SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended January 31, 1998
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)
Registrant's telephone number, including area code: (630) 820-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock
(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
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.
The aggregate market value of the $.01 par value Common Stock held by non-
affiliates of the Registrant on April 30, 1998, based upon the last reported
sale price on that date on the Nasdaq National Market of $5.50 per share,
was approximately $31,140,000.
Registrant had 6,765,081 shares of $.01 par value Common Stock, outstanding as
of April 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days of January 31, 1998, are incorporated by reference
into Part III hereof.
PART I
Item 1. Business
General
Successories, Inc. ("Successories" or the "Company") 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. Company
personnel 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 majority of the Company's sales are derived from proprietary products that
have been internally developed, designed, or customized. All products are
designed to have a positive motivational or self-improvement theme that can be
used to reinforce basic business goals such as customer service, attitude and
teamwork, or to recognize achievement and good performance. The Company's
products also appeal to organized sports teams, athletes and
individuals for motivational or inspirational purposes, and for gifts.
The Company has a wide range of customers, including Fortune 500 companies,
mid-sized and small businesses, sole proprietors, entrepreneurs, sales people,
schools, athletic organizations and individuals. The Company's products are
marketed primarily under its Successories trade name through direct marketing
(catalog, electronic commerce and telemarketing), retail sales (Company-owned
stores), and wholesale distribution (including sales to franchisees).
As of January 31, 1998, there were 82 Successories retail locations, 41 of
which were Company-owned and 41 of which were franchised. For the fiscal year
ended January 31, 1998, the Company mailed 12.2 million catalog pieces.
The operating subsidiaries (the "Subsidiaries") of the Company commenced
operations in 1985 and their original owners included certain executive officers
and directors of the Company. In October 1990, Primus Development Group II Ltd.
("Primus") acquired in excess of 90% of the stock of the Subsidiaries through a
share exchange. The Company was formed as a wholly-owned subsidiary of
Primus and, in February 1992, Primus merged into the Company. In March 1991
and April 1993, the Company acquired the remaining outstanding stock of the
Subsidiaries through share exchanges.
Products
A majority of the Company's sales are derived from proprietary products which
either have been internally developed or designed, or individually customized.
All products are designed to have a positive motivational or self-improvement
theme which can be used in businesses to reinforce basic business goals such
as customer service, attitude and teamwork, to recognize achievement and good
performance. The Company's products also appeal to many individuals for
both personal and professional motivation and for gifts.
As of January 31, 1998, the Company offered approximately 4,800 stock-keeping
units ("SKUs"). Successories retail stores generally carry an average of 850
SKUs while kiosks carry an average of 550 SKUs. The Company's Successories
catalog carries approximately 420 SKUs in its 40-page version and 550 SKUs in
its 52-page edition.
The Company's proprietary wall decor product line includes dramatic photography
and other art developed, designed or customized in-house and printed on high-
quality coated paper stock with various motivational captions. Company
designers give each grouping of wall decor products a unique, uniform overall
appearance, including consistent visual themes, a range of predominant colors
and distinctive border design and lettering, thereby providing each grouping
with a distinctive Trade Dress. The prints within each product grouping are
also similar in size. Most framed art comes in an aluminum frame with an
electroplated high-gloss black finish. The Company recently began offering
selected products framed in wood and intends to expand the number of wood-
framed products in the future. High-quality tempered glass is used for
safety reasons and to protect against damage.
The Company's wall decor includes framed and unframed lithographs in various
sizes ranging from 16-inch by 20-inch to 24-inch by 30-inch. The Company's
merchandise is categorized into the product "groupings" that convey a specific
theme and Trade Dress.
The Company markets smaller versions (5-inch by 7-inch) of its wall decor as
well as other products designed to be placed on desktops and countertops.
In addition, mini-sized framed lithographs and mouse pads are marketed. All
desktop products contain motivational words and/or images similar to those
used for wall decor.
All books and tapes sold by the Company are specifically selected for their
motivational or inspirational content and include those published by the
Company as well as by third parties. The Company markets collections of
motivational or inspirational quotations containing illustrations by Company
artists, and educational books for sales, customer service and human resource
professionals.
The Company offers a wide variety of customized products to its customers.
In-house custom capabilities include hot-stamping, screen-printing, and
engraving for logos and personalized messages. Etched brass and crystal
products are also available. Some of the products with customized features
include employee awards, promotional items and corporate gifts.
While Successories retail stores typically carry many of the Company's
proprietary products, they also carry a variety of products purchased
from outside vendors.
In October 1996, the Company acquired 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 the
development of retail locations and a direct mail catalog featuring golf
related wall decor, gifts and other collectibles. The Company intends to expand
upon the line of proprietary products acquired in the British Links transaction
by the development and expansion of The Golf Company from Golf Digest catalog
and retail stores.
Although the major product category is wall decor, the Company also sells
watches, pens, wall plaques, clocks, chairs, lamps, books, planters, keepsake
wooden boxes, display racks and cabinets, glasses, mugs, jewelry and other
related products.
Product Development
The Company tries to expand its most popular product lines by offering new
items with each new catalog version and by creating new product lines that
are distinctive in appearance from existing lines.
Sales and Marketing
The Company generates revenue through direct marketing, Company-owned retail
stores, franchise stores, wholesale distribution and licensing agreements.
The Company believes that each one of these channels is an efficient way to
reach a specific segment of the customers. Customers are categorized as
follows:
- corporate buyers including executives, sales managers, human resource
managers and production managers of larger corporations,
- entrepreneurial buyers including small business owners, home office
businesses, sales professionals, and
- consumers who are primarily purchasing the Company's products for
themselves or as a gift for the end user.
The Company believes that the optimal way to reach its diverse customer base
is to market its products through several distribution channels. In addition,
the Company believes that its different distribution channels provide numerous
benefits in cross-marketing. For example, retail stores allow potential
customers to view, first-hand, the quality of the product offerings which
may lead to future catalog sales. In addition, retail stores act as a
source of new customers for the Company's mailing list.
For the fiscal year ended January 31, 1998, direct marketing sales accounted
for approximately 48% of the Company's product sales, while retail sales
from Company-owned stores were approximately 31% of the total. Wholesale
distribution sales, including product sales to franchisees, were
approximately 21% of the Company's product sales.
The Company's revenue base is comprised of a wide range of customers including
Fortune 500 companies, mid-sized and small businesses, corporate management
personnel, athletic and educational organizations and retail customers. No
individual customer accounted for more than 10% of the Company's net sales
during the fiscal year ended January 31, 1998.
The Company emphasizes customer service to achieve its goal of producing a
high level of customer satisfaction. All merchandise sold to the Company's
direct marketing and retail customers may be returned for any reason.
Direct Marketing
Through the use of its Successories catalogs, the Company targets sales
managers, executives of small and medium-sized businesses, meeting planners,
human resource managers and corporate training managers who have purchased or
shown a willingness to purchase the Company's products in the past. These
customers use the Company's products to reinforce important work themes, to
motivate and recognize employees, and as gifts at meetings and conventions.
In addition, the Company is constantly prospecting for new customers by
mailing its catalogs to prospective customers which have favorable
demographic profiles or purchasing patterns.
The Company's catalog features the entire line of proprietary products and
some third-party products. The two types of catalogs currently being mailed
are a 52-page version mailed to existing customers and catalog requesters
and a 40-page version mailed to individuals on rented lists with the
objective to acquire them as new customers.
The Company maintains a large proprietary in-house database. Building on this
foundation, the Company maintains an ongoing prospecting effort by testing
various mailing lists and evaluating the recipient's responsiveness to the
Company's product offerings. When a prospect makes a purchase, they are
promoted to the 52-page catalog using selection criteria based on purchase
history. A group of corporate sales representatives handle larger corporate
accounts through telemarketing. During the fiscal year ended January 31,
1998, the Company mailed approximately 9.7 million Successories catalogs.
In October 1996 the Company acquired the stock of British Links Golf Classics,
Inc., a catalog company specializing in golf-related wall decor, gifts and
other collectibles. The Company believes that due to the popularity of golf
and its acceptance in the business community, it will be able to generate
incremental sales of golf-related products from the Company's in-house
mailing list of business executives, entrepreneurs and sales people. The
Company produced four digest-size issues of the British Links catalog, with an
average issue numbering 56 pages, and mailed approximately 2.5 million
British Links catalogs during the fiscal year ended January 31, 1998.
In addition, the Company recently mailed the first issue of The Golf Company
from Golf Digest catalog. The catalog was introduced as a full-sized
version and contains approximately 40 pages.
Retail Sales
The Company-owned retail locations consist of stores and kiosks primarily
located in shopping malls. The Company's Successories stores were introduced
in early 1991. As of January 31, 1998, the Company owned a total of 41
retail locations, including 34 stores and 7 kiosks. The following table
shows the number of Company-owned retail locations that were opened, closed
and in operation for each of the last three fiscal years.
<TABLE>
<CAPTION>
In Operation
at End of
Fiscal Year Ended Opened Closed Fiscal Year
<S> <C> <C> <C>
February 3, 1996 6 3 54
February 1, 1997* 9 14 49
January 31, 1998 3 11 41
</TABLE>
* Includes acquisition of one British Links store.
