<PAGE>
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 October 31, 1998
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 Identification Number)
incorporation or organization)
2727 Diehl Road,
Naperville, IL 60563-2371
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (630) 579-2000
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of the Registrant's Common Stock outstanding as of December
11, 1998 was 7,503,098.
<PAGE>
Factory Card Outlet Corp.
Form 10-Q
For the Quarter Ended October 31, 1998
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of October 31, 1998 and January 31, 1998 3
Consolidated Statements of Operations for the three fiscal months and nine
fiscal months ended October 31, 1998 and October 25, 1997 4
Consolidated Statements of Cash Flows for the nine fiscal months
ended October 31, 1998 and October 25, 1997 5
Notes to Consolidated Financial Statements
6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
Item 3 Quantitative and Qualitative Disclosures About Market Risk *
Part II Other Information 15
Signatures 16
</TABLE>
* Not applicable
2
<PAGE>
PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 262,900 $ 30,373
Receivables 167,840 795,003
Inventories 96,358,857 72,911,489
Prepaid expenses 1,657,654 1,773,130
Deferred income taxes 2,148,965 331,307
------------ ------------
Total current assets 100,596,216 75,841,302
Fixed assets, net 41,777,612 38,507,001
Deferred income taxes 493,353 493,353
Other assets 1,183,837 188,010
------------ ------------
Total assets
$144,051,018 $115,029,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 2,212,637 $ 1,820,809
Accounts payable 25,538,403 16,094,326
Due to related parties 5,134,344 2,942,979
Accrued expenses 6,383,124 4,753,764
------------ ------------
Total current liabilities 39,268,508 25,611,878
Revolving credit note payable 36,353,266 29,700,000
Term loan 9,584,963 -
Capital lease obligations 2,161,681 2,667,836
Deferred rent liabilities 7,000,616 5,315,820
------------ ------------
Total liabilities 94,369,034 63,295,534
------------ ------------
Stockholders' equity:
Common stock - $.01 par value. Voting class - authorized 15,000,000 shares;
7,503,098 and 7,335,519 shares issued and outstanding at October 31, 1998
and January 31, 1998, respectively. Non-voting class - authorized 205,000
shares, no shares issued or outstanding. 75,030 73,355
Additional paid-in capital 51,999,816 51,222,520
Retained earnings (deficit) (2,392,862) 438,257
------------ ------------
Total stockholders' equity 49,681,984 51,734,132
------------ ------------
Total liabilities and stockholders' equity
$144,051,018 $115,029,666
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three fiscal months ended Nine fiscal months ended
------------------------------ -------------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $57,715,406 $41,232,467 $162,326,429 $115,097,111
Cost of sales and occupancy 39,986,679 26,849,696 108,492,659 72,184,398
----------- ----------- ------------ ------------
Gross profit 17,728,727 14,382,771 53,833,770 42,912,713
Selling, general and administrative expenses 20,626,493 16,912,336 54,761,492 41,360,310
Special charge - - 655,269 -
----------- ----------- ------------ ------------
Income (loss) from operations (2,897,766) (2,529,565) (1,582,991) 1,552,403
Interest expense 1,441,597 466,085 3,135,543 760,159
----------- ----------- ------------ ------------
Income (loss) before tax (benefit) (4,339,363) (2,995,650) (4,718,534) 792,244
Income tax (benefit) (1,735,746) (1,198,259) (1,887,415) 421,594
----------- ----------- ------------ ------------
Net income (loss) $(2,603,617) $(1,797,391) $(2,831,119) $ 370,650
=========== =========== =========== ============
Earnings (loss) per share -
basic $ (0.35) $ (0.25) $ (0.38) $ 0.05
=========== =========== =========== ============
diluted $ (0.35) $ (0.25) $ (0.38) $ 0.05
=========== =========== =========== ============
Weighted average shares outstanding -
basic 7,445,579 7,236,826 7,395,054 7,223,970
=========== =========== =========== ============
diluted 7,445,579 7,236,826 7,395,054 7,954,337
=========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine fiscal months ended
---------------------------
October 31, October 25,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,831,119) $ 370,650
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of fixed assets 5,492,267 3,294,386
Amortization of deferred finance cost and debt discount 336,080 -
Loss on the disposal or retirement of fixed assets 237,066 260,046
Stock option compensation 44,253 77,583
Non-cash portion of special charge 451,412 -
Changes in assets and liabilities:
(Increase) decrease in assets:
Receivables 627,164 (15,811)
Inventories (23,447,368) (22,069,013)
Prepaid expenses 106,909 (210,440)
Other assets (1,224,876) (842,541)
Deferred income taxes (1,817,658) (820,260)
Increase (decrease) in liabilities:
Accounts payable 11,635,442 11,540,351
Accrued expenses 1,438,762 3,069,609
Deferred rent liabilities 1,684,796 772,305
Income taxes payable - 344,180
----------- ------------
Net cash used in operating activities (7,266,870) (4,228,955)
----------- ------------
Net cash used in investing activities - purchase of fixed assets, net (7,959,601) (12,087,331)
----------- ------------
Cash flows from financing activities:
Borrowings under revolving credit note 118,302,829 74,744,900
Borrowings under term loan 10,000,000 -
Repayment of borrowings under revolving credit note (111,649,563) (56,968,400)
Payment of long-term obligations (1,415,486) (1,465,803)
Costs related to issuance of common stock - (173,195)
Sale of treasury stock to employee stock purchase plan - 115,488
Proceeds from exercise of employee stock options 221,218 16,378
----------- ------------
Net cash provided by financing activities 15,458,998 16,269,368
----------- ------------
Net increase (decrease) in cash 232,527 (46,918)
Cash at beginning of period 30,373 287,771
----------- ------------
Cash at end of period $ 262,900 $ 240,853
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
The consolidated financial statements include the accounts of Factory
Card Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of
America, Ltd. (the "Company"). The Company is a chain of 211 company-owned
superstores offering an extensive selection of party supplies, greeting
cards, gift wrap and other special occasion merchandise at everyday value
prices in 23 states as of October 31, 1998. 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 seven-
month transition period ended January 31, 1998. 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.
All intercompany balances and transactions have been eliminated in
consolidation. In addition, certain prior year amounts have been
reclassified to conform with the current year presentation.
(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 revenue and expenses during the reporting
period and related disclosures. Significant estimates made as of and for
the three and nine fiscal month periods ended October 31, 1998 and October
25, 1997 included provisions for inventory shrinkage and damage and
capitalized overhead costs related to inventory. Actual results could
differ from those estimates.
