UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 1, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22834
SUCCESSORIES, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2520 Diehl Road
Aurora, Illinois 60504
(Address of principal executive offices) (Zip Code)
(630) 820-7200
(Registrant's telephone number, including area code)
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
Registrant had 6,769,416 shares of common stock, $.01 par value,
outstanding as of September 9, 1998.
<PAGE>
SUCCESSORIES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
SUCCESSORIES, INC.
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
August 1, January 31,
1998 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,353,000 $ 1,751,000
Accounts and notes receivable, net 4,363,000 7,330,000
Inventories, net 11,470,000 9,749,000
Prepaid catalog expenses 674,000 1,439,000
Other prepaid expenses 1,453,000 1,307,000
Total current assets 19,313,000 21,576,000
Property and equipment, net 10,409,000 10,292,000
Notes receivable, net 216,000 292,000
Deferred financing costs 444,000 482,000
Deferred income taxes 5,339,000 5,339,000
Intangibles and other assets, net 2,509,000 2,600,000
TOTAL ASSETS $38,230,000 $40,581,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,575,000 $ 5,445,000
Accounts payable 5,170,000 4,629,000
Accrued expenses 1,328,000 1,160,000
Total current liabilities 13,073,000 11,234,000
Long-term debt 5,925,000 6,561,000
Total liabilities 18,998,000 17,795,000
Minority interest in subsidiaries 99,000 352,000
Stockholders' equity:
Common stock, $.01 par value;
20,000,000 shares authorized;
6,769,416 and 6,762,520 shares issued
and outstanding, respectively 68,000 68,000
Common stock warrants 1,584,000 1,584,000
Notes receivable from stockholders (273,000) (273,000)
Additional paid-in capital 26,155,000 26,127,000
Accumulated deficit (8,333,000) (4,999,000)
Foreign currency translation adjustment (68,000) (73,000)
Total stockholders' equity 19,133,000 22,434,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,230,000 $40,581,000
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
SUCCESSORIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net product sales $11,506,000 $13,061,000 $23,767,000 $24,889,000
Cost of goods sold 5,180,000 6,349,000 10,357,000 11,350,000
Gross profit on
product sales 6,326,000 6,712,000 13,410,000 13,539,000
Fees, royalties and
other income 378,000 306,000 696,000 610,000
Gross margin 6,704,000 7,018,000 14,106,000 14,149,000
Operating expenses 8,395,000 7,395,000 16,805,000 15,284,000
Loss from operations (1,691,000) (377,000) (2,699,000) (1,135,000)
Other income (expense):
Interest expense (330,000) (650,000) (671,000) (993,000)
Minority interest in
subsidiaries 26,000 (52,000) (10,000) (78,000)
Other, net 36,000 (71,000) 46,000 (70,000)
Total other expense (268,000) (773,000) (635,000) (1,141,000)
Loss before income tax
benefit (1,959,000) (1,150,000) (3,334,000) (2,276,000)
Income tax benefit - - - -
Net loss $(1,959,000) $(1,150,000) $(3,334,000) $(2,276,000)
Loss per share:
Basic and diluted $ (.29) $ (.23) $ (.49) $ (.45)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SUCCESSORIES, INC.