As of January 31, 1998, the Company's retail locations are located in Canada
and the following states:
<TABLE>
<C> <C> <C>
Arizona Indiana Oklahoma
California Maryland Pennsylvania
Colorado Massachusetts Texas
Florida Michigan Virginia
Georgia Minnesota Wisconsin
Illinois New York
</TABLE>
Kiosks are self-contained, 10' by 12' retail displays located in the center
aisle of an enclosed shopping mall where all four sides of the display are
available for showing products and conducting sales. The center of the kiosk
is utilized for storage. Because of the lower costs associated with
establishing, furnishing and stocking such a location, these types of
locations offer a relatively inexpensive way for both the Company and its
franchisees to test mall locations prior to opening a larger store.
Depending on seasonality, location, size of market and build-out costs, the
Company generally expects a new store to achieve profitability within twelve
months of opening.
The retail division plans currently call for moderate expansion in fiscal
1998, with the focus being on profit enhancement at existing Company-owned
stores and kiosks, rather than on new store sales.
Wholesale Distribution
The Company sells products to a number of wholesale customers. In 1996, the
Company designed and introduced the Winnersr Collection brand for wholesale
distribution. Wholesale customers include other direct marketing
distributors and distributors who have acquired distribution rights for
the Company's products in other countries. Included within this category
are sales to franchisees and royalty income.
One of the Company's wholesale distribution strategies is to broaden its
product distribution through sales to franchisees. Product sales to
franchisees are typically made at a discount to retail or at product
cost plus a certain percentage.
The Company licenses some of its proprietary images to third parties for use
in their products for which the Company receives a royalty payment. These
third parties generally market office supply products such as pens,
notebooks and note cubes either through retail stores or through direct
marketing catalog sales.
Franchising Program
The Company has devised a strategy whereby the development of Company-owned
stores is concentrated in major metropolitan areas with a base population
in excess of one million people, while franchise store development is
concentrated in areas with a base population of fewer than one million
people. The Company believes that it can operate Company-owned stores
most efficiently and profitably in areas where it has the ability to operate
multiple units in relatively close proximity. The operation of several
stores in a metropolitan area "cluster" allows the Company to benefit from
management and distribution efficiencies resulting from providing products
and services to several locations at once, as opposed to providing such
services to individual stores. In geographic areas where the population
and demographics suggest a single retail location rather than several
locations in a cluster, the Company may seek to place a franchisee to act
as an owner/operator. As an owner/operator, the individual franchisee has
the ability to service an individual retail operation more efficiently than
the Company by maintaining lower overhead costs than those required by a
single, isolated Company-owned store.
Prospective franchisees frequently approach the Company on an unsolicited
basis. Franchisees must meet specific qualification criteria and are pre-
screened to substantiate level of interest and compliance with certain
minimum net worth and liquid asset tests. Prospective franchisees who
meet the initial qualification requirements are invited to the Company's
headquarters for extensive interviews with Company executives, who must
approve all franchisees. Upon approval, franchisees sign a franchise
agreement and pay a franchise fee prior to participating in the franchise
training and orientation program.
As of January 31, 1998, there were 41 franchised retail stores. The following
table shows the number of franchised stores that were opened, closed and in
operation for each of the last three fiscal years.
<TABLE>\
<CAPTION>
In Operation
at End of
Fiscal Year Ended Opened Closed Fiscal Year
<S> <C> <C> <C>
February 3, 1996 9 7 43
February 1, 1997 6 2 47
January 31, 1998 4 10 41
</TABLE>
The Company provides its franchisees with a comprehensive system of business
training, education, site selection assistance, professional marketing,
promotion and advertising programs and other forms of franchise support.
Franchise Operations
All franchisees are required to comply with Company-established operational
policies and procedures relating to, among other things, quality of service,
training, design and decor of stores and trademark usage. The Company's
operations personnel make periodic visits to franchise stores to ensure that
the stores are operating in conformity with its standards. The Company
retains the right to receive an assignment of any leasehold interest and gain
possession of the store if the franchisee fails to comply with the Company's
operational policies and procedures or upon expiration of the franchise
agreement.
The Company provides new franchisees with training at both the Company's
headquarters and at Company-owned retail locations focused on the various
aspects of store management including marketing fundamentals, financial
controls and product knowledge. In addition, the Company provides ongoing
employee training to franchisees and their managers, as well as its own
managers.
Various factors are considered in evaluating sites including trade area
demographics, availability and cost of space, location of competitors and
total retail sales in a given enclosed shopping area. The Company reviews
all proposed franchise store locations and reserves the right to review
the lease terms thereof.
Franchise Agreement
The Company attracts qualified franchise owners with a low initial franchise
fee. The franchise fee for the first store is $35,000, and $30,000 for each
additional store, payable in full upon execution of a franchise agreement.
Franchisees are responsible for the costs of leasehold improvements,
inventory, furniture, fixtures, decor and certain other items including
initial working capital. The franchisee purchases for resale Company
manufactured products or products from others that are Company-approved.
Due to the proprietary nature of most of the Company's products, the
Company is the only available source for many products sold by franchisees.
Franchisees currently pay a monthly royalty to the Company of 2% of
franchise gross sales. Franchisees are further required to spend between
$5,000 and $10,000 on grand opening advertising followed by 3% of monthly
gross sales for local advertising and promotion.
The franchise agreements have an initial term of five years with an option for
the franchisee to renew for three additional, successive terms of five years
each. The agreements also provide the Company with the right to purchase the
franchisee's store assets upon termination or expiration of the franchise
agreement, and a right of first refusal if the franchise is to be sold.
The franchisee must obtain the Company's approval in all instances where there
is a sale of the franchise. The franchise agreement is granted for the
operation of a single retail store at a specified location. The Company
reserves certain rights within close proximity to franchised retail stores to
sell products through channels of distribution distinct from that of a
franchised retail business.
Manufacturing, Order Fulfillment and Distribution
The Company's manufacturing operations consist primarily of framing, product-
engraving, hot-stamping and silk screening. The Company mounts and assembles
its framed wall decor in-house and has developed a special packaging system
designed to reduce the risk of breakage in shipping.
Generally, the Company's catalog customers may choose to have their orders
sent via ground shipment (7 - 10 days), economy (4 - 6 days), express
(2 - 3 days) or next day shipment. The Company's manufacturing operations
and order fulfillment capabilities enable it to accommodate last-minute
orders for a variety of products, and to produce samples of products for
existing and potential customers. These capabilities further enable the
Company to produce and test products before inclusion in the distribution
channels.
The Company depends upon outside suppliers for many items such as mugs,
stationary and components for framing, all of which are readily available
from a number of suppliers. In addition, the Company outsources its film
work and printing, although its creative staff works closely with outside
film houses and printers to assure that all work is done to the Company's
specifications and satisfaction.
Seasonality
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality."
Competition
The industry supplying motivational, self-improvement and custom awards is
highly competitive and fragmented, with limited barriers to entry. The
primary bases for competition are customer service, selection, price, quality
and name recognition. Although certain classes of products offered by the
Company such as greeting cards, mugs and books are offered by many other
companies, the Company is not aware of any other company with established
distribution channels that offers a similar range of products with
motivational and self-improvement themes.
The Company competes with other franchisors for qualified franchisees. The
Company's strategy is to attract franchisees with successful business and
management backgrounds. Franchisees are not required to have experience
in the retail industry or with the types of products offered by the Company.
Trademarks and Service Marks
The Company owns a federal registration for the service mark Successories on
the Principal Register of the United States Patent and Trademark Office ("PTO").
The Company believes the use of the service mark Successories is important in
establishing and maintaining its reputation and is committed to protecting
this service mark by vigorously challenging any unauthorized use.
Although many of the quotations, photographs and other art work used by the
Company are in the public domain and are not individually protectable under
copyright and trademark laws, the Company continually endeavors to protect
its products through exclusive licensing relationships with the owners or
subjects of various photographs by giving the products a distinctive Trade
Dress.
Employees
As of January 31, 1998, the Company employed 575 persons, 319 of whom were
employed full time. Of this total, 266 were employed at the corporate
headquarters in marketing, manufacturing, order fulfillment or administrative
capacities, and 309 were field personnel, store managers or store personnel.
The Company is not a party to any collective bargaining agreements and has
not experienced a strike or work stoppage. The Company believes that its
employee relations are good.
Item 2. Properties
The Company leases its corporate office and manufacturing/warehouse facility
in Aurora, Illinois, under the terms of a lease agreement which expires in
July 2009. The lease is for approximately 20,000 square feet of office space
and 110,000 square feet of manufacturing/warehouse space.
The Company leases all Company-owned stores from various property owners
under terms typical in an enclosed mall or strip shopping center. Lease
terms generally vary from five to ten years for stores, and six months to
one year for kiosks. None of the Company's stores leases are individually
material to the operations of the Company, and the Company expects that it
will be able to renew its leases on satisfactory terms as they expire.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Principal Occupation for Last Five Years
<S> <C> <C>
Arnold M. Anderson 53 Chairman of the Board and Director for the
Company since May 1997; prior thereto, Chief
Executive Officer, President, Chairman of
the Board and Director for the Company and
its predecessor (Primus) since October 1990;
prior thereto, Chairman and President of
the Subsidiaries.