(3) Change in Fiscal Year
In January 1998, the Company changed its fiscal year-end to the
Saturday closest to January 31 which will be its fiscal year-end in the
future. Prior to January 1998, the Company's fiscal year ended on the
Saturday closest to June 30. The Company's quarterly reporting periods have
also changed in accordance with the fiscal year-end change.
(4) Special Charge
During the quarter ended August 1, 1998, the Company recorded a pre-
tax special charge of $655,269 relating to certain severance and new store
design costs.
6
<PAGE>
(5) Earnings Per Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, earnings per share - basic were computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Earnings per share - diluted includes the effect of stock
options and warrants except in loss periods when these securities would be
anti-dilutive.
The reconciliation of earnings per share - basic to earnings per share -
diluted is as follows:
<TABLE>
<CAPTION>
Income Per
(loss) Shares share
----------- --------- ------
<S> <C> <C> <C>
For the three fiscal months ended October 31, 1998 -
Earnings per share - basic and diluted:
--------------------------------------
Net (loss) available to common stockholders $(2,603,617) 7,445,579 $(0.35)
=========== ========= ======
For the three fiscal months ended October 25, 1997 -
Earnings per share - basic and diluted:
--------------------------------------
Net (loss) available to common stockholders $(1,797,391) 7,236,826 $(0.25)
=========== ========= ======
For the nine fiscal months ended October 31, 1998 -
Earnings per share - basic and diluted:
--------------------------------------
Net (loss) available to common stockholders $(2,831,119) 7,395,054 $(0.38)
=========== ========= ======
For the nine fiscal months ended October 25, 1997 -
Earnings per share - basic:
--------------------------
Net income $ 370,650 7,223,970 $ 0.05
Effect of dilutive securities
Stock options 654,167
Warrants 76,200
---------
Earnings per share diluted:
----------------------------
Net income available to common stockholders and assumed conversions $ 370,650 7,954,337 $ 0.05
=========== ========= ======
</TABLE>
Options to purchase common stock outstanding during the periods
presented above that were not included in the computation of earnings per
share - diluted because the option price was greater than the average
market price of the common shares were as follows:
<TABLE>
<CAPTION>
Period Shares
------ ------
<S> <C>
For the nine fiscal months ended October 25, 1997 70,046
</TABLE>
During the three fiscal months and nine fiscal months ended October
31, 1998, 111,364 and 167,850 shares, respectively, were issued upon the
exercise of stock options and stock warrants. During the three fiscal
months and nine fiscal months ended October 25, 1997, 6,024 and 167,580
shares, respectively, were issued upon the exercise of stock options.
7
<PAGE>
(6) Debt
On July 11, 1998, the Company borrowed $10,000,000 under a Term Loan
and Security Agreement (Term Loan) with Back Bay Capital, LLC (the
Lenders). The Term Loan, which expires on December 31, 1999, bears interest
at a rate of 14.5%. Interest is payable monthly at a rate of 12% with the
remaining 2.5% accruing as Notes due at the maturity of the Term Loan.
These Notes bear interest at a rate of 12.5%. The Company's obligation
under these Notes may be waived by the Lenders if the Term Loan has been
repaid by January 31, 1999. An anniversary fee in the amount of $200,000 is
also payable if the Term Loan is outstanding on July 1, 1999. Upon entering
into the Term Loan, the Lenders received warrants to purchase 215,000
shares of the Company's common stock exercisable until July 31, 2003, at
$7.50 per share. The Term Loan is collateralized by a first security
interest in the Company's equipment and a secondary interest in the
remainder of the Company's assets.
The Company also amended its Loan and Security Agreement (Amended
Agreement) with BankBoston Retail Finance Inc. on July 11, 1998. The
Amended Agreement contains restrictive covenants requiring minimum
cumulative consolidated earnings before interest, taxes, depreciation and
amortization and limiting capital expenditures. Advances under the Amended
Agreement are limited based on inventory levels, which vary if the Term
Loan is outstanding, and are subject to certain reserves. Interest is
accrued at an annual rate equal to the BankBoston, N.A. prime rate plus 50
basis points or, at the Company's option, a rate based on the London
Interbank Offered Rate plus 250 basis points.
The fair market value of the warrants issued in conjunction with the
Term Loan was determined to be $513,500 and was recorded as additional
paid-in capital on common stock and as a discount on the face amount of the
debt. Amortization of the discount and the related financing costs
recognized were $98,463 and $237,617, respectively, for the nine fiscal
months ended October 31, 1998. The Company had borrowings of $10,000,000
under the Term Loan and $36,353,266 under the Amended Agreement as of
October 31, 1998, respectively.
(7) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three fiscal months ended Nine fiscal months ended
--------------------------- ---------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash paid (received) during the period:
Interest $1,172,170 $480,507 $3,516,980 $752,632
Income taxes (13,194) 856,815 79,575 824,999
</TABLE>
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred and notes payable on equipment and
vehicle purchases were $1,301,157 in the three and nine fiscal month
periods ended October 31, 1998 and $2,035,446 and $4,832,689 in the three
and nine fiscal month period ended October 25, 1997, respectively.
Additional paid in capital of $513,500 was recognized for the common
stock warrants issued in July 1998.
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" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the success of efforts to renegotiate the Company's senior credit
facilities; store performance; weather and economic conditions; dependence on
key personnel; competition; ability to anticipate merchandise trends and
consumer demand; ability to maintain relationships with suppliers; successful
implementation of information systems; successful handling of merchandise
logistics; inventory shrinkage; availability and cost of capital; governmental
regulations; ability to complete corrective actions necessary to address Year
2000 issues and other factors both referenced and not referenced in the
Company's Transition Report on Form 10-K and the Company's other filings with
the Securities and Exchange Commission. When used in this Quarterly Report on
Form 10-Q, the words "estimate", "project", "expect", "intend", "believe" and
similar expressions are intended to identify forward-looking statements.
