<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended August 1, 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
September 4, 1998 was 7,426,875.
<PAGE>
Factory Card Outlet Corp.
Form 10-Q
For the Quarter Ended August 1, 1998
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of August 1, 1998 and January 31, 1998 3
Consolidated Statements of Income for the three fiscal months and six
fiscal months ended August 1, 1998 and August 2, 1997 4
Consolidated Statements of Cash Flows for the six fiscal months
ended August 1, 1998 and August 2, 1997 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3 Quantitative and Qualitative Disclosures About Market Risk *
Part II Other Information 14
Signatures 15
* Not applicable
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 220,640 $ 30,373
Receivables 569,098 2,008,604
Inventories 89,206,994 72,911,489
Prepaid expenses 2,081,755 1,773,130
Deferred income taxes 419,648 331,307
------------ ------------
Total current assets 92,498,135 77,054,903
Fixed assets, net 40,588,209 38,507,001
Deferred income taxes 493,353 493,353
Other assets 1,118,059 188,010
------------ ------------
Total assets $134,697,756 $116,243,267
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 1,899,536 $ 1,820,809
Accounts payable 26,203,953 17,307,927
Due to related parties 3,812,801 2,942,979
Accrued expenses 4,987,619 4,753,764
------------ ------------
Total current liabilities 36,903,909 26,825,479
Revolving credit note payable 27,775,040 29,700,000
Term loan 9,504,735 -
Capital lease obligations 1,733,748 2,667,836
Deferred rent liabilities 6,592,997 5,315,820
------------ ------------
Total liabilities 82,510,429 64,509,135
------------ ------------
Stockholders' equity:
Common stock - $.01 par value. Voting class - authorized 15,000,000 shares;
7,391,735 and 7,335,519 shares issued and outstanding at August 1, 1998 and
January 31, 1998, respectively. Non-voting class - authorized 205,000 shares,
no shares issued or outstanding. 73,917 73,355
Additional paid-in capital 51,902,655 51,222,520
Retained earnings 210,755 438,257
------------ ------------
Total stockholders' equity
52,187,327 51,734,132
------------ ------------
Total liabilities and stockholders' equity $134,697,756 $116,243,267
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three fiscal months ended Six fiscal months ended
--------------------------- ---------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------------------------- ---------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $54,748,968 $40,918,975 $104,611,023 $73,864,644
Cost of sales and occupancy 36,322,795 24,875,821 68,505,980 45,334,702
----------- ----------- ------------ -----------
Gross profit 18,426,173 16,043,154 36,105,043 28,529,942
Selling, general and administrative
expenses 18,184,416 12,734,883 34,134,999 24,447,974
Special charge 655,269 - 655,269 -
----------- ----------- ------------ -----------
Income (loss) from operations (413,512) 3,308,271 1,314,775 4,081,968
Interest expense 912,483 167,230 1,693,946 294,074
----------- ----------- ------------ -----------
Income (loss) before taxes (1,325,995) 3,141,041 (379,171) 3,787,894
Income tax (benefit) (530,398) 1,348,174 (151,669) 1,619,853
----------- ----------- ------------ -----------
Net income (loss) $ (795,597) $ 1,792,867 $ (227,502) $ 2,168,041
=========== =========== ============ ===========
Earnings (loss) per share -
basic $ (0.11) $ 0.25 $ (0.03) $ 0.30
=========== =========== ============ ===========
diluted $ (0.11) $ 0.23 $ (0.03) $ 0.27
=========== =========== ============ ===========
Weighted average shares outstanding -
basic 7,385,196 7,225,011 7,369,791 7,217,541
=========== =========== ============ ===========
diluted 7,385,196 7,923,200 7,369,791 7,959,076
=========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six fiscal months ended
------------------------------
August 1, August 2,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (227,502) $ 2,168,041
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of fixed assets 3,492,066 2,029,776
Amortization of deferred finance cost and debt discount 132,160 -
Loss on the disposal or retirement of fixed assets 234,222 246,687
Stock option compensation 29,502 62,832
Non-cash portion of special charge 600,789 -
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (131,443) (871,017)
Inventories (16,295,505) (9,764,911)
Prepaid expenses (308,625) 366,575
Other assets (836,629) (344,626)
Deferred income taxes (88,341) (820,260)
Increase (decrease) in liabilities:
Accounts payable 11,336,797 4,479,874
Accrued expenses (313,464) 387,395
Deferred rent liabilities 1,277,177 442,265
Income taxes payable - 1,542,439
------------ ------------
Net cash used in operating activities (1,098,796) (74,930)
------------ ------------
Net cash used in investing activities - purchase of fixed
assets, net (6,030,064) (6,816,843)
------------ ------------
Cash flows from financing activities:
Borrowings under revolving credit note 47,158,497 32,809,400
Borrowings under term loan 10,000,000 -
Repayment of borrowings under revolving credit note (49,083,457) (24,243,000)
Payment of long-term obligations (893,608) (1,071,113)
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 137,695 5,122
------------ ------------
Net cash provided by financing activities 7,319,127 7,442,702
------------ ------------
Net increase in cash 190,267 550,929
Cash at beginning of period 30,373 287,771
------------ ------------
Cash at end of period $ 220,640 $ 838,700
============ ============
</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 199 company-owned
superstores offering an extensive selection of party supplies, greeting
cards, gift wrap and other special occasion merchandise at everyday value
prices in 22 states as of August 1, 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 revenues and expenses during the reporting
period and related disclosures. Significant estimates made as of and for
the three and six fiscal month periods ended August 1, 1998 and August 2,
1997 included provisions for inventory shrinkage and damage, capitalized
overhead costs related to inventory and markdowns of inventories. 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 three month period 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 August 1, 1998 -
Earnings per share - basic and diluted:
Net (loss) available to common stockholders $ (795,597) 7,385,196 $(0.11)
========== ========= ======
For the three fiscal months ended August 2, 1997 -
Earnings per share - basic:
Net income $1,792,867 7,225,011 $ 0.25
Effect of dilutive securities
Stock options 621,992
Warrants 76,197
---------
Earnings per share - diluted:
Net income available to common stockholders and assumed conversions $1,792,867 7,923,200 $ 0.23
========== ========= ======
For the six fiscal months ended August 1, 1998 -
Earnings per share - basic and diluted:
Net (loss) available to common stockholders $ (227,502) 7,369,791 $(0.03)
========== ========= ======
For the six fiscal months ended August 2, 1997 -
Earnings per share basic:
Net income $2,168,041 7,217,541 $ 0.30
Effect of dilutive securities
Stock options 665,334
Warrants 76,201
---------
Earnings per share - diluted:
Net income available to common stockholders and assumed conversions $2,168,041 7,959,076 $ 0.27
========== ========= ======
</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 three fiscal months ended August 1, 1998 86,203
For the three fiscal months ended August 2, 1997 72,457
For the six fiscal months ended August 1, 1998 73,387
For the six fiscal months ended August 2, 1997 68,965
</TABLE>
During the three fiscal months and six fiscal months ended August 1,
1998, 11,044 and 56,216 shares, respectively, were issued upon the exercise
of stock options. During the three fiscal months and six fiscal months
ended August 2, 1997, 1,004 and 5,020 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 Loan and Security Agreement contains restrictive covenants
requiring minimum cumulative consolidated earnings before interest, taxes,
depreciation and amortization and limiting capital expenditures. Advances
under the Amended Loan and Security Agreement are limited based on
inventory levels, which vary if the Term Loan is outstanding, and 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
additional 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 was $18,235 and $30,202 during July 1998. The Company had
borrowings of $10,000,000 under the Term Loan and $27,775,040 under the
Amended Agreement as of August 1, 1998.
(7) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three fiscal months ended Six fiscal months ended
------------------------------- -------------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash paid (received) during the period:
Interest 1,378,461 159,085 2,344,810 272,125
Income taxes 298,071 (39,591) 92,768 (31,816)
</TABLE>
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred and notes payable on equipment and
vehicle purchases were $23,997 and $2,797,243 in the three and six fiscal
month periods ended August 2, 1997, respectively.