James M. Beltrame 54 Chief Executive Officer for the Company
since May 1997, Chief Operating Officer and
President for the Company since June 1995,
Director for the Company from March 1995,
Chief Financial Officer for the Company
from March 1995 to June 1996; prior thereto,
Chief Financial Officer for RTO Enterprises
since 1992; prior thereto, Director,
Executive Vice President, Chief Financial
Officer for Restaurant Associates since 1984.
Steven D. Kuptsis 42 Senior Vice President and Chief
Administrative Officer for the Company since
September 1997; prior thereto, General
Manager of Chadwick-Miler, Inc. since 1996;
prior thereto, Senior Vice President and
Chief Operating Officer of Chadwick-Miller,
Inc. since 1995; prior thereto, Vice
President and Chief Financial Officer of
CMI Holding Corp. since 1991.
Timothy C. Dillon 35 Senior Vice President, General Counsel and
Secretary for the Company since 1993,
Director for the Company since 1995; prior
thereto, President of First American
Franchise Corporation since 1992; prior
thereto, attorney for Francorp, Inc.
Michael H. McKee 44 Senior Vice President, Creative Director
and Director for the Company and its
predecessor since October 1990; prior
thereto, Creative Director of Product
Development and Advertising for the
Subsidiaries.
John F. Halpin 44 Senior Vice President, Direct Marketing
Division for the Company since September
1996; prior thereto, Vice President of
Marketing for Foster & Gallagher, Inc.;
prior thereto, Director of Mail Order
Promotions for Encyclopedia Britannica.
Peter C. Walts 37 Senior Vice President of Business Development
for the Company and its predecessor since
October 1990; prior thereto, held various
positions with the Subsidiaries.
Jill K. Werner 42 Vice President, Retail Division for the
Company since 1996; prior thereto, held
various positions within the Company since
1993; prior thereto, principal owner of I.
M. Petite, Inc., retail store chain since
1982.
Robert P. Hayes 41 Senior Vice President, Merchandising for
the Company since April 1998; prior thereto,
Senior Vice President, Merchandising for
Sportmart Stores since February 1996;
prior thereto, Vice President, Merchandising
for MCSports since April 1993.
</TABLE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on the NASDAQ National Market under the
symbol "SCES." The following table sets forth the high and low bid prices
for the Company's common stock as reported by the NASDAQ Stock Market for the
applicable periods shown.
<TABLE>
<CAPTION>
High Low
Fiscal Year Ended February 1, 1997
<S> <C> <C>
First Quarter $9.125 $7.750
Second Quarter 8.375 5.125
Third Quarter 7.625 4.875
Fourth Quarter 8.250 6.375
Fiscal Year Ended January 31, 1998
First Quarter $7.625 $5.750
Second Quarter 6.563 5.125
Third Quarter 7.750 5.625
Fourth Quarter 8.250 5.750
</TABLE>
As of April 30, 1998, the number of holders of record of the Company's common
stock was approximately 600, and there were approximately 900 beneficial
owners of the Company's common stock. As of the same date, the bid price for
the Company's common stock was $5.50.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its earnings to finance
future growth and therefore has no present intention of paying dividends.
Under the Company's current credit facility, cash dividends are prohibited.
Item 6. Selected Financial Data
Set forth below is selected financial data for the Company as of and for each
of the last five fiscal periods. Certain prior year amounts have been
reclassified to conform with the current year presentation.
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended Nine Months Year Ended
Ended
January 31, February 1, February 3, April 30, April 30,
1998 1997 1996 1995 1994
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net product sales $ 56,821 $ 56,032 $ 35,484 $ 42,809 $ 28,594
Income (loss) before
income taxes $ 141 $ (2,347) $ (688) $ (7,745) $ 3,619
Income tax expense
(benefit) $ 54 $ (2,609) $ (1,388) $ -- $ 1,405
Net income (loss) $ 87 $ 262 $ 700 $ (7,745) $ 2,214
Preferred stock
dividends and accretion$ (741) $ (1,126) $ -- $ -- $ --
Income (loss) available
to common stockholders $ (654) $ (864) $ 700 $ (7,745) $ 2,214
Earnings (loss) per share:
Basic $ (0.10) $ (0.16) $ 0.14 $ (1.60) $ 0.57
Diluted $ (0.10) $ (0.16) $ 0.13 $ (1.60) $ 0.50
Weighted-average number of common
shares outstanding 6,283,662 5,321,179 5,144,894 4,854,004 3,916,535
Balance Sheet Data:
Total assets $ 40,581 $ 33,853 $ 32,166 $ 29,166 $ 21,790
Long-term debt $ 6,561 $ 4,094 $ 8,528 $ 8,275 $ 218
Redeemable preferred
stock $ -- $ 5,472 $ -- $ -- $ --
</TABLE>
Effective May 1, 1995, the Company changed its financial reporting year from a
fiscal year ending on April 30 to a fiscal year ending on the Saturday closest
to January 31. The period ended February 3, 1996 was a nine month period.
The changes were made to conform with retail industry reporting practices.
Item 7. 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.
The Company 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. Its 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. Company personnel also customize 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 sales (Company-owned stores), and
wholesale distribution (including sales to franchisees). In October 1996,
the Company acquired the stock of British Links Golf Classics, Inc., a
catalog company specializing in golf-related gifts and wall decor. The
Company intends to expand upon the line of golf products acquired in the
British Links transaction.
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 years ended January 31, 1998 and February 1, 1997, and the twelve and
nine months ended February 3, 1996, direct marketing, retail and wholesale
distribution accounted for the following percentages of the Company's net
product sales:
<TABLE>
<CAPTION>
Twelve Months Nine Months
Year Ended Year Ended Ended Ended
January 31, February 1, February 3, February 3,
1998 1997 1996 1996
<S> <C> <C> <C> <C>
Direct marketing 48% 49% 46% 46%
Retail 31% 34% 36% 35%
Wholesale distribution* 21% 17% 18% 19%
</TABLE>
__________________________________
*Includes sales to franchisees.
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 since
these sales are generally made at a significant discount from retail price.
Results of Operations
The following table sets forth the results of operations for the last three
fiscal years and the change from the previous year, as taken from the
Company's consolidated statements of operations. The Company's 1997 fiscal
year consisted of the 52 weeks ended January 31, 1998. The Company's 1996
fiscal year consisted of the 52 weeks ended February 1, 1997. The Company's
1995 fiscal year consisted of a nine-month period from May 1, 1995 through
February 3, 1996. The reader should note that the results of operations for
the year ended February 1, 1997 are being compared to the unaudited results
for the corresponding twelve months ended February 3, 1996.
(In thousands)
<TABLE>
<CAPTION>
Years Ended Increase (Decrease)
January 31, 1998 February 1, 1997 1998 vs. 1997
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Net product sales $56,821 100.0 $56,032 100.0 $ 789 1.4
Cost of goods sold 25,542 45.0 23,557 42.0 1,985 8.4
Gross profit on
product sales 31,279 55.0 32,475 58.0 (1,196) (3.7)
Fees, royalties and
other income 1,824 3.2 1,280 2.2 544 42.5
Gross margin 33,103 58.2 33,755 60.2 (652) (1.9)
Operating expenses,
excluding special
charge 31,089 54.7 31,751 56.7 (662) (2.1)
Special charge -- -- 2,701 4.8 (2,701) N/A
Income (loss) from
operations 2,014 3.5 (697) (1.3) 2,711 389.0
Other expenses (1,873) (3.2) (1,650) (2.9) (223) (13.5)
Income (loss) before
income taxes 141 0.3 (2,347) (4.2) 2,488 106.0
Income tax (expense)
benefit (54) (0.1) 2,609 4.7 (2,663) (102.1)
Net income $ 87 0.2 $ 262 0.5 ($ 175) (66.8)
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended Increase (Decrease)
February 1, 1997 February 3, 1996 1997 vs. 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Net product sales $56,032 100.0 $46,145 100.0 $ 9,887 21.4
Cost of goods sold 23,557 42.0 19,864 43.0 3,693 18.6
Gross profit on
product sales 32,475 58.0 26,281 57.0 6,194 23.6
Fees, royalties and
other income 1,280 2.2 938 2.0 342 36.5
Gross margin 33,755 60.2 27,219 59.0 6,536 24.0
Operating expenses,
excluding special
charge 31,751 56.7 32,513 70.5 (762) (2.3)
Special charge 2,701 4.8 -- 0.0 2,701 N/A
Loss from operations (697) (1.3) (5,294) (11.5) 4,597 86.8
Other expenses (1,650) (2.9) (1,283) (2.8) (367) (28.6)
Loss before income
taxes (2,347) (4.2) (6,577) (14.3) 4,230 64.3
Income tax benefit 2,609 4.7 1,388 3.1 1,221 88.0
Net income (loss) $ 262 0.5 ($ 5,189) (11.2) $ 5,451 105.0
</TABLE>
Year Ended January 31, 1998, Compared to Year Ended February 1, 1997
Net product sales were $56,821,000 for the year ended January 31, 1998,
compared to $56,032,000 for fiscal 1996. The $789,000 increase reflects a
20.1% increase in wholesale distribution sales, while direct marketing sales
remained constant and retail sales decreased 6.4% due to fewer Company-owned
stores. At January 31, 1998, the Company owned and operated 41 retail
locations, compared to 49 locations at February 1, 1997. During fiscal 1997
the Company opened three Company-owned retail locations and closed eleven
underperforming locations. Same-store sales showed strong improvement with
a 6.7% increase. As planned, the number of catalogs mailed during fiscal
1997 decreased 25.6% to 12.2 million. Through the implementation of more
sophisticated systems to better track its direct marketing efforts, the
Company has improved the effectiveness of its catalog mailings.