Due to the importance of the spring and fall seasons, the second and fourth
fiscal quarters have historically contributed, and the Company expects they will
continue to contribute, disproportionately to the Company's results for the
entire fiscal year. As a result, the Company's quarterly results of operations
may fluctuate. In addition, results of periods 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
------------------------- -------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales and occupancy 69.3 65.1 66.8 62.7
----- ----- ----- -----
Gross profit 30.7 34.9 33.2 37.3
Selling, general and administrative expenses 35.7 41.0 33.8 35.9
Special charge - - 0.4 -
----- ----- ----- -----
Income (loss) from operations (5.0) (6.1) (1.0) 1.4
Interest expense 2.5 1.2 1.9 0.7
----- ----- ----- -----
Income (loss) before tax (benefit) (7.5) (7.3) (2.9) 0.7
Income tax (benefit) (3.0) (2.9) (1.2) 0.4
----- ----- ----- -----
Net income (loss) (4.5) % (4.4) % (1.7) % 0.3 %
===== ===== ===== =====
Number of stores open at end of period 211 170 211 170
</TABLE>
9
<PAGE>
Three Fiscal Months Ended October 31, 1998 and October 25, 1997
Net Sales. Net sales increased $16.5 million, or 40.0%, to $57.7 million
for the three fiscal month period ended October 31, 1998 from $41.2 million for
the three fiscal month period ended October 25, 1997. The increase resulted from
(i) net sales of $7.8 million from new stores opened during the current fiscal
year, (ii) net sales increase of $8.1 million from stores opened prior to
February 1998 not included in the comparable store base, and (iii) a comparable
store sales increase of $0.6 million, or 1.5%. Comparable store sales were
impacted by lower Halloween sales partially a result of significant levels of
carryover merchandise from the prior year. 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 merchandise, store occupancy,
purchasing and distribution costs. Gross profit increased $3.3 million, or
22.9%, to $17.7 million for the three fiscal month period ended October 31, 1998
from $14.4 million for the three fiscal month period ended October 25, 1997. As
a percentage of net sales, gross profit was 30.7% for the three fiscal month
period ended October 31, 1998 compared to 34.9% in the prior year. Gross profit
as a percentage of net sales decreased primarily as a result of price reductions
to clear Halloween and summer merchandise. In addition, distribution and freight
costs increased due to the earlier shipment of seasonal merchandise to stores.
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 $3.7 million, or 21.9%, to $20.6 million for
the three fiscal month period ended October 31, 1998 from $16.9 million for the
three fiscal month period ended October 25, 1997. The majority of the $3.7
million increase resulted from the operation of 41 additional new superstores.
As a percentage of net sales, selling, general and administrative expenses
decreased to 35.7% in the three fiscal month period ended October 31, 1998 from
41.0% in the three fiscal month period ended October 25, 1997. This decrease
resulted from lower preopening costs due to fewer new store openings and general
and administrative costs remaining flat.
Interest Expense. Interest expense was $1.4 million in the three fiscal
month period ended October 31, 1998 compared to $0.5 million in the three fiscal
month period ended October 25, 1997. This increase resulted from higher
borrowing levels to support the opening of 41 new superstores and increased
inventory levels.
Income Tax. During the three month period ended October 31, 1998 and
October 25, 1997, the Company had a taxable loss resulting in a tax benefit of
$1.7 and $1.2 million respectively.
Nine Fiscal Months Ended October 31, 1998 and October 25, 1997
Net Sales. Net sales increased $47.2 million, or 41.0%, to $162.3 million
for the nine fiscal month period ended October 31, 1998 from $115.1 million for
the nine fiscal month period ended October 25, 1997. The increase resulted from
(i) net sales of $14.6 million from new stores opened during the nine-month
period, (ii) net sales increase of $30.4 million from stores opened prior to
February 1998 not included in the comparable store base, and (iii) a comparable
store sales increase of $2.2 million, or 1.9%. Comparable store sales were
impacted by the uneven flow of basic merchandise during the spring of this year
resulting from system conversion issues associated with the consolidation of the
Company's distribution facilities and lower Halloween sales partially a result
of significant levels of carryover merchandise from the prior year.
10
<PAGE>
Gross Profit. Gross profit increased $10.9 million, or 25.4%, to $53.8
million for the nine fiscal month period ended October 31, 1998 from $42.9
million for the nine fiscal month period ended October 25, 1997. As a
percentage of net sales, gross profit was 33.2% for the nine fiscal month period
ended October 31, 1998 compared to 37.3% in the prior year. Gross profit as a
percentage of net sales decreased as a result of price reductions to clear
seasonal and summer merchandise, higher occupancy and other fixed costs
partially offset by vendor promotional program monies and a favorable year-end
inventory shrinkage adjustment reflected in the prior year compared to an
estimate in the current year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.4 million, or 32.4%, to $54.8 million for
the nine fiscal month period ended October 31, 1998 from $41.4 million for the
nine fiscal month period ended October 25, 1997. Approximately $11.6 million of
this increase resulted from the operation of 41 additional new superstores. The
remainder of the increase in selling, general and administrative expenses
resulted primarily from additional field and corporate personnel to support
additional stores along with the reversal of a management bonus accrual during
the prior year. As a percentage of net sales, selling, general and
administrative expenses decreased to 33.7% in the nine fiscal month period ended
October 31, 1998 from 35.9% in the nine fiscal month period ended October 25,
1997.
Special Charge. During July 1998, the Company recognized a special charge
of $0.7 million relating to certain severance and new store design costs.
Interest Expense. Interest expense was $3.1 million in the nine fiscal
month period ended October 31, 1998 compared to $0.8 million in the nine fiscal
month period ended October 25, 1997. This increase resulted from higher
borrowing levels to support the opening of 41 new superstores and increased
inventory levels.
Income Tax. During the nine month period ended October 31, 1998, the
Company had a taxable loss resulting in a tax benefit compared to taxable income
for the nine month period ended October 25, 1997 resulting in tax expense. The
benefit was recognized at an effective rate of 40.0% during the nine month
period ended October 31, 1998 compared to the expense recognized at an effective
rate of 53.2%.
Year 2000 Readiness Disclosure
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a temporary
inability to process transactions or engage in similar normal business
activities. The Company has initiated a Year 2000 program designed to identify
and correct these problems.
The Year 2000 program was developed with the help of independent
consultants and consists of teams to identify and evaluate Year 2000 issues and
remediate systems that are not Year 2000 compliant. The Company's program to
identify and evaluate Year 2000 readiness includes inventorying and testing
systems that are commonly thought of as information technology (IT), such as
computer networks, as well as systems that are not commonly thought of as IT
systems, such as timeclocks and the telephone system. IT systems with non-
compliant code are expected to be modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems. The teams will also be investigating the Year 2000 readiness of
suppliers and other third parties, which will include surveying their Year 2000
remediation programs, and developing contingency plans where necessary.
11
<PAGE>
Key IT systems have been inventoried and assessed for compliance and
detailed plans are being developed for required system modifications or
replacements, including remediation and testing activities. Independent
consultants are assisting in the assessment and remediation phases of key IT
systems and will be monitoring progress against remediation programs and
performing tests of critical activities. All of the IT systems and
approximately 60% of the non-IT systems have been inventoried and assessed for
compliance. The Company expects to be completed with the remediation and
testing phases by June 1999 for its IT and non-IT systems.
Incremental costs directly related to Year 2000 issues, which includes
equipment and software replacements, reprogramming, systems testing, and outside
consulting services, are estimated to be in the range of $0.8 million to $1.1
million, of which approximately $300,000 has been spent to date. No costs were
incurred prior to 1998. This estimate assumes that the Company will not incur
significant Year 2000 related costs on behalf of its suppliers or other third
parties.
