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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended January 29, 2000 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended
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)
(630) 579-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of April 25, 2000 was approximately $517,975, computed on the
basis of the last reported bid price per share ($0.13) of such stock on the Over
the Counter Bulletin Board system. Shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K | |
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |X|
The number of shares of the Registrant's Common Stock outstanding as of April
26, 2000 was 7,503,098.
<PAGE>
Factory Card Outlet Corp.
(Debtor in possession effective March 23, 1999)
Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Page
Item 1 Business 1
Item 2 Properties 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a Quantitative and Qualitative Disclosures About Market Risks 18
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10 Chairman and Executive Officers of the Registrant 19
Item 11 Executive Compensation 19
Item 12 Security Ownership of Certain Beneficial Owners
and Management 19
Item 13 Certain Relationships and Related Transactions 19
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. On March 23, 1999, the Company filed a petition
for reorganization under chapter 11 of title 11 of the United States Bankruptcy
Code and is operating as a debtor in possession. All forward-looking statements
relating to aspects of any plan of reorganization submitted in connection with
its chapter 11 cases are dependent upon, among other things, further
improvements in the Company's store-level operating performance, the formulation
of reorganization plan, that is confirmed by the bankruptcy court.
In general, the results, performance or achievements of the Company and
its stores and the value of the Company's common stock are dependent upon a
number of factors including, without limitation, the following: effects
resulting from the commencement and completion of the chapter 11 cases; ability
to meet sales plans; 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; and other factors both referenced and not referenced
in this Form 10-K. When used in this Report on Form 10-K, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," and similar expressions
are intended to identify forward-looking statements.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Factory Card Outlet Corp. ("FCO") and its subsidiary, Factory Card
Outlet of America Ltd. (collectively, with FCO, the "Company"), are a chain of
company-owned stores offering a wide assortment of greeting cards, giftwrap,
balloons, party supplies and other special occasion merchandise at everyday
value prices. As of April 26, 2000, the Company operated 182 stores in 21
states. Based on the published number of stores of the Company's competitors as
compiled by the Company from various business publications and other publicly
available information, the Company believes it is one of the largest chains of
company-owned stores in the greeting card, party supply and special occasion
industry. The Company opened 33, 58, and 29 stores in fiscal 1998, 1997 and
1996, respectively. The Company currently has no plans to open any additional
stores and the Company closed 28 stores in fiscal 1999.
The Company's stores provide customers with a value-oriented,
"one-stop" shopping destination for greeting card, party supply and special
occasion merchandise for all major holidays and celebratory events, including
birthdays, graduations, weddings, baby showers and other family, religious and
special occasions. The Company's newer stores average approximately 12,000
square feet, with approximately 80% of the space devoted to selling space, and
are designed to provide ease of shopping within an attractive, spacious and
festive environment.
Proceedings Under Chapter 11 of the Bankruptcy Code
On March 23, 1999, the Company filed petitions for reorganization under
chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The
petitions were filed in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") under case numbers 99-685 (JJF) and 99-686
(JJF) (the "Chapter 11 Cases"). The Chapter 11 Cases have been procedurally
consolidated for administrative purposes. The Company is currently operating its
business and managing its properties as a debtor in possession pursuant to the
Bankruptcy Code.
Subsequent to the commencement of the Chapter 11 Cases, the Company
sought and obtained several orders from the Bankruptcy Court which were intended
to stabilize their business and enable the Company to continue business
operations as a debtor in possession. The most significant of these orders (1)
approved a $50 million debtor in possession loan agreement, the revolving credit
and guarantee agreement, among FCO, as borrower, Foothill Capital Corporation,
as agent, and Paragon Capital LLC, as oversight agent, each for itself and any
other lenders party thereto (the "Loan Agreement"), (2) permitted the Company to
operate their consolidated cash management system during the Chapter 11 Cases in
substantially the same manner as it was operated prior to the commencement of
the Chapter 11 Cases, and (3) authorized payment of prepetition wages, vacation
pay and employee benefits and reimbursement of employee business expenses.
The Loan Agreement was entered into on March 23, 1999. The Loan
Agreement provides FCO with a revolving line of credit for loans and letters of
credit in an aggregate amount not to exceed $50 million, including the ability
to issue up to $10 million of letters of credit. FCO uses amounts available
under the Loan Agreement for its ongoing working capital needs and for other
general corporate purposes. FCO granted a security interest to the lenders under
the Loan Agreement in substantially all of its assets as security for its
obligations under the Loan Agreement. All obligations under the Loan Agreement
are afforded "super-priority" administrative expense status in the Chapter 11
Cases.
1
<PAGE>
On April 6, 1999, a statutory committee of unsecured creditors (the
"Creditors' Committee") was appointed by the Office of the United States Trustee
to represent the interests of the Company's unsecured creditors in the Chapter
11 Cases. The Creditors' Committee has the right to review and object to certain
business transactions and may participate in the formulation of the Company's
long term business plan and plan of reorganization. The Company is required to
reimburse certain fees and expenses of the Creditors' Committee, including fees
for attorneys and other professionals, to the extent allowed by the Bankruptcy
Court.
The Company has the right, subject to Bankruptcy Court approval and
certain other limitations, to assume or reject executory contracts and unexpired
leases. In this context, "assumption" means that the Company agrees to perform
their obligations and cure all existing defaults under the contract or lease,
and "rejection" means that the Company is relieved from its obligations to
perform further under the contract or lease but is subject to a claim for
damages for the breach thereof. Any damages resulting from rejection of
executory contracts and unexpired leases are treated as general unsecured claims
in the Chapter 11 Cases. The Company obtained approval from the Bankruptcy Court
to close and conduct closing sales at 27 stores. Subsequent to the closing of
such stores, the Company sought and obtained approval from the Bankruptcy Court
to reject 26 of the closed store leases and assume and assign one of such
leases. The Company will continue to analyze, and may assume or reject,
additional leases and other existing contracts. The time within which the
Company must assume or reject unexpired leases of real property currently
expires on August 24, 2000. The Company, however, may request that the
Bankruptcy Court grant an extension of the time within which it must assume or
reject unexpired leases of real property.
The Bankruptcy Code provides that the Company has an exclusive period
during which only it may propose, file and solicit acceptances of a plan of
reorganization. The Company has requested that the Bankruptcy Court grant an
extension of its exclusive period to file a plan and to solicit acceptances to
and including June 16, 2000 and August 18, 2000, respectively. The Company
currently retains its exclusivity pending the Court's consideration of that
request. If the Company fails to file a plan of reorganization during the
exclusive period or, after such plan has been filed, if the Company fails to
obtain acceptance of such plan from the requisite impaired classes of creditors
and equity security holders during the exclusive period, any party in interest,
including a creditor, an equity security holder, a committee of creditors or
equity security holders, or an indenture trustee, may file their own plan of
reorganization for the Company. The Company plans to develop a plan of
reorganization for submission to the Bankruptcy Court. In connection therewith,
the Company has considered proposals from certain third parties pursuant to
which such parties would provide the Company with funding for a plan of
reorganization in consideration for which, among other things, such parties
would obtain control over the Company or substantially all of its assets. The
Company currently supports a proposal from one of such parties, Saunders, Karp
and Megrue ("SKM"), which proposal does not currently provide for any recoveries
to the Company's stockholders. The SKM proposal is subject to, among other
things, resolution of certain open business issues, due diligence, definitive
documentation and court approval through the plan of reorganization process as
provided for in the Bankruptcy Code. Accordingly, there can be no assurances
regarding the final terms of that plan, or whether it ultimately will be
finalized and implemented.
After a plan of reorganization has been filed with the Bankruptcy
Court, the plan, along with a disclosure statement approved by the Bankruptcy
Court, will be sent to impaired creditors and equity security holders for their
consideration and approval. Following the solicitation period, the Bankruptcy
Court will consider whether to confirm the plan. In order to confirm a plan of
reorganization, the Bankruptcy Court, among other things, is required to find
that (1) with respect to each impaired class of creditors and equity security
holders, each holder in such class will, pursuant to the plan, receive at least
as much as such holder would receive in a liquidation, (2) each impaired class
of creditors and equity security holders has accepted the plan by the requisite
vote (except as provided in the following sentence), and (3) confirmation of the
plan is not likely to be followed by a liquidation or a need for further
financial reorganization of the Company or any successors to the Company unless
the plan proposes such liquidation or reorganization. If any impaired class of
creditors or equity security holders does not accept a plan and assuming that
all of the other requirements of the Bankruptcy Code are met, the proponent of
2
<PAGE>
the plan may invoke the "cram down" provisions of the Bankruptcy Code. Under
these provisions, the Bankruptcy Court may confirm a plan notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity security
holders if certain requirements of the Bankruptcy Code are met with respect to
the non-accepting class. These requirements may, among other things, necessitate
payment in full for senior classes of creditors before payment to a junior class
can be made. A "cram down," as well as other potential plans of reorganization,
could also result in holders of the Company's common stock receiving no value
for their interests if it is determined that the liabilities subject to
compromise in these Chapter 11 cases exceed the reorganization value of the
Company. Because of such possibilities, the value of the Company's common stock
is highly speculative.
In September 1999 the Company announced that it received notification
that the NASDAQ's staff had delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999.
Business
The key elements of the Company's business are as follows:
Merchandise Offering. The Company offers a wide selection of greeting
cards, giftwrap, balloons, everyday and seasonal party supplies and special
occasion merchandise. With over 23,000 SKUs in each of its stores, the Company's
stores provide a single destination for a customer's special occasion product
needs. The stores offer product selections for all major holidays and seasonal
events, such as Valentine's Day, St. Patrick's Day, Passover, Easter,
Secretary's Day, Mother's Day, Father's Day, Grandparent's Day, Fourth of July,
Rosh Hashanah, Halloween, Thanksgiving, Christmas, Hanukkah, Kwanzaa and New
Year's; celebratory events, including birthdays, graduations, weddings and baby
showers; and other family, religious and special occasions. The following five
major product categories comprise the Company's merchandise offering:
o Greeting Cards - The Company's stores feature approximately 4,000
titles of high quality, everyday and seasonal greeting cards for all
occasions, all sold at an everyday low price. Boxed everyday and
holiday cards are regularly sold at substantial discounts off
manufacturers' suggested retail prices.
o Giftwrap - The Company believes its stores have become a destination
for shoppers seeking a wide selection of giftwrap and giftwrap
accessories and sells most of these items at lower prices than
competitors. Items include glossy, printed, solid and foil giftwrap,
solid and printed ribbons, bows, gift bags, gift boxes, tissue paper
and gift tags.
o Balloons - Balloons are increasingly popular for all occasions. The
Company's stores offer value in mylar and latex balloons and carry
popular licensed designs along with a large selection for any occasion.
o Party Supplies - The Company stocks a broad selection of party supply
merchandise for everyday and special occasions in a wide variety of
attractive patterns and distinctive colors. Party supplies include
tableware, tablecovers, cutlery, invitations, party favors, milestone
birthday items, pinatas, banners, decorations, candles, decor and other
related party items.
o Other Special Occasion Merchandise - The Company complements its major
product lines by offering many other special occasion items in order to
provide a "one-stop" shopping destination for customers. These items
include candy, birthday and wedding items, candles and candle holders,
stationery, gifts, novelty items and seasonal products.
3
<PAGE>
Everyday Value Pricing. The Company's strategy of everyday value
pricing is designed to provide customers with consistent value on purchases. The
Company typically sells merchandise at discounts of 20% to 60% off
manufacturers' suggested retail prices. In addition, the stores feature a "power
aisle" offering a wide selection of opportunistic buys and manufacturers'
seasonal over-runs, all priced at deep discounts and frequently changed to
create continued customer interest.
Attractive, Spacious and Festive Superstore Format. The Company's
stores have an attractive and festive atmosphere within a spacious "easy to
shop" store. The superstores are designed to provide a comfortable shopping
experience, with bright lighting, wide carpeted aisles and fixtures that offer
customers easy access to merchandise. The Company has increased the size of its
new stores to approximately 12,000 square feet. Management is currently
evaluating the size of the Company's stores to determine if 12,000 square feet
is optimal.
Targeted Advertising. The Company utilizes a Company-wide direct mail
program to reach targeted customers and highlight the breadth and value of its
merchandise. The direct mail pieces are printed in 4-color and range from four
to eight pages depending on the season. The Company plans to continue this
direct mail program and support all holidays and special events. The Company
also uses radio advertising to support select major holiday selling seasons.
Distribution Center and Office Complex. The Company completed the
consolidation of its distribution facilities and offices into a new distribution
center and office complex in Naperville, Illinois in February 1998. The
newly-constructed, three-story office building and 300,000 square-foot
distribution center is on 39 acres. The lease agreement provides for the
expansion of the warehouse to 600,000 square feet, as needed. The Company
believes it is the only special occasion store chain to have a distribution
facility. Associated with the Company's consolidation of its distribution
facilities, system conversion issues arose resulting in the uneven flow of basic
stock merchandise. These issues have been corrected. Management believes the
distribution facility can provide the Company purchasing and distribution
efficiencies.
Store Locations. As of April 26, 2000, the Company operated 182 stores
in 21 states, all of which are leased. The Company's store leases typically have
an average initial term of 10 years with two five-year renewal options.
4
<PAGE>
Set forth below is a list of the Company's store locations by state as of April
26, 2000:
<TABLE>
<CAPTION>
Number Number Number
of of of
Location Stores Location Stores Location Stores
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
ARKANSAS (1) KENTUCKY (5) OHIO (20)
Fayettesville ..................1 Louisville Metro .............3 Cincinnati Metro .............4
DELAWARE (1) Florence .....................1 Cleveland Metro ..............4
Wilmington .....................1 Owensboro ....................1 Columbus Metro ...............5
FLORIDA (10) MARYLAND (13) Akron ........................2
Gainesville ....................1 Baltimore Metro ..............8 Dayton .......................1
Jacksonville ...................1 Washington, DC Metro (MD) ....4 Lancaster ....................1
Naples .........................1 Salisbury ....................1 Mansfield ....................1
Orlando ........................4 MICHIGAN (1) St Clairsville ...............1
Tampa ..........................3 Benton Harbor ................1 Wooster ......................1
ILLINOIS (38) MINNESOTA (6) PENNSYLVANIA (6)
Chicago Metro..................30 Minneapolis St Paul Metro ....4 Erie .........................1
Bloomington ....................1 Mankato ......................1 Hanover ......................1
Champaign ......................1 Rochester ....................1 Lancaster ....................1
DeKalb .........................1 MISSOURI (9) State College.................1
Fairview Heights ...............1 St Louis Metro ...............5 Wilkes Barre-Scranton ........2
Moline .........................1 Cape Girardeau ...............1 SOUTH CAROLINA (2)
Peoria .........................1 Columbia .....................1 Charleston ...................1
Rockford .......................1 Joplin .......................1 Greenville ...................1
Springfield ....................1 Springfield ..................1 TENNESSEE (6)
INDIANA (18) NEBRASKA (5) Chattanooga ..................2
Indianapolis Metro .............6 Omaha Metro ..................3 Memphis ......................2
Anderson .......................1 Lincoln ......................1 Nashville ....................2
Bloomington ....................1 Grand Island .................1 VIRGINIA (6)
Clarksville ....................1 NEW YORK (9) Washington DC Metro (VA) .....1
Evansville .....................2 Buffalo Metro ................3 Fredericksburg ...............1
Fort Wayne .....................1 Albany .......................1 Lynchburg ....................1
Highland .......................1 Olean ........................1 Norfolk-Newport News .........2
Merrillville ...................1 Rochester ....................3 Richmond .....................1
Michigan City ..................1 Syracuse .....................1 WEST VIRGINIA (1)
Mishawaka ......................1 NORTH CAROLINA (4) Clarksburg ...................1
Muncie .........................1 Charlotte ....................1 WISCONSIN (14)
Richmond .......................1 Raleigh ......................1 Milwaukee Metro ..............6
IOWA (7) Hickory ......................1 Appleton .....................1
Des Moines Metro ...............3 Winston Salem ................1 Eau Claire ...................1
Cedar Rapids ...................1 Green Bay ....................1
Davenport ......................1 Janesville ...................1
Dubuque ........................1 Madison ......................2
Waterloo .......................1 Oshkosh ......................1
Wausau .......................1
--------
TOTAL 182
========
</TABLE>
5
<PAGE>
Product Sourcing
Due to its size and the use of its distribution center, the Company has
historically been able to take advantage of volume purchase discounts. The
Company purchases its inventory from more than 300 vendors world-wide, with the
largest supplier, Creative Expressions, Inc., representing approximately 11% and
the ten largest suppliers representing approximately 40% of the Company's
aggregate purchases for the fiscal year ended January 29, 2000. A small portion
of the Company's merchandise is imported from foreign manufacturers or their
agents, principally from the Far East. As is customary in its industry, the
Company does not have long term contracts with any suppliers.
Although the Company believes that its well-established relationships
with overseas suppliers have historically provided it with an advantage over
many of its competitors by enabling the Company to offer an extensive selection
of distinctive products at higher gross margins, the Company's liquidity
problems and the Chapter 11 Cases could have a material adverse effect on the
Company and its relationships with its suppliers.
Management Information Systems
The Company believes that its management information systems are an
important factor in supporting its business and enhancing its competitive
position in the industry. Over the past three years, the Company has invested
significant resources in systems and infrastructure to support its business and
make it more efficient. The Company uses a management information and control
system, which is based on the JDA Merchandise Management System software package
("JDA") and supports the complete range of retail cycle functions in the areas
of finance, merchandising and distribution. All stores are linked to the
Company's headquarters through personal computers which interface with an IBM
AS/400 and provide the stores with the ability to enter store orders and payroll
information and send and receive electronic mail. These personal computers are
also tied into the Company's point-of-sale system ("POS system"). The POS system
provides sales information to the Company's stores and central office and is
used to enhance merchandise planning and buying programs. While the POS system
provides sales information, the Company intends to focus its future systems
development efforts on enhancing inventory management tools.
6
<PAGE>
Competition
The greeting card, party supplies and special occasion industry is
highly competitive. The Company currently competes against a diverse group of
retailers, ranging from other party supply and greeting card retailers to
designated departments in drug stores, general mass merchandisers, supermarkets
and department stores of local, regional and national chains. In addition, a
trend toward discounting the cost of party supplies and greeting cards is
developing and the Company may encounter additional competition from new
entrants in the future. Some of the Company's competitors have substantially
greater financial resources and experience than the Company.
Trademarks
The Company has registered trademarks under the name of "Factory Card
Outlet"(R) and "Partymania"(R) and the "Partymania"(R) design on the Principal
Register of the United States Patent and Trademark Office.
Government Regulation
Each of the Company's stores must comply with regulations adopted by
Federal agencies and with licensing and other regulations enforced by state and
local health, sanitation, safety, fire and other departments. More stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors, and difficulties or failures in obtaining the
required licenses or approvals, can delay and sometimes prevent, the opening of
a new store. In addition, the Company must comply with the Fair Labor Standards
Act and various state laws governing various matters such as minimum wage,
overtime and other working conditions. The Company also must comply with the
provisions of the Americans with Disabilities Act of 1990, as amended, which
requires generally that employers provide reasonable accommodation for employees
with disabilities and that stores be accessible to customers with disabilities.
Employees
The Company had approximately 3,100 employees as of April 1, 2000,
comprised of 1,100 full-time and 2,000 part-time employees. The number of store
employees increases during peak selling seasons. None of the Company's employees
are covered by a collective bargaining agreement. The Company believes its
relations with its employees are generally good.
ITEM 2. PROPERTIES
In addition to the Company's stores, all of which are leased, the
Company also leases a distribution center in Naperville, Illinois, with the
lease term expiring in February 2007. This facility consists of a newly
constructed, three-story office building and 300,000 square-foot distribution
center that sits on 39 acres of land.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company commenced the Chapter 11 Cases on March 23, 1999.
Additional information relating to the Chapter 11 Cases is set forth in Part 1,
Item 1 of this Form 10-K report under the caption "Proceedings under Chapter 11
of the Bankruptcy Code": and in Note 1 of the Notes to Consolidated Financial
Statements under the caption "Reorganization and Chapter 11 Filing." Such
information is incorporated herein by reference.
Prior to the commencement of the Chapter 11 Cases, several litigations
were commenced by creditors of the Company relating to unpaid amounts due to
such creditors. These actions are now stayed as a result of Chapter 11 Cases. As
of the date of this Annual Report on Form 10-K, the Company is aware of no
material existing or threatened litigation to which it is or may be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock traded on the NASDAQ National Market under
the symbol "FCPY" until March 26, 1999, when the symbol was changed to "FCPYQ"
as a result of the commencement of the Chapter 11 Cases. The common stock was
delisted on September 1, 1999. The common stock now trades on the OTC Bulletin
Board, an electronic quotation service for NASD Market Makers. There can be no
assurance that the common stock will continue to trade on the OTC Bulletin
Board. The following table sets forth the high and low closing sale prices of
the Company's Common Stock as reported on the NASDAQ National Market for the
periods indicated. After September 1, 1999, the prices presented are bid prices
which represent bid prices quoted by broker-dealers and do not necessarily
reflect prices from actual transactions.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
Quarter High Low High Low
<S> <C> <C> <C> <C>
First (ended May 1, 1999 and May 2, 1998) $ 2.44 $ 1.13 $ 12.75 $ 7.13
Second (ended July 31, 1999 and August 1, 1998) 1.10 .05 12.13 5.25
Third (ended October 30, 1999 and October 31,1998) .38 .03 5.88 3.56
Fourth (ended January 29, 2000 and January 30, 1999) .18 .05 4.13 1.38
</TABLE>
On April 25, 2000, the last bid price of the common stock reported on the OTC
Bulletin Board was $0.13. At February 27, 1999, the approximate number of
holders on record of the Common Stock was 114.