Cost of goods sold was 45.0% of net product sales for the year ended January
31, 1998, compared to 42.0% for fiscal 1996. The increase in the cost of
goods sold percentage was principally attributable to higher wholesale sales
during fiscal 1997 that have a lower gross profit margin and thus raise the
overall cost of goods sold percentage.
During fiscal 1997 the Company relocated its multiple manufacturing/
distribution facilities to a new, single facility. The Company also
internalized production of wood framing and installed a fully integrated
fulfillment conveyor system. These actions created manufacturing
efficiencies and cost savings in fiscal 1997, the full effect of which will
not be realized until fiscal 1998.
Operating expenses, excluding the special charge in fiscal 1996, declined
$662,000 for the year ended January 31, 1998. As a percentage of net product
sales, operating expenses were 54.7% for fiscal 1997, compared to 56.7% for
fiscal 1996. The reduction primarily resulted from management's ongoing cost
containment and asset enhancement efforts. Advertising, which represented
29.3% of operating expenses for fiscal 1997, decreased $1,965,000 as a
result of fewer, but more effective catalog mailings.
The Company had a provision for doubtful accounts of $425,000 for the year
ended January 31, 1998, compared to $246,000 for fiscal 1996. Included in
the fiscal 1997 provision was a $305,000 receivable due from Talking Frames
Corporation. This receivable arose from a 1995 transaction, whereby Talking
Frames Corporation had an obligation to repurchase all of the convertible
preferred stock held by the Company for $305,000. In January 1998, Talking
Frames Corporation discontinued its operations and was dissolved.
During fiscal 1996 the Company recorded a special charge of $2,701,000 which
was comprised of: a) reserve for certain costs associated with the relocation
of the Company's corporate office and manufacturing/warehouse facilities to
a new facility; b) reserve for costs associated with a plan to close certain
Company-owned stores that were underperforming; and c) write-down of the
order entry computer system in anticipation of replacing it during fiscal
1997. In fiscal 1997, the Company decided not to close two of the
aforementioned Company-owned stores and accordingly, reduced the
related reserve by $227,000.
Interest expense increased $70,000 to $1,561,000 for the year ended January
31, 1998. Included in interest for fiscal 1997 and 1996 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 $567,000 and
$308,000 for fiscal 1997 and 1996, respectively.
Income taxes were $54,000 for the year ended January 31, 1998, compared to a
$2,609,000 tax benefit for fiscal 1996. The fiscal 1996 tax benefit
primarily relates to the recognition of a portion of the net deferred tax
asset. In prior years a valuation allowance was established against the net
deferred tax asset due to the uncertainty as to whether the Company would
realize the net operating loss (NOL) carryforwards. During fiscal 1996, the
valuation allowance associated with the net deferred tax asset was reduced
by $2,635,000 to zero.
As of January 31, 1998, the Company has approximately $15,200,000 of tax net
NOL carryforwards. Approximately $2,692,000 of the carryforwards relate to
deductions arising from the exercise of non-qualified stock options. These
carryforwards comprised a large portion of the net deferred tax asset of
$5,339,000 at January 31, 1998. To the extent the NOL carryforwards and
existing deductible temporary differences are not offset by existing
taxable temporary differences reversing within the carryforward period,
the remaining NOL carryforwards are expected to be realized by achieving
future profitable operations based on the following:
1. During the past three years the Company has assembled a new, experienced
management team with the background, knowledge and incentives to grow the
business profitably.
2. Operating income significantly improved during fiscal 1997 and 1996, after
excluding the impact of the one-time special charge, as compared to fiscal
1995 and 1994.
3. The Company expects to continue to experience savings and improved earnings
from the cost containment efforts that were implemented during fiscal 1997
and prior years. Specifically, these savings are anticipated to be
achieved from: a) efficiencies and lower rent from the consolidation of
the Company's corporate headquarters and manufacturing/distribution
facilities to a single facility; b) continued realization of benefits
from the implementation of more sophisticated systems to track the
Company's direct marketing efforts, thereby resulting in more effective
catalog mailings; c) closure of Company-owned stores that were
underperforming; and d) execution of improved budgeting, forecasting and
performance monitoring techniques.
The NOL carryforwards do not begin expiring until 2009.
As indicated above, realization of the recorded net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the NOL carryforwards. Although realization is not assured,
the Company believes that it is more likely than not that the deferred tax
asset will be realized.
The Company reported net income of $87,000 and $262,000 for fiscal 1997 and
1996, respectively.
Year Ended February 1, 1997, Compared to Twelve Months Ended
February 3, 1996
Net product sales for the year ended February 1, 1997 increased 21.4% to
$56,032,000, compared to $46,145,000 for the twelve months ended February 3,
1996. Of the $9,887,000 net product sales increase, approximately 23% was
attributable to retail sales and 64% was attributable to increased direct
marketing sales. Same store sales showed strong improvement with an
increase of $1,345,000 or 9.3% for the year ended February 1, 1997, when
compared to the same period in the prior year. As of February 1, 1997, the
Company owned and operated 49 retail locations, compared to 54 locations as
of February 3, 1996. Franchise locations increased to 47 locations from 43
at February 3, 1996. The number of direct mail pieces mailed during the
twelve months ended February 1, 1997, was approximately 16.4 million.
Cost of goods sold as a percentage of net product sales was 42% for the year
ended February 1, 1997, compared to 43% for the same twelve-month period
ended in the prior year. This improvement is primarily the result of
continuing improvements in labor and overhead and streamlining the Company's
order fulfillment system.
Operating expenses, excluding the special charge, declined as a percentage of
net product sales to 56.7% for the year ended February 1, 1997, compared to
70.5% for the same twelve-month period in the prior year. The reduction in
operating expenses was primarily a result of improved management practices
and cost containment efforts, coupled with increased sales.
The Company recorded a special charge of $2,701,000 for the year ended
February 1, 1997 which was comprised of: a) reserve for certain costs
associated with the Company's relocation and consolidation of its
manufacturing and distribution facilities and its corporate offices to a
new facility; b) reserve for costs associated with a plan to close up to five
Company-owned stores that were underperforming; and c) write-down of the
existing order entry computer system in anticipation of replacing it during
the upcoming fiscal year.
Interest expense increased from $1,154,000 for the twelve months ended
February 3, 1996, to $1,491,000 for the year ended February 1, 1997. The
$337,000 increase was a result of additional borrowings.
For the twelve months ended February 1, 1997 and February 3, 1996, the Company
recorded an income tax benefit of $2,609,000 and $1,388,000, respectively,
which relates mainly to the recognition of a portion of the net deferred tax
asset. In both years the valuation allowance associated with the NOL
carryforwards was reduced.
At February 1, 1997, the net deferred tax asset was $5,375,000 after a
valuation allowance of zero. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to
expiration of the NOL carryforwards. The Company believes it is more likely
than not that the deferred tax asset from the available NOL carryforwards
will be realized. The NOL carryforwards do not begin to expire until 2009.
The Company reported net income of $262,000 for the year ended February 1,
1997, compared to a net loss of $5,189,000 for the twelve months ended
February 3, 1996.
Liquidity and Capital Resources
Net cash used in the Company's operating activities was $633,000 for the year
ended January 31, 1998, compared to $1,088,000 for fiscal 1996 and $74,000 for
fiscal 1995. The improvement in cash used in operating activities for fiscal
1997, when compared to fiscal 1996, primarily resulted from improvements in
the Company's operations. Income before taxes was $141,000 for fiscal 1997,
compared to a loss before taxes of $2,347,000 and $688,000 for fiscal 1996
and 1995, respectively. Accounts and notes receivable increased and reduced
the cash available for operations by $3,173,000 for fiscal 1997, compared to
an increase of $853,000 for fiscal 1996 and a decrease of $485,000 for fiscal
1995. Accounts payable increased by $1,138,000 in fiscal 1997, compared to a
decrease of $3,444,000 in fiscal 1996 and an increase of $380,000 in fiscal
1995.
The increase in accounts and notes receivable for fiscal 1997 primarily
resulted from delays in the billing cycle due to a system conversion that
took place in November 1997. The Company also had approximately $1.3 million
of accounts receivable due from a wholesale customer at January 31, 1998.