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: ability to open and operate new stores; weather and economic
conditions; dependence on key personnel; competition; ability to anticipate
merchandise trends and consumer demand; ability to maintain relationships with
suppliers; successful implementation of information systems; successful handling
of merchandise logistics; inventory shrinkage; ability to meet future capital
needs; governmental regulations; ability to complete corrective action necessary
to address Year 2000 issues and other factors both referenced and not referenced
in this Quarterly Report on Form 10-Q. 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 profitability 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 income 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 Six fiscal months ended
-------------------------- --------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0% 100.0 % 100.0%
Cost of sales and occupancy 66.3 60.8 65.5 61.4
--------- --------- --------- ---------
Gross profit 33.7 39.2 34.5 38.6
Selling, general and administrative expenses 33.2 31.1 32.6 33.1
Special charge 1.2 - 0.6 -
--------- --------- --------- ---------
Income (loss) from operations (0.7) 8.1 1.3 5.5
Interest expense 1.7 0.4 1.7 0.4
--------- --------- --------- ---------
Income (loss) before taxes (2.4) 7.7 (0.4) 5.1
Income tax (benefit) (1.0) 3.3 (0.2) 2.2
--------- --------- --------- ---------
Net income (loss) (1.4)% 4.4% (0.2)% 2.9%
========= ========= ========= =========
Number of stores open at end of period 199 145 199 145
</TABLE>
9
<PAGE>
Three Fiscal Months Ended August 1, 1998 and August 2, 1997
Net Sales. Net sales increased $13.8 million, or 33.7%, to $54.7 million
for the three fiscal month period ended August 1, 1998 from $40.9 million for
the three fiscal month period ended August 2, 1997. The increase resulted from
(i) net sales of $4.3 million from new stores opened during the current fiscal
year, (ii) net sales increase of $9.0 million from stores opened prior to
February 1998 not included in the comparable store base, and (iii) a comparable
store sales increase of $0.5 million, or 1.4%. Comparable store sales were
unfavorably impacted by the uneven flow of basic stock merchandise during the
spring of this year resulting from system conversion issues associated with the
consolidation of the Company's distribution facilities. The Company includes
stores opened 13 or 14 months after their opening date in the calculation of
comparable sales. If the opening date of a store falls in the first 14 days of a
period, the store is included in the comparable store calculation in its 13th
month of operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
Gross Profit. Cost of sales includes merchandise, store occupancy,
purchasing and distribution costs. Gross profit increased $2.4 million, or
15.0%, to $18.4 million for the three fiscal month period ended August 1, 1998
from $16.0 million for the three fiscal month period ended August 2, 1997. As a
percentage of net sales, gross profit was 33.7% for the three fiscal month
period ended August 1, 1998 compared to 39.2% in the prior year. Gross profit as
a percentage of net sales decreased as a result of higher occupancy and other
fixed costs along with 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 include labor, advertising, depreciation, other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $5.5 million, or 43.3%, to $18.2 million for
the three fiscal month period ended August 1, 1998 from $12.7 million for the
three fiscal month period ended August 2, 1997. Approximately $4.3 million of
this increase resulted from the operation of 54 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 three fiscal month period ended August 2, 1997. As a percentage of net
sales, selling, general and administrative expenses increased to 33.2% in the
three fiscal month period ended August 1, 1998 from 31.1% in the three fiscal
month period ended August 2, 1997.
Special Charge. During the quarter ended August 1, 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 $0.9 million in the three fiscal
month period ended August 1, 1998 compared to $0.2 million in the three fiscal
month period ended August 2, 1997. This increase resulted from higher borrowing
levels to support the opening of 54 new superstores and increased inventory
levels.
Income Tax. During the three month period ended August 1, 1998, the
Company had a taxable loss resulting in a tax benefit compared to taxable income
for the three month period ended August 2, 1997 resulting in tax expense.
10
<PAGE>
Six Fiscal Months Ended August 1, 1998 and August 2, 1997
Net Sales. Net sales increased $30.7 million, or 41.5%, to $104.6 million
for the six fiscal month period ended August 1, 1998 from $73.9 million for the
six fiscal month period ended August 2, 1997. The increase resulted from (i) net
sales of $6.8 million from new stores opened during the six-month period, (ii)
net sales increase of $22.4 million from stores opened prior to February 1998
not included in the comparable store base, and (iii) a comparable store sales
increase of $1.5 million, or 2.2%. Comparable store sales were impacted by the
uneven flow of basic stock merchandise during the spring of this year resulting
from system conversion issues associated with the consolidation of the Company's
distribution facilities.