Dividends
The Company has never paid cash dividends on its common stock and does
not intend to pay cash dividends in the foreseeable future. The Company expects
earnings will be retained for the continued development of the Company's
business. In addition, the Loan Agreement between the Company and its lenders
restricts the ability of the Company to pay cash dividends on its capital stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and operating data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of
the end of, each of the fiscal years in the two-year period ended June 29, 1996,
are derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG LLP, independent certified public
accountants. The consolidated financial statements as of January 29, 2000 and
January 30, 1999, and for the fiscal years ended January 29, 2000 and January
30, 1999, the seven-month transition period ended January 31, 1998 and for the
fiscal year ended June 28, 1997, and the report thereon, are included elsewhere
in this Form 10-K. In addition, selected consolidated financial and operating
data is presented as of and for the 53-week period ended January 31, 1998. This
data was derived from the unaudited consolidated financial statements of the
Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto included elsewhere in this Annual Report on Form 10-K.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollar amounts in thousands, except per share data)
<TABLE>
52-Weeks 52-Weeks 53-Weeks Transition Fiscal year Fiscal year Fiscal year
ended ended ended period ended ended ended ended
Jan. 29, Jan. 30, Jan. 31, Jan. 31, June 28, June 29, July 1,
2000 1999 1998 1998 1997 1996 1995
---------------------------------- -------------------------------------------------
STATEMENT OF OPERATIONS DATA: (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 217,658 $ 226,499 $ 174,497 $ 110,699 $ 133,945 $ 94,589 $ 63,174
Cost of sales.............. 121,224 134,996 87,079 56,977 65,981 46,029 32,104
---------------------------------- -------------------------------------------------
Gross profit........... 96,434 91,503 87,418 53,722 67,964 48,560 31,070
Selling, general and
administrative expenses 101,892 114,836 82,066 53,935 63,077 46,843 29,969
---------------------------------- -------------------------------------------------
Income (loss) from operations (5,458) (23,333) 5,352 (213) 4,887 1,717 1,101
Interest expense........... 3,049 4,572 1,482 1,269 1,402 1,529 411
---------------------------------- -------------------------------------------------
Income (loss) before reorganization
items, net, income
taxes (benefit)
and extraordinary item (8,507) (27,905) 3,870 (1,482) 3,485 188 690
Reorganization items, net 19,082 - - - - - -
---------------------------------- -------------------------------------------------
Income (loss) before income taxes
(benefit) and extraordinary
item (27,589) (27,905) 3,870 (1,482) 3,485 188 690
Income taxes (benefit)..... - 451 1,652 (593) 1,462 118 322
---------------------------------- -------------------------------------------------
Income (loss) before
Extraordinary item (27,589) (28,356) 2,218 (889) 2,023 70 368
Extraordinary item......... (1,292) - - - (313) - -
---------------------------------- -------------------------------------------------
Net income (loss)..... $ (28,881) $ (28,356) $ 2,218 $ (889) $ 1,710 $ 70 $ 368
================================== =================================================
Earnings (loss) per share - basic
Before extraordinary item $ (3.68) $ (3.82) $ 0.31 $ (0.12) $ 0.35 $ 0.02 $ 0.09
Extraordinary item....... (0.17) - - - (0.05) - -
---------------------------------- -------------------------------------------------
Net income
(loss).......................... $ (3.85) $ (3.82) $ 0.31 $ (0.12) $ 0.30 $ 0.02 $ 0.09
================================== =================================================
Weighted average shares
outstanding... 7,503,098 7,422,069 7,261,542 7,261,542 5,739,962 4,068,409 3,999,914
================================== =================================================
Earnings (loss) per share - diluted (1).
Before extraordinary item (3.68) (3.82) 0.28 (0.12) 0.30 0.01 0.07
Extraordinary item....... (0.17) - - - (0.04) - -
---------------------------------- -------------------------------------------------
Net income (loss)........ (3.85) (3.82) 0.28 (0.12) 0.26 0.01 0.07
================================== =================================================
Weighted average shares
outstanding................ 7,503,098 7,422,069 7,946,188 7,261,542 6,686,243 5,249,479 5,180,984
================================== =================================================
OPERATING DATA:
Number of stores:
Opened during period 0 33 58 42 35 32 25
Closed/relocated during period 28 3 2 2 2 3 2
Open at end of period 182 210 180 180 140 107 78
Comparable store sales increase (2) 0.7% 0.8% 8.3% 9.5% 11.5% 6.0% 22.2%
Average sales per store (3) $1,175 $1,129 $1,170 676 $1,101 $997 $941
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................. 18,969 22,977 $ 50,230 $ 50,230 $ 35,459 $ 23,605 $ 15,625
Total assets..................... 90,803 107,571 115,030 115,030 85,702 59,080 36,801
Total debt (4)................... 22,869 34,153 34,189 34,189 7,690 19,326 7,161
Total stockholders' equity
(deficit)........................ (4,703) 24,178 51,734 51,734 52,273 17,124 16,640
- - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings per share for all periods have been restated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and the Securities and Exchange Commission Staff Accounting
Bulletin No. 98.
(2) Includes stores open 13 or 14 months after their opening date. If the
opening date of a store falls in the first 14 days of a period, then it
will be included in the comparable store calculation in its 13th month
of operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
(3) Includes only stores open during the entire period.
(4) Total debt is defined as total current and long-term debt.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a chain of company-owned stores offering a wide
assortment of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices. As of April 26, 2000, the
Company operated 182 stores in 21 states. The Company currently has no plans to
open any additional stores and the Company closed 28 stores in fiscal 1999, 27
due to reorganization and one due to a natural disaster.
In January 1998, the Company changed its fiscal year end from the
Saturday closest to June 30 to the Saturday closest to January 31. As a result,
the financial information presented includes: (1) consolidated financial
statements for the fiscal year ended January 29, 2000; (2) consolidated
financial statements for the fiscal year ended January 30, 1999; (3)
consolidated financial statements for the transition period beginning June 29,
1997 and ended January 31, 1998 ("the transition period") and (4) consolidated
financial statements for fiscal year ended June 28, 1997. For comparative
purposes, financial and operating data is also presented for the 53-week period
ended January 31, 1998.
Chapter 11 Filing
On March 23, 1999, the Company filed a petition for reorganization
under chapter 11 of title 11 of the United States Code. The Company is currently
operating its business and managing its properties as a debtor in possession
pursuant to the Bankruptcy Code. See "Item 1. Business - Proceedings Under
Chapter 11 of the Bankruptcy Code" and Note 1 of Notes to the Consolidated
Financial Statements.
Other Items
In April 1999, the Company obtained approval from the Bankruptcy Court
to close and conduct closing sales at 27 stores that were in markets the Company
did not intend to continue to operate in or were underperforming or
unprofitable. During the fiscal year ended January 29, 2000, the Company
recorded a provision for reorganization costs relating to the store closings of
approximately $10,634. This provision included the write-down of fixed assets,
estimated lease rejection claims and the loss on the disposition of merchandise
inventory. In addition to the provision for the store closings, reorganization
costs for professional fees and other costs related to the Company's
reorganization were $8,448 during the fiscal year ended January 29, 2000.
During the fiscal year ended January 30, 1999, as a result of the
reassessment of previous operating strategies, the Company recorded several
items which impacted the consolidated statement of operations. Cost of sales and
occupancy included a $11.3 million provision for certain merchandise which was
discontinued from the Company's ongoing inventory assortment, as well as
inventory with excess quantities on hand and certain seasonal inventory
remaining from past holidays. Selling, general and administrative expenses
included $3.6 million of charges consisting of: (1) a $2.1 million charge for
lease termination costs relating to executed leases for new stores which the
Company no longer plans to open; (2) a $0.7 million charge for employee
severance and the write-off of new store design costs; and (3) $0.8 million of
additional depreciation expense resulting from the change in the depreciable
lives of certain technology equipment from ten to five years. The provision for
income taxes for the fiscal year ended January 30, 1999 resulted from the
establishment of a valuation allowance of $11.3 million to fully reserve for the
Company's net deferred tax assets at January 30, 1999. See Note 8 - "Income
Taxes" in the Notes to Consolidated Financial Statements.
11
<PAGE>
During the first quarter of fiscal 1998, the Company consolidated its
distribution facilities and offices into a new distribution center in
Naperville, Illinois. The newly constructed, three-story office building and
300,000 square foot distribution center resides on 39 acres of land.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Transition Fiscal
year ended year ended year ended period ended year ended
Jan. 29, Jan. 30, Jan 31, Jan. 31, June 28,
2000 1999 1998 1998 1997
----------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100% 100.0% 100.0%
Cost of sales ............................. 55.7 59.6 49.9 51.5 49.3
Gross profit............................ 44.3 40.4 50.1 48.5 50.7
Selling, general and administrative
expenses................................... 46.8 50.7 47.1 48.7 47.1
Income (loss) from operations........... (2.5) (10.3) 3.0 (0.2) 3.6
Interest expense........................... 1.4 2.0 0.8 1.1 1.0
Income (loss) before reorganization items, net,
Income taxes (benefit) and
extraordinary item .................... (3.9) (12.3) 2.2 (1.3) 2.6
Reorganization items, net ................. 8.8 -- -- -- --
Income (loss) before income taxes (benefit)
and extraordinary item.................. (12.7) (12.3) 2.2 (1.3) 2.6
Income taxes (benefit)..................... -- 0.2 0.9 (0.5) 1.1
Income (loss) before extraordinary
item....................................... (12.7) (12.5) 1.3 (0.8) 1.5
Extraordinary item - loss on early
retirement of debt,
net of income tax benefit............... 0.6 -- -- -- 0.2
Net income (loss) ......................... (13.3)% (12.5)% 1.3% (0.8)% 1.3%
Number of stores open at end of period .... 182 210 180 180 140
</TABLE>
52-WEEKS ENDED JANUARY 29, 2000 COMPARED TO 52-WEEKS ENDED JANUARY 30, 1999
Net Sales. Net sales decreased $8.8 million, or 3.9%, to $217.7 million
during the 52-weeks ended January 29, 2000 from $226.5 million for the 52-weeks
ended January 30, 1999. The decrease resulted primarily from liquidation of
merchandise and closure of 27 stores starting in April 1999. These store
closures resulted in decreased sales of $22.8 million in fiscal year 1999.
Offsetting the decrease was a comparable store sales increase of $1.4 million or
0.7% and new store sales of $12.6 million. The Company includes stores opened 13
or 14 months after their opening date in the calculation of comparable store
sales. If the opening date of a store falls in the first 14 days of a period,
the store is included in the comparable store calculation in its 13th month of
operation; otherwise, a store is included in the comparable store calculation in
its 14th month of operation.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $4.9 million, or 5.4%, to $96.4 million during the 52-weeks ended
January 29, 2000 from $91.5 million for the 52-weeks ended January 30, 1999. As
a percentage of net sales, gross profit was 44.3% during the 52-weeks ended
January 29, 2000 and 40.4% for the 52-weeks ended January 30, 1999. The higher
gross profit percentage resulted primarily from the $11.3 million inventory
provision recorded in fiscal 1998 discussed above under "Other Items".
12
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses. Store
occupancy expenses are included in selling, general and administrative expenses
for all information presented. Selling, general and administrative expenses
decreased $12.9 million, or 11.3%, to $101.9 million during the 52-weeks ended
January 29, 2000 from $114.8 million for the 52-weeks ended January 30, 1999.
The decrease resulted from operating 28 fewer stores in fiscal year 1999.
Additionally, a portion of the decrease can be attributed to charges taken in
fiscal 1998 discussed above in "Other Items". As a percentage of net sales,
selling, general and administrative expenses decreased to 46.8% for the 52-weeks
ended January 29, 2000 from 50.7% for the 52-weeks ended January 30, 1999.
Interest Expense. Interest expense was $3.0 million for the 52-weeks
ended January 29, 2000 compared to $4.6 million for the 52-weeks ended January
30, 1999. This decrease resulted from lower borrowing levels needed to support
28 fewer stores.
Reorganization Items, net. The Company has recognized $19.1 million
of reorganization items consisting of a provision for the write down of fixed
assets, estimated lease rejection claims, the loss on the disposal of
merchandise inventory related to the 28 store closings, professional fees, and
other costs related to the reorganization of the Company during the 52-weeks
ended January 29, 2000.
Income Taxes (Benefit). Management believes that it is more likely than
not that deferred tax assets created by net operating losses for the 52-weeks
ended January 29, 2000 will not be realized through future taxable income.
Therefore, the Company has increased its valuation allowance which was
established during the fiscal year ended January 30, 1999, to fully reserve the
potential tax benefits resulting from these net operating losses. As a result,
the effective tax rate for the 52-weeks ended January 29, 2000 was zero.
52-WEEKS ENDED JANUARY 30, 1999 COMPARED TO 53-WEEKS ENDED JANUARY 31, 1998
(UNAUDITED)
Net Sales. Net sales increased $52.0 million, or 29.8%, to $226.5
million during the 52-weeks ended January 30, 1999 from $174.5 million for the
53-weeks ended January 31, 1998. The increase resulted from (1) net sales of
$24.5 million from 33 new stores opened during the 52-weeks ended January 30,
1999, (2) net sales of $26.1 million from stores opened prior to January 31,
1998 not included in the comparable store base, and (3) a comparable store sales
increase of $1.4 million, or 0.8%. Comparable store sales were adversely
impacted by the uneven flow of basic merchandise during the spring of 1998
resulting from system conversion issues associated with the consolidation of the
Company's distribution facilities and, during the fall, lower Halloween and
Christmas seasonal sales partially as a result of significant levels of
carryover merchandise from 1997.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $4.1 million, or 4.67%, to $91.5 million during the 52-weeks ended
January 30, 1999 from $87.4 million for the 53-weeks ended January 31, 1998. As
a percentage of net sales, gross profit was 40.4% during the 52-weeks ended
January 30, 1999 and 50.1% for the 53-weeks ended January 31, 1998. The lower
gross profit percentage resulted primarily from the $11.3 million inventory
provision discussed above under "Other Items" along with higher price reductions
to clear seasonal and summer merchandise.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses. Store
occupancy expenses are included in selling, general and administrative expenses
for all information presented. Selling, general and administrative expenses
increased $32.8 million, or 39.9%, to $114.8 million during the 52-weeks ended
January 30, 1999 from $82.1 million for the 53-weeks ended January 31, 1998.
Approximately $14.8 million of this increase resulted from the opening and
operation of 33 new superstores during the 52-weeks ended January 30, 1999. The
remaining balance of the increase resulted from the charges discussed above
under "Other Items" along with an increase in general and administrative costs
to support additional stores. As a percentage of net sales, selling, general and
administrative expenses increased to 50.7% for the 52-weeks ended January 30,
1999 from 47.1% for the 53-weeks ended January 31, 1998.
Interest Expense. Interest expense was $4.6 million for the 52-weeks
ended January 30, 1999 compared to $1.5 million for the 53-weeks ended January
31, 1998. This increase resulted from increased borrowings to support the
opening of new superstores and increased inventory levels.
Income Taxes (Benefit). For the 52-weeks ended January 30, 1999, the
Company recorded a tax provision to fully reserve the net deferred tax assets
which were carried forward from the transition period and to reserve for the
potential tax benefits of net operating losses generated during the current year
which cannot be carried back to prior tax years.
TRANSITION PERIOD COMPARED TO FISCAL YEAR 1997
Results of operations for the transition period ended January 31, 1998
include amounts for a seven month period, while results for the fiscal year
ended June 28, 1997 include amounts for a twelve-month period. Results (in terms
of dollar amounts) for these periods are not directly comparable. Accordingly,
management's discussion and analysis for these periods is generally based upon a
comparison of specified results as a percentage of net sales.
Net Sales. Net sales decreased $23.2 million, or 17.3%, to $110.7
million in the transition period from $133.9 million in fiscal year 1997. This
decrease resulted primarily from reporting seven months for the transition
period compared to twelve months for fiscal 1997. The decrease was offset by the
addition of 42 new superstores during the transition period which generated net
sales of $17.3 million. Sales from comparable stores increased 9.5% for the
transition period compared to the same seven months included in fiscal 1997.
This increase was driven mainly by improved seasonal merchandise selection,
especially for Halloween and Christmas.
Gross Profit. Cost of sales includes distribution costs. Gross profit
decreased $14.2 million, or 21.0%, to $53.7 million during the transition period
from $68.0 million during fiscal year 1997. As a percentage of net sales, gross
profit was 48.5% during the transition period compared to 50.7% in fiscal year
1997. Gross profit as a percentage to net sales decreased primarily from the
seasonality of the seven-month transition period compared with the full prior
year, additional seasonal promotions and a lower capitalized inventory overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Selling, general and administrative expenses decreased $9.1 million, or 14.5%,
to $53.9 million during the transition period from $63.1 million for fiscal year
1997. As a percentage of net sales, selling, general and administrative expenses
increased to 48.7% for the transition period from 47.1% for fiscal year 1997.
The increase resulted from the expansion of the Company's direct mail
advertising program and a test of television advertising in selected markets and
the cost to open seven more superstores during the transition period. These
increases were partially offset by the leveraging of corporate administrative
costs.
14
<PAGE>
Interest Expense. Interest expense was $1.3 million, or 1.1% of sales,
for the transition period compared to $1.4 million, or 1.0% of sales, for fiscal
year 1997. Interest expense as a percentage to sales increased as a result of
higher borrowing levels to support the opening of 42 new superstores and
increased inventory levels.
Income Taxes (Benefit). During the transition period, the Company had a
taxable loss resulting in an effective tax benefit rate of 40.0% compared to
taxable income for fiscal year 1997 resulting in an effective tax rate of 42.0%.
The effective tax rate decreased as a result of state tax savings.
Inflation
Management does not believe that inflation has had a material effect on
its financial condition or results of operations during the past three fiscal
years. However, there can be no assurance that inflation will not have a
material adverse effect on the Company's future financial condition or results
of operations.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Current Sources and Uses of Cash
Operating activities provided $8.7 million in the fiscal year ended
January 29, 2000 compared to $13.0 million in the fiscal year ended January 30,
1999. The items most significantly influencing this change were the $14.0
million noncash portion of reorganization items and $41.4 million increase in
liabilities subject to compromise which was partially offset by the related
$24.0 million decrease in accounts payable.
Cash flows used in investment activities were $2.0 million in the
fiscal year ended January 29, 2000 and $8.7 million in the fiscal year ended
January 30, 1999. The Company's capital expenditures were primarily related to
investments in information technology systems. In 1999 the Company entered into
master capital lease agreements for the purchase of warehouse equipment and
store surveillance equipment. Amounts financed under these agreements were $128
and $40 respectively.
Cash flows used in financing activities were $8.5 million for the
fiscal year ended January 29, 2000 and $0.8 million for the fiscal year ended
January 30, 1999. In March 1999 the Company used $24.7 million of borrowings
under the Loan Agreement to pay the outstanding balances under the Company's
previous revolving credit agreement and term loan.
On March 23, 1999, the Company filed the Chapter 11 Cases to address
certain operational and liquidity disruptions. The Company's liquidity position
for the remainder of fiscal 2000 will be impacted primarily by the success of
initiatives undertaken to improve store level cash flows and the effects of the
Chapter 11 Cases. The Company's uses of capital for the remainder of fiscal 2000
are expected to include working capital for operating expenses and satisfaction
of current liabilities, expenditures related to maintaining and refurbishing
existing stores, interest payments on outstanding borrowings and costs
associated with the Chapter 11 Cases. The Company's long-term liquidity and the
adequacy of the Company's capital resources cannot be determined until a plan of
reorganization has been approved and confirmed in connection with the Chapter 11
Cases.
As debtor in possession under the Bankruptcy Code, actions to collect
prepetition indebtedness are stayed and certain contractual obligations may not
be enforced against the Company. With the approval of the Bankruptcy Court,
certain of these obligations may be paid prior to the confirmation of the
reorganization plan. To date, the Company has received approval to pay customary
obligations associated with the daily operation of its business, including the
timely payment of new inventory shipments, employee wages and other obligations.
As permitted under the Bankruptcy Code, the Company received Bankruptcy Court
approval to reject 13 real estate leases for stores that were never opened and
to close and conduct closing sales at 27 stores in fiscal 1999. The Company has
not completed its review of all of its prepetition contracts and leases for
assumption or rejection. The ultimate amount of, and settlement terms for, such
liabilities are subject to an approved plan of reorganization and, accordingly,
the timing and form of settlement are not presently determinable.
The Company is a party to the Loan Agreement dated as of March 23,
1999, which was entered into subsequent to the commencement of the Chapter 11
Cases and will terminate upon the earlier of the confirmation of a plan of
reorganization in the Chapter 11 Cases or March 23, 2001. The Loan Agreement
provides the Company with a revolving line of credit for loans and letters of
credit in an aggregate amount not to exceed $50.0 million outstanding at any one
time, including a sublimit of $10.0 million for the issuance of letters of
credit. The Company intends to use all amounts borrowed under the Loan Agreement
for its ongoing working capital needs and for other general corporate purposes
of the Company.
16
<PAGE>
The Loan Agreement contains certain restrictive covenants which, among
other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of the
Company to grant liens and incur additional indebtedness. The Company was in
compliance with or had obtained waivers for all such convenants as of January
29, 2000.