This customer is in the process of returning approximately $1.1 million of
excess merchandise in accordance with their agreement. The gross profit
associated with these returns has been reserved at January 31, 1998.
Investing activities utilized cash of $4,221,000 for the year ended January
31, 1998, compared to $1,125,000 for fiscal 1996 and $1,679,000 for fiscal
1995. Capital expenditures were the principal use of cash. For these three
fiscal years the Company expended funds to open new Company-owned stores and
upgrade its manufacturing/warehouse and computer equipment. The substantial
increase during fiscal 1997 was primarily attributable to (i) leasehold
improvements, furniture and equipment expenditures associated with the
Company's new corporate office and manufacturing/warehouse facility and
(ii) the installation of new order entry, inventory control, manufacturing,
fulfillment and financial systems. In fiscal 1996 the Company acquired
British Links Golf Classics, Inc. for $360,000 in cash and $900,000 in notes
payable and shares of the Company's stock.
The Company will be installing new point-of-sale computer systems for all of
its Company-owned retail locations during the year ending January 30, 1999.
The new systems are expected to cost approximately $500,000. Additionally,
the Company expects moderate growth in the number of retail stores in fiscal
1998. The Company's credit facility limits capital expenditures to $2
million for fiscal 1998 and $1 million for each fiscal year thereafter.
The new order entry, inventory control, manufacturing, fulfillment,
financial and point-of-sale systems are all Year 2000 compatible. The
Company is currently reviewing its other systems to determine if there are
any Year 2000 issues. The Year 2000 problem is the result of computer
programs being written using two digits, rather than four, to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
Year 2000, which could result in miscalculations or system failures. The
cost of addressing potential Year 2000 problems are not currently expected
to have a material impact on the Company's consolidated financial position
or results of operations.
Net cash provided by financing activities was $5,432,000 for the year ended
January 31, 1998, compared to $2,156,000 for fiscal 1996 and $1,805,000 for
fiscal 1995. On June 20, 1997, the Company entered into a new credit
facility with a bank. Borrowings on the new facility totaled $12,447,000
and were the principal financing source of cash during fiscal 1997. In fiscal
1996, the Company generated $6,382,000 from the issuance of Series A and B
cumulative convertible preferred stock. A portion of the funds from the new
credit facility and Series A and B preferred stock were used to payoff
existing debt. Repayments of debt totaled $7,286,000 for fiscal 1997,
$7,209,000 for fiscal 1996 and $3,237,000 for fiscal 1995. Included in the
total repayments for fiscal 1997 were $1,250,000 of subordinated notes due
to certain investors of the Company, including executive officers and
Directors of the Company. At January 31, 1998, the Company had total debt
outstanding of $12,006,000, with a weighted average interest rate of 9.6%.
The June 1997 credit 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 eligible inventory is 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 were
prime plus 1.25% and .75%, respectively, through August 2, 1997, and
fluctuate based on the margin ratio, as defined, to no higher than prime
plus 1.25% and .75%, respectively, after August 2, 1997. 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 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.
Warrants for 150,000 shares of the Company's common stock were issued to the
bank as part of this agreement. These warrants have exercise prices ranging
from $6.19 to $9.73.
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 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 and have 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. For fiscal 1997 the Company was not in compliance with
the earnings before interest, taxes, depreciation and amortization ("EBITDA")
and interest coverage ratio covenants. On May 14, 1998, the agreement was
amended to waive these two covenants for fiscal 1997 and adjusted 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, in conjunction with the amendment, the exercise prices
of the 222,464 warrants previously issued to the bank were reduced to $5.85
and the expiration dates were extended one year.
On September 16, 1996, the Company issued 400 shares of Series A cumulative
convertible preferred stock with a liquidation preference of $5,000 per
share and a par value of $100 per share. The Series A preferred stock was
converted into 300,661 shares ($2,000,000) of common stock during the year
ended February 1, 1997.
On December 17, 1996, the Company issued 1,212 shares of Series B cumulative
convertible preferred stock. Each preferred share had a liquidation
preference of $5,000 and a par value of $100. During fiscal 1997, 100
shares ($500,000) of the Series B preferred stock were redeemed and the
balance was converted into 1,010,667 shares ($5,560,000) of common stock.
Because the proceeds from the issuance of the Series A and B convertible
preferred stock were less than the mandatory redemption and conversion
amounts, the carrying amounts were increased by periodic accretion so that
the carrying amounts equaled the redemption or conversion amounts at the
mandatory redemption or conversion date. Preferred stock accretion amounted
to $588,000, $1,093,000 and $0 for fiscal 1997, 1996 and 1995, respectively.
At January 31, 1998, available borrowings on the revolving credit loan were
$1,553,000. The Company believes that internally generated funds and the
credit facility will be sufficient to meet its current operating needs and
fund anticipated capital expenditures for fiscal 1998.
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-K and the documents incorporated by reference herein contain
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 new management team, management's
long-term performance goals, programs to reduce the Company's costs and
enhance asset utilization, efficiencies realized from new systems, the
potential realization of benefits from net operating loss carryforwards
prior to their expiration, 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-K or in any document incorporated by
reference herein.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
See the Index to Financial Statements and Financial Statement Schedules on
page F-1. Such Financial Statements and Schedules are incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the above will be included under the caption, "Election
of Directors," in the Company's definitive proxy statement for its 1998
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after January 31, 1998, and is
incorporated herein by reference. Information regarding executive officers
of the Company is included under a separate caption in Part I hereof, and is
incorporated herein by reference, in accordance with General Instruction
G(3) to Form 10-K, and Instruction 3, Item 401(b) of Regulation S-K.
Item 11. Executive Compensation
Information regarding the above will be included under the caption,
"Compensation and Other Transactions with Management," in the Company's
definitive proxy statement for its 1998 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission within
120 days after January 31, 1998, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the above will be included under the caption,
"Security Ownership," in the Company's definitive proxy statement for its
1998 annual meeting of stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after January 31, 1998, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding the above will be included under the caption,
"Compensation and Other Transactions with Management," in the Company's
definitive proxy statement for its 1998 annual meeting of stockholders,
which will be filed with the Securities and Exchange Commission within
120 days after January 31, 1998, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. See Index to Financial Statements and Financial Statement Schedules.
2. See Index to Financial Statements and Financial Statement Schedules.
3. See Index to Exhibits immediately following the Signatures page.
(b) There were no reports on Form 8-K filed during the quarter ended
January 31, 1998.
(c) See Index to Exhibits immediately following the Signatures page.
(d) See Index to Financial Statements and Financial Statement Schedules.
Item 14(a). Index to Financial Statements and Financial Statement Schedules
Page
(1) Financial Statements:
Reports of Independent Accountants F-2 and F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
(2) Financial Statement Schedule:
Report of Independent Accountants F-23
Schedule II - Valuation and Qualifying Accounts F-24
All other schedules called for under Regulation S-X are not submitted
because they are not applicable, or not required, or because the required
information is not material or is included in the consolidated financial
statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Stockholders of
Successories, Inc.
We have audited the accompanying consolidated balance sheets of Successories,
Inc. (an Illinois corporation) and subsidiaries as of January 31, 1998 and
February 1, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended January 31, 1998. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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
Successories, Inc. and subsidiaries as of January 31, 1998 and February 1,
1997, and the results of its operations and its cash flows for each of the
two years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule on Page
F-24 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 24, 1998 (except with respect to
the matter discussed in the 3rd paragraph of
Note 7, as to which the date is May 14, 1998)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Stockholders
of Successories, Inc.
In our opinion, the accompanying consolidated statements of operations, cash
flows and changes in stockholders' equity for the period May 1, 1995 through
February 3, 1996 of Successories, Inc. present fairly, in all material
respects, the results of operations and cash flows of Successories, Inc.
and its subsidiaries for the period May 1, 1995 through February 3, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Successories, Inc. for any period
subsequent to February 3, 1996.
