Form 8-K
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation of the
Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen of the Company's common stock certificate. (1)
27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 29,
1997.
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-13827), dated December 12, 1996, and
incorporated by reference.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: May 9, 1997 By: __________________________
Charles R. Cumello,
President
Dated: May 9, 1997 By: __________________________
Glen J. Franchi,
Executive Vice President and Treasurer
(principal financial officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> MAR-29-1997
<CASH> 237,831
<SECURITIES> 0
<RECEIVABLES> 173,628
<ALLOWANCES> 0
<INVENTORY> 53,645,286
<CURRENT-ASSETS> 56,143,315
<PP&E> 33,192,053
<DEPRECIATION> 8,309,420
<TOTAL-ASSETS> 81,799,088
<CURRENT-LIABILITIES> 21,858,777
<BONDS> 3,038,454
0
0
<COMMON> 72,282
<OTHER-SE> 49,554,581
<TOTAL-LIABILITY-AND-EQUITY> 81,799,088
<SALES> 93,656,807
<TOTAL-REVENUES> 93,656,807
<CGS> 59,698,404
<TOTAL-COSTS> 33,128,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,273,587
<INCOME-PRETAX> (443,446)
<INCOME-TAX> (185,679)
<INCOME-CONTINUING> (257,767)
<DISCONTINUED> 0
<EXTRAORDINARY> (312,886)
<CHANGES> 0
<NET-INCOME> (570,653)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