Consolidated Statement Of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Common Notes
Common Stock Paid-In Stock Receivable
Shares Amount Capital Warrants From Officers
<S> <C> <C> <C> <C> <C>
Balance,
January 31, 1998 6,762,520 $68,000 $26,127,000 $1,584,000 $(273,000)
Net loss for the period
Foreign currency transalation
adjustment
Common stock transactions:
Sales of common shares 6,896 28,000
Balance,
August 1, 1998 6,769,416 $68,000 $26,155,000 $1,584,000 $(273,000)
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency Total
Accumulated Translation Stockholders'
Deficit Adjustment Equity
<S> <C> <C> <C>
Balance,
January 31, 1998 $(4,999,000) $(73,000) $22,434,000
Net loss for the period (3,334,000) (3,334,000)
Foreign currency translation
adjustment 5,000 5,000
Common stock transactions:
Sales of common shares 28,000
Balance,
August 1, 1998 $(8,333,000) $(68,000) $19,133,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
SUCCESSORIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
August 1, August 2,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,334,000) $(2,276,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 1,369,000 1,164,000
Amortization of debt discount 59,000 495,000
(1,906,000) (617,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 2,967,000 (337,000)
Inventories (1,721,000) (201,000)
Prepaid catalog expenses 765,000 869,000
Other prepaid expenses (342,000) (606,000)
Deferred financing costs - (483,000)
Accounts payable 541,000 (546,000)
Accrued expenses 176,000 133,000
Other (99,000) (355,000)
Net cash provided by (used in)
operating activities 381,000 (2,143,000)
Cash flows from investing activities:
Purchases of property and equipment (1,243,000) (1,717,000)
Net cash used in investing activities (1,243,000) (1,717,000)
Cash flows from financing activities:
Proceeds from sales of common stock 28,000 40,000
Preferred stock dividends - (153,000)
Redemption of Series B preferred stock - (500,000)
Net borrowings on revolving credit loan 754,000 1,713,000
Proceeds from long-term debt - 8,981,000
Repayments of long-term debt (318,000) (6,899,000)
Net cash provided by financing activities 464,000 3,182,000
Net decrease in cash (398,000) (678,000)
Cash and cash equivalents,
beginning of period 1,751,000 1,173,000
Cash and cash equivalents,
end of period $ 1,353,000 $ 495,000
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SUCCESSORIES, INC.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1. DESCRIPTION OF THE BUSINESS
Successories, Inc. (formerly Celex Group, Inc.) and its subsidiaries (the
"Company") design, manufacture and market proprietary and licensed products
for business, personal motivation and golf enthusiasts. The Company considers
itself a single line of business with products that are marketed primarily
under the Successories, Winners Collection, British Links and the Golf Company
from Golf Digest trade names through direct marketing (catalog, electronic
commerce and telemarketing), retail (Company-owned stores) and wholesale
distribution (including sales to franchisees) channels. The Company operates
a chain of Successories retail stores located primarily in the United States.
The Company also operates a franchising program whereby it sells franchises to
market the Company's products under the Successories trademark.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared,
without audit, in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
matters) considered necessary for a fair presentation have been included.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
The Company's fiscal year ends on the Saturday closest to January 31.
References to the three and six months ended August 1, 1998 and August 2,
1997 refer to the thirteen and twenty-six weeks ended on the dates indicated.
The results of operations for the six months ended August 1, 1998 are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1998.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENT
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income and its components.
Comprehensive income represents the change in equity during a period from
transactions and other events from nonowner sources. Comprehensive income
consists of the following:
<TABLE>
<CAPTION>
Six Months Ended
August 1, August 2,
1998 1997
<S> <C> <C>
Net loss $(3,334,000) $(2,276,000)
Foreign currency translation adjustment 5,000 (40,000)
Comprehensive loss $(3,329,000) $(2,316,000)
</TABLE>
The adoption of this statement does not impact the Company's financial
position, results of operations or cash flows.
<PAGE>
NOTE 4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
<S> <C> <C>
Finished goods $ 8,814,000 $ 6,690,000
Raw materials 2,784,000 3,187,000
11,598,000 9,877,000
Less reserve for obsolescence (128,000) (128,000)
$11,470,000 $ 9,749,000
</TABLE>
NOTE 5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
<S> <C> <C>
Bank borrowings:
Term loan, net of debt discount of
$365,000 and $401,000 $ 6,635,000 $ 6,849,000
Revolving credit loan 5,201,000 4,447,000
Fixed rate loan, net of debt discount of
$223,000 and $246,000 277,000 254,000
Subordinated note to former owners of
British Links Golf Classics, Inc. 155,000 155,000
Capital lease obligations 232,000 301,000
12,500,000 12,006,000
Less current portion (6,575,000) (5,445,000)
Long-term debt $ 5,925,000 $ 6,561,000
On June 20, 1997, the Company entered into a new credit facility with a bank.