As of April 7, 2000, the Company had $22.0 million of borrowings
outstanding under the Loan Agreement and had utilized approximately $1.7 million
of the Loan Agreement to issue letters of credit. The Company believes that its
cash flow from operations and borrowings under the Loan Agreement will provide
it with sufficient liquidity to conduct its operations while the Chapter 11
Cases are pending. The Company will be exploring opportunities to obtain
long-term financing to support the Company's business plan after it emerges from
Chapter 11; however, there can be no assurance that the Company will be able to
obtain such financing on satisfactory terms, if at all.
The Company's present plans call for total capital expenditures of not
more than $5.0 million in the fiscal year ending February 3, 2001. The Company
had no material commitments in connection with these planned capital
expenditures at January 29, 2000.
The Company does not intend to pay cash dividends in the foreseeable
future and under its current Loan Agreement is restricted from paying dividends
on its capital stock.
Historic Sources and Uses of Cash
In July 1998, the Company borrowed $10.0 million under a Term Loan with
Back Bay Capital, LLC ("the lenders"). The Term Loan bore interest at a rate of
14.5%. Interest was 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 bore
interest at 12.5%. 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 was collateralized by a
first security interest in the Company's equipment and a secondary interest in
the remainder of the Company's assets.
In January 1998, the Company entered into a Loan and Security Agreement
("Loan and Security Agreement") with BankBoston Retail Finance Inc. providing a
$40.0 million revolving line of credit which could be increased at the Company's
discretion up to $60.0 million in $5.0 million increments. In July 1998, the
Loan and Security Agreement was amended. Advances under the Amended Loan and
Security Agreement were limited based on inventory levels which varied as the
Term Loan was outstanding, and were subject to certain reserves as defined in
the Amended Loan and Security Agreement. Interest was 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 ("LIBOR")
plus 250 additional basis points. A fee of 0.25% per year was assessed monthly
on the unused portion of the line of credit. Borrowings under the Amended Loan
and Security Agreement were secured by all of the Company's assets. The Amended
Loan and Security Agreement contained restrictive covenants requiring minimum
cumulative consolidated earnings before interest, taxes, depreciation and
amortization and limiting capital expenditures.
In August 1998, the Company entered into a master capital lease
agreement for the purchase of point-of-sale equipment and related software.
During the fiscal year ended January 30, 1999, $1.3 million of equipment was
financed under this agreement.
17
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks from changes in interest rates.
The interest rate on the Company's revolving credit facilities, which represent
a significant portion of the Company's outstanding debt, is variable based on
the prime rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Report commencing on page F-1 and is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE>
PART III
In accordance with general instruction G(3) of Form 10-K, except as set forth
below, the information called for by items 10, 11, 12 and 13 of Part III will be
filed by an amendment to this Form 10-K on or prior to 120 days after the end of
the Company's fiscal year.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
- - - - - - - - - - - - ---- --- --------
William E. Freeman (1) 57 President and Chief Executive Officer
James D. Constantine (1) 47 Senior Vice President and Chief Financial
Officer
Glen J. Franchi (1) 46 Executive Vice President, Chief Operating
Officer and Treasurer
Gary W. Rada 46 Executive Vice President and General
Merchandising Manager
Carol A. Travis (1) 49 Vice President and Secretary
Timothy F. Gower 49 Senior Vice President, Retail Store
Operations
Robert Krentzman 51 Vice President, Information Technology
Joseph M. Cabon 53 Vice President, Distribution
William A. Beyerl 48 Vice President, Human Resources
(1) All the Officers, other than William Freeman, James Constantine, Glen
Franchi, and Carol Travis, hold their respective positions in the
Company's operating subsidiary.
William E. Freeman has been President and Chief Executive Officer
since October 1999. He is a co-founder of the Company, and has been a director
of the Company since forming the investor group that acquired it in July 1989.
Mr. Freeman was Chairman of the Board of Directors of the Company from April
1994 to April 1997. From May 1994 to October 1995, he was Chief Executive
Officer of the Company's operating subsidiary, and from May 1994 to September
1996, he was Chief Executive Officer of the Company. From 1989 to 1994, he was
President of the Company.
James D. Constantine has been Senior Vice President and Chief Financial
Officer since February 2000. Prior to joining the Company, he was Senior
Assistant Treasurer for Sears, Roebuck and Co. and held various managerial
positions from 1981 to 1999. From 1974 to 1981 he held various managerial
positions with Deloitte & Touche LLP.
Glen J. Franchi has been Executive Vice President and Treasurer of the
Company since March 1995. He has been the Chief Operating Officer of the
Company's operating subsidiary since November 1990. Prior to joining the
Company, from 1977 to 1989, he held various management and senior financial
positions with Carson Pirie Scott Co., a chain of retail department stores.
19
<PAGE>
Gary W. Rada has been Executive Vice President since October 1999. From
January 1998 to October 1999, he served as Senior Vice President and General
Merchandise Manager. From 1997 to 1998, he served as the Vice President of
General Merchandise for Bruno's, a Birmingham, Alabama supermarket and drug
chain, which filed a voluntary petition for bankruptcy under Chapter 11 in
February 1998. Prior to joining Bruno's, he held various management and
merchandising positions with American Stores, including Merchandise Manager at
American Drug Stores and Vice President of General Merchandise and Grocery
Merchandising at Jewel Food Stores.
Carol A. Travis has been with the Company since it was originally
founded in 1985, serving as Secretary of the Company since May 1994 and as Vice
President since June 1994. She has been a Vice President of the Company's
operating subsidiary since August 1987.
Timothy F. Gower has been Senior Vice President, Retail Store
Operations since October 1999. From April 1998 to October 1999, he served as
Vice President, Retail Store Operations. Prior to that, from August 1997 to
March 1998, he served as Vice President of Store Operations for Zellers Inc.,
Canada's largest discount store chain. Prior to joining Zellers, he held various
store operations positions with Office Max and F&M SuperDrug Stores.
Robert Krentzman has been Vice President, Information Technology since
September 1995. From March 1994 to September 1995, he served as Director of
Management Information Systems. From 1990 to 1994, he was Director, Management
Information Systems, for Reader's Market, a division of Waldenbooks.
Joseph M. Cabon has been Vice President, Distribution since April 1995.
From December 1993 to January 1995, he was employed as a consultant in retail
distribution. From October 1992 through December 1993, he was Vice President,
Logistics for One Price Clothing, a specialty retailer. In January 1995, he
filed a bankruptcy petition under chapter 7 of the United States Bankruptcy
Code, and that same month received a discharge from indebtedness in connection
therewith.
William A. Beyerl has been Vice President, Human Resources since
December 1999. From June 1999 to December 1999 he served as Director of Human
Resources. From September 1997 to June 1999, he served as Director of Store
Operations. From 1991 to 1997, he served as Director of Human Resources for
Today's Man, a specialty menswear retailer on the East Coast. Prior to joining
Today's Man, he held various management positions with Bradlees Department
Stores and Gimbel's Department Stores.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report on Form 10-K.
1. The following financial statements of the Company are filed as
a separate section of this Report commencing on page F-1.
Independent Auditors' Report
Consolidated Balance Sheets as of January 29, 2000 and January
30, 1999
Consolidated Statements of Operations for the fiscal years
ended January 29, 2000 and January 30, 1999, the transition
period ended January 31, 1998 and the fiscal year ended June
28, 1997
Consolidated Statements of Stockholders' Equity (Deficit) for
the fiscal years ended January 29, 2000 and January 30, 1999,
the transition period ended January 31, 1998 and the fiscal
year ended June 28, 1997
Consolidated Statements of Cash Flows for the fiscal years
ended January 29, 2000 and January 30, 1999, the transition
period ended January 31, 1998 and the fiscal year ended June
28, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is filed as a
separate section of this Report commencing on page S-1.
Independent Auditors' Report
Condensed Financial Information of Factory Card Outlet Corp. -
Balance Sheets as of January 29, 2000 and January 30, 1999
Condensed Financial Information of Factory Card Outlet Corp. -
Statements of Operations for the fiscal years ended January
29, 2000 and January 30, 1999, the transition period ended
January 31, 1998 and fiscal year ended June 28, 1997
Condensed Financial Information of Factory Card Outlet Corp. -
Statements of Cash Flows for the fiscal years ended January
29, 2000 and January 30, 1999, the transition period ended
January 31, 1998 and the fiscal year ended June 28, 1997
Notes to Condensed Financial Information of Factory Card
Outlet Corp.
21
<PAGE>
3. List of Exhibits.
The following exhibits are included as part of this Annual
Report on Form 10-K or incorporated herein by reference.
<TABLE>
<CAPTION>
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 (1) Form of Amended and Restated Certificate of Incorporation of the Company.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
3.2 (2) Amended and Restated By-Laws of the Company.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
4.1 (1) Specimen of Registrant's Common Stock Certificate.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.1 (1) Employment Agreement, dated as of April 6, 1995, by and between the Company and Charles R. Cumello.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.2 (1) Consulting Agreement, dated July 30, 1996 by and between the Company and J. Bayard Kelly.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.3 (1) Supply Agreement, dated as of August 2, 1996, by and between the Company and Fine Art Developments, p.l.c.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.4 (1) Lease Agreement between the Company and Prudential Insurance Company of America, dated September 25, 1992.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.5 (1) Lease Agreement between the Company and Elk Grove Village Industrial Park Ltd., dated July 17, 1995.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.5.1(1) Industrial Building Lease dated as of October 28, 1996 by and between Centerpoint Realty Services Corporation and
FCO.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.6.1 (1) 1989 Stock Option Plan of the Company, as amended.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.6.2 (1) 1996 Employee Stock Purchase Plan of the Company.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.6.3 (1) Incentive Savings Plan of the Company.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.7 (1) Business Purpose Revolving Promissory Note dated November 1, 1996 from the Company and FCO to Bank One.
10.7.1 (1) Business Loan Agreement dated as of November 1, 1996 among the Company, FCO and Bank One.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.7.2 (2) Commitment letter dated September 9, 1997 from Bank One.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.8 (1) Loan Agreement dated as July 2, 1996 by and between FCO and Petra Capital, L.L.C. ("Petra")
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.8.1 (1) Stock Purchase Warrant dated July 2, 1996 by and between the Company and Petra, as amended.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.8.2 (1) Secured Promissory Note dated July 2, 1996 by and between FCO and Petra.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.8.3 (1) Security Agreement dated July 2, 1996 by and between FCO and Petra.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.8.4 (1) Guaranty Agreement dated July 2, 1996 by and between the Company and Petra.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.1 (1) Loan Agreement dated November 15, 1995 by and between FCO and Sirrom Capital Corporation ("Sirrom").
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.2 (1) Stock Purchase Warrant dated November 15, 1995 by and between the Company and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.3 (1) Secured Promissory Note dated November 15, 1995 by and between FCO and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.4 (1) Security Agreement dated November 15, 1995 by and between FCO and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.5 (1) Guaranty Agreement dated November 15, 1995 by and between the Company and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.6 (1) First Amendment to Loan Agreement and Loan Documents dated June 28, 1996 by and between FCO and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.7 (1) Stock Purchase Warrant dated June 28, 1996 by and between the Company and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.8 (1) Secured Promissory Note dated June 28, 1996 by and between FCO and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.9.9 (1) Amended and Restated Stock Purchase Warrant dated July 30, 1996 by and between the Company and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
22
<PAGE>
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
10.9.10 (1) Amendment to Stock Purchase Warrant dated July 30, 1996 by and between the Company and Sirrom.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.10.1 (1) Term Lease Master Agreement dated October 28, 1996 by and between FCO and IBM Credit Corporation.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.10.2 (1) Master Lease Agreement dated August 19, 1996 by and between FCO and Symbol Lease, Inc.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.11 (3) Loan and Security Agreement dated January 30, 1998 among Factory Card Outlet of America, Ltd. and BankBoston
Retail Finance Inc.
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.11.1 (4) First Amendment to Loan and Security Agreement between FCO and BankBoston Retail Finance Inc. dated July 17, 1998
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.11.2 (4) Term Loan and Security Agreement between FCO and Back Bay Capital, LLC dated July 17, 1998
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.12 (3) 1997 Outside Director Stock Option Plan
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.13 (5) Separation and Release Agreement between Factory Card Outlet Corp. and Charles R. Cumello
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.14 (6) Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation, Paragon Capital LLC
and Other Financial Institutions dated March 23, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.15 First Amendment to Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation,
Paragon Capital LLC and Other Financial Institutions dated April 14, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.16 Second Amendment to Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation,
Paragon Capital LLC and Other Financial Institutions dated August 20, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.17 Third Amendment to Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation,
Paragon Capital LLC and Other Financial Institutions dated September 20, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.18 Fourth Amendment to Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation,
Paragon Capital LLC and Other Financial Institutions dated December 20, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.19 Fifth Amendment to Debtor In Possession Loan and Security Agreement between FCO and Foothill Capital Corporation,
Paragon Capital LLC and Other Financial Institutions dated March 3, 2000
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.20 Separation Agreement between Factory Card Outlet Corp. and Stewart M. Kasen dated October 8, 1999
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.21 Separation Agreement between Factory Card Outlet Corp. and Frederick G. Kraegel dated March 3, 2000
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
10.22 Employment Agreement between Factory Card Outlet Corp. and James D. Constantine dated March 1, 2000
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
21.1(1) List of the subsidiaries of the Company
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of KPMG LLP
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
Notes
</TABLE>
1. Incorporated by reference to the Company's Registration Statement as
amended on Form S-1 Number 333-13827 as filed with the Commission on
December 12, 1996.
2. Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 28, 1997.
23
<PAGE>
3. Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 27, 1997.
4. Incorporated by reference to the Company's Current Report on Form 8-K
filed on July 22, 1998.
5. Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended October 31, 1998.
6. Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 28, 1999.
(b) Reports on Form 8-K.
None.
24
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William E. Freeman and James D.
Constantine with full power to act without the other, his true and lawful
attorney-in-fact and agent, each with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this report on Form 10-K, and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person hereby, ratifying and confirming that
each of said attorneys-in-fact and agents or his substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2000 FACTORY CARD OUTLET CORP.
/s/ William E. Freeman
----------------------
By: William E. Freeman, President and
Chief Executive Officer
25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ William E. Freeman May 15, 2000
- - - - - - - - - - - - -----------------------
William E. Freeman President and
Chief Executive Officer
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
/s/ Glen J. Franchi May 15, 2000
- - - - - - - - - - - - --------------------------
Glen J. Franchi Executive Vice President and
Chief Accounting Officer
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
/s/ James D. Constantine May 15, 2000
- - - - - - - - - - - - -------------------------
James D. Constantine Senior Vice President and
Chief Financial Officer
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
/s/ J. Bayard Kelly May 15, 2000
- - - - - - - - - - - - --------------------
J. Bayard Kelly Director
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
/s/ James L. Nouss May 15, 2000
- - - - - - - - - - - - ------------------
James L. Nouss Director
- - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ............................................................................... F-2
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999 .................................... F-3
Consolidated Statements of Operations for the fiscal years ended January 29, 2000 and
January 30, 1999, the transition period ended January 31, 1998 and the fiscal year
ended June 28, 1997 ................................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years
ended January 29, 2000 and January 30, 1999, the transition period ended
January 31, 1998 and the fiscal year ended June 28, 1997 .............................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended January 29,
2000 and January 30, 1999, the transition period ended January 31, 1998 and
the fiscal year ended
June 28, 1997 ........................................................................................ F-6
Notes to Consolidated Financial Statements ................................................................. F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
We have audited the consolidated balance sheets of Factory Card Outlet
Corp. and subsidiary as of January 29, 2000 and January 30, 1999 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the fiscal years ended January 29, 2000 and January 30, 1999, the
transition period ended January 31, 1998 and the fiscal year ended June 28,
1997. These consolidated financial statements are the responsibility of the
management of Factory Card Outlet Corp. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Factory Card
Outlet Corp. and subsidiary as of January 29, 2000 and January 30, 1999, and the
results of their operations and their cash flows for the fiscal years ended
January 29, 2000 and January 30, 1999, the transition period ended January 31,
1998 and the fiscal year ended June 28, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, in March 1999 the Company filed voluntary petitions for
relief under chapter 11 of title 11 of the United States Code. In addition, the
Company has suffered losses from operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Chicago, Illinois
March 21, 2000
F-2
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
------------------ ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,713 $ 3,597
Merchandise inventories 56,142 61,658
Refundable income taxes - 747
Prepaid expenses and other 1,748 980
------------------ --------------
Total current assets 59,603 66,982
Fixed assets, net 30,559 39,585
Other assets 641 1,004
------------------ ----------------
Total assets $ 90,803 $ 107,571
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt $ 22,869 $ 34,153
Accounts payable 9,103 33,089
Accrued expenses 8,662 8,755
------------------ ----------------
Total current liabilities 40,634 75,997
Deferred rent - 7,396
------------------ ----------------
Liabilities subject to compromise 54,872 -
------------------ ----------------
Stockholders' equity (deficit):
Common stock-$.01 par value. Voting class-authorized 15,000,000
shares; 7,503,098 shares issued and outstanding. Non-voting
class-authorized 205,000 shares; no shares issued or outstanding. 75 75
Additional paid-in capital 52,021 52,021
Accumulated deficit (56,799) (27,918)
---------------- --------------
Total stockholders' equity (deficit) (4,703) 24,178
------------------ ----------------
Total liabilities and stockholders' equity (deficit) $ 90,803 $ 107,571
================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TRANSITION FISCAL
------------------------------- PERIOD ENDED YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31, JUNE 28,
2000 1999 1998 1997
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 217,658 $ 226,499 $ 110,699 $ 133,945
Cost of sales 121,224 134,996 56,977 65,981
--------------- -------------- --------------- -------------------
Gross profit 96,434 91,503 53,722 67,964
Selling, general and administrative expenses 101,892 114,836 53,935 63,077
-------------- -------------- --------------- -------------------
Income (loss) from operations (5,458) (23,333) (213) 4,887
Interest expense 3,049 4,572 1,269 1,402
--------------- -------------- --------------- -------------------
Income (loss) before reorganization items, net,
income taxes (benefit) and (8,507) (27,905) (1,482) 3,485
extraordinary item
Reorganization items, net 19,082 - - -
--------------- -------------- --------------- -------------------
Income (loss) before income taxes (benefit)
and extraordinary item (27,589) (27,905) (1,482) 3,485
Income taxes (benefit) - 451 (593) 1,462
--------------- -------------- --------------- -------------------
Income (loss) before extraordinary item (27,589) (28,356) (889) 2,023
Extraordinary item - loss on early retirement of
debt,
net of income tax benefit (1,292) - - (313)
--------------- -------------- --------------- -------------------
Net income (loss) $ (28,881) $ (28,356) $ (889) $ 1,710
=============== ============== =============== ===================
Earnings (loss) per share - basic
Before extraordinary item $ (3.68) $ (3.82) $ (0.12) $ 0.35
Extraordinary item (0.17) - - (0.05)
--------------- -------------- --------------- -------------------
Net income (loss) per share - basic $ (3.85) $ (3.82) $ (0.12) $ 0.30
=============== ============== =============== ===================
Weighted average shares outstanding 7,503,098 7,422,069 7,261,542 5,739,962
=============== ============== =============== ===================
Earnings (loss) per share - diluted
Before extraordinary item $ (3.68) $ (3.82) $ (0.12) $ 0.30
Extraordinary item (0.17) - - (0.04)
--------------- -------------- --------------- -------------------
Net income (loss) per share - diluted $ (3.85) $ (3.82) $ (0.12) $ 0.26
=============== ============== =============== ===================
Weighted average shares outstanding 7,503,098 7,422,069 7,261,542 6,686,243
=============== ============== =============== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS TREASURY STOCK EQUITY
----------------- -------------------- -----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT (DEFICIT)
------- --------- --------- --------------------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1996 52,416 14,457 933,720 $ 3,050 $ - $ (383) - $ - $ 17,124
Net income - - - - - 1,710 - - 1,710
Issuance of Series C
convertible
preferred stock 25,639 9,739 - - - - - - 9,739
Additional paid-in capital
attributable to common
stock warrants - - - 264 - - - - 264
Conversion of all convertible
preferred stock to
common stock (78,055) (24,196) 3,134,674 24,196 - - - - -
Redesignation of common stock
from no par value
to $.01 par value - - - (27,469) 27,469 - - - -
Issuance of common stock -
Initial public offering - - 2,944,050 29 23,094 - - - 23,123
Exercise of stock options
and warrants - - 218,767 2 400 - 1,529 (13) 389
Treasury stock transactions,
net - - - - (12) - 7,168 (64) (76)
--------- -------- --------- -------- --------- --------- --------- --------- ---------
Balance at June 28, 1997 - - 7,231,211 72 50,951 1,327 8,697 (77) 52,273
Net loss - - - - - (889) - - (889)
Exercise of stock options
and warrants - - 104,308 1 317 - - - 318
Sale of treasury stock to
employee stock
Purchase plan - - - - (45) - (8,697) 77 32
--------- -------- --------- -------- --------- --------- --------- --------- ---------
Balance at January 31, 1998 - - 7,335,519 73 51,223 438 - - 51,734
Net loss - - - - - (28,356) - - (28,356)
Exercise of stock options
and warrants - - 167,579 2 798 - - - 800
--------- -------- --------- -------- --------- --------- --------- --------- ---------
Balance at January 30, 1999 - $ - 7,503,098 $ 75 $ 52,021 $(27,918) - $ - $ 24,178
Net loss - - - - - (28,881) - - (28,881)
--------- -------- --------- -------- --------- --------- --------- --------- ---------
Balance at January 29, 2000 - $ - $7,503,098 $ 75 $ 52,021 $ (56,799) - $ - $ (4,703)
--------- -------- --------- -------- --------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
TRANSITION FISCAL YEAR
FISCAL YEAR ENDED PERIOD ENDED
ENDED
-----------------------------
JANUARY 29, JANUARY 30, JANUARY 31, JUNE 28,
2000 1999 1998 1997
--------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ (28,881) $ (28,356) $ (889) $ 1,710
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of fixed assets ...... 7,729 8,039 3,087 3,523
Amortization of deferred financing costs and
debt discount ......................................... 762 543 -- 337
Noncash portion of reorganization items ............ 14,034 -- -- --
Extraordinary loss on early retirement of debt ..... 1,292 -- -- 313
Deferred income taxes .............................. -- 835 (795) 585
Loss of disposal of fixed assets ................... 36 649 191 359
Stock option compensation .......................... -- 59 34 209
Change in assets and liabilities:
(Increase) decrease in assets:
Merchandise inventories ................... 1,470 11,254 (17,553) (13,555)
Prepaid expenses and other ................ (20) 831 (382) (1,083)
Other assets .............................. (835) (1,168) 315 (1,602)
Increase (decrease) in liabilities:
Accounts payable .......................... (23,986) 14,052 1,484 2,850
Accrued expenses .......................... (4,317) 4,262 1,662 111
Deferred rent liabilities ................. -- 2,080 904 850
Liabilities subject to compromise ......... 41,437 -- -- --
Income taxes payable ...................... -- -- (503) 525
--------- --------- --------- ---------
Net cash provided by (used in) operating activities .... 8,721 13,080 (12,445) (4,868)
--------- --------- --------- ---------
Net cash used in investing activities - purchase
of fixed assets, net ................................... (2,044) (8,725) (12,337) (10,106)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings ........................................... 256,450 184,106 77,166 70,457
Repayment of borrowings .............................. (264,759) (183,152) (51,241) (79,809)
Proceeds from issuance of subordinated debentures .... -- -- -- 2,911
Retirement of subordinated debentures ................ -- -- -- (8,000)
Payment of long-term obligations ..................... (252) (1,959) (1,423) (2,524)
Proceeds from issuance of convertible preferred ...... -- -- -- 8,638
stock
Proceeds from issuance of common stock ............... -- -- -- 23,123
Proceeds from exercise of employee stock options ..... -- 217 227 104
Purchase of treasury stock ........................... -- -- -- (180)
Sale of treasury stock to employee stock purchase
plan .................................................. -- -- 32 103
--------- --------- --------- ---------
Net cash (used in) provided by financing activities ...... (8,561) (788) 24,761 14,823
--------- --------- --------- ---------
Net increase (decrease) in cash .......................... (1,884) 3,567 (21) (151)
Cash at beginning of year ................................ 3,597 30 51 202
--------- --------- --------- ---------
Cash at end of year .................................... $ 1,713 $ 3,597 $ 30 $ 51
========= ========= ========= =========
Supplemental cash flow information:
Interest paid ....................................... $ 2,691 $ 4,225 $ 1,194 $ 1,441
Income taxes paid (refunded) ........................ (792) 307 857 350
Supplemental disclosure of noncash financing activities:
Capital lease obligations incurred .................. 168 1,301 1,997 4,961
Additional paid-in capital for warrants issued ...... -- 514 -- 264
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(1) Reorganization and Chapter 11 Filing
The Company filed voluntary petitions for relief under chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code") on March 23,
1999 (the "petition date") under case numbers 99-685 (JJF) and 99-686
(JJF) (the "Chapter 11 Cases"). The Chapter 11 Cases have been
procedurally consolidated for administrative purposes. The Company is
currently operating its business as a debtor in possession under the
jurisdiction of the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Company's liabilities, as of the
petition date, are generally subject to settlement in a plan of
reorganization, which must be voted on by certain of its creditors and
confirmed by the Bankruptcy Court. Until a reorganization plan has been
confirmed, the Company is prevented from making payments on prepetition
debt unless permitted by the Bankruptcy Code or approved by the
Bankruptcy Court. The Company will review all unexpired prepetition
executory contracts and leases to determine whether they should be
assumed or rejected. Parties affected by the rejection of contracts and
leases may file claims against the Company.