Due to some uncertainty inherent in the Year 2000 issue, including
uncertainty regarding the readiness of suppliers, the Company cannot yet
complete a comprehensive analysis of the most likely worst case Year 2000
scenario. However, the Company will be developing contingency plans for Year
2000 related interruptions. The process will include, but not be limited to,
developing emergency backup and recovery procedures, manual processes,
alternative systems and work around procedures, identifying alternative
suppliers and developing alternative plans to engage in business activities with
suppliers should they not be Year 2000 compliant. Contingency plans for highly
critical systems will be established by July 1999 and will be reviewed
continually up through the date change to Year 2000.
Liquidity and Capital Resources
The Company's cash needs are primarily for working capital to support its
operations and its inventory requirements. In recent years, the Company has
financed its expanding operations primarily through proceeds from its initial
public offering effective December 1996, borrowings under revolving credit
facilities, proceeds from issuances of convertible preferred stock and
subordinated debentures and internally generated funds. The Company's ability
to fund its activities is directly dependent upon its sales, its ability to
effectively manage its inventory and working capital needs and its ability to
obtain sufficient external financing. While the Company has been able to obtain
sufficient external financing to date, no assurance can be given that such
financing, along with internally generated funds, will be sufficient to enable
the Company to satisfy its financial obligations and return to profitable
growth.
As a result of the Company's lower than expected sales for the three fiscal
month period ended October 31, 1998, the Company is continuing to reduce its
overall corporate administrative expenses. The Company is also taking several
steps in an effort to improve its liquidity position. These steps include:
engaging in discussions with its landlords to renegotiate certain leases,
including the signed leases for its previously planned 14 new store openings for
fiscal 1999; evaluating the disposition of certain stores; engaging in
discussions with the lenders under its senior credit facilities in an effort to
increase its borrowing capacity under such facilities; exploring additional
and/or replacement sources of debt financing; and discussing payment terms with
certain major suppliers. There can be no assurance that the Company will be
successful in such steps. Any such steps may (i) increase the Company's cost of
capital, (ii) result in equity dilution to the holders of the Company's common
stock, (iii) increase the Company's vulnerability to general adverse economic
and industry conditions, (iv) limit the Company's ability to obtain additional
financing to fund future working capital and capital expenditure needs, (v)
limit the Company's flexibility in planning for changes in its business and
industry, and (vi) place the Company at a competitive disadvantage vis-a-vis
less leveraged competitors. The Company's current liquidity position may also
adversely affect its relationship with its suppliers which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
12
<PAGE>
At October 31, 1998 and October 25, 1997, the Company's working capital was
$61.3 million and $43.2 million, respectively. Net cash used in operations for
the nine fiscal month periods ended October 31, 1998 and October 25, 1997 was
$7.3 million and $4.2 million, respectively. In these two periods, $23.4
million and $22.1 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 fiscal month periods
ended October 31, 1998 and October 25, 1997 was $8.0 million and $12.1 million,
respectively. These uses were primarily a result of opening new superstores,
investing in equipment for the new distribution center and investing in
information technology systems. During the nine fiscal months ended October 31,
1998 and October 25, 1997, the Company spent $5.0 million and $9.7 million,
respectively, for capital expenditures for new superstores.
Net cash provided by financing activities during the nine fiscal month
periods ended October 31, 1998 and October 25, 1997 was $15.5 million and $16.3
million, respectively. At October 31, 1998, the outstanding balance under the
Loan and Security Agreement with BankBoston Retail Finance Inc. ("Loan and
Security Agreement") was $36.4 million and under the Term Loan and Security
Agreement (Term Loan) with Back Bay Capital, LLC was $10.0 million. At October
25, 1997, the outstanding balance under the Company's Business Loan Agreement
with Bank One, Chicago, NA was $18.2 million.
On July 11, 1998, the Company borrowed $10,000,000 under a Term Loan with
Back Bay Capital, LLC (the Lenders). The Term Loan, which expires on December
31, 1999, bears interest at a rate of 14.5%. Interest is payable monthly at a
rate of 12% with the remaining 2.5% accruing as Notes due at the maturity of the
Term Loan. These Notes bear interest at a rate of 12.5%. The Company's
obligation under these Notes may be waived by the lenders if the Term Loan has
been repaid by January 31, 1999. An anniversary fee in the amount of $200,000 is
also payable if the Term Loan is outstanding on July 1, 1999. Upon entering into
the Term Loan, the lenders received warrants to purchase 215,000 shares of the
Company's common stock exercisable until July 31, 2003, at $7.50 per share. The
Term Loan is collateralized by a first security interest in the Company's
equipment and a secondary interest in the remainder of the Company's assets.
On January 30, 1998 the Company entered into a Loan and Security Agreement
with BankBoston Retail Finance Inc. providing a $40,000,000 revolving line of
credit which can be increased at the Company's discretion up to $60,000,000, in
$5,000,000 increments. In July 1998, the Loan and Security Agreement was
amended. Advances under the Amended Loan and Security Agreement, which expires
January 31, 2001, are limited based on inventory levels which vary if the Term
Loan is outstanding, and are subject to certain reserves as defined in the
Amended Loan and Security Agreement. Interest is accrued at an annual rate
equal to the BankBoston, N.A. prime rate plus 50 basis points or, at the
Company's option, a rate based on the London Interbank Offered Rate plus 250
additional basis points. A fee of 0.25% per year is assessed monthly on the
unused portion of the line of credit. Borrowings under the Amended Loan and
Security Agreement are secured by all of the Company's assets. The Amended Loan
and Security Agreement contains restrictive covenants requiring minimum
cumulative consolidated earnings before interest, taxes, depreciation and
amortization and limiting capital expenditures.
13
<PAGE>
Prior to the Agreement with BankBoston Retail Finance Inc., the Company
borrowed funds under a Loan and Security Agreement with Bank One Chicago, NA
("Bank One Agreement"). The Bank One Agreement allowed for borrowings of the
lesser of $35,000,000 or a predetermined advance rate (not to exceed 50%)
against net inventory as determined by an appraisal. The Bank One Agreement was
terminated upon the closing of the BankBoston Loan and Security Agreement.
In August 1998, the Company entered into a master capital lease agreement
for the purchase of point-of-sale (POS) equipment and related software over the
next three years in an amount not to exceed $5.0 million. During the three
months ended October 31, 1998 financing for $1.3 million of the POS equipment
was completed under this agreement.
In October 1996, the Company entered into two capital lease agreements for
POS computer equipment and related software having a total cost of $2.1 million.