The new facility is comprised of a $7.5 million term loan and a revolving
credit loan that provides for maximum borrowings of $6 million from January
through June and $9 million from July through December. Borrowings under
the revolving credit loan are limited to 85% of eligible receivables plus
50% of eligible inventory, as defined, provided that from February through
April borrowings against eligible inventory are limited to $3 million. A
commitment fee of .5% is payable on the daily unused amount of the maximum
revolving credit commitment. The facility expires in June 2003 and
borrowings under the facility are secured by substantially all the assets
of the Company. The interest rates on the term loan and revolving credit
loan borrowings fluctuate based on the margin ratio, as defined, to no
higher than prime plus 1.25% and .75%, respectively. The term loan is
payable in quarterly installments of $125,000 through June 1, 1998, $312,500
from September 1, 1998 through June 1, 2000, and $375,000 thereafter.
Prepayments on the loans are required in certain cases including, among
others, equity offerings and asset dispositions. Further, the Company
must annually prepay the loans in an amount equal to 60% of excess cash
flow, as defined. As of August 1, 1998, available borrowings on the
revolving credit loan were $569,000. Warrants for 150,000 shares of the
Company's common stock were issued to the bank as part of this agreement.
These warrants were issued at exercise prices ranging from $6.19 to $9.73.
<PAGE>
In July 1997, the agreement for the credit facility was amended to include
an additional $500,000 fixed rate loan for the purpose of redeeming a
portion of the Series B cumulative convertible preferred stock. The loan
bears interest at 12% and is due in June 2003. Warrants for an additional
72,464 shares were issued to the bank in connection with this amendment at
an exercise price of $6.90.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on
capital expenditures and additional indebtedness, and restrictions on the
payment of dividends. On May 14, 1998, the agreement was amended to waive
the earnings before interest, taxes, depreciation and amortization ("EBITDA")
and interest coverage ratio covenants for the year ended January 31, 1998,
and adjust certain other covenants. The amended agreement requires that
(i) EBITDA, which is based on a rolling four quarter period, may not be less
than $4 million for the four quarters ended May 2, 1998, and increases each
subsequent quarter to $6.8 million for the four quarters ended February 3,
2001 and each quarter thereafter and (ii) the interest coverage ratio, as
defined, may not be less than 3.0 to 1.0 from May 2, 1998 through October 31,
1998, 4.0 to 1.0 at January 30, 1999, 4.5 to 1.0 at May 1, 1999 and July 31,
1999, and 5.0 to 1.0 thereafter. Further, on September 1, 1998, the
agreement was amended to waive the EBITDA covenant and two other related
covenants for the second and third quarters of fiscal 1998 and the interest
coverage ratio for the second quarter of fiscal 1998, provided that EBITDA
for the third quarter of fiscal 1998 is not less than $1.6 million. In
conjunction with the 1998 amendments, the exercise prices of the 222,464
warrants previously issued to the bank were reduced to $3.00 and their
expiration dates were extended an additional two years.
In connection with the acquisition of British Links Golf Classics, Inc.,
the Company originally issued subordinated promissory notes aggregating
$400,000. The final settlement of the acquisition reduced the amount due
on the subordinated notes to $355,000. The notes are payable in three
installments: $100,000 was paid on May 1, 1997 and September 20, 1997, and
the remaining $155,000 is due on September 20, 1998. Interest is payable at
the prime rate.
The stock options and warrants issued in conjunction with the new credit
facility and certain other financing transactions were assigned a fair value
using the Black-Scholes option pricing model. The fair value of the options
and warrants have been reflected as a discount on the debt and are being
amortized as interest expense over the terms of the related debt. Interest
expense related to these stock options and warrants amounted to $59,000 and
$495,000 for the six months ended August 1, 1998 and August 2, 1997,
respectively.
The weighted average interest rate on borrowings outstanding as of
August 1, 1998 and January 31, 1998 was 9.4% and 9.6%, respectively.