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates continuity
of operations and the realization of assets and the satisfaction of
liabilities in the normal course of business. The commencement of the
Chapter 11 Cases, and net losses resulting in a deficit, raise
substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not give effect to
adjustments, some of which could be material, to the carrying values of
assets and liabilities which may be necessary as a consequence of a
plan of reorganization. The continuation of the Company's business as a
going concern is contingent upon, among other things, the ability to
(1) formulate a plan of reorganization that will be confirmed by the
Bankruptcy Court, (2) achieve satisfactory levels of future profitable
operations, (3) maintain adequate financing and (4) provide sufficient
cash from operations to meet future obligations.
The Bankruptcy Code provides that the Company has an exclusive period
during which only it may propose, file and solicit acceptances of a
plan of reorganization. The Company has requested that the Bankruptcy
Court grant an extension of its exclusive period to file a plan and to
solicit acceptances to and including June 16, 2000 and August 18, 2000,
respectively. The Company currently retains its exclusivity pending the
Court's consideration of that request. If the Company fails to file a
plan of reorganization during the exclusive period or, after such plan
has been filed, if the Company fails to obtain acceptance of such plan
from the requisite impaired classes of creditors and equity security
holders during the exclusive period, any party in interest, including a
creditor, an equity security holder, a committee of creditors or equity
security holders, or an indenture trustee, may file their own plan of
reorganization for the Company. The Company plans to develop a plan of
reorganization for submission to the Bankruptcy Court.
F-7
<PAGE>
(2) Summary of Significant Accounting Policies
Basis of Presentation
All intercompany balances and transactions have been eliminated in
consolidatioin.
Organization
The consolidated financial statements include the accounts of Factory
Card Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet
of America Ltd. (collectively the "Company"). The Company is a chain of
company-owned stores offering an extensive selection of greeting cards,
giftwrap, balloons, party supplies and other special occasion
merchandise at everyday value prices.
Fiscal Year End Change
In January 1998, the Company changed its fiscal year end to the
Saturday closest to January 31. Prior to January 1998, the Company's
fiscal year ended on the Saturday closed to June 30. The fiscal years
ended January 29, 2000 and January 30, 1999, referred to as fiscal 1999
and 1998, each consisted of a 52-week period. The seven-month period
from June 29, 1997 through January 31, 1998 is referred to as the
transition period. The fiscal year ended June 28, 1997, referred to as
fiscal 1997 consisted of a 52-week period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period and
related disclosures. Actual results could differ from those estimates.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or
estimated net realizable value utilizing the retail method. In
determining the cost of inventory, the Company includes costs incurred
to purchase, store and distribute goods prior to sale.
At January 29, 2000 and January 30, 1999, the Company has provisions of
$4,166 and $11,300, respectively, for certain merchandise which is to
be discontinued from its ongoing inventory assortment, as well as,
inventory with excess quantities on hand and certain seasonal inventory
remaining from past holidays.
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization is
computed on a straight line basis over three to ten years for fixtures
and equipment and over the initial term of the lease for leasehold
improvements. Amortization related to capital leases is also included
in depreciation and amortization. During fiscal 1998 the Company
changed its estimate of the depreciable lives of certain technology
equipment from ten to five years, resulting in additional depreciation
expense of $771.
F-8
<PAGE>
Income Taxes
The Company files a consolidated Federal income tax return. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
reporting and tax bases of assets and liabilities and are determined
using tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
Deferred Rent Liabilities
Certain of the Company's operating leases provide for scheduled
increases in base rentals over their terms. For these leases, the
Company recognizes the total rental amounts expected to be paid over
the lease terms on a straight line basis and, accordingly, has
established corresponding deferred rent liabilities for the differences
between the amounts recognized and the amounts paid. The Company also
receives certain lease incentives, primarily construction allowances.
These allowances have been deferred and are amortized on a
straight-line basis over the initial term of a lease as a reduction of
rent expense. In fiscal 1999, deferred rent liabilities were
reclassified to liabilities subject to compromise.
Intangibles
Certain software costs are capitalized and amortized on a straight line
basis over three years. Unamortized software costs which are included
in fixed assets, net were approximately $1,315 and $1,471 as of January
29, 2000 and January 30, 1999, respectively. Amortization of these
software costs was approximately $875, $917, $564 and $545 for fiscal
1999 and 1998, the transition period and fiscal 1997, respectively.
Advertising Expenses
The Company expenses advertising costs when the advertising first
occurs. Advertising production costs incurred before the advertising
takes place are recorded as a prepaid expense. At January 29, 2000,
$694 was included as prepaid expense. At January 30, 1999, no amounts
were included as prepaid expense. In fiscal 1999 and 1998, the
transition period and fiscal 1997, advertising expense was $7,897,
$8,335, $4,681, and $4,006, respectively.
F-9
<PAGE>
Earnings per Share
Earnings per share - basic was computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Earnings per share - diluted includes the effect of stock
options and warrants. The reconciliation of earnings per share - basic
to earnings per share - diluted is as follows:
<TABLE>
<CAPTION>
Net income Per
(loss) Shares Share
-------------- ------------ -----------
<S> <C> <C> <C>
For fiscal 1999
Earnings (loss) per share-basic and diluted:
--------------------------------------------
Net (loss) available to common
stockholders $ (28,881) 7,503,098 $ (3.85)
============== ============ ===========
For fiscal 1998
Earnings (loss) per share-basic and diluted:
--------------------------------------------
Net (loss) available to common
stockholders $ (28,356) 7,422,069 $ (3.82)
============== ============ ===========
For the transition period
Earnings (loss) per share-basic and diluted:
--------------------------------------------
Net (loss) available to common
stockholders $ (889) 7,261,542 $ (0.12)
============== ============ ===========
For fiscal 1997
Earnings per share - basic:
---------------------------
Net income $ 1,710 5,739,962 $ 0.30
Effect of dilutive securities:
Stock options 870,057
Warrants 76,224
------------
Earnings per share - diluted:
-----------------------------
Net income available to common
stockholders and assumed conversions $ 1,710 6,686,243 $ 0.26
============== ============ ===========
</TABLE>
Options to purchase common stock outstanding during the periods
presented above 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 during the respective periods. These
options were 540,664, 462,334, 85,160 and 68,660 for fiscal 1999,
fiscal 1998, the transition period and fiscal 1997, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current year presentation.
F-10
<PAGE>
(3) Fixed Assets
The components of fixed assets, net at January 29, 2000 and January 30,
1999 are as follows:
January 29, January 30,
2000 1999
------------ -----------
Furniture and equipment $ 43,772 $ 45,464
Leasehold improvements 12,206 13,120
------------ -----------
Total fixed assets 55,978 58,584
Less accumulated depreciation and amortization 25,419 18,999
------------ -----------
Fixed assets, net $ 30,559 $ 39,585
============ ===========
(4) Debt
Subsequent to the commencement of the Chapter 11 Cases, the Company
entered into a Revolving Credit and Guaranty Agreement (the "Loan
Agreement") in March 1999 which provides up to $50,000 (including
$10,000 for letters of credit) to fund working capital needs and for
general corporate purposes. Borrowing under the facility is limited by
inventory levels and has an interest rate of 1% over prime. The Loan
Agreement expires on the earlier of March 23, 2001 or the date the
Bankruptcy Court confirms a plan of reorganization. Borrowings under
the Loan Agreement are secured by substantially all of the Company's
assets. Certain restrictive covenants apply, including maintenance of
certain inventory levels, achievement of specified operating results
and limitations on the incurrence of additional liens and indebtedness,
capital expenditures, asset sales and payment of dividends, all of
which were met or waived at January 29, 2000.
Proceeds from the Loan Agreement were used in March 1999 to repay all
borrowings under the Company's previous revolving credit agreement and
term loan. As a result, the Company recognized an extraordinary loss of
$1,292 associated with the early retirement of the Company's previous
revolving credit agreement and term loan.
In January 1998, the Company entered into a Loan and Security Agreement
("Agreement") with two large commercial banks providing a $40,000
revolving line of credit which could be increased at the Company's
discretion up to $60,000, in $5,000 increments. Borrowings under the
Agreement were limited by inventory levels subject to certain reserves
as defined in the Agreement. Interest accrued at an annual rate equal
to the prime rate or, at the Company's option, the London Interbank
Offered Rate ("LIBOR") plus an additional 175 or 200 basis points
dependent on the Company's financial performance. Interest was payable
monthly or upon the expiration of an advance issued under the Company's
LIBOR option. Borrowings under the Agreement were secured by
substantially all of the Company's assets. This Agreement contained
restrictive financial covenants requiring minimum net worth of $42,700
and a limit on annual capital expenditures.
In July 1998, the Company borrowed $10,000 under a Term Loan and
Security Agreement ("Term Loan") from an affiliate of one of the
participants in the Agreement. The Term Loan, which was to expire in
December 1999, bore interest at a rate of 14.5%. Upon entering into the
Term Loan, warrants to purchase 215,000 shares of the Company's common
stock at $7.50 per share exercisable until July 2003, were issued. The
Term Loan was collateralized by a first security interest in the
Company's equipment and a secondary interest in the remainder of the
Company's assets.
F-11
<PAGE>
The fair market value of the warrants issued in conjunction with the
Term Loan, determined to be $514, was recorded as additional paid in
capital and as a discount to the face amount of the debt. Amortization
of the discount and the related financing costs recognized was $331 and
$360, respectively, for fiscal 1998.
In July 1998, the Company also amended its Agreement (the "Amended
Agreement"). The Amended Agreement contained restrictive covenants
requiring minimum cumulative consolidated earnings before interest,
taxes, depreciation and amortization and limitations on annual capital
expenditures. Advances under the Amended Agreement were limited based
on inventory levels, which varied if the Term Loan was outstanding, and
were subject to certain possible reserves. Interest was accrued at an
annual rate equal to prime rate plus 50 basis points or, at the
Company's option, a rate based on LIBOR plus 250 basis points.
(5) Lease Commitments
The Company conducts substantially all of its activities using leased
premises. Store and office leases generally provide that real estate
taxes, insurance, maintenance, and operating expenses are obligations
of the Company. Certain store leases also provide for contingent
rentals based on sales in excess of specified minimums.
The cost of fixed assets held under capital leases, certain of which
legally could be characterized as financings, and included in fixed
assets was $8,608 and $8,463 at January 29, 2000 and January 30, 1999
respectively. Accumulated amortization related to such fixed assets was
$4,416 and $2,478 at January 29, 2000 and January 30, 1999,
respectively. Fixed assets held under capital leases consist
principally of technology, office and warehouse equipment.
The following is a schedule of future minimum lease payments for
capital and operating leases with initial or remaining terms in excess
of one year as of January 29, 2000.
<TABLE>
<CAPTION>
Capital Operating
Fiscal year: leases leases
------------------------------
<S> <C> <C> <C>
2000 $ 1,269 $ 23,929
2001 418 24,240
2002 242 23,783
2003 35 23,717
Thereafter 3 75,614
------------------------------
Total minimum lease payments 1,967 $ 171,283
===============
Less amount representing interest 156
---------------
Present value of net minimum lease payments
(including long-term lease obligations of $646) $ 1,811
===============
</TABLE>
The Company currently has the right to assume or reject unexpired lease
contracts. Future minimum lease payments exclude payment for leases
that have been rejected pursuant to Bankruptcy Court orders. Certain
lessors of rejected leases have filed claims for damages and an
estimate for such potential claims has been included in liabilities
subject to compromise. The lease obligations described above are
subject to possible adjustment under the Chapter 11 Cases.
F-12
<PAGE>
Rent expense charged to operations under operating leases was $25,722
and $26,001 in fiscal 1999 and 1998, respectively, $11,390 in the
transition period and $13,860 in fiscal 1997.
(6) Liabilities Subject to Compromise
The components of liabilities subject to compromise at January 29, 2000
are as follows:
January 29,
2000
------------------
Accounts payable $ 39,216
Accrued expenses 1,675
Capital lease obligations 3,597
Potential claims related to
rejection of certain real property leases 3,356
Deferred rent obligations 7,028
------------------
$ 54,872
==================
In conjunction with the Chapter 11 Cases, differences between claims
filed by potential creditors and amounts recorded by the Company are
currently being identified and reconciled. Any differences will be
resolved by negotiated agreement between the Company and the claimant
or by the Bankruptcy Court. Additional claims may arise in conjunction
with the termination of contractual obligations related to executory
contracts and leases. As a result, recorded amounts may be adjusted in
the future. A plan of reorganization may materially change the amount
and terms of these prepetition liabilities.
F-13
<PAGE>
(7) Reorganization Items, net
In April 1999, the Company obtained approval from the Bankruptcy Court
to close and conduct closing sales at 27 stores that were in markets
the Company did not intend to continue to operate in or were
underperforming or unprofitable. During fiscal 1999, the Company
recorded a provision for reorganization costs relating to these store
closings of approximately $10,837. This provision included the
write-down of fixed assets, estimated lease rejection claims and the
loss on the disposition of merchandise inventory. In addition to the
provision for the store closings, reorganization costs for professional
fees and other costs related to the Company's reorganization were
$8,245 in fiscal 1999.
(8) Income Taxes (Benefit)
Income taxes (benefit), excluding the tax benefit related to the
extraordinary items in fiscal 1999 and 1997, are as follows:
<TABLE>
<CAPTION>
Valuation
Current Deferred Allowance Total
----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Fiscal 1999:
Federal: $ - $ (8,893) $ 8,530 $ (363)
State - (2,124) 2,487 363
-----------------------------------------------------------------
$ - $ (11,017) $ 11,017 $ -
=================================================================
Fiscal 1998:
Federal $ (406) $ (8,383) $ 9,905 $ 1,116
State 23 (2,099) 1,411 (665)
-----------------------------------------------------------------
$ (383) $ (10,482) $ 11,316 $ 451
=================================================================
Transition period:
Federal $ 193 $ (578) $ - $ (385)
State (48) (160) - (208)
-----------------------------------------------------------------
$ 145 $ (738) $ - $ (593)
=================================================================
Fiscal 1997:
Federal $ 797 $ 459 $ - $ 1,256
State 80 126 - 206
-----------------------------------------------------------------
$ 877 $ 585 $ - $ 1,462
=================================================================
</TABLE>
F-14
<PAGE>
Income taxes (benefit) differs from the amounts computed by applying
the Federal income tax rate of 34% to income (loss) before income taxes
(benefit) as a result of the following:
<TABLE>
<CAPTION>
Fiscal Fiscal Transition Fiscal
1999 1998 period 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Computed "expected" income taxes
(benefit) (34.0)% (34.0)% (34.0)% 34.0%
Increase (decrease) in income taxes
resulting from:
Increase in valuation allowance 38.5 40.6 - -
State net operating loss carrybacks
and carryforwards (5.6) (2.8) (10.7) -
State and local income taxes, net of
Federal income tax benefit 1.1 (2.3) 1.5 4.4
Other, net - 0.1 3.2 3.6
------------ ------------- ------------- --------------
Income taxes (benefit) - % 1.6% (40.0)% 42.0%
============ ============= ============= ==============
</TABLE>
Deferred income taxes on the balance sheet reflect the net tax effect
of operating loss and alternative minimum tax credit carryforwards
along with the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Deferred tax assets related to:
Alternative minimum tax credit carryforward $ 564 $ 564
Deferred rent liabilities 1,154 1,296
Accrued expenses 2,002 1,756
Merchandise inventories 1,580 4,375
Net operating loss carryforwards 20,151 6,051
---------------- ----------------
Total deferred tax assets 25,451 14,042
Valuation allowance (22,333) (11,316)
---------------- ----------------
Net deferred tax assets 3,118 2,726
Deferred tax liabilities related to fixed assets 3,118 2,726
---------------- ----------------
Net deferred tax asset $ - $ -
================ ================
</TABLE>
In assessing the realization of deferred tax assets, management
considers the likelihood that those assets will be realized through
future taxable income. Because the realization of the deferred tax
assets may be limited by events involving the Chapter 11 Cases or other
events related to the ownership of the Company, the Company has
recorded a valuation allowance to fully reserve for the value of the
net deferred tax assets at January 29, 2000 and January 30, 1999.
At January 29, 2000, the Company had net operating loss ("NOL")
carryforwards for Federal tax purposes of $51,282 which expire
beginning in 2017. The utilization of NOL carryforwards may be
significantly limited by future events related to direct and/or
indirect ownership changes of the Company.
F-15
<PAGE>
(9) Employee Benefit Plans
1989 Incentive Stock Option Plan
A stock option plan was approved by the stockholders of the Company in
July 1989 to provide additional incentives and opportunities through
stock ownership to employees, outside directors and consultants of the
Company. Under the plan, incentive stock options may be granted for the
purchase of the Company's common stock at an exercise price not less
than 100% of the fair market value at the time of grant as determined
by the Board of Directors. The term of each option is also determined
by the Board of Directors, but can not be more than ten years from the
date of grant. Options are exercisable in accordance with the plan and
generally vest at the rate of 20% to 25% per year from the date of
grant.
In July 1996, the Company granted options to purchase 351,400 shares of
common stock to certain individuals, including employees and directors,
at an option price of $2.49 per share. Options to purchase 190,760
shares which were granted to employees vest over four years, and
options to purchase 160,640 shares were fully vested in September 1996.