PRICE WATERHOUSE LLP
Chicago, Illinois
April 26, 1996, except as to (a) the pro
forma amounts for the period May 1, 1995
through February 3, 1996 presented in
Note 11, the date of which is April 18,
1997 and (b) the basic and diluted earnings
per share amounts for the period May 1,
1995 through February 3, 1996 presented
in the consolidated statements of operations
and in Notes 11 and 14, the date of which
is April 24, 1998
SUCCESSORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, February 1,
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,751,000 $ 1,173,000
Accounts and notes receivable, net 7,330,000 4,157,000
Inventories, net 9,749,000 8,970,000
Prepaid catalog expenses 1,439,000 2,006,000
Other prepaid expenses 1,307,000 1,180,000
Total current assets 21,576,000 17,486,000
Property and equipment, net 10,292,000 8,000,000
Notes receivable 292,000 301,000
Deferred financing costs, net 482,000
Deferred income taxes 5,339,000 5,375,000
Intangible and other assets, net 2,600,000 2,691,000
Total assets $40,581,000 $33,853,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,445,000 $ 2,215,000
Accounts payable 4,629,000 3,491,000
Reserve for stores to be closed 16,000 420,000
Reserve for relocation-related expenses 497,000
Accrued expenses 1,144,000 747,000
Total current liabilities 11,234,000 7,370,000
Long-term debt 6,561,000 4,094,000
Total liabilities 17,795,000 11,464,000
Minority interests in subsidiaries 352,000 509,000
Mandatory redeemable Series B convertible preferred
stock, $100 par value; 1,212 shares authorized;
1,212 shares issued and outstanding as of
February 1, 1997 -- 5,472,000
Stockholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 6,762,520 and 5,703,459
shares issued and outstanding, respectively 68,000 57,000
Common stock warrants 1,584,000 370,000
Notes receivable from officers (273,000)
Additional paid-in capital 26,127,000 20,362,000
Accumulated deficit (4,999,000) (4,345,000)
Foreign currency translation adjustment (73,000) (36,000)
Total stockholders' equity 22,434,000 16,408,000
Total liabilities and stockholders' equity $40,581,000 $33,853,000
</TABLE>
The accompanying notes are an integral part of these balance sheets
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
<S> <C> <C> <C>
Net product sales $56,821,000 $56,032,000 $35,484,000
Cost of goods sold 25,542,000 23,557,000 13,310,000
Gross profit on product sales 31,279,000 32,475,000 22,174,000
Fees, royalties and other
income 1,824,000 1,280,000 741,000
Gross margin 33,103,000 33,755,000 22,915,000
Operating expenses, excluding
special charge 31,089,000 31,751,000 22,724,000
Special charge 2,701,000
Income (loss) from operations 2,014,000 (697,000) 191,000
Other income (expense):
Minority interests in
subsidiaries (269,000) (184,000) (100,000)
Interest income 31,000 19,000 48,000
Interest expense (1,561,000) (1,491,000) (866,000)
Other (74,000) 6,000 39,000
Total other expense (1,873,000) (1,650,000) (879,000)
Income (loss) before income taxes 141,000 (2,347,000) (688,000)
Income tax benefit (expense) (54,000) 2,609,000 1,388,000
Net income $ 87,000 $ 262,000 $ 700,000
Earnings (loss) per share:
Basic ($ .10) ($ .16) $ .14
Diluted ($ .10) ($ .16) $ .13
</TABLE>
The accompanying notes are an integral part of these statements.
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(8 COLUMNS ON 2 PAGES)
<TABLE>
<CAPTION>
Additional Notes
Common Stock Paid-In Accumulated Receivable
Shares Amount Capital Deficit From Officers
<S> <C> <C> <C> <C> <C>
Balance at
April 30, 1995 5,117,397 $51,000 $15,811,000 ($4,181,000) $ --
Net income 700,000
Foreign currency
translation
adjustment
Issuance of warrants
Common stock transactions:
Sales of common
shares 79,748 1,000 433,000
Exercise of stock
options and warrants 11,750 - 57,000
Balance at
February 3, 1996 5,208,895 52,000 16,301,000 (3,481,000) --
Net income 262,000
Foreign currency
translation
adjustment
Preferred stock transactions:
Preferred stock
dividends (33,000)
Accretion of preferred
stock discount (1,093,000)
Common stock transactions:
British Links
acquisition 91,324 1,000 499,000
Sales of
common shares 65,079 1,000 313,000
Conversion of Series A
preferred stock 300,661 3,000 1,997,000
Tax benefit of
stock options
exercised 1,050,000
Exercise of
stock options 37,500 -- 202,000
Balance at
February 1, 1997 5,703,459 57,000 20,362,000 (4,345,000) --
Net income 87,000
Foreign currency
translation
adjustment
Issuance of
warrants
Notes receivable (273,000)
Preferred stock transactions:
Preferred stock
dividends (153,000)
Accretion of preferred
stock discount (588,000)
Common stock transactions:
Sales of
common shares 48,394 1,000 215,000
Conversion of Series B
preferred stock 1,010,667 10,000 5,550,000
Balance at
January 31, 1998 6,762,520 $68,000 $26,127,000 ($4,999,000) ($273,000) ($73,000) $1,584,000 $ 22,434,000
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
Foreign
Currency Common Total
Translation Stock Stockholders
Adjustment Warrants Equity
<S> <C> <C> <C>
Balance at
April 30, 1995 ($57,000) $ -- $11,624,000
Net income 700,000
Foreign currency
translation
adjustment (151,000) (151,000)
Issuance of warrants 378,000 378,000
Common stock transactions:
Sales of common
shares 434,000
Exercise of stock
options and warrants (8,000) 49,000
Balance at
February 3, 1996 (208,000) 370,000 13,034,000
Net income 262,000
Foreign currency
translation
adjustment 172,000 172,000
Preferred stock transactions:
Preferred stock
dividends (33,000)
Accretion of preferred
stock discount (1,093,000)
Common stock transactions:
British Links
acquisition 500,000
Sales of
common shares 314,000
Conversion of Series A
preferred stock 2,000,000
Tax benefit of
stock options
exercised 1,050,000
Exercise of
stock options 202,000
Balance at
February 1, 1997 (36,000) 370,000 16,408,000
Net income 87,000
Foreign currency
translation
adjustment 37,000 (37,000)
Issuance of warrants 1,214,000 1,214,000
Notes receivable (273,000)
Preferred stock transactions:
Preferred stock
dividends (153,000)
Accrection of preferred
stock discouont (588,000)
Common stock transactions:
Sales of
common shares 216,000
Conversion of Series B
preferred stock 5,560,000
Balance at
January 31, 1998 ($73,000) $1,584,000 $22,434,000
</TABLE>
The accompanying notes are an integral part of these statements.
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 87,000 $ 262,000 $ 700,000
Adjustments to reconcile
net income to net cash
used in operating
activities, net of
effects of acquisitions:
Depreciation and
amortization 2,516,000 3,527,000 1,388,000
Deferred income tax
benefit (49,000) (2,656,000) (1,600,000)
Amortization of
debt discount 567,000 308,000 70,000
3,121,000 1,441,000 558,000
Changes in operating assets and liabilities:
Accounts and notes
receivable (3,173,000) (853,000) 485,000
Inventories (779,000) 428,000 (735,000)
Prepaid catalog
expenses 567,000 1,844,000 (1,166,000)
Other prepaid expenses (473,000) (113,000) 420,000
Accounts payable 1,138,000 (3,444,000) 380,000
Reserve for stores
to be closed (245,000) 420,000
Reserve for relocation-
related expenses (497,000) 497,000
Accrued expenses 397,000 381,000 201,000
Other (689,000) (1,689,000) (217,000)
Net cash used in
operating activities (633,000) (1,088,000) (74,000)
Cash flows from investing activities:
Net cash paid for
acquisitions (50,000) (360,000)
Purchases of property
and equipment (4,171,000) (765,000) (1,679,000)
Net cash used in
investing activities (4,221,000) (1,125,000) (1,679,000)
Cash flows from financing activities:
Proceeds from issuing
common stock 216,000 314,000 434,000
Proceeds from issuing
Series A and B
preferred stock, net 6,382,000
Proceeds from exercise of
stock options and warrants 202,000 57,000
Preferred stock dividends (153,000) (33,000)
Redemption of Series B
preferred stock (500,000)
Notes receivable from
officers (273,000)
Proceeds from long-term
debt and net borrowings
on revolving credit
loan 13,428,000 2,500,000 4,551,000
Repayments of long-
term debt (7,286,000) (7,209,000) (3,237,000)
Net cash provided by
financing activities 5,432,000 2,156,000 1,805,000
Net increase (decrease)
in cash 578,000 (57,000) 52,000
Cash and cash equivalents,
beginning of period 1,173,000 1,230,000 1,178,000
Cash and cash equivalents,
end of period $1,751,000 $1,173,000 $1,230,000
</TABLE>
The accompanying notes are an integral part of these statements.
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for golf enthusiasts. The Company
considers itself a single line of business with products that are marketed
primarily under its Successories, Winners Collection and British Links trade
names through direct marketing (catalog, electronic commerce and
telemarketing), retail sales (Company-owned stores) and wholesale distribution
(including sales to franchisees). 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year End
Effective May 1, 1995, the Company changed its financial reporting year from a
fiscal year ending on April 30 to a fiscal year of 52 or 53 weeks ending on
the Saturday closest to January 31. In addition, the Company changed its
quarterly reporting period to 4-5-4 week format. The changes were made to
conform with retail industry reporting practices.
The fiscal years ended January 31, 1998 and February 1, 1997 include 52 weeks.
The period ended February 3, 1996 was a nine month period.
Principles of Consolidation
The consolidated financial statements include the accounts of Successories, Inc.
and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The financial results
of franchised stores have not been reflected in the Company's consolidated
financial statements.
Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid instruments with an
original maturity of three months or less.
Revenue Recognition
Net revenues include retail, direct marketing and wholesale activities.
Retail sales at the Company-owned stores are net of returns and allowances.
Wholesale and direct marketing sales are generally recognized at the time
orders are shipped to customers.
The Company recognizes revenue from individual franchise and area license
sales when all material services or conditions relating to the sale have
been substantially performed or satisfied. For individual franchises this
is generally coincident with the retail store opening. No deferred revenue
was recorded as of January 31, 1998 or February 1, 1997.