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the statements of cash flows are as follows:
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
August 1, August 2,
1998 1997
<S> <C> <C>
Cash paid during the period for:
Income taxes $ 19,000 $ 10,000
Interest 595,000 474,000
</TABLE>
<PAGE>
NOTE 7. EARNINGS (LOSS) PER SHARE
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The computations of
basic and diluted loss per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic and diluted loss
per share:
Net loss $(1,959,000) $(1,150,000) $(3,334,000) $(2,276,000)
Preferred stock
dividends and accretion - (211,000) - (540,000)
Loss available to common
stockholders $(1,959,000) $(1,361,000) $(3,334,000) $(2,816,000)
Weighted-average
shares 6,765,197 5,927,149 6,764,335 6,272,154
Basic and diluted loss
per share $ ( .29) $ ( .23) $ ( .49) $ ( .45)
</TABLE>
The diluted computations did not assume the exercise of stock options and
warrants, nor the conversion of preferred stock due to their antidilutive
effect on the loss per share.
NOTE 8. SUBSEQUENT EVENT
On September 3, 1998, the Company announced that it will focus growth on
its core motivational and self-improvement products and its two most
profitable distribution channels: direct marketing and franchised retail
stores. As a result, the Company plans to divest its golf catalog business
and convert up to 33 of its Company-owned retail locations to franchised
stores.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the consolidated financial statements and notes thereto
included elsewhere in this Report.
Successories, Inc. is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of
motivational and self-improvement products, many of which are the Company's
own proprietary designs. The Company's products include distinctive lines
of wall decor, desktop art, books, audio tapes, personalized gifts and
awards, greeting cards and mugs. In addition, the Company sells other
motivational products supplied by third parties. In-house designers create
proprietary art work and designs that can be used in conjunction with a wide
variety of products. The Company will also customize its products to fulfill
customers' special needs.
The Company's products are marketed primarily under its Successories and
Winners Collection trade names through direct marketing (catalog, electronic
commerce and telemarketing), retail (Company-owned stores) and wholesale
distribution (including sales to franchisees) channels. In October 1996,
the Company acquired the stock of British Links Golf Classics, Inc., a
catalog company selling golf-related gifts, art, wall decor and other
collectibles. In November 1997, the Company executed a license agreement
with The New York Times Company Magazine Group, Inc. to use the names Golf
Digest and The Golf Company from Golf Digest in connection with development
of retail locations and a direct mail catalog featuring golf-related wall
decor, gifts and other collectibles.
Although the Company utilizes multiple distribution channels for its
products, the Company's products have similar purposes and uses in each
channel of distribution and similar opportunities for growth. The
profitability varies among products and distribution channels. The Company
utilizes its facilities interchangeably for each distribution channel.
Furthermore, the marketing channels are directed at a single customer base
located primarily in the United States.
For the three and six months ended August 1, 1998 and August 2, 1997, direct
marketing, retail and wholesale distribution accounted for the following
percentages of the Company's net product sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Direct marketing 58% 44% 59% 50%
Retail 30% 30% 29% 30%
Wholesale distribution* 12% 26% 12% 20%
*Includes sales to franchisees
</TABLE>
The gross profit margins for retail sales attributable to Company-owned
stores are slightly lower than for direct marketing due to more
non-proprietary products being sold in the retail stores. The gross
profit margin for wholesale distribution sales, including sales to
franchisees, is lower than the other channels since these sales are
generally made at a significant discount from retail price.
On September 3, 1998, the Company announced that it will focus growth on its
core motivational and self-improvement products and its two most profitable
distribution channels: direct marketing and franchised retail stores. As a
result, the Company plans to divest its golf catalog business and convert up
to 33 of its Company-owned retail locations to franchised stores.
<PAGE>
RESULTS OF OPERATION
Three Months Ended August 1, 1998, Compared To Three Months Ended August 2, 1997
Net product sales totaled $11,506,000 for the quarter ended August 1, 1998,
compared to $13,061,000 for the corresponding quarter in 1997. The
$1,555,000 decrease was comprised of a direct marketing sales increase of
$988,000, or 17.4%, while retail sales decreased $441,000, or 11.2% and
wholesale distribution sales decreased $2,102,000, or 60.1%.