Based on the estimated fair value of the Company's common stock at the
time of grant of these options of $3.30 per share, the Company
recognized compensation expense of $59, $34 and $208 during fiscal
1998, the transition period and fiscal 1997, respectively. Of the
amount recognized during fiscal 1997, $146 related to options which
were fully vested in September 1996. The estimated fair value of the
Company's common stock used in accounting for these options was based
on information from various sources which included a valuation prepared
by Avalon Group Ltd. (Avalon). At the time of the valuation, the
chairman and president of Avalon each owned 100 shares of the Company's
Series B preferred stock (or 0.3% of issued and outstanding Series B
preferred stock) and each had options to purchase 4,016 shares of the
Company's common stock (or 0.8% of weighted average common shares).
Outside Director Stock Option Plan
In November 1997, the Company's shareholders approved the 1997 Outside
Director Stock Option Plan permitting stock option awards to directors
who are not employees of the Company. The 1997 Outside Director Stock
Option Plan was effective in July 1997 and expires in July 2007. Under
the plan, options may be granted for the purchase of the Company's
common stock at an exercise price not less than 100% of the fair market
value of a share of common stock on the date of grant. The number of
shares of common stock reserved in connection with this plan is
250,000, subject to certain adjustments. The Company granted 160,000
options in November 1997 to eligible directors which become exercisable
at the rate of 8.33% per quarter through November 2000.
F-16
<PAGE>
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under Statement of Financial
Accounting Standard ("SFAS") No. 123, the Company's net income (loss)
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Transition Fiscal
----------------------------
1999 1998 period 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (28,881) $ (28,356) $ (889) $ 1,710
Pro forma (28,984) (28,618) (1,052) 1,450
Earnings (loss) per share - diluted As reported (3.85) (3.82) (0.12) 0.26
Pro forma (3.86) (3.86) (0.13) 0.22
</TABLE>
Pro forma net income (loss) reflects only options granted during fiscal
1999 and 1998, the transition period and fiscal 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected
over the options' vesting periods of generally four years and
compensation cost for options granted prior to July 1995 is not
considered.
The per share weighted average fair value of stock options granted
during fiscal 1999 and 1998, the transition period and fiscal 1997 was
estimated using the Black Scholes Option-Pricing Model with the
following weighted average assumptions: Fiscal 1999 and 1998 - expected
dividend rate of 0.0%, risk-free interest rate of 5.0%, volatility of
68% and an expected life of approximately two years; transition period
- expected dividend rate of 0.0%, risk-free interest rate of 6.0%,
volatility of 60% and an expected life of approximately two years;
Fiscal 1997 - expected dividend rate of 0.0%, risk-free interest rate
of 6.2%, volatility of 60% and an expected life of approximately two
years.
Stock option activity is as follows:
<TABLE>
<CAPTION>
--------------------- --------------------- --------------------- ---------------------
Fiscal Fiscal Transition Fiscal
1999 1998 Period 1997
--------------------- --------------------- --------------------- ---------------------
Number Weighted Number Weighted Number Weighted- Number Weighted
of shares - of shares - of shares average of shares -
average average exercise average
exercise exercise price exercise
price price per share price
per share per share per share
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of period 1,017,505 $4.34 1,173,749 $4.10 1,023,841 $2.97 739,346 $2.36
Granted 15,000 2.38 147,000 6.44 325,000 6.85 432,083 3.58
Exercised - - (91,356) 2.49 (102,348) 2.22 (99,396) 1.17
Forfeited (491,841) 3.96 (211,888) 5.19 (72,744) 3.32 (48,192) 3.11
--------------------- --------------------- --------------------- ---------------------
Outstanding at end
of period 540,664 4.62 1,017,505 4.34 1,173,749 4.10 1,023,841 2.97
--------------------- --------------------- --------------------- ---------------------
Exercisable at end
of period 438,639 4.33 679,937 3.36 613,536 2.93 568,560 2.85
--------------------- --------------------- --------------------- ---------------------
Weighted-average
fair value of
options granted
during the period $1.36 $1.83 $2.89 $1.69
--------------------- --------------------- --------------------- ---------------------
Available for future
grants at end of
period 182,500 195,637 130,749 133,004
--------------------- --------------------- --------------------- ---------------------
</TABLE>
F-17
<PAGE>
Information regarding options outstanding and exercisable at January
29, 2000 and January 30, 1999 is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Options outstanding Options exercisable
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices outstanding Contractual Life Price exercisable Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 29, 2000:
$ 1.63 to $ 2.38 17,000 9.01 $ 2.29 500 $ 1.63
2.49 to 2.49 262,445 5.65 2.49 256,421 2.49
3.50 to 9.00 261,219 6.80 6.92 181,718 6.93
-----------------------------------------------------------------------------
$ 1.63 to $ 9.00 540,664 6.31 $ 4.62 438,639 $ 4.33
=============================================================================
January 30, 1999:
$ .62 to $ 1.63 164,680 0.96 $ 0.67 155,680 $ 0.62
2.49 to 2.49 366,869 6.79 2.49 334,138 2.49
3.50 to 11.00 485,956 8.30 6.97 190,119 7.14
-----------------------------------------------------------------------------
$ .62 to $ 11.00 1,017,505 6.56 $ 4.34 679,937 $ 3.36
=============================================================================
</TABLE>
Incentive Savings Plan
The Incentive Savings Plan (the "ISP Plan") is a defined contribution
plan sponsored by the Company for all eligible employees. Participants
in the ISP Plan may elect to contribute between 2% and 13% of their
pre-tax base salary, subject to limitations imposed by the Internal
Revenue Service.
The Company makes a discretionary matching contribution to the ISP Plan
at the rate of 33% of the first 6% of the participant's contribution.
For fiscal 1999 and 1998, the transition period, and fiscal 1997, the
Company's discretionary matching contributions to the ISP Plan were
$193, $230, $95 and $121, respectively. The ISP Plan also allows for a
discretionary base contribution to be made by the Company only if it
has current or accumulated net profits. No discretionary base
contributions have been made by the Company to date.
Employee Stock Purchase Plan
In December 1996, the Company adopted an Employee Stock Purchase Plan
(the "ESPP Plan") to provide eligible employees the opportunity to
purchase shares of its common stock. Employees may purchase shares,
through payroll deductions, up to 10% of the employee's compensation,
not to exceed $5 per offering period, at a price per share equal to 90%
of the fair market value of the common stock as of the last day of any
offering. Withholdings from employees for purchases under the ESPP Plan
were -0- in fiscal 1999, $70 in fiscal 1998, $73 in the transition
period and $161 in fiscal 1997.
(10) Fair Value of Financial Instruments
The Company's financial instruments at January 29, 2000 and January 30,
1999 include accounts payable and debt. The Company has assumed that
the carrying value of trade accounts payable approximates fair value
because of the short maturity of these instruments. The Company
believes the carrying value of the debt approximates fair value due to
the variable rate of interest on this instrument. Such fair values are
subject to possible adjustment in conjunction with the bankruptcy
proceedings discussed in Note 1.
F-18
<PAGE>
(11) Quarterly Financial Information (unaudited)
Following is a summary of unaudited quarterly information:
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter Quarter
------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999:
Total sales $52,533 $52,234 $50,485 $62,406
Gross profit 24,413 25,813 21,148 25,060
Income (loss) before reorganization
items, income taxes and (2,249) 249 (4,781) (1,726)
extraordinary item
Loss before extraordinary item (14,796) (1,760) (7,078) (3,955)
Net loss (16,088) (1,760) (7,078) (3,955)
Net loss per share - basic and diluted (2.14) (.23) (.94) (.54)
First Second Third Fourth
quarter quarter quarter quarter
------------------------------------------------
Fiscal 1998:
Total sales $49,862 $54,749 $57,715 $ 64,173
Gross profit 25,475 26,755 26,540 12,733
Net income (loss) 568 (796) (2,603) (25,525)
Net income (loss) per share - basic 0.08 (0.11) (0.35) (3.40)
Net income (loss) per share - diluted 0.07 (0.11) (0.35) (3.40)
</TABLE>
(12) Supplemental Cash Flow Information
In August 1996, the Company exchanged Series C preferred stock for
consideration of trade accounts payable of $1,101.
On December 12, 1996, all outstanding shares of Convertible preferred
stock were converted into 3,134,674 shares, or $24,196 of common stock.
F-19
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Factory Card Outlet Corp.:
Under date of March 21, 2000 we reported on the consolidated balance
sheets of Factory Card Outlet Corp. and subsidiary as of January 29, 2000 and
January 30, 1999 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the fiscal years ended January 29, 2000 and January
30, 1999, the transition period ended January 31, 1998 and the fiscal year ended
June 28, 1997, which are included in this Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related financial statement schedule as listed in Item 14(a)(2) of this Form
10-K. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 of the Notes to
the Consolidated Financial Statements, on March 23, 1999, the Company filed a
voluntary petition for relief under chapter 11 of title 11 of the United States
Code. In addition, the Company has suffered losses from operations. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chicago, Illinois
March 21, 2000
S-1
<PAGE>
Schedule I
----------
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Condensed Financial Information of Factory Card Outlet Corp.
Balance Sheets
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ - $ 17
Due from subsidiary 12,179 13,716
Note receivable - subsidiary 47,648 40,188
----------------- ----------------
Total current assets 59,827 53,921
Investment in subsidiary (64,530) (29,743)
----------------- ----------------
Total assets $ (4,703) $ 24,178
================= ================
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock -$.01 par value. Voting class - authorized 15,000,000
shares; 7,503,098 shares issued and outstanding at January 29,
2000 and January 30, 1999. Non-voting class - authorized 205,000 shares, no
shares issued or outstanding. 75 75
Additional paid-in capital 52,021 52,021
Accumulated deficit (56,799) (27,918)
----------------- ----------------
Total stockholders' equity (deficit) $ (4,703) $ 24,178
================= ================
</TABLE>
See accompanying notes to condensed financial information.
S-2
<PAGE>
Schedule I
----------
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Condensed Financial Information of Factory Card Outlet Corp.
Statements of Operations
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Transition
Fiscal year Fiscal year period Fiscal year
ended ended ended ended
January 29, January 30, January 31, June 28,
2000 1999 1998 1997
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Royalty income $ 3,265 $ 3,397 $ 1,660 $ -
Interest income - subsidiary note receivable 4,277 2,981 1,990 1,713
Equity in net income (loss) of subsidiary (34,787) (33,231) (2,432) 716
--------------- -------------- --------------- ---------------
Net revenue (loss) (27,245) (26,853) 1,218 2,429
Operating expenses 1,636 1,581 1,077 -
--------------- -------------- --------------- ---------------
Income (loss) before income taxes ( benefit) (28,881) (28,434) 141 2,429
Income taxes (benefit) - (78) 1,030 719
--------------- -------------- --------------- ---------------
Net income (loss) $ (28,881) $ (28,356) $ (889) $ 1,710
=============== ============== =============== ===============
</TABLE>
See accompanying notes to condensed financial information.
S-3
<PAGE>
Schedule I
----------
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Condensed Financial Information of Factory Card Outlet Corp.
Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Transition
Fiscal year Fiscal year period Fiscal year
ended ended ended ended
January 29, January 30, January 31, June 28,
2000 1999 1998 1997
-------------------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (28,881) $ (28,356) (889) $ 1,710
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in net loss (income) of subsidiary 34,787 33,231 2,432 (716)
Decrease (increase) in due from subsidiary 1,537 141 332 (53)
-------------------------- ------------ --------------
Net cash provided by operating activities 7,443 5,016 1,875 941
-------------------------- ------------ --------------
Cash used in investing activities -
Increase in note receivable from subsidiary (7,460) (5,233) (2,225) (32,729)
-------------------------- ------------ --------------
Cash flows from financing activities:
Proceeds from issuance of Series C convertible
preferred stock - - - 8,638
Proceeds from issuance of common stock - - - 23,123
Proceeds from exercise of employee stock options - 217 297 104
Purchase of treasury stock - - - (180)
Sale of treasury stock to employee stock purchase plan - - 53 103
-------------------------- ------------ --------------
Net cash provided by financing activities - 217 350 31,788
-------------------------- ------------ --------------
Net increase (decrease) in cash (17) - - -
Cash at beginning of year 17 17 17 17
-------------------------- ------------ --------------
Cash at end of year $ - $ 17 $ 17 $ 17
========================== ============ ==============
Supplemental disclosures of cash flow information:
Noncash financing activities -
In August 1996, the Company exchanged Series C
Preferred stock for consideration
of its subsidiary's trade accounts payable - - - 1,101
In December 1996, all outstanding shares
of Convertible Preferred stock were converted into - - - 24,196
3,134,674 shares of common stock
Additional paid-in capital recognized for
Common stock warrants - 514 - 264
See accompanying notes to condensed financial information.
</TABLE>
S-4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Notes to Condensed Financial Information of Factory Card Outlet Corp.
(Dollar amounts in thousands, except per share data)
(1) Basis of Accounting
The Condensed Financial Information of Factory Card Outlet
Corp. ("the Company") has been prepared pursuant to Securities and
Exchange Commission rules and regulations and should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto as of January 29, 2000 and January 30, 1999 and the fiscal
years ended January 29, 2000 and January 30, 1999, the transition
period ended January 31, 1998 and the fiscal year ended June 28, 1997.
The Condensed Financial Information of the Company has been prepared on
an unconsolidated basis. The Company's investment in and amounts due
from its subsidiary are recorded on the equity basis.
(2) Chapter 11 Filing
On March 23, 1999, the Company and its subsidiary, Factory
Card Outlet of America Ltd., filed a petition for reorganization under
chapter 11 of title 11 of the United States Code. The Company is
currently operating its business and managing its properties as a
debtor in possession pursuant to the Bankruptcy Code. See Note 1 to the
Notes to Consolidated Financial Statements.
(3) Guarantees
The Company has guaranteed the credit and debt agreements
between its subsidiary and various lenders. For information related to
the agreements, see Notes 1 and 4 of Notes to Consolidated Financial
Statements.
(4) Notes Receivable - Subsidiary
During fiscal 1997, the subsidiary issued a note to the
Company. Interest is accrued quarterly based on the prime lending rate
plus two percent per year. The note and any accrued interest is due and
payable on demand.
(5) Royalty and Licensing Agreement
In June 1997 the Company entered into a Royalty and Licensing
Agreement ("Agreement") with its subsidiary. This Agreement grants its
subsidiary the right to use trademarks and tradenames owned by the
Company in exchange for a royalty fee of one and one-half percent of
net sales from operations.
S-5
FIRST AMENDMENT TO DEBTOR IN POSSESSION
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FIRST AMENDMENT TO DEBTOR IN POSSESSION LOAN AND SECURITY
AGREEMENT (this "First Amendment") is entered into and effective as of April 14,
1999, by and among Factory Card Outlet of America Ltd., an Illinois corporation
and a debtor and debtor in possession (the "Borrower"), on the one hand, and
Foothill Capital Corporation, as Agent ("Foothill") and the financial
institutions listed on the signature page of the Loan Agreement referred to
below (such financial institutions, together with their respective successors
and assigns, are collectively referred to herein as the "Lenders"), on the other
hand. This First Amendment amends certain provisions of the Debtor in Possession
Loan and Security Agreement dated as of March 23, 1999 by and among the Borrower
and Foothill, as Agent, and the Lenders (as amended by and through the date of
this First Amendment, and as hereafter amended and/or restated from time to
time, the "Loan Agreement"). Capitalized terms used herein and not otherwise
defined shall have the same meanings herein as in the Loan Agreement.
BACKGROUND
----------
This First Amendment is entered into to conform the Loan Agreement to
the terms of the Final Order (A) Approving Postpetition Financing, (B) Granting
Security Interests and Superpriority Administrative Expense Treatment, and (C)
Modifying Automatic Stay, Pursuant to Sections 362 and 364 of the Bankruptcy
Code and Bankruptcy Rule 4001(c) entered in the Case by the Bankruptcy Court on
April 14, 1999.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
----------------------------
(a) Amendments to Subsection 1.1.
----------------------------
(i) Subsection 1.1 is hereby amended by deleting the existing
definition of "Carve Out" appearing therein and inserting in lieu
thereof the following:
"'Carve Out' means, at any time of determination, the
sum of (i) allowed administrative expenses payable
pursuant to 28 U.S.C. ss. 1930(a)(6) and (ii) up to
$1,250,000 of Priority Professional Expenses due but
unpaid as of, or incurred after the date of an Event
of Default, and (iii) up to $250,000 of Nonpriority
Professional Expenses."
(ii) Subsection 1.1 is hereby amended by deleting the existing
definition of "Case" appearing therein and inserting in lieu thereof
the following:
1
NY2:\3001578\3\44336.0003
<PAGE>
"'Case' means the Borrower's and Parent's jointly
administered reorganization cases Nos. 99-685(JJF)
and 99-686(JJF) under Chapter 11 of the Bankruptcy
Code, pending in the Bankruptcy Court."
(iii) Subsection 1.1 is hereby amended by deleting the
existing definition of "Obligations" appearing therein and inserting in
lieu thereof the following:
"'Obligations' means all loans, Advances, debts,
principal, interest (including any interest that, but
for the provisions of the Bankruptcy Code, would have
accrued), contingent reimbursement obligations under
any outstanding Letters of Credit, premiums
(including Early Termination Premiums), liabilities
(including all amounts charged to Borrower's Loan
Account pursuant hereto), obligations, fees, charges,
costs, or Lender Group Expenses (including any fees
or expenses that, but for the provisions of the
Bankruptcy Code, would have accrued), lease payments,
guaranties, covenants, and duties owing by Borrower
to the Lender Group (provided the same arises under
or pursuant to, or is evidenced by, the Loan
Documents), whether direct or indirect, absolute or
contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability,
or obligation owing from Borrower to others that the
Lender Group may have obtained by assignment or
otherwise, and further including all interest not
paid when due and all Lender Group Expenses that,
Borrower is required to pay or reimburse by the Loan
Documents, by law, or otherwise, but, as to each item
referenced in this definition, only to the extent the
same arises under or pursuant to the Loan Documents."
(iv) Subsection 1.1 is hereby amended by inserting the
following definitions alphabetically therein:
"Avoidance Actions" means the Borrower's rights and
recoveries under Section 544, 545, 547, 548, 550 and
551 of the Bankruptcy Code."
"Committee" means the Official Committee of Unsecured
Creditors appointed in the Case."
"Permitted Application" has the meaning set forth in
Section 9.1.
"Petition Date" means March 23, 1999.
"Postpetition Liens" has the meaning given to such
term in the Final Order.
(b) Amendment to Subsection 2.2(a). Subsection 2.2(a) of the Loan
Agreement is hereby amended by deleting such subsection in its entirety and
inserting in lieu thereof the following:
2
<PAGE>
"(a) Agreement to Cause Issuance; Amounts; Outside
Expiration Date. Subject to the terms and conditions of this
Agreement, Agent agrees to issue, or cause an Affiliate of
Agent to issue, letters of credit for the account of Borrower
(each, an "L/C") or to guaranty letters of credit issued by an
Issuing Bank for the account of the Borrower (each such
guaranty, an "L/C Guaranty"). The Agent shall have no
obligation to issue an L/C or L/C Guaranty (x) at any time
during the pendency of a Default or Event of Default, or (y)
if, after giving effect to the issuance of such L/C or L/C
Guaranty:
(i) the sum of 50% (or such other percentage
as may from time to time equal the inverse of the
inventory advance rate) of the aggregate amount of
all undrawn and unreimbursed Inventory Letters of
Credit plus 100% of the aggregate amount of all other
types of undrawn and unreimbursed Letters of Credit,
would exceed the Borrowing Base less the amount of
outstanding Advances (including any Agent Advances
and Agent Loans);
(ii) the aggregate amount of all undrawn or
unreimbursed Letters of Credit would exceed the lower
of: (x) the Maximum Revolving Amount minus the amount
of outstanding Advances (including any Agent Advances
and Agent Loans); or (y) $10,000,000; or
(iii) the outstanding Obligations would
exceed the Maximum Revolving Amount.
Borrower expressly understands and agrees that Agent shall
have no obligation to arrange for the issuance by Issuing
Banks of the letters of credit that are to be the subject of
L/C Guaranties. Borrower and the Lender Group acknowledge and
agree that certain of the letters of credit that are to be the
subject of L/C Guaranties may be outstanding on the Closing
Date. Each Letter of Credit shall have an expiry date no later
than 60 days prior to the date on which this Agreement is
scheduled to terminate under Section 3.4 (without regard to
any potential renewal term), unless the Agent expressly agrees
to a later expiry date, and all such Letters of Credit shall
be in form and substance acceptable to Agent in its sole
discretion. If the Lender Group is obligated to advance funds
under a Letter of Credit, Borrower immediately shall reimburse
such amount to Agent and, in the absence of such
reimbursement, the amount so advanced immediately and
automatically shall be deemed to be an Advance hereunder and,
thereafter, shall bear interest at the rate then applicable to
Advances under Section 2.7."
(c) Amendment to Subsection 2.6. Subsection 2.6 of the Loan Agreement
is hereby amended by deleting the word "immediately" appearing therein and
inserting after the word "Agent" the phrase "by no later than the second
Business Date after the Agent has provided notice to the Borrower that an
Overadvance exists."