Gross Profit. Gross profit increased $7.6 million, or 26.7%, to $36.1
million for the six fiscal month period ended August 1, 1998 from $28.5 million
for the six fiscal month period ended August 2, 1997. As a percentage of net
sales, gross profit was 34.5% for the six fiscal month period ended August 1,
1998 compared to 38.6% in the prior year. Gross profit as a percentage of net
sales decreased as a result of 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 $9.7 million, or 39.8%, to $34.1 million for
the six fiscal month period ended August 1, 1998 from $24.4 million for the six
fiscal month period ended August 2, 1997. Approximately $7.9 million of this
increase resulted from the operation of 54 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 increased to 32.6% in the six fiscal month period ended
August 1, 1998 from 33.1% in the six fiscal month period ended August 2, 1997.
Special Charge. During the quarter ended August 1, 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 $1.7 million in the six fiscal
month period ended August 1, 1998 compared to $0.3 million in the six fiscal
month period ended August 2, 1997. This increase resulted from higher borrowing
levels to support the opening of 54 new superstores and increased inventory
levels.
Income Tax. During the six month period ended August 1, 1998, the Company
had a taxable loss resulting in a tax benefit compared to taxable income for the
six month period ended August 2, 1997 resulting in tax expense. The benefit was
recognized at an effective rate of 40.0% during the six month period ended
August 1, 1998 compared to the expense recognized at an effective rate of 42.8%.
The lower effective rate is a result of state tax savings.
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. 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 to support its continued growth. 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 support its continued growth.
At August 1, 1998 and August 2, 1997, the Company's working capital was
$55.6 million and $40.2 million, respectively. Net cash used in operations for
the six fiscal month period ended August 1, 1998 was $1.1 million compared to
$0.1 million net cash provided by operations for the six fiscal month period
ended August 2, 1997. In these two periods, $16.3 million and $9.8 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 six fiscal month periods
ended August 1, 1998 and August 2, 1997 was $6.0 million and $6.8 million,
respectively. These costs were primarily a result of opening new superstores,
investing in equipment for the new distribution center and investing in
information technology systems. During the six fiscal month periods ended August
1, 1998 and August 2, 1997, the Company spent $3.1 million and $3.8 million,
respectively, for capital expenditures for new superstores.
Net cash provided by financing activities during the six fiscal month
periods ended August 1, 1998 and August 2, 1997 was $7.3 million and $7.4
million, respectively. At August 1, 1998, the outstanding balance under the Loan
and Security Agreement with BankBoston Retail Finance Inc. ("Loan and Security
Agreement") was $27.8 million and under the Term Loan and Security Agreement
(Term Loan) with Back Bay Capital, LLC was $10.0 million. At August 2, 1997, the
outstanding balance under the Company's Business Loan Agreement with Bank One,
Chicago, NA was $9.0 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
12
<PAGE>
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.
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) and related software over the next three
years in an amount not to exceed $5.0 million. During August 1998, financing for
$0.7 million of the POS equipment was completed under this agreement. This lease
has a term of four years.
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 at that time.
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.
13
<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.
(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.
14
<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: September 14, 1998 By: /s/ Stewart M. Kasen
-----------------------------------------
Stewart M. Kasen
Chairman of the Board,
President and Chief Executive Officer
Dated: September 14, 1998 By: /s/ Glen J. Franchi
-----------------------------------------
Glen J. Franchi
Executive Vice President,
Treasurer, and Chief Operating Officer
(principal financial officer)
Dated: September 14, 1998 By: /s/ Thomas W. Stoltz
-----------------------------------------
Thomas W. Stoltz
Vice President - Finance
(principal accounting officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet, Consolidated Statements of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 220,640
<SECURITIES> 0
<RECEIVABLES> 569,098
<ALLOWANCES> 0
<INVENTORY> 89,206,994
<CURRENT-ASSETS> 92,498,135
<PP&E> 55,400,236
<DEPRECIATION> 14,812,027
<TOTAL-ASSETS> 134,697,756
<CURRENT-LIABILITIES> 36,903,909
<BONDS> 1,733,748
0
0
<COMMON> 73,917
<OTHER-SE> 52,113,410
<TOTAL-LIABILITY-AND-EQUITY> 134,697,756
<SALES> 104,611,023
<TOTAL-REVENUES> 104,611,023
<CGS> 68,505,980
<TOTAL-COSTS> 34,790,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,693,946
<INCOME-PRETAX> (379,171)
<INCOME-TAX> (151,669)
<INCOME-CONTINUING> (227,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227,502)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