The 17.4% increase in direct marketing sales was primarily attributable to
improved response rates from the customer database and an increase in
circulation through prospective catalog mailings. Retail sales decreased
11.2% due to the planned closings of 9 underperforming locations since last
year. At August 1, 1998, the Company owned and operated 39 retail locations,
compared to 45 at August 2, 1997. Same-store sales increased by .7% as
compared to the same quarter in 1997. Wholesale distributions sales
decreased 60.1% primarily due to the loss of business from three major
accounts.
Cost of goods sold, as a percentage of net product sales, was 45.0% for the
quarter ended August 1, 1998, compared to 48.6% for the corresponding quarter
in 1997. Cost of goods sold decreased 3.6% primarily due to changes in the
channels sales mix and the impact of a moving sale in 1997 to clear out
certain older products at reduced prices prior to the Company's move to its
new facility in Aurora.
Operating expenses were $8,395,000 for the quarter ended August 1, 1998,
compared to $7,395,000 for the same quarter in 1997. Advertising expense,
including new catalogs for the European and golf markets, accounted for
$512,000 of the increase. Expenses related to post-installation improvements
in the Company's new information systems of approximately $200,000, costs
related to the expansion of the merchandising product development department
of $137,000 and additional start-up expenses for the European and golf
markets of $81,000 also contributed to the increase in 1998.
Interest expense was $330,000 the quarter ended August 1, 1998, which
represents a $320,000 decrease from the corresponding quarter in 1997.
Included in interest was the amortization of the debt discount associated
with the value of stock options and warrants issued to certain lenders.
This non-cash interest amounted to $28,000 and $308,000 for the quarters
ended August 1, 1998 and August 2, 1997, respectively.
The net loss of $1,959,000 for the quarter ended August 1, 1998 was greater
than the net loss of $1,150,000 for the quarter ended August 2, 1997
primarily due to lower wholesale distribution sales and additional operating
expenses in 1998. Preferred stock dividends and accretion reduced the 1997
loss available to common stockholders by $211,000 to $1,361,000. During
the second quarter of 1997, the Series B convertible preferred stock was
partially redeemed and the balance was converted into shares of the
Company's common stock.
Six Months Ended August 1, 1998, Compared To Six Months Ended August 2, 1997
Net product sales totaled $23,767,000 for the six months ended August 1,
1998, compared to $24,889,000 for the corresponding six-month period in 1997.
The $1,122,000 decrease was comprised of a direct marketing sales increase
of $1,767,000, or 14.3%, while retail sales decreased $762,000, or 10.1%,
and wholesale distribution sales decreased $2,127,000, or 42.5%.
The 14.3% increase in direct marketing sales was attributable to improved
response rates and marketing strategies associated with the Company's core
customer lists. In 1998 the Company began to increase its direct
marketing customer base through prospective catalog mailings which also
contributed to the sales increase. Retail sales decreased 10.1% due to the
planned closings of 9 underperforming locations. Same-store sales increased
by 1.7% as compared to the same period in 1997. Wholesale distribution sales
decreased 42.5% due to the loss of business from three major accounts.
Cost of goods sold, as a percentage of net product sales, was 43.6% for the
six months ended August 1, 1998, compared to 45.6% for the corresponding
period in 1997. Cost of goods sold decreased 2.0% primarily due to changes in
the channels sales mix and the impact of a moving sale in 1997 to clear out
certain older products at reduced prices prior to the Company's move to its
new facility in Aurora.
<PAGE>
Operating expenses were $16,805,000 for the six months ended August 1, 1998,
compared to $15,284,000 for the same period in 1997. Advertising accounted
for $295,000 of the increase, including direct marketing catalogs for the
European and golf markets of $253,000. Additional factors affecting the
increase include other start-up expenses for the European and golf markets,
and expenses related to post-installation improvements in the Company's new
information systems and expansion of the merchandising and product development
departments.
Interest expense was $671,000 the six months ended August 1, 1998, compared
to $993,000 for the corresponding period in 1997. Included in interest was
the amortization of the debt discount associated with the value of stock
options and warrants issued to certain lenders. This non-cash interest
amounted to $59,000 and $495,000 for the six-month periods ended August 1,
1998 and August 2, 1997, respectively.