3
<PAGE>
(d) Amendment to Subsection 2.11. Subsection 2.11 of the Loan Agreement
is hereby amended by deleting the last sentence of such existing subsection and
inserting in lieu thereof the following sentences:
"Agent shall render statements regarding the Loan Account to
Borrower and the Committee, including principal, interest, and
fees, including an itemization of all charges and expenses
constituting the Lender Group Expenses owing, and, subject to
the following sentence, such statements shall be conclusively
presumed to be correct and accurate and constitute an account
stated between Borrower and Lender Group unless, within 30
days after receipt thereof by Borrower, Borrower shall deliver
to Agent written objection thereto describing the error or
errors contained in any such statements. In addition, the
Borrower and the Committee shall have thirty (30) days after
the receipt of such statements to object to the reasonableness
of the attorneys' fees and expenses incurred by the Lender
Group. Any objection shall be first sent to the Agent and its
counsel. If the parties cannot resolve the dispute within ten
(10) days of the objection's delivery to the Agent and its
counsel, the Borrower and/or the Committee may seek relief
from the Bankruptcy Court. In the absence of a timely
objection and (if necessary) request for relief by the
Borrower or the Committee, the attorneys' fees and expenses of
the Lender Group shall be conclusively presumed reasonable."
(e) Amendment to Subsection 4.2. Subsection 4.2 of the Loan Agreement
is hereby amended by adding the following sentence to the end of such existing
subsection:
"Notwithstanding the foregoing, the proceeds of any Avoidance
Actions shall not be subject to, and shall not be used to
satisfy, the Super-Priority Claim of the Lender Group, except
that to the extent the Lender Group funds the Carve Out, the
amount so funded shall be first repaid from the proceeds of
the Avoidance Actions to satisfy the Super-Priority Claim of
the Lender Group."
(f) Amendment to Subsection 6.19. Subsection 6.19 of the Loan Agreement
is hereby amended by deleting the number "25" appearing therein and inserting in
lieu thereof the number "32."
(g) Amendment to Section 8. Section 8 of the Loan Agreement is hereby
amended by deleting such section in its entirety and inserting in lieu thereof
the following:
"8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower shall fail to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of
principal, interest
4
<PAGE>
(including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due the
Lender Group, reimbursement of Lender Group Expenses, or other amounts
constituting Obligations);
8.2 If Borrower shall fail to perform, keep or observe: (a)
any term, provision, condition, covenant or agreement contained in
Sections 6.3 (Tax Returns), 6.6 (Title to Equipment), 6.11 (Location of
Inventory and Equipment), 6.12 (Compliance with Laws), 6.13 (Employee
Benefits) or 6.14 (Leases) of this Agreement, and such failure
continues for a period of 5 days after the date of such failure or
neglect; (b) any term, provision, condition, covenant or agreement
contained in Sections 6.1 (Accounting System) or 6.17 (Cycle Count
Program) of this Agreement, and such failure continues for a period of
15 days after the date of such failure or neglect; or (c) any other
term, provision, condition, covenant or agreement contained in this
Agreement, or in any of the other Loan Documents (subject to any grace
periods set forth therein); provided, however, that during any period
of time that any such failure exists, even if such failure is not yet
an Event of Default by virtue of the existence of a grace period,
Lenders shall not be required during such period to make Advances to
Borrower;
8.3 If there is a Material Adverse Change;
8.4 If any material portion (i.e., more than $250,000 per
creditor or $1,000,000 in the aggregate) of Borrower's or Parent's
properties or assets shall be attached, seized, subjected to a writ or
distress warrant, or levied upon, or come into the possession of any
third Person;
8.5 If Borrower shall fail to make: (a) rental payments not in
bona fide dispute in the aggregate amount of at least $100,000 due
under its retail location leases, or (b) any rental payment not in bona
fide dispute under the lease for its principal place of business and
main distribution center, to the extent such payments arose after the
commencement of the Case and prior to the rejection of any such lease;
8.6 If the Case is dismissed or converted to a case under
Chapter 7 of the Bankruptcy Code, or if a trustee under Section 1104 of
the Bankruptcy Code or an examiner with expanded powers relating to the
operation of the business of the Borrower and/or the Parent under
Section 1106(b) of the Bankruptcy Code is appointed;
8.7 If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any material
part of its business affairs;
8.8 If a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's properties or assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, or
if any taxes or debts owing at any time hereafter to any one
5
<PAGE>
or more of such entities becomes a lien, whether choate or otherwise
with a priority equal or superior to the liens granted to the Agent and
the Lenders hereunder, upon any of Borrower's properties or assets and
the same is not paid on the payment date thereof;
8.9 If a judgment or other claim becomes a lien or encumbrance
with a priority equal or superior to the liens granted to the Agent and
the Lenders hereunder upon any material portion (i.e., more than
$250,000 per creditor or $1,000,000 in the aggregate) of Borrower's or
Parent's properties or assets;
8.10 If there is a filing by Borrower or Parent, or
confirmation (regardless of the proponent), of a Reorganization Plan or
Plans in the Case which does not provide for (i) the termination of all
of the Lenders' commitments to lend and indefeasible payment in full in
cash of all Obligations and the cash collateralization or return of all
Letters of Credit in a manner satisfactory to Agent on or before the
effective date of such plan and (ii) the continuation of the
Postpetition Liens in favor of Agent until such effective date;
8.11 If Borrower shall make any payment on account of
Indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, except to the extent such
payment is permitted by the terms of the subordination provisions
applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report
made to the Lender Group by Borrower or any officer, employee, agent,
or director of Borrower, or if any such warranty, representation,
statement or report is withdrawn;
8.13 If the obligation of any guarantor under its guaranty or
other third person under any Loan Document is limited or terminated by
operation of law or by the guarantor or other third Person thereunder,
or any such guarantor (other than the Parent) or other third person
becomes the subject of an Insolvency Proceeding, it being acknowledged
that as of the date of this Agreement the Parent is the only Guarantor
of the Obligations;
8.14 If the Bankruptcy Court shall enter any order (i)
amending, supplementing, altering, staying, vacating, rescinding or
otherwise modifying any Order, or (ii) granting relief from the
automatic stay to any creditor asserting a lien or reclamation claim on
a material portion (i.e., more than $250,000 per creditor or $1,000,000
in the aggregate) of the assets of the Borrower or the Parent;
8.15 If an application shall be filed by the Borrower for the
approval of any other superpriority claim herein which is pari passu
with or senior to the claims of the Agent and the Lenders against the
Borrower hereunder and the Order or under any of the other Loan
Documents (unless after giving effect to the transactions contemplated
6
<PAGE>
by such application, all Obligations (whether contingent or otherwise)
shall be paid in full in cash and the Commitment shall be terminated,
or there shall arise any such superpriority claim;
8.16 If Borrower shall be generally unable to pay its
post-petition debts as they mature, or shall fail to comply with any
order of the Bankruptcy Court in any material respect;
8.17 If a Reorganization Plan shall be filed by the Borrower
or approved by the Bankruptcy Court (regardless of the proponent) in
the Case which does not satisfy the requirements of Section 4.4 of this
Agreement;
8.18 If Borrower shall file a motion in the Case (i) to use
cash collateral of the Lenders under Section 363(c) of the Bankruptcy
Code except with the Lenders' consent, (ii) to recover from any portion
of the Collateral any costs or expenses of preserving or disposing of
any such collateral under Section 506(c) of the Bankruptcy Code, or
(iii) except with respect to the filing of a Permitted Application (as
defined in Section 9 below), to take any other action or actions
adverse to the Lenders or their rights and remedies hereunder or under
any of the other Loan Documents or any documents related thereto or the
Lenders' interest in any of the Collateral, which other action or
actions would individually or in the aggregate, have a Material Adverse
Change;
8.19 If Borrower shall pay or discharge any prepetition
Indebtedness in an aggregate amount exceeding $50,000, other than the
Prepetition Bank Debt and such Indebtedness paid pursuant to customary
orders entered by this Court on or immediately following the Petition
Date;
8.20 If there shall remain undischarged for more than thirty
(30) days any final post-petition judgment against the Borrower in
excess of $400,000;
8.21 If the Borrower or Parent shall commence, or participate
in (unless compelled to do so by order of the Bankruptcy Court) any
lawsuit, adversary proceeding, or contested matter against the Agent or
Lenders, other than a Permitted Application; or
8.22 If there shall occur any attempt by Borrower or Parent to
invalidate, reduce or otherwise impair Agent's or any Lender's claims
against Borrower or Parent or to subject any Collateral to assessment
pursuant to Section 506(c) of the Bankruptcy Code."
(h) Amendment to Subsection 9.1. Subsection 9.1 of the Loan Agreement
is hereby amended by deleting the third paragraph of such subsection in its
entirety and inserting in lieu thereof the following paragraph
7
<PAGE>
Upon the occurrence and during the continuance of an Event of Default
which has resulted in any of the Obligations having been declared due
and payable prior their stated maturity (an "Acceleration") and before
exercising any of the rights or remedies of the Lender Group comprising
the enforcement of its Liens against Collateral subject to the
immediately preceding paragraph or the exercise of its rights of
set-off under this Agreement, the Agent shall provide at least seven
(7) Business Days' prior written notice to the Borrower, bankruptcy
counsel to the Borrower, counsel to the Committee and the office of the
United States Trustee in the Case, setting forth the Event of Default
or Events of Default which the Agent believes in good faith to have
occurred and to have been continuing at the time of such Acceleration
and providing notice that the Agent, on behalf of the Lender Group,
intends to enforce its Liens against Collateral and/or to exercise its
rights of set-off. During such seven (7) Business Day period (the
"Waiting Period"), any of such parties may file an application (a
"Permitted Application") with the Bankruptcy Court with a copy to the
Agent and its counsel, (a) stating that: (i) such party believes in
good faith that no Event of Default specified in such notice has
occurred and was continuing at the time of such Acceleration; or (ii)
that due to compelling circumstances the immediate enforcement of the
Agent's and the Lender's rights should not be permitted; and (b)
requesting that a hearing be held promptly to determine whether such is
the case. During the Waiting Period and, if any such Permitted
Application is filed with the Bankruptcy Court, during such additional
period (an "Extended Period") expiring on the earlier to occur of (i)
the conclusion of any such hearing requested and (ii) five (5) Business
Days following the filing of such application, (A) the Agent shall
refrain from proceeding to exercise such rights or remedies or rights
of set-off, and (B) the Borrower may use funds to make payment in the
ordinary course of business consistent with past practices in the
Operating Account and up to 50% of the amount of cash proceeds from
account debtors and obligors received by the Borrower or the Agent and
otherwise creditable to the Obligations; provided that the total amount
for the Waiting Period and the Extended Period (if applicable) shall
not exceed, in the aggregate, the sum of $250,000 plus payroll expenses
in an amount not to exceed $1,700,000. At the end of the Waiting Period
or the Extended Period (if applicable) the Agent shall be free to
exercise all of such rights and remedies and such rights of set-off
unless, in the event a Permitted Application has been filed, the
Bankruptcy Court has determined within such Extended Period that no
such Event of Default has occurred and was continuing at the time of
such Acceleration or that due to compelling circumstances the immediate
enforcement of the Agent's and the Lender's rights should not be
permitted. In the event that the Bankruptcy Court does determine that
no such Event of Default has occurred and was continuing at the time of
such Acceleration, the scheduled maturity of the Obligations which had
been the subject of such Acceleration, together with the automatic stay
of Section 362(a) of the Bankruptcy Code, shall be reinstated, all with
the same effect as if no such Event of Default has been declared or
Acceleration occurred.
8
<PAGE>
(i) Amendments to Exhibit B-1. The Loan Agreement is hereby amended by
deleting in its entirety the existing Exhibit B-1 (Business Plan) thereto and
substituting therefor the form of Exhibit B-1 (Business Plan) attached to this
First Amendment.
2. Representations and Warranties; Confirmation of
Representations, Warranties.
-------------------------------------------------------------
This First Amendment has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms. The Borrower, by execution of this
First Amendment, certifies to the Agent and each of the Lenders that each of the
representations and warranties set forth in the Loan Agreement and the other
Loan Documents is true and correct as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date, as if
fully set forth in this First Amendment, and that, as of the date hereof, no
Default or Event of Default has occurred and is continuing under the Loan
Agreement or any other Loan Document. The Borrower acknowledges and agrees that
this First Amendment shall become a part of the Loan Agreement and shall be a
Loan Document.
3. No Novation; Effect; Counterparts; Governing Law.
------------------------------------------------
Except to the extent specifically amended hereby, the Loan Agreement
and each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this First Amendment shall not be deemed a novation of
the Loan Agreement or any other Loan Document. The Borrower hereby acknowledges,
confirms and ratifies its obligations under the Loan Agreement and each of the
other Loan Documents. This First Amendment may be executed in any number of
counterparts, and by the different parties on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all the
counterparts shall together constitute one instrument. This First Amendment
shall be governed by the internal laws of The Commonwealth of Massachusetts
(without reference to conflicts of law principles) and the United States
Bankruptcy Code and shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Borrower acknowledges that the reasonable out-of-pocket expenses of the Agent
and the Lenders incurred in connection with the preparation, execution and
delivery of this First Amendment shall be "Lender Group Expenses," as such term
is defined in the Loan Agreement.
4. Construction.
------------
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date of
this First Amendment and as further amended and/or restated from time to time
hereafter.
[Signatures appear on following page]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Loan and Security Agreement as a sealed instrument as of the date
first above written.
FACTORY CARD OUTLET OF AMERICA,
LTD.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
FOOTHILL CAPITAL CORPORATION, for
itself and as Agent for the Lenders
By:
----------------------------------
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
----------------------------------
(Title)
10
SECOND AMENDMENT TO DEBTOR IN POSSESSION
LOAN AND SECURITY AGREEMENT
---------------------------
THIS SECOND AMENDMENT TO DEBTOR IN POSSESSION LOAN AND SECURITY
AGREEMENT (this "Second Amendment") is entered into and effective as of August
__, 1999, by and among Factory Card Outlet of America Ltd., an Illinois
corporation and a debtor and debtor in possession (the "Borrower"), on the one
hand, and Foothill Capital Corporation, as Agent ("Foothill") and the financial
institutions listed on the signature page of the Loan Agreement referred to
below (such financial institutions, together with their respective successors
and assigns, are collectively referred to herein as the "Lenders"), on the other
hand. This Second Amendment amends certain provisions of the Debtor in
Possession Loan and Security Agreement dated as of March 23, 1999 by and among
the Borrower and Foothill, as Agent, and the Lenders (as amended by and through
the date of this Second Amendment, and as hereafter amended and/or restated from
time to time, the "Loan Agreement"). Capitalized terms used herein and not
otherwise defined shall have the same meanings herein as in the Loan Agreement.
BACKGROUND
----------
This Second Amendment is entered into to amend certain of the
provisions governing the availability of "Special Sub-Line Advances" under the
Loan Agreement, in accordance with the terms and conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
----------------------------
(a) Amendment to Subsection 2.1(a)(ii). Subsection 2.1(a)(ii) of the
Loan Agreement is hereby amended by deleting such subsection in its entirety and
inserting in lieu thereof the following:
"(a)(ii) Special Sub-Line Advances. The term "Borrowing Base"
shall also include amounts available in respect of the Special Sub-Line
Advances in accordance with this Section 2.1(a)(ii). Subject to the
terms and conditions of this Agreement, each Lender agrees to make
special sub-line advances ("Special Sub-Line Advances") to Borrower in
an amount at any one time outstanding not to exceed such Lender's Pro
Rata Share of an amount equal to 10% of the Cost value of Eligible
Inventory, provided that during the period August 20, 1999 through and
including November 20, 1999, the Special Sub-Line Advances to Borrower
may be in an amount at any one time outstanding not to exceed such
Lender's Pro Rata Share of an amount equal to 15% of the Cost value of
Eligible Inventory,
1
NY2:\3036965v1\44336.0003
<PAGE>
provided further, however, that, except as expressly set forth in the
next succeeding sentence, in no event will Advances (on a combined
basis under Sections 2.1(a)(i)(y) and 2.1(a)(ii)) exceed 82.5% of the
Net Retail Liquidation Value of Eligible Inventory. Notwithstanding the
foregoing, the Lenders agree that: (i) during the period August 20,
1999 through and including September 30, 1999, Advances (on a combined
basis under Sections 2.1(a)(i)(y) and 2.1(a)(ii)) shall not exceed 90%
of the Net Retail Liquidation Value of Eligible Inventory, and (ii)
during the period October 1, 1999 through and including October 31,
1999, Advances (on a combined basis under Sections 2.1(a)(i)(y) and
2.1(a)(ii)) shall not exceed 92% of the Net Retail Liquidation Value of
Eligible Inventory, and (iii) during the period November 1, 1999
through and including November 20, 1999, Advances (on a combined basis
under Sections 2.1(a)(i)(y) and 2.1(a)(ii)) shall not exceed 85% of the
Net Retail Liquidation Value of Eligible Inventory."
2. Representations and Warranties; Confirmation of
Representations, Warranties.
-------------------------------------------------------------
This Second Amendment has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms. The Borrower, by execution of this
Second Amendment, certifies to the Agent and each of the Lenders that each of
the representations and warranties set forth in the Loan Agreement and the other
Loan Documents is true and correct as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date, as if
fully set forth in this Second Amendment, and that, as of the date hereof, no
Default or Event of Default has occurred and is continuing under the Loan
Agreement or any other Loan Document. The Borrower acknowledges and agrees that
this Second Amendment shall become a part of the Loan Agreement and shall be a
Loan Document.
3. No Novation; Effect; Counterparts; Governing Law.
------------------------------------------------
Except to the extent specifically amended hereby, the Loan Agreement
and each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this Second Amendment shall not be deemed a novation
of the Loan Agreement or any other Loan Document. The Borrower hereby
acknowledges, confirms and ratifies its obligations under the Loan Agreement and
each of the other Loan Documents. This Second Amendment may be executed in any
number of counterparts, and by the different parties on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all the
counterparts shall together constitute one instrument. This Second Amendment
shall be governed by the internal laws of The Commonwealth of Massachusetts
(without reference to conflicts of law principles) and the United States
Bankruptcy Code and shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Borrower acknowledges that the reasonable out-of-pocket expenses of the Agent
and the Lenders incurred in connection with the preparation, execution and
delivery of this Second Amendment shall be "Lender Group Expenses," as such term
is defined in the Loan Agreement.
2
<PAGE>
4. Construction.
------------
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date of
this Second Amendment and as further amended and/or restated from time to time
hereafter.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment to Loan and Security Agreement as a sealed instrument as of the date
first above written.
FACTORY CARD OUTLET OF AMERICA,
LTD.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
FOOTHILL CAPITAL CORPORATION, for
itself and as Agent for the Lenders
By:
----------------------------------
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
----------------------------------
(Title)
3
THIRD AMENDMENT TO DEBTOR IN POSSESSION
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO DEBTOR IN POSSESSION LOAN AND SECURITY
AGREEMENT (this "Third Amendment") is entered into and effective as of September
24, 1999, by and among Factory Card Outlet of America Ltd., an Illinois
corporation and a debtor and debtor in possession (the "Borrower"), on the one
hand, and Foothill Capital Corporation, as Agent ("Foothill") and the financial
institutions listed on the signature page of the Loan Agreement referred to
below (such financial institutions, together with their respective successors
and assigns, are collectively referred to herein as the "Lenders"), on the other
hand. This Third Amendment amends certain provisions of the Debtor in Possession
Loan and Security Agreement dated as of March 23, 1999 by and among the Borrower
and Foothill, as Agent, and the Lenders (as amended by and through the date of
this Third Amendment, and as hereafter amended and/or restated from time to
time, the "Loan Agreement"). Capitalized terms used herein and not otherwise
defined shall have the same meanings herein as in the Loan Agreement.
BACKGROUND
----------
This Third Amendment is entered into to amend certain of the provisions
governing the availability of "Special Sub-Line Advances" under the Loan
Agreement, in accordance with the terms and conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
----------------------------
(a) Amendment to Subsection 2.2(a). Subsection 2.2(a)(ii) of the Loan
Agreement is hereby amended by deleting such subsection in its entirety and
inserting in lieu thereof the following:
"(ii) the aggregate amount of all undrawn or
unreimbursed Letters of Credit would exceed the lower
of: (x) the Maximum Revolving Amount minus the amount
of outstanding Advances (including any Agent Advances
and Agent Loans); or (y)(1) for the period September
24, 1999 through November 23, 1999, $12,500,000, or
(2) at all other times during the term of this
Agreement, $10,000,000;"
2. Representations and Warranties; Confirmation of
Representations, Warranties.
-------------------------------------------------------------
This Third Amendment has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of
1
NY2:\3048140v1\44336.0003
<PAGE>
the Borrower, enforceable against the Borrower in accordance with their
respective terms. The Borrower, by execution of this Third Amendment, certifies
to the Agent and each of the Lenders that each of the representations and
warranties set forth in the Loan Agreement and the other Loan Documents is true
and correct as of the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date, as if fully set forth in this
Third Amendment, and that, as of the date hereof, no Default or Event of Default
has occurred and is continuing under the Loan Agreement or any other Loan
Document. The Borrower acknowledges and agrees that this Third Amendment shall
become a part of the Loan Agreement and shall be a Loan Document.
3. Amendment Fee. Prior to or concurrently with the execution by the
Agent and the Lenders of this Third Amendment, and as a condition to the
obligation of the Lenders to execute this Third Amendment and make the
accomodations to the Borrower described herein:
(a) This Third Amendment shall have been executed and delivered by each
of the parties hereto; and
(b) The Borrower shall have paid to the Agent for the ratable benefit
of the Lenders an amendment fee of $12,500. Such fee shall be fully earned when
paid to the Agent and shall not be refunded to the Borrower under any
circumstances.