The Company's franchise agreements generally require franchisees and licensees
to remit continuing royalty fees of 2% of gross revenues derived from
proprietary product sales. The Company recognizes these fees as revenue
when actually earned.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and includes material, labor and
overhead costs.
Prepaid Catalog Expenses
Prepaid catalog expenses consist primarily of mail order catalogs for the
Company's products. The cost of such direct response advertising is charged
to expense over the period that the related catalog sales are expected, not
to exceed twelve months. The amortization period is based upon the
Company's historical patterns of catalog response. All other advertising
costs are expensed as incurred.
Advertising expense was $9,097,000, $11,062,000 and $7,353,000 for the years
ended January 31, 1998 and February 1, 1997, and the period from May 1, 1995
through February 3, 1996, respectively.
Prepaid Licensing Costs
Prepaid licensing costs, which consist primarily of the rights to use
certain images, are being capitalized and amortized over a three-year period.
Historically, these costs were amortized over a two-year period. The
Company changed its amortization period to better approximate the product
life cycle during the fiscal year ended February 1, 1997. The change
resulted in an increase to income of approximately $48,000 during fiscal 1996.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided for on a straight-line basis over the estimated useful lives of
the related assets, ranging from 3 to 15 years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the useful life of the
improvement or the term of the lease. Major renewals and betterments are
capitalized and maintenance and repair costs are charged to expense as
incurred.
The Company recorded a special charge of approximately $1,689,000 for the year
ended February 1, 1997, to write down certain assets to their fair value.
These assets included the order entry computer system, which was replaced in
November 1997, and certain leasehold improvements associated with the
relocation of the Company's corporate office and manufacturing/warehouse
facilities.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the term of the related debt. Accumulated amortization was
$44,000 and $0 as of January 31, 1998 and February 1, 1997, respectively.
Intangible Assets
Intangible assets consist principally of distribution rights and goodwill.
Such assets are being amortized on a straight-line basis. Distribution
rights are being amortized over a period of 5 years. Goodwill, which
represents the cost of purchased businesses in excess of the fair value of
net assets acquired, is amortized over 40 years. The Company reviews the
realizability of the intangible assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Accumulated amortization amounted to $1,310,000 and $1,065,000 at January
31, 1998 and February 1, 1997, respectively.
Accounts Payable
Checks outstanding, net of approximately $871,000 and $1,173,000, are
included in accounts payable as of January 31, 1998 and February 1, 1997,
respectively.
Income Taxes
The Company provides for deferred income taxes under the asset and liability
method of accounting. This method requires the recognition of deferred
income taxes based on the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities.
Store Opening and Closing Costs
Costs associated with the opening of new stores are expensed as incurred.
Estimated costs associated with the closing of under-performing Company-owned
stores are recognized in the period a decision has been reached to close the
store.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share is similar to basic earnings
per share except the diluted computation gives effect to all dilutive
potential common shares that were outstanding during the period. The
prior years consolidated financial statements have been restated for
SFAS No. 128.
Foreign Currency Translation
One of the Company's subsidiaries has operations in Canada. The assets and
liabilities of this subsidiary are translated at the current exchange rate
in effect at the balance sheet date, with gains or losses resulting
from such translation included in stockholders' equity. Revenues and
expenses are translated at the average exchange rate in effect at the time
the underlying transaction occurred. Transaction gains or losses are
included in the results of operations.
Financial Instruments
The carrying amounts for current assets and current liabilities approximate
their fair value due to their short-term maturity periods. The carrying
amount of long-term debt reasonably approximates its fair value as the
stated interest rates approximate current market interest rates of debt with
similar terms.
Use of Estimates
The preparation of the 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report the change in its net assets during
the period from nonowner sources, and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual
and interim reporting and disclosure standards for an enterprise's operating
segments. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and
will be limited to the form and content of its disclosures. Both statements
are effective for fiscal years beginning after December 15, 1997.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3. ACQUISITIONS
On September 18, 1997, the Company purchased certain assets of a franchisee
who operated a Successories retail location in California. The purchase
price of approximately $230,000 consisted of $50,000 in cash and the
forgiveness of indebtedness owed by the franchisee. The transaction
resulted in goodwill of $185,000.
On October 1, 1996, the Company purchased all of the stock of British Links
Golf Classics, Inc. for approximately $1,260,000. The purchase price
consisted of $760,000 in cash and notes payable and 91,324 shares of the
Company's common stock. The purchase price exceeded the fair value of the net
assets acquired and resulted in goodwill of $1,287,000. The notes are
subordinate to all other debt of the Company. British Links Golf Classics,
Inc. is a catalog company which sells golf-related wall decor, gifts and
other collectibles.
On October 15, 1995, the Company purchased the 20% minority interest in
Celex Successories, Inc. from its joint venture partner bringing the
Company's ownership to 100%. The purchase price of approximately $106,000
was settled through assignment of certain joint venture assets and
forgiveness of indebtedness owed by the partner.
On October 30, 1995, the Company purchased certain assets and assumed certain
liabilities of a franchisee who operated a Successories retail location in
Florida. The purchase price of approximately $128,000 was settled through
the assignment of certain assets and the forgiveness of indebtedness owed
by the franchisee.
All of the aforementioned acquisitions were accounted for as purchases and
accordingly, the acquired assets and liabilities assumed have been recorded
at their estimated fair values at the acquisition date. The results of
operations of the acquired businesses have been included in the consolidated
financial statements from their respective dates of acquisition.
NOTE 4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
<S> <C> <C>
Accounts receivable $ 7,830,000 $ 4,535,000
Notes receivable 402,000 429,000
8,232,000 4,964,000
Less allowance for doubtful
accounts and sales returns (610,000) (506,000)
7,622,000 4,458,000
Less current portion 7,330,000 4,157,000
Noncurrent portion $ 292,000 $ 301,000
</TABLE>
A portion of the Company's sales are made through the extension of credit.
Accounts receivable from credit sales are generally unsecured. Notes
receivable from franchisees are generally secured by a personal guarantee
of the franchisee and the assets of the franchised store. Approximately 17%
of the accounts and notes receivable were due from franchisees at January 31,
1998 and February 1, 1997.
In December 1997, the Company granted a licensee the exclusive right in
Australia and New Zealand to (i) produce and distribute Successories
catalogs, (ii) produce, distribute and sell Successories and Winners
Collection products through direct marketing and wholesale channels and
(iii) own, operate and sell franchises to others to operate Successories
retail locations. In consideration for this right, the licensee agreed
to pay an initial fee of $300,000, with $23,000 paid upon execution of the
agreement and the balance payable in quarterly installments of $16,000 from
April 1998 through July 2002. The amount financed is evidenced by a
promissory note. In addition, the licensee is required to remit continuing
royalty fees of 4% of gross sales, as defined, and an additional fee of
$20,000 for each retail location opened. The agreement has an initial term
of five years and can be renewed by the licensee for successive terms of
five years each provided certain defined conditions have been fulfilled.
The balance due on the promissory note was $277,000 as of January 31, 1998.
NOTE 5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
<S> <C> <C>
Finished goods $ 6,690,000 $ 6,245,000
Raw materials 3,187,000 2,893,000
9,877,000 9,138,000
Less reserve for obsolescence (128,000) (168,000)
$ 9,749,000 $ 8,970,000
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
<S> <C> <C>
Leasehold improvements $ 7,831,000 $ 7,096,000
Machinery and equipment 5,441,000 4,455,000
Furniture and fixtures 4,200,000 3,597,000
Vehicles 19,000 92,000
17,491,000 15,240,000
Less accumulated depreciation
and amortization (7,199,000) (7,240,000)
$10,292,000 $ 8,000,000
</TABLE>
NOTE 7. DEBT
Debt is comprised of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
Bank borrowings:
<S> <C> <C>
Term loan, net of debt discount of
$401,000 and $0 $ 6,849,000 $ 4,495,000
Revolving credit loan 4,447,000
Fixed rate loan, net of debt discount of
$246,000 and $0 254,000
Subordinated notes:
10% notes to investors 1,250,000
British Links Golf Classics, Inc.
former owners 155,000 400,000
Capital lease obligations 301,000 146,000
Other 18,000
12,006,000 6,309,000
Less current portion (5,445,000) (2,215,000)
Long-term debt $ 6,561,000 $ 4,094,000
</TABLE>
On June 20, 1997, the Company entered into a new credit facility with a bank.
The facility replaced an existing credit agreement that would have expired
on May 1, 1998. 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 eligible inventory is 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 were prime plus 1.25% and .75%, respectively, through
August 2, 1997, and fluctuate based on the margin ratio, as defined, to no
higher than prime plus 1.25% and .75%, respectively, after August 2, 1997.
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 January 31, 1998, available borrowings on the revolving
credit loan were $1,553,000. Warrants for 150,000 shares of the Company's
common stock were issued to the bank as part of this agreement. These
warrants have exercise prices ranging from $6.19 to $9.73.