The net loss of $3,334,000 for the six months ended August 1, 1998 was
greater than the net loss of $2,276,000 for the six months ended August 2,
1997 primarily due to lower wholesale distribution sales and additional
operating expenses in 1998. Preferred stock dividends and accretion reduced
the 1997 loss available to common stockholders by $540,000 to $2,816,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements are for working capital, capital
expenditures and debt service. The Company expects to rely on cash generated
from its operations, supplemented by borrowings available on the revolving
credit loan, to fund its cash requirements.
Operating activities provided cash of $381,000 for the six months ended
August 1, 1998 and used cash of $2,143,000 for the corresponding six-month
period in fiscal 1997. The improvement in the cash flows from operating
activities for 1998 was primarily attributable to a $2,967,000 decrease in
accounts and notes receivable and a $541,000 increase in accounts payable,
which together provided cash of $3,508,000. During the first six months of
1997, accounts and notes receivable and accounts payable collectively used
cash of $883,000. Inventories increased and used cash of $1,721,000 and
$201,000 in 1998 and 1997, respectively.
The decrease in accounts and notes receivable in 1998 primarily reflects
the return of approximately $926,000 of excess merchandise from a wholesale
customer in accordance with their agreement, combined with improved
collections in accounts receivable after a delay in billings in the fourth
quarter of fiscal 1997 due to a system conversion. This return of
merchandise also caused in part the increase in inventories in 1998. Other
causes for the increase in inventories include planned increases in inventory
levels to support the development and expansion of The Golf Company from Golf
Digest catalog and the pre-build of wall and desk decor products to meet the
third and fourth quarter sales demand.
Investing activities utilized cash of $1,243,000 for the six months ended
August 1, 1998, compared to $1,717,000 for the same period in 1997. Capital
expenditures were the principal use of cash. The Company installed new
point-of-sale computer systems in all of its retail locations in fiscal 1998.
The new systems cost approximately $500,000. Additionally, the Company
expects to open two Company-owned retail stores in 1998. The Company's
credit facility limits capital expenditures to $2 million for fiscal 1998
and $1 million for each fiscal year thereafter.
Financing activities provided cash of $464,000 for the six months ended
August 1, 1998, compared to $3,182,000 for the corresponding period in 1997.
On June 20, 1997 the Company entered into a new credit facility with a bank.
Borrowings on the new facility were the principal financing source of cash
in 1998 and 1997. A portion of the funds from the new credit facility were
used to payoff existing debt and redeem a portion of the Series B convertible
preferred stock in 1997. Repayments of long-term debt totaled $318,000 and
$6,899,000 for the first six months of fiscal 1998 and 1997, respectively.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on
capital expenditures and additional indebtedness, and restrictions on the
payment of dividends. On May 14, 1998, the agreement was amended to waive
the earnings before interest, taxes, depreciation and amortization ("EBITDA")
and interest coverage ratio covenants for the year ended January 31, 1998,
and adjust certain other covenants. The amended agreement requires that
(i) EBITDA, which is based on a rolling four quarter period, may not be less
than $4 million for the four quarters ended May 2, 1998, and increases each
subsequent quarter to $6.8 million for the four quarters ended February 3,
2001 and each quarter thereafter and (ii) the interest coverage ratio, as
defined, may not be less than 3.0 to 1.0 from May 2, 1998 through October 31,
1998, 4.0 to 1.0 at January 30, 1999, 4.5 to 1.0 at May 1, 1999 and July 31,
1999, and 5.0 to 1.0 thereafter. Further, on September 1, 1998, the agreement
was amended to waive the EBITDA covenant and two other related covenants for
the second and third quarters of fiscal 1998 and the interest coverage ratio
for the second quarter of fiscal 1998, provided that EBITDA for the third
quarter of fiscal 1998 is not less than $1.6 million. In conjunction with
the 1998 amendments, the exercise prices of the 222,464 warrants previously
issued to the bank were reduced to $3.00 and their expiration dates were
extended an additional two years.