4. No Novation; Effect; Counterparts; Governing Law.
------------------------------------------------
Except to the extent specifically amended hereby, the Loan Agreement
and each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this Third Amendment shall not be deemed a novation of
the Loan Agreement or any other Loan Document. The Borrower hereby acknowledges,
confirms and ratifies its obligations under the Loan Agreement and each of the
other Loan Documents. This Third Amendment may be executed in any number of
counterparts, and by the different parties on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all the
counterparts shall together constitute one instrument. This Third Amendment
shall be governed by the internal laws of The Commonwealth of Massachusetts
(without reference to conflicts of law principles) and the United States
Bankruptcy Code and shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Borrower acknowledges that the reasonable out-of-pocket expenses of the Agent
and the Lenders incurred in connection with the preparation, execution and
delivery of this Third Amendment shall be "Lender Group Expenses," as such term
is defined in the Loan Agreement.
2
<PAGE>
4. Construction.
------------
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date of
this Third Amendment and as further amended and/or restated from time to time
hereafter.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment to Loan and Security Agreement as a sealed instrument as of the date
first above written.
FACTORY CARD OUTLET OF AMERICA,
LTD.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
FOOTHILL CAPITAL CORPORATION, for
itself and as Agent for the Lenders
By:
----------------------------------
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
----------------------------------
(Title)
3
FOURTH AMENDMENT TO DEBTOR IN POSSESSION
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FOURTH AMENDMENT TO DEBTOR IN POSSESSION LOAN AND SECURITY
AGREEMENT (this "Fourth Amendment") is entered into and effective as of December
__, 1999, by and among Factory Card Outlet of America Ltd., an Illinois
corporation and a debtor and debtor in possession (the "Borrower"), on the one
hand, and Foothill Capital Corporation, as Agent ("Foothill") and the financial
institutions listed on the signature page of the Loan Agreement referred to
below (such financial institutions, together with their respective successors
and assigns, are collectively referred to herein as the "Lenders"), on the other
hand. This Fourth Amendment amends certain provisions of the Debtor in
Possession Loan and Security Agreement dated as of March 23, 1999 by and among
the Borrower and Foothill, as Agent, and the Lenders (as amended by and through
the date of this Fourth Amendment, and as hereafter amended and/or restated from
time to time, the "Loan Agreement"). Capitalized terms used herein and not
otherwise defined shall have the same meanings herein as in the Loan Agreement.
BACKGROUND
----------
This Fourth Amendment is entered into to amend certain of the
provisions governing certain of the covenants described in the Loan Agreement
and Schedule 7.21 thereto, increasing the interest payable on the Obligations,
and amending certain other provisions, all in accordance with the terms and
conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
----------------------------
(a) Amendment to Section 2.7. Section 2.7 of the Loan Agreement is
hereby amended by deleting the table of interest rate margins appearing therein,
deleting references to the Adjusted Eurodollar Rate Margin appearing therein,
and inserting in lieu thereof the following table:
<TABLE>
Borrower's EBITDA, determined using the Borrower's
Audited Financial Statements for the Immediately Preceding Reference Rate Margin
Fiscal Year ---------------------
-----------
<S> <C>
greater than or equal to $15,000,001 +.25%
greater than or equal to $11,000,001, but less than +.25%
$15,000,001
less than $11,000,001, but greater than $9,000,000 +.50%
$9,000,000 or less +1.00%
</TABLE>
1
NY2:\3073942v3\44336.0003
<PAGE>
The Borrower acknowledges that the Eurodollar Rate interest rate option has been
deleted from the Loan Agreement, and that accordingly the Borrower's right to
request that Eurodollar Rate Loans accrue interest at the Adjusted Eurodollar
Rate Margin is terminated.
(b) Amendment to Subsection 3.6. Subsection 3.6 is hereby amended by
deleting such subsection in its entirety and inserting in lieu thereof the
following:
"3.6 EARLY TERMINATION BY BORROWER. The Borrower has
the option, at any time upon 90 days prior written notice to
Agent, to terminate this Agreement by paying to Agent (for the
ratable benefit of the Lender Group), in cash, the Obligations
(including an amount equal to 102% of the undrawn amount of
the Letters of Credit), in full, together with a premium (the
"Early Termination Premium") equal to (x) 2% of the Maximum
Revolving Amount during the period from December 17, 1999
through December 17, 2000, and (y) 1% of the Maximum Revolving
Amount during the period from December 18, 2000 through the
Maturity Date, provided, however, that no Early Termination
Premium payment shall be due in connection with payment in
full of the Obligations on the Maturity Date."
(c) Amendment to Subsection 7.20(a). Subsection 7.20(a) of the Loan
Agreement is hereby amended by deleting the term "85%" in the two places where
it appears in such subsection and inserting in lieu thereof (in each of those
two places) the term "90%."
(d) Amendment to Section 7.21. Section 7.21 of the Loan Agreement is
amended by deleting the existing Schedule 7.21 to the Loan Agreement and
replacing same with the Schedule 7.21 attached to this Fourth Amendment as
Exhibit A.
2. Representations and Warranties; Confirmation of
Representations, Warranties.
-------------------------------------------------------------
This Fourth Amendment has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms. The Borrower, by execution of this
Fourth Amendment, certifies to the Agent and each of the Lenders that each of
the representations and warranties set forth in the Loan Agreement and the other
Loan Documents is true and correct as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date, as if
fully set forth in this Fourth Amendment, and that, as of the date hereof, no
Default or Event of Default has occurred and is continuing under the Loan
Agreement or any other Loan Document. The Borrower acknowledges and agrees that
this Fourth Amendment shall become a part of the Loan
2
<PAGE>
Agreement and shall be a Loan Document. The Borrower further acknowledges and
agrees that the Agent and the Lenders have acted in good faith in entering into
this Fourth Amendment.
3. Conditions Precedent. Prior to or concurrently with the execution by
the Agent and the Lenders of this Fourth Amendment, and as a condition to the
obligation of the Lenders to execute this Fourth Amendment and make the
accommodations to the Borrower described herein:
(a) This Fourth Amendment shall have been executed and delivered by
each of the parties hereto; and
(b) The Borrower shall have paid to the Agent for the ratable benefit
of the Lenders an amendment fee of $100,000. Such fee shall be fully earned when
paid to the Agent and shall not be refunded to the Borrower under any
circumstances.
4. No Novation; Effect; Counterparts; Governing Law.
------------------------------------------------
Except to the extent specifically amended hereby, the Loan Agreement
and each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this Fourth Amendment shall not be deemed a novation
of the Loan Agreement or any other Loan Document. The Borrower hereby
acknowledges, confirms and ratifies its obligations under the Loan Agreement and
each of the other Loan Documents. This Fourth Amendment may be executed in any
number of counterparts, and by the different parties on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all the
counterparts shall together constitute one instrument. This Fourth Amendment
shall be governed by the internal laws of The Commonwealth of Massachusetts
(without reference to conflicts of law principles) and the United States
Bankruptcy Code and shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Borrower acknowledges that the reasonable out-of-pocket expenses of the Agent
and the Lenders incurred in connection with the preparation, execution and
delivery of this Fourth Amendment shall be "Lender Group Expenses," as such term
is defined in the Loan Agreement.
4. Construction.
------------
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date of
this Fourth Amendment and as further amended and/or restated from time to time
hereafter.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment to Loan and Security Agreement as a sealed instrument as of the date
first above written.
FACTORY CARD OUTLET OF AMERICA,
LTD.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
FOOTHILL CAPITAL CORPORATION, for
itself and as Agent for the Lenders
By:
----------------------------------
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
----------------------------------
(Title)
<PAGE>
EXHIBIT A
---------
- - - - - - - - - - - - --------------------------------------------------------------------------------
RETAIL COVENANTS
- - - - - - - - - - - - --------------------------------------------------------------------------------
Min / Max Inventory Measured monthly, on a rolling 3
month basis. Average EOM inventory AT COST
shall be at least 90.0% of plan and not more
than 105.0% of plan.
- - - - - - - - - - - - --------------------------------------------------------------------------------
Minimum Purchases Measured monthly on a rolling 3 month basis.
Total purchases AT COST , shall not be less
than 93.0% of Planned Purchases in any one
fiscal month.
- - - - - - - - - - - - --------------------------------------------------------------------------------
Minimum Gross Margin Measured monthly on a rolling 3 month basis.
Actual Gross Margin Dollars shall be at
least 95.0% of Planned Gross Margin Dollars.
- - - - - - - - - - - - --------------------------------------------------------------------------------
Trade A/P to Inventory Measured monthly. EOM Post-petition Trade
Accounts Payable as a percentage of EOM
Inventory AT COST shall not vary negatively
from plan by more than 2.25 percentage
points.
- - - - - - - - - - - - --------------------------------------------------------------------------------
COMPOSITION GUIDELINES
- - - - - - - - - - - - --------------------------------------------------------------------------------
Seasonal Carry-Over Measured monthly. "Seasonal Carry-Over"
shall not exceed the lesser of $9.8MM
(Actual $ Amount at closing) or, 7.0%
(Actual % at closing) of total RETAIL
inventory.
- - - - - - - - - - - - --------------------------------------------------------------------------------
Basic Party Measured monthly. "Basic Party" EOM RETAIL
inventory cannot fall below 32.0% of total
RETAIL inventory.
- - - - - - - - - - - - --------------------------------------------------------------------------------
Cards Measured monthly. "Cards" EOM RETAIL
inventory cannot fall below 20.5% of total
RETAIL inventory.
- - - - - - - - - - - - --------------------------------------------------------------------------------
FINANCIAL COVENANTS
- - - - - - - - - - - - --------------------------------------------------------------------------------
CAPEX Not to exceed $5MM per annum
- - - - - - - - - - - - --------------------------------------------------------------------------------
5
<PAGE>
- - - - - - - - - - - - --------------------------------------------------------------------------------
EBITDA (i) For the period from the beginning of the
Borrower's current fiscal year to the end of
each month (each a "Test Period") through
January 2000, commencing with the Test
Period ending July 3, 1999, maintain EBITDA
of at least 90.0% of projected EBITDA for
the Test Period as set forth in the Business
Plan; and (ii) commencing February 2000 and
as of the last day of each month thereafter,
maintain EBITDA for the rolling period of 12
consecutive months then ended of at least
90.0% of projected EBITDA for such period of
12 consecutive months as set forth in the
applicable Business Plan(s).
- - - - - - - - - - - - --------------------------------------------------------------------------------
6
FIFTH AMENDMENT TO DEBTOR IN POSSESSION
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FIFTH AMENDMENT TO DEBTOR IN POSSESSION LOAN AND SECURITY
AGREEMENT (this "Fifth Amendment") is entered into and effective as of February
15, 2000, by and among Factory Card Outlet of America Ltd., an Illinois
corporation and a debtor and debtor in possession (the "Borrower"), on the one
hand, and Foothill Capital Corporation, as Agent ("Foothill") and the financial
institutions listed on the signature page of the Loan Agreement referred to
below (such financial institutions, together with their respective successors
and assigns, are collectively referred to herein as the "Lenders"), on the other
hand. This Fifth Amendment amends certain provisions of the Debtor in Possession
Loan and Security Agreement dated as of March 23, 1999 by and among the Borrower
and Foothill, as Agent, and the Lenders (as amended by and through the date of
this Fifth Amendment, and as hereafter amended and/or restated from time to
time, the "Loan Agreement"). Capitalized terms used herein and not otherwise
defined shall have the same meanings herein as in the Loan Agreement.
BACKGROUND
----------
This Fifth Amendment is entered into to amend certain of the provisions
governing certain of the covenants described in the Loan Agreement and Schedule
7.21 thereto, increasing the monthly collateral management fee payable by the
Borrower, adding an Event of Default, and amending certain other provisions, all
in accordance with the terms and conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower, the Agent and the
Lenders hereby agree as follows:
1. Amendments to Loan Agreement.
----------------------------
(a) Amendment to Subsection 1.1. Subsection 1.1 of the Loan Agreement
is hereby amended by inserting the following definition alphabetically therein:
"'Key Managers' means William Freeman, the President
and Chief Executive Officer of the Borrower, Gary
Rada, an Executive Vice President and General
Merchandising Manager of the Borrower and Glen
Franchi, an Executive Vice President and Chief
Operating Officer of the Borrower."
(b) Amendment to Subsection 2.17(f). Subsection 2.17(f) of the Loan
Agreement is hereby amended by deleting the term "$7,000" appearing therein and
inserting in lieu thereof the term "$10,000."
1
NY2:\3087185v1\44336\0003
<PAGE>
(c) Amendment to Section 8. Section 8 is hereby amended by deleting the
period at the end of existing subsection 8.24 and inserting in lieu thereof a
semi-colon followed by the word "or" and is further amended by adding the
following provision to the end of such section as a new subsection 8.25:
"8.25. If any one of the Key Managers shall cease to
hold the office(s) with the Borrower held by such Key
Manager as of January 1, 2000 or any one of the Key
Managers shall cease to perform the duties at the
Borrower performed by such Key Manager as of January
1, 2000."
(d) Amendment to Section 7.21. Section 7.21 of the Loan Agreement is
amended by deleting the existing Schedule 7.21 to the Loan Agreement and
replacing same with the Schedule 7.21 attached to this Fifth Amendment as
Exhibit A.
2. Representations and Warranties; Confirmation of
Representations, Warranties.
-------------------------------------------------------------
This Fifth Amendment has been duly authorized, executed and delivered
by the Borrower. The Loan Agreement, as amended hereby, and each of the other
Loan Documents, as amended by and through the date hereof, constitute legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms. The Borrower, by execution of this
Fifth Amendment, certifies to the Agent and each of the Lenders that each of the
representations and warranties set forth in the Loan Agreement and the other
Loan Documents is true and correct as of the date hereof, except to the extent
such representations and warranties expressly relate to an earlier date, as if
fully set forth in this Fifth Amendment, and that, as of the date hereof, no
Default or Event of Default has occurred and is continuing under the Loan
Agreement or any other Loan Document. The Borrower acknowledges and agrees that
this Fifth Amendment shall become a part of the Loan Agreement and shall be a
Loan Document. The Borrower further acknowledges and agrees that the Agent and
the Lenders have acted in good faith in entering into this Fifth Amendment.
3. Conditions Precedent. The obligation of the Agent and the Lenders to
execute this Fifth Amendment and make the accommodations to the Borrower
described herein is subject to the following conditions, as determined by the
Agent and the Lenders in their sole discretion:
(a) This Fifth Amendment shall have been executed and delivered by each
of the parties hereto;
(b) No Default or Event of Default shall have occurred under the Loan
Agreement, as amended hereby; and
(c) The Borrower shall have paid to the Agent, for the benefit of the
Lenders, an amendment fee of $25,000 (the "Amendment Fee"). The Amendment Fee
shall be fully earned when paid and shall not be repaid to the Borrower under
any circumstances.
2
<PAGE>
4. No Novation; Effect; Counterparts; Governing Law.
------------------------------------------------
Except to the extent specifically amended hereby, the Loan Agreement
and each of the other Loan Documents shall be unaffected hereby and shall remain
in full force and effect; this Fifth Amendment shall not be deemed a novation of
the Loan Agreement or any other Loan Document. The Borrower hereby acknowledges,
confirms and ratifies its obligations under the Loan Agreement and each of the
other Loan Documents. This Fifth Amendment may be executed in any number of
counterparts, and by the different parties on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all the
counterparts shall together constitute one instrument. This Fifth Amendment
shall be governed by the internal laws of The Commonwealth of Massachusetts
(without reference to conflicts of law principles) and the United States
Bankruptcy Code and shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Borrower acknowledges that the reasonable out-of-pocket expenses of the Agent
and the Lenders incurred in connection with the preparation, execution and
delivery of this Fifth Amendment shall be "Lender Group Expenses," as such term
is defined in the Loan Agreement.
5. Construction.
------------
The Borrower, by execution hereof, acknowledges and confirms that for
all purposes of the Loan Agreement and the other Loan Documents, the term "Loan
Agreement" shall mean the Loan Agreement as amended by and through the date of
this Fifth Amendment and as further amended and/or restated from time to time
hereafter.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fifth
Amendment to Loan and Security Agreement as a sealed instrument as of the date
first above written.
FACTORY CARD OUTLET OF AMERICA,
LTD.
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
FOOTHILL CAPITAL CORPORATION, for
itself and as Agent for the Lenders
By:
----------------------------------
(Title)
PARAGON CAPITAL, LLC, as a Lender
By:
----------------------------------
(Title)
4
<PAGE>
EXHIBIT A
---------
5
SEPARATION AGREEMENT
This Separation Agreement ("Agreement") between FACTORY CARD OUTLET
CORP., a Delaware corporation (the "Company"), and STEWART M. KASEN (the
"Executive") shall be effective October 8, 1999.
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 Company's Severance Pay Plan (the "Severance Plan") (a copy
of which is attached hereto 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 October 8, 1999 (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, if any,
of the Company for which Executive served in such capacity, and 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 has ceased to
perform any duties or be entitled to or eligible for any compensation or
benefits except as expressly provided in this Agreement. As outlined below, the
Company offers and Executive accepts the following special severance package.
2. Severance Package.
-----------------
(a) Commencing with the first payroll period following the
Separation Date and upon expiration of the seven (7) day revocation period in
accordance with paragraph 8 hereof, and continuing for twelve (12) months (the
"Severance Period") thereafter the Company shall pay Executive an amount equal
to $320,000 annual base salary in bi-weekly in installments of $12,307.70 (the
"Severance Pay") consistent with the Company's ordinary payroll practices.
NY2:\14056773\2\54497.0003
<PAGE>
(b) Bonuses.
-------
(i) If Executive would have otherwise been
entitled to receive a Management Incentive Bonus for the fiscal year
ending January 29, 2000, Executive shall receive a lump-sum payment
equal to that amount prorated in accordance with the guidelines set
forth in the Company's "Fiscal Year 1999 Management Incentive
Program, Officer Group" (Such pro-ration calls for application of a
fraction the numerator of which is the number of completed months of
service during the fiscal year and the denominator of which is equal
to number of months in the fiscal period, which equals .667 for
Executive). Such amount, if any, shall be paid to Executive
concurrently with the Company's payment of such bonus for fiscal year
1999 to other participants in the Management Incentive Bonus Program,
subject only to the conditions contained in that program.
(ii) If Executive would have otherwise been
entitled to receive a Retention Bonus pursuant to the Company's
"Retention Bonus Program for Officers" upon the Company's receipt of
final approval of a Plan of Reorganization from the applicable
judicial authority, Executive shall receive such Retention Bonus at
the same time, in the same manner and subject to the same terms and
conditions as other participants in such plan.
(c) The Company shall continue Executive's medical insurance
coverage (as in effect immediately prior to the Separation Date) until the
earlier of (i) twelve (12) months 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 each installment of
Executive's Severance Pay shall be reduced by an amount equal to the portion of
the periodic cost for such coverage that was payable by Executive immediately
prior to the Separation Date consistent with the Company's ordinary payroll
practices. 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 eighteen (18) months
following the end of the twelve (12) month Severance Period and, later, to
convert such benefits to an individual policy pursuant to and consistent with
COBRA. Executive will be provided with a separate notice of his COBRA rights at
the end of the Severance Period consistent with and to the extent required by
COBRA.
(d) 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 sixty (60) days after the Separation Date.
2
<PAGE>
(e) 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.
(f) To the extent any stock option granted to Executive by the
Company had become exercisable as of the Separation Date, such stock option may
be exercised to the extent allowed under the applicable plan and grant document.
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 options.
(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.
3. Restrictive Covenants.
---------------------
(a) Executive hereby agrees that during the term of the
Employee's employment with the Company and for a period of one (1) calendar year
thereafter (the "Restriction Period"), the Executive will not, singly, jointly,
or as a partner, member, consultant, or agent of any partnership, or as an
agent, consultant, or stockholder of any other corporation or entity, or as an
investor of more than five percent (5%) of the voting stock of any entity, or in
any other capacity, directly, indirectly or otherwise beneficially:
(i) Own, manage, operate, join in, control or
participate in the ownership, management, operation, or control of,
or work for (as an employee, consultant, independent contractor or
otherwise), or permit the use of his name by, or provide financial or
other assistance to, or be connected in any manner with, any of the
following (each a "Competitive Business"): (1) any retailer located
anywhere in the Restricted Area (as hereinafter defined) which
generates thirty-five percent (35%) or more of its gross revenues
from the sale, anywhere in the Restricted Area, of greeting cards,
party goods, gift wrap accessories, stationery and/or any other
products or services which materially reproduce, incorporate or copy
any of the products or services which are offered or developed for
marketing by the Company during the term of the Employee's employment
with the Company ("Competitive Products") or which offers greeting
cards for sale in the Restricted Area under a "one price" strategy at
a price per card of $.39 or less or under a "half-off" strategy at a
price per care of 2/$1.00 or less, or (2) any retailer which
generates thirty-five percent (35%) or more of its gross revenue from
the sale of Competitive Products anywhere in the Restricted Area;
(ii) Induce or attempt to induce any person who, during the
term of Executive's employment with the Company, is an employee,
representative, consultant, agent or supplier of the Company, to
terminate his, her or its employment or relationship with the Company
or to violate the terms of any agreement between said representative,
agent, consultant, employee or supplier and the Company, or hire or
attempt to hire any employee of the Company who has left the
3
<PAGE>
employment of the Company within sixty (60) days after the
termination of such employee's employment with the Company; or
(iii) Induce or attempt to induce any person, business or
entity which is or was a customer of the Company at any time during
the term preceding the effective date of this Agreement to terminate
any written or oral agreement or understanding with the Corporation
or to become a customer of any person, corporation, partnership or
other entity which engages in any Competitive business.