During February 1997, financing for $2.4 million of additional POS equipment was
incorporated into one of the leases. During July and August 1997, financing for
$1.9 million of additional POS equipment was also incorporated. These leases
have terms of four and five years.
The Company, under its Loan and Security Agreement, is restricted from
paying dividends on its capital stock.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
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.
27.1 Financial Data Schedule.
10.13 Separation and Release Agreement between
Factory Card Outlet Corp. and Charles R. Cumello
(b) The following reports were filed on Form 8-K since January 31, 1998.
Current Report on Form 8-K filed on May 29, 1998 to report the
appointment of Stewart Kasen as President and Chief Executive Officer.
Current Report on Form 8-K filed on July 22, 1998 to report revised
earnings expectations, the amendment of the Company's existing credit
facility and an agreement for an additional $10 million credit
facility.
Current Report on Form 8-K filed on November 24, 1998 to report third
quarter results and the revision of earnings expectations for the
fourth quarter and year ending January 30, 1999.
Current Report on Form 8-K filed on December 14, 1998 to report the
resignation of Thomas W. Stoltz, Vice President of Finance and the
appointment of Frederick G. Kraegel, Interim Chief Financial Officer
15
<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: December 11, 1998 By: /s/ Stewart M. Kasen
---------------------
Stewart M. Kasen
Chairman of the Board,
President and Chief Executive Officer
Dated: December 11, 1998 By: /s/ Glen J. Franchi
-------------------
Glen J. Franchi
Executive Vice President,
Treasurer, and Chief Operating Officer
(principal financial officer)
Dated: December 11, 1998 By: /s/ Thomas W. Stoltz
--------------------
Thomas W. Stoltz
Vice President - Finance
(principal accounting officer)
16
<PAGE>
EXHIBIT 10.13 SEPARATION AND RELEASE AGREEMENT
This Separation and Release Agreement ("Agreement") is dated September __,
1998 between FACTORY CARD OUTLET CORP., a Delaware corporation (the "Company"),
and CHARLES R. CUMELLO ("Executive").
RECITALS
--------
The Company and Executive desire to provide an orderly and amicable
arrangement with respect to the cessation of Executive's employment as President
and Chief Executive Officer and service as a director of the Company, and to
resolve claims between the parties relating to his employment, the cessation of
his employment, the Employment Agreement dated as of April 10, 1995 (the
"Employment Agreement") between the Company and Executive (a copy of which is
attached to this Agreement as Exhibit A), and otherwise.
AGREEMENT
---------
In consideration of the foregoing recitals, the agreements set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and Executive agree as follows:
1. Resignation.
(a) Executive confirms his resignation as of May 22, 1998 (the
"Separation Date") as President and Chief Executive Officer of the Company, as a
director of the Company, as a director and officer of each subsidiary of the
Company for which Executive served in such capacity, and of any other position
or office with respect to the Company or any of its subsidiaries, including as a
legal representative or trustee of any employee benefit plan or trust of the
Company or any of its subsidiaries. Executive waives any and all right to
perform services in any capacity, including that of an employee, independent
contractor or otherwise, for the Company or any its subsidiaries.
(b) As a result of his voluntary resignation and the cessation of his
employment, effective on the Separation Date, Executive ceased to perform any
duties or be entitled to or eligible for any compensation or benefits except as
expressly provided in this Agreement (which compensation and benefits are
enhancements provided in lieu of any other compensation and benefits to which he
would otherwise be entitled pursuant to the Employment Agreement or otherwise).
As outlined below, the Company offers and Executive accepts a special separation
and severance package.
2. Special Separation and Severance Package.
(a) The Company will pay to Executive no later than five business days
after the date of this Agreement $24,615.40, representing four weeks unused
vacation time accrued by Executive through the Separation Date.
(b) The Company will reimburse Executive for any unreimbursed
reasonable business expenses incurred and paid for by Executive prior to the
Separation Date consistent with the Company's policies in effect with respect to
travel, entertainment and other business expenses, and upon Executive's
providing to the Company reasonably acceptable documentation of such expenses
within 90 days after the Separation Date.
(c) Subject to Sections 2(e) and 14, the Company will pay to
Executive, on each regular bi-weekly payroll date during the 12-calendar month
period beginning on June 1, 1998 (the "Severance
<PAGE>
Period"), an amount equal to $12,307.70. Executive acknowledges his receipt of
all of amounts payable pursuant to this Section 2(c) through and including the
Company's September 18, 1998 payroll date.
(d) Subject to Sections 2(e) and 14, if Executive would have otherwise
been entitled to receive a performance-based bonus for the fiscal year ending
January 30, 1999, Executive shall receive a lump-sum payment equal to the amount
(if any) that would be payable based upon the extent of the Company's
achievement of the performance targets heretofore established under the
Company's Management Incentive Plan for such fiscal year and assuming that
Executive were to have remained continuously employed by the Company until the
date such bonuses are paid. Such amount shall be paid to Executive concurrently
with the Company's payment of the annual bonus (if any) for such fiscal year to
other participants in the Management Incentive Plan.
(e) If, during any calendar month of the Severance Period, Executive
performs services as an employee, officer, consultant or independent contractor
("Services") of or to any company, entity or person other than the Company or
any of its subsidiaries (a "New Employer") for which Services Executive receives
or becomes entitled to receive any payments or other compensation (whether
monetary or nonmonetary, vested or subject to any forfeiture condition,
contingent or non-contingent, or current or deferred) ("New Compensation"), (i)
Executive shall within no more than five business days after the end of such
month notify the Company in writing of the nature, amount and payor of such New
Compensation received or to be received by Executive (including without
limitation the information specified in the form of certificate attached to this
Agreement as Exhibit B) and (ii) the amounts otherwise payable by the Company
pursuant to Sections 2(c) or 2(d) shall be reduced (but not below zero) by the
aggregate fair market value of all such New Compensation paid or payable to
Executive. In addition, Executive shall, no more than five business days after
the end of the Severance Period, deliver to the Company a certificate in the
form attached as Exhibit B to this Agreement. To the extent that Executive shall
have received or become entitled to receive New Compensation in respect of
Services performed during the Severance Period which New Compensation is, by
reason of Executive's failure to give timely notice as required by this Section,
not offset against amounts otherwise payable to Executive pursuant to Sections
2(c) or 2(d), the Company shall be entitled to recover from Executive an amount
equal to the fair market value of such New Compensation, together with (i)
interest on such amount at a rate equal to the prime lending rate (as announced
from time to time in The Wall Street Journal) plus 200 basis points or, if
lower, the highest interest rate permitted by applicable law and (ii) all
reasonable attorneys' fees and expenses incurred by the Company in recovering
such amount.