At August 1, 1998 available borrowings on the revolving credit loan were
$569,000. The Company believes that internally generated funds and the
credit facility will be sufficient to meet its current operating needs and
fund debt service and anticipated capital expenditures for the next year.
SEASONALITY
The Company generally experiences peak sales in the fourth quarter of its
fiscal year (November through January) due to the holiday season, and its
lowest sales levels in its first and second fiscal quarters (February
through July). The effects of seasonality are greater in the Company's
retail operations than in its direct marketing operations. Most operating
expenses are incurred evenly throughout the year, although some selling and
administrative expenses are variable with sales. The Company's quarterly
operating results may also vary depending upon such factors as the opening
of new stores, new catalog mailings and the timing of new product
introductions by the Company. The Company's cash requirements generally
reach a seasonal peak in October to finance increased inventory levels
needed to meet third and fourth quarter sales demand.
INFLATION
The Company does not believe that inflation has had a material impact on
its operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Such forward-looking statements may be deemed to include, among other things,
statements relating to anticipated financial performance, the management
team, management's long-term performance goals, plans to divest the Company's
golf catalog business and convert retail locations to franchised stores,
programs to reduce the Company's costs and enhance asset utilization,
efficiencies realized from new systems, the Company's generation of funds
sufficient to meet its current operating needs and to fund anticipated
capital expenditures, as well as statements relating to the Company's
operational and growth strategies. Although the Company believes that
the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
accurate, and actual results could differ materially from those addressed in
forward-looking statements contained in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is, however, involved in routine litigation arising in the ordinary
course of its business and, while the results of the proceedings cannot be
predicted with certainty, the Company believes that the final outcome of
such matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits immediately following the Signatures page.
(b) No reports on Form 8-K have been filed during the three months ended
August 1, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUCCESSORIES, INC.
(Registrant)
Date: September 10, 1998 By: /s/ Arnold M. Anderson
Arnold M. Anderson
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 10, 1998 By: /s/ Steven D. Kuptsis
Steven D. Kuptsis
Senior Vice President, Administration and
Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Articles of Incorporation of Registrant (1)
3.2 Articles of Amendment to the Company's Articles of
Incorporation changing the Company's name to
Successories, Inc. (2)
3.3 Certificate of Designation creating the Company's Series A
Cumulative Convertible Preferred Stock (2)
3.4 Certificate of Designation creating the Company's Series B
Cumulative Convertible Preferred Stock (2)
3.5 By-laws of Registrant (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Series A Cumulative Convertible Preferred Stock
Certificate (2)
4.3 Specimen Series B Cumulative Convertible Preferred Stock
Certificate (2)
10.1 Form of Franchising Agreement (3)
10.4 Credit Agreement and Guaranty between the Company and
NBD Bank (5)
10.5 First Forbearance Agreement between the Company and
NBD Bank (6)
10.6 Amended and Restated Credit Agreement between the Company
and NBD Bank dated as of July 31, 1995 (7)
10.7 Lease Agreements between LaSalle National Trust Bank as
Trustee under Trust No. 107739 and Celebrating Excellence (4)
10.8 Stock Option Instrument for Arnold M. Anderson dated
November 19, 1991 (1)
10.9 Celex Group, Inc. Stock Option Plan (1)
10.10 Joint Venture Agreement with Morrison DFW, Inc. and related
documents (4)
10.11 Indemnification Agreement dated May 26, 1995 between the
Company and Arnold M. Anderson (7)
Indemnification Agreements in the form filed were also entered
into by the Messrs. James M. Beltrame, Seamas T.Coyle,
Timothy C. Dillon, C. Joseph LaBonte, Steven B. Larrick,
Michael H. McKee, Mervyn C. Phillips, Jr., Michael Singletary,