(b) For purposes of Section 3(a) hereof, "Restricted Area" means
the United States (and any of its territories), Canada and Mexico.
(c) If the Employee violates any of the restrictions contained in
Section 3(a) above, the Restriction Period automatically shall be increased by
the period of time from the commencement of any such violation until such time
as the Executive has cured such violation.
(d) Executive acknowledges and agrees that his employment by the
Company under this Agreement necessarily involves him understanding and having
access to certain trade secrets and other confidential information pertaining to
the business of the Company and any affiliates. Accordingly, Executive agrees
that for a period of two (2) years following the Separation Date, Executive
shall not, without the express written consent of the Board or a person
authorized thereby, directly or indirectly, disclose to any person, corporation
or entity or use or knowingly permit to be so disclosed or used, for the benefit
of any person, corporation or entity, or himself, any material confidential
information obtained by the Executive while in the employ of the Company with
respect to any of the Company or any of the affiliates' products, customers, or
current or future plans, the disclosure of which the Executive knows or should
reasonably believe will be damaging to the Company; provided, that such
confidential information shall not include any information known or available
generally to the public (other than as a result of unauthorized disclosure by
the Executive). This provision is intended only to prevent unauthorized
disclosure of material confidential information and is not intended to preclude
the Executive from securing other employment following the Separation Date
except as subject to such restrictions on such other employment as set forth in
subparagraph (a) of this section.
(e) Upon the Separation Date:
(i) to the extent within his possession or control, the
Executive shall surrender and deliver to the Company or its
authorized representative all files, figures, calculations, letters,
papers, records, proposals, listings, brochures, manuals,
instruments, drawings, designs, programs, plans or statistics, or any
copies thereof, any information or instruments derived therefrom, or
any other similar documents or information f any type or description,
however such information might be obtained or recorded and on
whatever medium such information may be contained, arising out of or
in any way relating to the business of affairs of the Company or any
affiliate or obtained as a result of or in connection with the
Executive's employment by the Company or any affiliate; and
4
<PAGE>
(ii) the Executive shall not be entitled to retain a copy
of any document or information referred to in section (i) above; and
(iii) Executive shall cease to represent himself as being
in any way connected with, or interested in the business of, the
Company or any affiliate.
(f) Executive agrees and acknowledges that the Company does not
have any adequate remedy at law for the breach or threatened breach by the
Executive of any of the provisions of this Section 3 and agrees that the Company
will be entitled to injunctive relief (without proof of monetary or immediate
damage and without any bond or other security being required) to bar Executive
from such breach or threatened breach in addition to any other remedies which
might be available to the Company at law or in equity. If, at any time,
Executive violates, to any material extent, any of the covenants or agreements
set forth in this Section 3, the Company shall have the right to immediately
terminate all of its obligations to make any further payments under Section 2.
4. 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 Severance Plan or any other written
or oral agreement, any change in Executive's employment status, any benefits or
compensation, any tortuous 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
5
<PAGE>
Released Parties which Claim has been released pursuant to Section 4(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 personal benefit to which he is not entitled, or (iii) any obligation
of Executive with respect to Section 3 of this 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 4(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.
5. 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.
6
<PAGE>
6.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.
7.Voluntary Agreement. Executive acknowledges and represents that he
(i) has read this Agreement, (ii) has had the opportunity to consult 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 twenty-one (21) days to fully
consider entering into this Agreement before its execution.
8.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 this Agreement 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.
9.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.
10. 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 confidential the existence, terms and conditions of this
Agreement; and except that Executive may inform any prospective employer that
7
<PAGE>
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.
11. Governing Law; Disputes. This Agreement shall be governed by, and
construed and enforced in accordance with the Employee Retirement Income
Security Act of 1974 ("ERISA") to the extent applicable and, 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.
12. 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 or
Senior V.P. of Human Resources
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Neal Aizenstein, Esq.
8
<PAGE>
If to Executive:
Stewart M. Kasen
60 East Square Lane
Richmond, Virginia 23233
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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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 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.
9
<PAGE>
18. 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.
19. Assignment of Interests. Executive warrants that he has not
assigned, transferred or purported to assign or transfer any claim of Executive
against the Company.
20. Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date set forth above.
FACTORY CARD OUTLET CORP.
By:
------------------------------------------------
EXECUTIVE:
/s/ Stewart M. Kasen
----------------------------------
Stewart M. Kasen
Acknowledged and Approved by
Factory Card Outlet Severance Pay Plan
Administrative Committee:
By:
-----------------------------------
11
<PAGE>
INDIVIDUAL ACKNOWLEDGMENT
STATE OF ILLINOIS )
) SS.
COUNTY OF DUPAGE )
On the _____ day of _______________, 199__, before me personally
appeared Steward M. Kasen, 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:
12
<PAGE>
Exhibit A
[COPY OF SEVERANCE PAY PLAN TO BE ATTACHED HERE]
SEPARATION AGREEMENT
This Separation Agreement ("Agreement") between FACTORY CARD OUTLET
CORP., a Delaware corporation (the "Company"), and FREDERICK G KRAEGEL (the
"Executive") shall be effective March 3, 2000.
RECITALS
--------
The Company and Executive desire to provide an orderly and amicable
arrangement with respect to the cessation of Executive's employment as Senior
Vice President and Chief Financial Officer and to resolve claims between parties
relating to his employment and the cessation of his employment.
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 March 3, 2000 (the
"Separation Date") as Senior Vice President and Chief Financial Officer, as an
officer of each subsidiary, if any, of the company for which Executive served in
such capacity, and 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 any capacity, including that of an employee,
independent contractor or otherwise, for the Company or any of its subsidiaries.
(b) As a result of his voluntary resignation and the cessation of
his employment, effective on the Separation Date, Executive will cease to
perform any duties or be entitled to or eligible for any compensation or
benefits except as expressly provided in this Agreement. As outlined below, the
company offers and Executive accepts the following package.
2. Package.
-------
(a) Bonuses.
-------
(i) If Executive would have otherwise been entitled to
receive a Management Incentive Bonus for the fiscal year ending
January 29, 2000, Executive shall receive a lump-sum payment equal to
that amount prorated in accordance with the guidelines set forth in
the company's "Fiscal Year 1999 Management Incentive Program, Officer
Group" (Such pro-ration calls for application of a fraction the
numerator of which is the number of completed months of service
during the fiscal year and the denominator of which is equal to
number of months in the fiscal period, which equals 1.00 for the
Executive). Such amount, if any, shall be paid to Executive
concurrently with the Company's payment of such bonus for fiscal year
1999 to other participants in the Management Incentive Bonus Program,
subject only to the conditions contained in that program.
<PAGE>
(ii) In lieu of any amount which Executive would otherwise
be entitled to under the Company's "Retention Bonus Program for
Officers" the Company agrees to pay Executive (i) $20,400 on the
Separation Date and (ii) subject to Executive compliance with the
terms of this Agreement, $20,400 upon the payment of retention
bonuses to the officers of the Company in accordance with the
"Retention Bonus Program for Officers" following the Company's
receipt of final approval of a Plan of Reorganization from the
applicable judicial authority.
(b) The Company shall continue Executive's medical insurance
coverage (as in effect immediately prior to the Separation Date) until the
earlier of (i) twelve (12) months 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 an amount
equal to the portion of the periodic cost for such coverage 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 eighteen (18) months following the end of the
twelve (12) month Package Period and, later, to convert such benefits to an
individual policy pursuant to and consistent with COBRA. Executive will be
provided with a separate notice of his COBRA rights at the end of the Severance
Period consistent with and to the extent required by COBRA.
(c) 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 sixty (60) days after the Separation Date. The company agrees to extend
the four thousand dollar ($4,000.00) monthly living expense arrangement
currently in force through the end of February.
(d) 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.
(e) To the extent any stock option granted to Executive by the
Company had become exercisable as of the Separation Date, such stock option may
be exercised to the extent allowed under the applicable plan and grant document.
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 options.
(f) 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.
3. Restrictive Covenants.
---------------------
(a) Executive hereby agrees that during the term of the
- 2 -
<PAGE>
Employee's employment with the Company and for a period of one (1) calendar year
thereafter (the "Restriction Period"), the Executive will not, singly, jointly,
or as a partner, member, consultant, or agent of any partnership, or as an
agent, consultant, or stockholder of any other corporation or entity, or as an
investor of more than five percent (5%) of the voting stock of any entity, or in
any other capacity, directly, indirectly or otherwise beneficially:
(i) Own, manage, operate, join in, control or participate
in the ownership, management, operation, or control of, or work for
(as an employee, consultant, independent contractor or otherwise), or
permit the use of his name by, or provide financial or other
assistance to, or be connected in any manner with, any of the
following (each a "Competitive Business"): (1) any retailer located
anywhere in the Restricted Area (as herinafter defined) which
generates thirty-five percent (35%) or more of its gross revenues
from the sale, anywhere in the Restricted Area, of greeting cards,
party goods, gift wrap accessories, stationery and/or any other
products or services which materially reproduce , incorporate or copy
any of the products or services which are offered or developed for
marketing by the Company during the term of the Employee's employment
with the Company ("Competitive Products") or which offers greeting
cards for sale in the Restricted Area under a "one price" strategy at
a price per card of $.39 or less or under a "half-off" strategy at a
price per card of 2/$1.00 or less, or (2) any retailer which
generates thirty-five percent (35%) or more of its gross revenue from
the sale of Competitive Products anywhere in the restricted Area;
(ii) Induce or attempt to induce any person who, during the
term of Executive's employment with the Company, is an employee,
representative, consultant, agent or supplier of the Company, to
terminate his, her or its employment or relationship with the Company
or to violate the terms of any agreement between said representative,
agent, consultant, employee or supplier and the Company, or hire or
attempt to hire any employee of the Company who has left the
employment of the Company within sixty (60) days after the
termination of such employee's employment with the Company; or
(iii) Induce or attempt to induce any person, business or
entity which is or was a customer of the Company at any time during
the term preceding the effective date of this Agreement to terminate
any written or oral agreement or understanding with the Corporation
or to become a customer of any person, corporation, partnership or
other entity which engages in any Competitive business.
(b) For purposes of Section 3(a) hereof, "Restricted Area" means
the United States (and any of its territories), Canada and Mexico.
(c) If the Employee violates any of the restrictions contained in
Section 3(a) above, the Restriction Period automatically shall be increased by
the period of time from the commencement of any such violation until such time
as the Executive has cured such violation.
(d) Executive acknowledges and agrees that his employment by the
Company under this Agreement necessarily involves him understanding and having
access to certain trade secrets and other confidential information pertaining to
the business of the Company and any affiliates. Accordingly, Executive agrees
that for a period of two (2) years following the Separation Date, Executive
- 3 -
<PAGE>
shall not, without the express written consent of the Board or a person
authorized thereby, directly or indirectly, disclose to any person, corporation
or entity or use or knowingly permit to be so disclosed or used, for the benefit
of any person, corporation or entity, or himself, any material confidential
information obtained by the Executive while in the employ of the Company with
respect to any of the Company or any of the affiliates' products, customers, or
current or future plans, the disclosure of which the Executive knows or should
reasonably believe will be damaging to the Company; provided, that such
confidential information shall not include any information known or available
generally to the public (other than as a result of unauthorized disclosure by
the Executive). this provision is intended only to prevent unauthorized
disclosure of material confidential information and is not intended to preclude
the Executive from securing other employment following the Separation Date
except as subject to such restrictions on such other employment as set forth in
subparagraph (a) of this section.
(e) Upon the Separation Date:
(i) to the extent within his possession or control, the
Executive shall surrender and deliver to the Company or its
authorized representative all files, figures, calculations, letters,
papers, records, proposals, listings, brochures, manuals,
instruments, drawings, designs, programs, plans or statistics, or any
copies thereof, any information or instruments derived therefrom, or
any other similar documents or information of any type or
description, however such information might be obtained or recorded
and on whatever medium such information may be contained, arising out
of or in any way relating to the business of affairs of the Company
or any affiliate or obtained as a result of or in connection with the
Executive's employment by the Company or any affiliate; and
(ii) the Executive shall not be entitled to retain a copy
of any document or information referred to in section (I) above; and
(iii) Executive shall cease to represent himself as being
in any way connected with, or interested in the business of, the
Company or any affiliate.
(f) Executive agrees and acknowledges that the Company does not
have any adequate remedy at law for the breach or threatened breach by the
Executive of any of the provisions of this Section 3 and agrees that the Company
will be entitled to injunctive relief (without proof of monetary or immediate
damage and without any bond or other security being required) to bar Executive
from such breach or threatened breach in addition to any other remedies which
might be available to the Company at law or in equity. If, at any time,
Executive violates, to any material extent, any of the covenants or agreements
set forth in this Section 3, the Company shall have the right to immediately
terminate all of its obligations to make any further payments under Section 2.
4. 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
- 4 -
<PAGE>
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 Severance Plan or any other written
or oral agreement, any change in executive's employment status, any benefits or
compensation, any tortuous 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
stature, 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 4(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 mad 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; and intentional tort; willful, reckless
- 5 -
<PAGE>
or grossly negligent misconduct; criminal activity; or the receipt by
Executive, directly or indirectly, of any financial or other personal
benefit to which he is not entitled, or (iii) any obligation of
Executive with respect to Section 3 of this 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 4(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.
5. No Detrimental Communication.
-----------------------------
(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. Without limiting the
generality of the foregoing, Executive agrees that, without the prior written
consent of the Company, he will not engage in discussions with or provide any
information or data relating directly or indirectly to the Company to any person
or entity which (i) is considering a potential acquisition of an equity interest
in, or substantial portion of the business or assets of, the Company or any of
its subsidiaries or (ii) has provided financing to, or is considering financing,
the Company or any of its subsidiaries.
(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.
6. 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 unreasonable 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 the Company shall
require Executive to provide than assistance or cooperation pursuant to this
Section, the Company shall pay Executive a consulting fee equal to $1,200 for
each such day; provide that clause (ii) of this sentence shall not apply to any
testimony provided by Executive at any time pursuant to this Section in
connection with any Proceeding or related deposition.
- 6 -
<PAGE>
7. Voluntary Agreement. Executive acknowledges and represents that he
(i) has red this Agreement, (ii) has had the opportunity to consult 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 twenty-one (21) days to fully
consider entering into this Agreement before its execution.
8. 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 the Agreement before the expriation of such seven-day
revocation period. If not revoked during this seven-day revocation period, this
Agreement shall remain in full force and effect.
9. 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.
10. 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 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.
11. Governing Law: Disputes. This Agreement shall be governed by, and
construed and enforced in accordance with the Employee Retirement Income
Security Act of 1974 ("ERISA") to the extent applicable and, 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 curt of competent jurisdiction located in DuPage County,
Illinois. Executive submits to the jurisdiction of any state court located in
DuPage Count, 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.
- 7 -
<PAGE>
12. 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 or
V.P. of Human Resources
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Neal Aizenstein, Esq.
If to Executive:
Frederick G. Kraegel
9 Dilton Ct.
Richmond, Virginia 23233
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.
13. 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.
14. 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.
- 8 -
<PAGE>
15. 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.
16. 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.
17. 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 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.
18. 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 supercedes all
previous oral and written agreements and all prior or contemporaneous oral
negotiations, commitments and understandings. Neither party has mad, and neither
party has relied upon, any representation or warranty in connection with this
Agreement except as expressly set forth herein.
19. Assignment of Interests. Executive warrants that he has not
assigned, transferred or purported to assign or transfer any claim of Executive
against the Company.
20. Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.
- 9 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the first date set forth above.
FACTORY CARD OUTLET CORP.
By: /s/ William E. Freeman
---------------------------------
William E. Freeman
EXECUTIVE:
/s/ Frederick G. Kraegel
------------------------------------
Frederick G. Kraegel
Witness:
/s/ William A. Beyerl
------------------------------------
William A. Beyerl
- 10 -
<PAGE>
INDIVIDUAL ACKNOWLEDGEMENT
STATE OF ILLINOIS )
) SS.
COUNTY OF DU PAGE )
On the 24 day of January, 2000, before me personally appeared
Frederick G. Kraegel, 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.
/s/ Carol A. Travis
--------------------------------------
Notary Public
Carol A. Travis, Notary
My commission expires: July 23, 2002
- 11 -
James D. Constantine
807 Crescent Blvd.
Glen Ellyn, IL 60137
February 17, 2000
Dear Jim,
I would like to confirm the job offer I made to you on February 17,
2000. It is contingent upon Factory Card Outlet (FCO) receiving your signed
acceptance of this offer by February 21, 2000 and you starting with us on or
before February 23, 2000.
Your title will be Senior Vice-President, Chief Financial Officer,
and you will report to our Chief Executive Officer, Bill Freeman. You will be a
member of our Operating Committee and our Executive Committee.
Your base salary will be $175,000 per year, which will be paid to you
on a bi-weekly basis while you are in our active employ. Your next scheduled
performance and salary review is April 1, 2001.
You will be eligible for our Management Incentive Program, with a
target annual bonus total of 40% of your base salary earnings for the bonus
period. The bonus is currently structured as follows:
o 75% of target based on our EBITDAR (earnings before interest,
taxes, depreciation, amortization and reorganization expenses
and reserves) performance versus plan.
o 25% of target based on merchandise inventory turn.
Both components are calculated separately, and do not impact the award for the
other component. Both parts can be as low as -0- and as high as double the
target percentage. Our bonus period is our fiscal year, February through
January, with any bonus payment occurring within 70 days of the end of the
fiscal year. You must be in our active employ on the last day of the respective
fiscal year in order to receive it.
You will be eligible to receive a pro-rata share of the company's
"Retention Bonus Plan" covering the period January 30, 2000 through July 29,
2000. The pro-rata share is calculated based on your start date with the
company. A copy of the plan is attached.
In the event that you are asked to leave FCO by the company, for
reasons unrelated to your disability or death, or for reasons other than breach
of trust or willful neglect by you, you will be eligible to receive the pro-rata
share of the retention bonus. You would also be eligible to receive up to twelve
months of base salary and continued medical benefits. This is after one year of
service or upon approval from the Board of Directors. These payments would begin
as soon as you signed a release that FCO would provide you that is our standard
release for Executive Officers.
You will receive four weeks of vacation per fiscal year, starting in
2000; additional vacation time would be granted based on the companies vacation
plan in place at that time. You will be eligible to join our medical, dental,
and prescription health care plan upon hire, and will be eligible for our other
benefits after meeting their respective length-of-service requirements. Those
benefits include; $350,000 of company-paid life insurance, a 401-k plan that
provides a 33.3% company-paid match to your contribution (which can be up to 6%
<PAGE>
of your gross earnings, or the legal limit on 401-k contributions, whichever is
less), six weeks of disability benefits at 100% of your pay, and long-term
disability that begins after 13 weeks at $10,000.00 per month until age 65. Each
of these benefits is regulated either by our insurance carrier or by our
procedures for the respective program. You will receive additional information
about each after you join us.
As is the case with our other Executives, your employment with FCO is
considered "at-will" and can be ended by you or FCO at any time, for any or no
reason, subject only to the conditions in this employment offer, and/or any
agreements that FCO and you may both agree to in the future.
Jim, I speak for Bill, Glen and myself when I say "Welcome to FCO!!"
We are confident that you will bring a significant amount of talent to our
executive team, talents that will help us reach our goal of being the leader in
our category. We also believe that we can provide you with both the opportunity
for personal growth, and the opportunity to obtain a significant financial
reward for you and your family. We are all looking forward to working with you.
Assuming that this offer is acceptable to you, please sign where
indicated below, and return this letter to me by fax or express mail. The
enclosed copy is for your records. If you are not able to sign this agreement
and return it to me in the next three days, please call me immediately so we can
discus the matter.
Sincerely,
/s/ William A. Beyerl
William A. Beyerl
Vice-President, Human Resources
CC: William E Freeman, Chief Executive Officer
Glen Franchi, Executive Vice-President and Chief Operating Officer.
------------------------------------------------------------------
I understand and agree to the terms of this two-page employment offer.
/s/ James D. Constantine
- - - - - - - - - - - - ------------------------------------------ ------------
James D. Constantine DATE
/s/ William A Beyerl
- - - - - - - - - - - - ------------------------------------------ ------------
William A Beyerl VP-HR, FCO DATE
2
CONSENT OF KPMG LLP
The Board of Directors
Factory Card Outlet Corp. and Subsidiary:
We consent to the incorporation by reference in the registration statements on
Form S-8 (File Nos. 33-21645, 333-22435 and 333-30437) of Factory Card Outlet
Corp. of our reports dated March 21, 2000, on the consolidated balance sheets of
Factory Card Outlet Corp. and subsidiary as of January 29, 2000 and January 30,
1999 and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the fiscal years ended January 29, 2000 and
January 30, 1999, the transition period ended January 31, 1998 and the fiscal
year ended June 28, 1997 and the related financial statement schedule, which
reports appear in this annual report on Form 10-K.
/s/ KPMG LLP
Chicago, IL
May 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 1713
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 56,142
<CURRENT-ASSETS> 59,603
<PP&E> 55,978
<DEPRECIATION> 25,419
<TOTAL-ASSETS> 90,803
<CURRENT-LIABILITIES> 40,634
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> (4778)
<TOTAL-LIABILITY-AND-EQUITY> 90,803
<SALES> 217,658
<TOTAL-REVENUES> 217,658
<CGS> 121,224
<TOTAL-COSTS> 121,224
<OTHER-EXPENSES> 120,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3049
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