3. Executive Benefits.
(a) To the extent that any stock option granted to Executive by the
Company had become exercisable as of the Separation Date, Executive shall be
entitled to exercise such option during the first 90 days after the Separation
Date, but in no event after the expiration of the term of such option. Effective
as of the Separation Date, Executive shall not (i) be entitled to exercise any
stock option to the extent that such option had not become exercisable as of the
Separation Date or (ii) eligible to be granted any additional stock options.
(b) Subject to Sections 3(f) and 14, the Company shall continue
Executive's health insurance coverage (as in effect immediately prior to the
Separation Date) until the earlier of (i) the end of the Severance Period or
(ii) the first date on which Executive becomes covered under any other group
health plan (as an employee or otherwise) which does not contain any exclusion
or limitation with respect to any preexisting condition of Executive; provided
that Executive shall pay the Company on a monthly basis the portion of the
periodic cost of such continued coverage equal to the dollar amount of such
periodic cost that was payable by Executive immediately prior to the Separation
Date. As and to the extent provided by the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA"), Executive will be eligible to continue his
health insurance benefits at his own expense for up to 18 months following the
end of Severance Period
2
<PAGE>
and, later, to convert such benefits to an individual policy. Executive will be
provided with a separate notice of his COBRA rights.
(c) Subject to Sections 3(f) and 14, the Company shall continue
Executive's life insurance and accidental death and dismemberment insurance
(ADD) coverage during the first 12 months after the Separation Date as such
coverage was in effect immediately prior to the Separation Date; provided that
Executive shall pay the Company on a monthly basis the portion of the periodic
cost of each provision of such continued coverage equal to the dollar amount of
the periodic cost of such provision that was payable by Executive immediately
prior to the Separation Date.
(d) In lieu of continued long-term disability insurance ("LTD")
coverage, the Company shall within five business days after the date of this
Agreement pay to Executive $2,073.60, which amount represents 200% of the
Company's good-faith estimate of the portion of the Company's aggregate annual
premium cost for its LTD policy that is attributable to Executive's LTD coverage
as in effect immediately prior to the Separation Date.
(e) Subject to Section 14, the Company shall continue to pay to
Executive a car allowance during the Severance Period in the amount of $803.75
per month.
(f) Except as expressly provided in this Agreement or in an employee
benefit plan of the Company, Executive shall not be entitled to receive any
severance payments or any other benefits or compensation from the Company.
(g) Nothing in this Agreement shall preclude the Company from amending
or terminating any employee benefit plan, program or practice at any time in
compliance with applicable law.
4. Restrictive Covenants. Executive acknowledges and affirms his
continuing obligations under Section 14 of the Employment Agreement, including
without limitation his obligations with respect to competitive employment and
the solicitation of employees, suppliers or customers of the Company and
acknowledges that such obligations continue in accordance with their terms after
the Separation Date. Executive shall, during the Restriction Period (as defined
in the Employment Agreement), notify the Company in writing before he obtains
employment with or performs services for any Competitive Business (as defined in
the Employment Agreement). If Executive engages in such competitive activity
without first obtaining the Company's express prior written consent, the
Company's obligation to pay Executive any amounts pursuant to Sections 2(c) or
2(d) shall immediately terminate and the Company shall be entitled to recover
from Executive all amounts paid pursuant to such Sections on or after the first
date on which Executive engages in such competitive activity. The Company will
not seek to recover any amounts or benefits provided to Executive prior to his
engagement in competitive activity, but the Company's remedies for Executive's
breach of the Employment Agreement, including but not limited to injunctive
relief, are not otherwise limited.
5. Confidentiality. Executive acknowledges and affirms his continuing
obligations under Section 13 of the Employment Agreement, including without
limitation his obligations with respect to trade secrets and other confidential
information pertaining to the business of the Company and its subsidiaries and
acknowledges that such obligations continue in accordance with their terms after
the Separation Date.
6. Remedies. Executive acknowledges that the services rendered by him
are of a special, unique and extraordinary character, and that any violation of
this Agreement would be likely to be highly injurious to the Company or its
successors in interest with respect to the resulting disruption in their
management. By reason of the foregoing, if, during the term of this Agreement
Executive violates any provisions of Sections 4 or 5, the Company or its
successors in interest shall be entitled, in addition to any other remedies that
they may have, including money damages, to an injunction to be issued by a court
of competent jurisdiction, restraining him from committing or continuing any
violation of this Agreement.
3
<PAGE>
If, at any time, Executive violates, to any material extent, any of the
covenants or agreements set forth in Sections 4 or 5, the Company shall have the
right to immediately terminate all of its obligations to make any further
payments under Section 2.
7. Releases and Covenants Not To Sue.
(a) Executive, for himself, his legal representatives, assigns, heirs,
distributees, devisees, legatees, administrators, personal representatives and
executors (collectively, the "Executive Releasing Parties"), releases and
forever discharges the Company, its present or past subsidiaries and affiliates,
and their respective successors and assigns, and their respective present or
past officers, trustees, directors, shareholders, employees and agents of each
of them (collectively, the "Executive Released Parties"), from any and all
claims, demands, actions, liabilities and other claims for relief and
remuneration whatsoever (including without limitation attorneys' fees and
expenses), whether known or unknown, absolute, contingent or otherwise (each, a
"Claim"), arising or which could have arisen up to and including the date of his
execution of this Agreement, including without limitation those arising out of
or relating to Executive's employment or cessation and termination of
employment, the Employment Agreement or any other written or oral agreement, any
change in Executive's employment status, any benefits or compensation, any
tortious injury, breach of contract, wrongful discharge (including any claim for
constructive discharge), infliction of emotional distress, slander, libel or
defamation of character, and any Claims arising under Title VII of the Civil
Rights Act of 1964 (as amended by the Civil Rights Act of 1991), the Americans
With Disabilities Act, the Rehabilitation Act of 1973, the Equal Pay Act, the
Fair Labor Standards Act, the Older Workers Benefits Protection Act, the Age
Discrimination in Employment Act, the Illinois Human Rights Act, the Illinois
Wage Payment and Collection Act, the Employee Retirement Income Security Act of
1974, or any other federal, state or local statute, law, ordinance, regulation,
rule or executive order, any tort or contract claims, and any of the claims,
matters and issues which could have been asserted by Executive against the
Company or its subsidiaries in any legal, administrative or other proceeding;
provided, however, that the foregoing release does not apply to (i) any Claim
under or based on this Agreement or (ii) any vested benefit Executive may have
as of the Separation Date under any applicable employee benefit plan of the
Company.