Guy E. Snyder and Peter C. Walts
10.12 First Amendment to the Credit Agreement between the Company and
NBD Bank dated as of September 25, 1995 (8)
10.13 Second Amendment to the Credit Agreement between the Company
and NBD Bank dated as of February 7, 1996 (9)
10.14 Form of Subordinated Note, Common Stock Purchase Warrant and
Subordination Agreement relating to issuance of $1,500,000
Subordinated Notes and Warrants to purchase 120,000 shares of
the Company's Common Stock (9)
10.15 Common Stock Option Agreement granted to Arnold M. Anderson and
Incentive Stock Option Agreement granted to Arnold M. Anderson (9)
10.16 Common Stock Option Agreement granted to James M. Beltrame and
Incentive Stock Option Agreement granted to James M. Beltrame (9)
10.17 Third Amendment to the Credit Agreement between the Company
and NBD Bank dated as of May 2, 1996 (9)
10.18 Employment Agreement with Arnold M. Anderson dated March 1,
1996 (10)
10.19 Employment Agreement with James M. Beltrame dated June 1, 1996
(10)
10.20 Employment Agreement with Michael H. McKee dated June 1, 1996
(10)
10.21 Common Stock Option Agreement granted to James M. Beltrame
dated June 17, 1996 (10)
10.22 Agreement and Plan of Merger among Successories, Inc., British
Links Acquisition Corp., British Links Golf Classics, Inc.,
David J. Houston and Michael McArthur dated October 1, 1996 (11)
10.23 Regulations S Securities Subscription Agreement between
Successories, Inc. and Seacrest Capital Limited and Farring
Capital Limited dated September 16, 1996 (2)
10.24 Registration Rights Agreement dated as of December 17, 1996,
by and among Successories, Inc., Infinity Investors Limited
and Seacrest Capital Limited (2)
10.25 Form of Subordinated Note Extensions, Stock Options and
Subordination Agreement relating to the extension of $1,250,000
of Subordinated Notes, and options to purchase 125,000 shares
of the Company's Common Stock (2)
10.26 Fourth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of December 16, 1996 (12)
10.27 Fifth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of December 17, 1996 (12)
10.28 Sixth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of January 30, 1997 (12)
10.29 Credit Agreement between the Company and The Provident Bank
dated as of June 20, 1997 (13)
10.30 First Amendment to Credit Agreement between the Company and
The Provident Bank dated as of July 16, 1997 (13)
10.31 Lease Agreement between LaSalle National Trust, N.A. as
Trustee under Trust No. 120358 and Celex, Group, Inc. (14)
10.32 Second Amendment to Credit Agreement between the Company and
the Provident Bank dated as of May 14, 1998 (14)
21.1 Subsidiaries (4)
27.1 Financial Data Schedule (filed herewith)
_____________________________
(1) Previously filed with Registration Statement on Form SB-2,
No. 33-76530C filed on August 17, 1993, and incorporated herein
by reference.
(2) Previously filed with Registration Statement of Form S-3,
No. 333-19313, and incorporated herein by reference.
(3) Previously filed with Post-effective Amendment Number 1 to the
Registration Statement of Form SB-2, No. 33-67530C filed on
January 19, 1994, and incorporated herein by reference.
(4) Previously filed with the Annual Report on Form 10-K for the year
ended April 30, 1994 and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter
ended July 31, 1995 and incorporated herein by reference.
(6) Previously filed with the Company's Form 8-K on June 7, 1995,
reporting Date of Event May 26, 1995, and incorporated herein
by reference.
(7) Previously filed with the Annual Report on Form 10-K for the year
ended April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q for the quarter
ended October 28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for
the year ended February 3, 1996, and incorporated herein by reference.
(10) Previously filed with the Company's Form 10-Q for the quarter ended
August 3, 1996 and incorporated herein by reference.
(11) Previously filed with the Company's Form 10-Q for the quarter ended
November 2, 1996 and incorporated herein by reference.
(12) Previously filed with the Company's Annual Report on Form 10-K for
the year ended February 1, 1997, and incorporated herein by reference.
(13) Previously filed with the Company's Form 10-Q for the quarter ended
August 2, 1997, and incorporated herein by reference.
(14) Previously filed with the Company's Form 10-Q for the quarter ended
May 2, 1998, and incorporated herein by reference.
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