(b) Executive further agrees on behalf of himself and the Executive
Releasing Parties (i) not to assert any Claim against the Executive Released
Parties which Claim has been released pursuant to Section 7(a) and (ii) not to
file or commence any proceeding in any forum in respect of any such released
Claim. Executive agrees to indemnify and hold harmless each of the Executive
Released Parties in respect of any such Claim or proceeding. If Executive files
or commences any proceeding in respect of such Claim, Executive shall forfeit,
as of the date of the institution of such proceeding, any right to continue to
receive the compensation and benefits provided in Section 2, and Executive shall
forthwith return to the Company all payment and benefit amounts previously made
to him pursuant to this Agreement.
(c) The Company, for itself and each of its subsidiaries and their
respective assigns, and to the extent it is legally able to do so, for their
respective present or past officers, trustees, directors, shareholders,
employees and agents (in each case solely relating to the scope of their
employment or in their corporate capacities and to the extent such person is
making a claim on behalf of the Company) (the "Company Releasing Parties")
hereby releases and forever discharges Executive from any and all Claims arising
or which could have arisen up to and including the date of the execution of this
Agreement, out of or relating to Executive's employment, cessation of employment
or change in employment status, the termination of prior agreements with him, or
the performance of his duties on behalf of the Company; including any act,
omission, occurrence, or other matters related to such employment, and any of
the claims, matters and issues which could have been asserted by the Company
against Executive in any legal, administrative, or other proceeding; provided,
however, that the foregoing release does not apply to (i) any Claim under or
based on this Agreement, (ii) any act or omission involving fraud; an
intentional tort; willful, reckless or grossly negligent misconduct; criminal
activity; or the receipt by Executive, directly or indirectly, of any financial
or other
4
<PAGE>
personal benefit to which he is not entitled, or (iii) any obligation of
Executive with respect to Sections 13 or 14 of the Employment Agreement.
(d) The Company further agrees on behalf of itself and the Company
Releasing Parties (i) not to assert any Claim against Executive which Claim has
been released pursuant to Section 7(c) and (ii) not to file or commence any
proceeding in any forum in respect of any such released Claim. The Company
agrees to indemnify and hold harmless Executive in respect of any such Claim or
proceeding.
8. No Charges or Complaints Filed. Executive represents that he has not
filed any complaints or charges against the Company with any local, state or
federal agency or court. If any such complaint or charge was filed on his
behalf, Executive shall take all reasonable steps necessary to effectuate
withdrawal of such complaint or charge.
9. No Liability Admitted. Executive and the Company acknowledge that
neither execution of this Agreement nor performance of its terms shall
constitute an admission by Executive or the Company of any wrongdoing in
connection with any matter, including (without limitation) the matters set forth
in Section 7.
10. No Detrimental Communications.
(a) Executive will not disclose or cause to be disclosed any negative,
adverse or derogatory comments or information about the Company, about any
product or service provided by the Company, or about the Company's prospects for
the future, except as may be required by legal process.
(b) The Company will not disclose or cause to be disclosed any
negative, adverse or derogatory comments or information about Executive, except
as may be required by legal process; provided, however, that the Company may (i)
provide factual information regarding the beginning and ending dates of
Executive's employment by the Company and the positions which he held during
such employment and (ii) make all disclosures which, based on the advice of
legal counsel, the Company reasonably believes to be required by securities or
other law.
11. Further Assistance. For a period of three years after the Separation
Date, Executive shall from time to time provide the Company with such assistance
and cooperation as the Company may from time to time request in connection with
any investigation, claim, dispute, judicial, legislative, administrative or
arbitral proceeding, or litigation (any of the foregoing, a "Proceeding")
arising out of matters within the knowledge of Executive and related to his
position as an employee or director of the Company. Such assistance and
cooperation shall include providing information, declarations or statements to
the Company, meeting with attorneys or other representatives of the Company, and
preparing for and giving truthful testimony in connection with any Proceeding or
related deposition. In any such instance, Executive shall provide such
assistance and cooperation at times and in places mutually convenient for the
Company and Executive and which do not unreasonably interfere with Executive's
business or personal activities. The Company shall (i) pay Executive's
reasonable out-of-pocket costs and expenses in connection with such assistance
and cooperation, whenever provided, and (ii) if after the end of the Severance
Period, the Company shall require Executive to provide more than three days of
assistance or cooperation pursuant to this Section during any calendar month,
the Company shall pay Executive a consulting fee equal to $1,200 for each such
day in excess of three days; provided that clause (ii) of this sentence shall
not apply to any assistance or cooperation provided by Executive pursuant to
this Section during the Severance Period or to any testimony provided by
Executive at any time pursuant to this Section in connection with any Proceeding
or related deposition.
12. Confidentiality. Executive shall keep confidential the existence of
this Agreement, as well as all of its terms and conditions, and shall not
disclose the existence, terms or conditions of this Agreement to any Person
except to his attorney, accountant, and members of his immediate family who have
agreed to keep
5
<PAGE>
confidential the existence, terms and conditions of this Agreement; and except
that Executive may inform any prospective employer that the reason for his
separation from employment with the Company was to pursue other opportunities.
In the event that Executive believes he is compelled by law to divulge the
existence, terms or conditions of this Agreement, he will notify the Company in
writing of the basis for that belief before actually divulging the information,
in order to permit the Company to take steps to protect its interests. Executive
will cooperate with the Company in all reasonable respects to permit the Company
to oppose such disclosure. Executive represents that, as of the date of this
Agreement, he has not disclosed the existence, terms or conditions of this
Agreement, except as permitted by this Section. The Company shall not disclose
the existence, terms or conditions of this Agreement, except to the extent
necessary to further the Company's legitimate business interests or as may be
required by legal process or by applicable law, rule or regulation.
13. Voluntary Agreement. Executive acknowledges and represents that he
(i) has read this Agreement, (ii) has consulted with legal counsel prior to
executing this Agreement, (iii) understands the legal effect and binding nature
of this Agreement; and (iv) is acting voluntarily and with full knowledge of his
actions in executing this Agreement. Further, Executive acknowledges that he
has been given at least 21 days to fully consider entering into this Agreement
before its execution.
14. Revocation. This Agreement may be revoked by Executive within the
first seven days after his execution of this Agreement, in which case this
Agreement shall not become effective or enforceable and all terms of this
Agreement shall become null and void. Notwithstanding any provision of this
Agreement to the contrary, Executive shall in no event be entitled to any
payment pursuant to Sections 2(c) or (d) before the expiration of such seven-day
revocation period. If not revoked during this seven-day revocation period, this
Agreement shall remain in full force and effect.
15. Legal Fees. The Company shall reimburse the Executive for the fees
and expenses (not in excess of $5,000) incurred by him for legal services
performed on or prior to the date of this Agreement in connection with the
negotiation and execution of this Agreement.
16. Governing Law; Disputes. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Illinois,
without giving effect to its conflict or choice of law provisions. Any action
brought to enforce this Agreement may be brought in a state or federal court of
competent jurisdiction located in DuPage County, Illinois. Executive submits to
the jurisdiction of any state court located in DuPage County, Illinois or any
federal court located in the Northern District of Illinois and waives the
defense of an inconvenient forum to the maintenance of any action in such
jurisdiction. Each party agrees that, if any action is brought to enforce this
Agreement in a state court outside of DuPage County, Illinois or any federal
court outside of the Northern District of Illinois, such party consents to a
transfer to a state court located in DuPage County, Illinois or a federal court
located in the Northern District of Illinois, and will accept service of process
and other papers by any method permitted by the rules of the court to which such
action is transferred.
17. Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
delivered personally, sent by certified, registered or express mail, postage
prepaid, or by overnight delivery service and shall be deemed to have been duly
given when delivered or three days after mailing (in the case of communications
sent by mail), as follows:
If to the Company:
Factory Card Outlet Corp.
2727 Diehl Road
Naperville, Illinois 60563
Attention: Chairman of the Board
6
<PAGE>
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Roger C. Siske, Esq.
If to Executive:
Charles R. Cumello
5614 S. Park Avenue
Hinsdale, Illinois 60521
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
Attention: William E. Mattingly, Esq.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
18. Waiver. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
19. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed shall be deemed to be an original
but both of which together will constitute one and the same instrument.
20. Withholding. The Company shall withhold from all benefits and other
amounts due or otherwise payable to Executive hereunder in order to comply with
any federal, state, local or other income or other tax laws requiring
withholding with respect to compensation and benefits provided to Executive
pursuant to this Agreement, or to comply with any personal or voluntary
deduction, including without limitation the employee contribution for any
insurance plan in which Executive participates, or other deductions authorized
by law or that have been requested by Executive during the course of his
employment.
21. Non-Admission. Nothing contained in this Agreement, nor any actions
taken by any party hereto in connection herewith, shall constitute, be construed
as, or be deemed to be, an admission of fault, liability, or wrongdoing of any
kind whatsoever on the part of any party hereto. The Company asserts that at
all times its treatment of Executive is, was and has been fully consistent with
the requirements of the law and the Company's policies and Executive
acknowledges the Company's assertion.
22. Validity. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, covenants and
restrictions of this Agreement shall remain in full force and effect and in no
way shall affect, impair or invalidate this Agreement. If any court determines
that any provision of Section 4 of this Agreement or Section 14 of the
Employment Agreement is unenforceable because of the duration or geographical
scope of
7
<PAGE>
such provision, such court shall have the power to reduce the duration or scope
of such provision, as the case may be, and, in its reduced form, such provision
shall then be enforceable.
23. Entire Agreement. Except as otherwise expressly provided in this
Agreement, this Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supersedes all
previous oral and written agreements and all prior or contemporaneous oral
negotiations, commitments and understandings. Neither party has made, and
neither party has relied upon, any representation or warranty in connection with
this Agreement except as expressly set forth herein.
24. Assignment of Interests. Executive warrants that he has not assigned,
transferred or purported to assign or transfer any claim of Executive against
the Company.
25. Representations. Each party represents that (a) prior to executing
this Agreement, it had the opportunity to review this Agreement with counsel of
its choice, (b) it has read this Agreement, knows its contents, and understands
that its terms are legally binding, (c) it has entered into this Agreement
voluntarily and has not been pressured or coerced in any way into signing this
Agreement.
26. Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date set forth above.
FACTORY CARD OUTLET CORP.
By:_____________________________
Stewart M. Kasen
Chairman of the Board, President
and Chief Executive Officer
EXECUTIVE:
________________________________
Charles R. Cumello
8
<PAGE>
Exhibit A
[copy of Employment Agreement to be attached here]
Exhibit B
CERTIFICATE
I, Charles R. Cumello, hereby certify and represent as follows to Factory
Card Outlet Corp. (the "Company") pursuant to Section 2(e) of the Separation and
Release Agreement dated as of September __, 1998 (the "Separation Agreement")
between me and the Company:
Check one of the following:
____ During the Severance Period (as defined in the Separation Agreement), I
did not perform any services as an employee, officer, consultant or independent
contractor of any company, entity or person (other than the Company or its
subsidiaries) for which services I did receive or was entitled to receive any
payment or other compensation.
OR
____ During the Severance Period, I did perform services as an employee,
officer, consultant or independent contractor of or to any company, entity or
person or company and, by reason of such services, received or became entitled
to receive payments or other compensation (whether monetary or non-monetary,
current or deferred, contingent or non-contingent, or vested or subject to any
forfeiture condition) as follows:
Aggregate amount of cash compensation
(before deductions or withholding): _____________________________________
Description of non-cash compensation: _____________________________________
Description of any contingencies
or vesting conditions: _____________________________________
Period during which services performed: _____________________________________
Company, person or entity for whom
services performed: _____________________________________
(Attach additional pages if necessary.)
* * * *
All of the information set forth above is true, correct and complete.
Dated: ________________, 199_ _____________________________________
Charles R. Cumello
B - 1
9
<PAGE>
INDIVIDUAL ACKNOWLEDGMENT
STATE OF ILLINOIS )
) SS.
COUNTY OF DUPAGE )
On the _____ day of _______________, 199__, before me personally appeared
Charles R. Cumello, known to me or proved to me on the basis of satisfactory
evidence to be the individual described in and who acknowledged the foregoing
instrument and swore and acknowledged that he executed the same as his free act
and deed.
________________________________________________
Notary Public
My commission expires __________________________
B-2
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Consolidated Balance Sheet, Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 262,900
<SECURITIES> 0
<RECEIVABLES> 167,840
<ALLOWANCES> 0
<INVENTORY> 96,358,857
<CURRENT-ASSETS> 100,596,216
<PP&E> 58,691,559
<DEPRECIATION> 16,913,947
<TOTAL-ASSETS> 144,051,018
<CURRENT-LIABILITIES> 39,268,508
<BONDS> 2,161,681
0
0
<COMMON> 75,030
<OTHER-SE> 49,606,954
<TOTAL-LIABILITY-AND-EQUITY> 144,051,018
<SALES> 162,326,429
<TOTAL-REVENUES> 162,326,429
<CGS> 108,492,659
<TOTAL-COSTS> 55,416,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,135,543
<INCOME-PRETAX> (4,718,534)
<INCOME-TAX> (1,887,415)
<INCOME-CONTINUING> (2,831,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,831,119)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