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 and
have 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. For the year ended January 31, 1998 the Company was not
in compliance with the earnings before interest, taxes, depreciation and
amortization ("EBITDA") and interest coverage ratio covenants. On May 14,1998,
the agreement was amended to waive these two covenants for the year ended
January 31, 1998 and adjusted 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, in conjunction with
the amendment, the exercise prices of the 222,464 warrants previously issued
to the bank were reduced to $5.85 and the expiration dates were extended
one year.
At February 1, 1997, the Company had a credit agreement with a bank that was
comprised of a $4,495,000 term loan and a revolving credit loan that allowed
for maximum borrowings of $4 million. The credit agreement was to expire on
May 1, 1998 and was secured by substantially all the Company's assets. The
interest rates on the term loan and revolving credit loan borrowings were
prime plus 1%. The term loan was payable in monthly principal and interest
installments approximating $95,000. At February 1, 1997, there were no
borrowings on the revolving credit loan. The credit agreement was paid off
using the proceeds from the new credit facility.
On November 10, 1995, the Company borrowed $1,500,000 from certain investors,
including executive officers and members of the Board of Directors. The
subordinated notes were originally due November 1, 1996, and bore interest
at 10%. Concurrent with these borrowings, warrants for 120,000 shares of the
Company's common stock were issued to the noteholders. In November 1996,
the Company extended the maturity date for $1,250,000 of the original amount
financed to November 1997. The interest rate for the extended financing
remained at 10%. In addition, the Company granted options for 125,000
shares to the noteholders participating in the extended financing. The
subordinated notes were paid off using the proceeds from the new credit
facility.
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. The interest rate is prime.
The stock options and warrants issued in conjunction with the new credit
facility and 10% subordinated notes 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 $567,000,
$308,000 and $70,000 for the years ended January 31, 1998 and February 1, 1997,
and the period from May 1, 1995 through February 3, 1996, respectively.
The weighted average interest rate on borrowings outstanding as of January
31, 1998 and February 1, 1997, was 9.6% and 9.2% respectively.
Aggregate future maturities of debt are as follows:
Fiscal year ending:
January 30, 1999 $ 5,445,000
January 29, 2000 1,452,000
February 3, 2001 1,429,000
February 2, 2002 1,507,000
February 1, 2003 1,507,000
Thereafter 1,313,000
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 212,000
State 18,000 47,000
Foreign 85,000
Deferred (49,000) (2,656,000) (1,600,000)
$ 54,000 ($ 2,609,000) ($ 1,388,000)
</TABLE>
A reconciliation between the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of
federal tax benefit (5.0) (5.0) (5.0)
Foreign taxes in excess
of domestic rate (21.3)
Recognition of prior
year tax benefit (77.8) (205.3)
Adjustment to prior
year taxes 30.7
Other, primarily
permanent items 22.0 5.6 12.1
(38.3)% (111.2)% (201.5)%
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
revenues and expense for financial and income tax reporting purposes. The
components of the net deferred tax asset are comprised of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 238,000 $ 197,000
Inventories 108,000 95,000
Special charge 1,222,000
Depreciation and amortization 79,000
Loss carryforwards 5,920,000 5,204,000
Other 170,000 50,000
6,515,000 6,768,000
Deferred tax liabilities:
Prepaid advertising 1,176,000 1,126,000
Depreciation and amortization 267,000
1,176,000 1,393,000
Net deferred tax asset $ 5,339,000 $ 5,375,000
</TABLE>
In prior years a valuation allowance was established against the net deferred
tax asset due to the uncertainty as to whether the Company would realize the
benefits of the net operating loss carryforwards. During the years ended
February 1, 1997 and February 3, 1996, the valuation allowance associated with
the net deferred tax asset was reduced by $2,635,000 and $1,262,000,
respectively. These reductions resulted in decreasing the valuation
allowance to zero as of February 1, 1997. Although realization is not
assured, the Company believes that it is more likely than not that the net
deferred tax asset will be realized.
Realization of the net deferred tax asset is largely dependent upon the
Company generating sufficient taxable income prior to the expiration of the
net operating loss carryforwards. However, the amount of such realization
could be reduced in the near term if estimates of future taxable income
during the carryforward period are changed. To the extent the net operating
loss carryforwards and existing deductible temporary differences are not
offset by existing taxable temporary differences reversing within the
carryforward period, the remaining loss carryforwards are expected to be
realized by achieving future profitable operations based on the following:
1. During the past three years the Company has assembled a new, experienced
management team with the background, knowledge and incentive to grow the
business profitably.
2. Operating income significantly improved during the years ended January
31, 1998 and February 1, 1997, after excluding the impact of the special
charge, as compared to the period from May 1, 1995 through February 3,
1996, and the year ended April 30, 1995.
3. The Company expects to continue to experience savings and improved
earnings from the cost containment efforts that have been implemented.
Specifically, these savings are anticipated to be achieved from:
a) efficiencies and lower rent from the consolidation of the Company's
manufacturing/distribution facilities and corporate office to a single
facility; b) continued realization of benefits from the implementation of
more sophisticated systems to track the Company's direct marketing
efforts, thereby resulting in more effective catalog mailings; c) closure
of Company-owned stores that were underperforming; and d) execution of
improved budgeting, forecasting and performance monitoring techniques.
The Company has approximately $ 15,200,000 of tax net operating loss
carryforwards as of January 31, 1998. The net operating losses do not
begin to expire until 2009. Approximately $2,692,000 of the loss
carryforwards relate to deductions arising from the exercise of non-
qualified stock options, the benefit of which has been credited to additional
paid-in capital.
NOTE 9. RELATED PARTY TRANSACTIONS
In June 1997, the Company agreed to loan three executive officers an
aggregate amount of $273,000 to allow the officers to purchase shares
of the Company's common stock. The notes bear interest at 7% or
the appropriate applicable federal rate as determined by the Internal
Revenue Service, whichever is higher. One of the notes for $33,000 is due
on demand. The other notes are payable in aggregate annual installments of
$25,000, with the balance due in June 2002; provided that each payment shall
be forgiven by the Company on a year-by-year basis if the Company meets
certain annual targets for earnings before interest and taxes. Two of
the notes are secured by a pledge of the shares purchased.
The Company advanced $77,000 to a franchise owned by a relative of an outside
director during the year ended February 1, 1997. In September 1997, the
Company purchased the net assets of the store for $50,000 in cash and
forgiveness of indebtedness owed by the franchisee.
A member of the Company's Board of Directors, who is also a shareholder,
serves as a consultant to the Company on various tax matters. Fees paid to
his firm for these services were $85,000, $141,000 and $72,000 for the years
ended January 31, 1998 and February 1, 1997, and the period from May 1, 1995
through February 3, 1996, respectively.
A member of the Company's Board of Directors, who is also a shareholder,
serves as legal counsel to the Company. Fees paid to the law firm in which
he is a partner for said services were $151,000, $262,000 and $237,000 for
the years ended January 31, 1998 and February 1, 1997, and the period from
May 1, 1995 through February 3, 1996, respectively.
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statements of cash flows are
as follows:
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 10,000 $ 11,000 $ --
Interest 958,000 1,277,000 737,000
Noncash investing activities:
Equipment purchased under
capital leases $ 203,000 $ 64,000 $ --
Acquisitions of businesses:
Fair value of assets
acquired 230,000 1,710,000 225,000
Liabilities assumed (450,000) (225,000)
Subordinated notes issued (400,000)
Common stock issued (500,000)
</TABLE>
NOTE 11. OPTIONS AND WARRANTS
The Company has a stock option plan (the "Option Plan") which provides for
the grant of stock options to directors, executive officers and other
employees of the Company. A total of 1,450,000 shares of the Company's
common stock were available for grant under the Option Plan. The number
of options to be granted or issued and the terms thereof are approved by
the Compensation Committee of the Company's Board of Directors, which is
comprised of non-employee directors. The exercise price of the options is
equal to the fair market value of the common stock at the date of grant.
Options granted under the Option Plan generally vest after five years and
expire ten years from the date of grant.
The Company has a non-compensatory Employee Stock Purchase Plan. The Company
intends that the Stock Purchase Plan qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code. Generally, the Stock
Purchase Plan provides for qualifying employees to elect to have a percentage
of their compensation used to purchase shares of the Company's common stock.
Shares purchased under the Stock Purchase Plan totaled 48,394, 65,079 and
79,748 for the years ended January 31, 1998 and February 1, 1997, and the
period from May 1, 1995 through February 3, 1996 respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by the statement, the Company will measure
compensation cost for its stock plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation has been recognized for the Company's stock
plans in the consolidated financial statements. Had compensation cost under
these plans been determined consistent with the method outlined in
SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION)
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
<S> <C> <C> <C>
Net income (loss):
As reported $ 87,000 $ 262,000 $ 700,000
Pro forma (470,000) (392,000) 523,000
Basic earnings (loss) per share:
As reported (.10) (.16) .14
Pro forma (.19) (.29) .10
Diluted earnings (loss) per share:
As reported (.10) (.16) .13
Pro forma (.19) (.29) .10
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for
the years ended January 31, 1998 and February 1, 1997, and the period from
May 1, 1995 through February 3, 1996: risk-free interest rate of 6.61%,
6.24% and 6.30%, respectively; expected dividend yield of 0% for all three
fiscal years; expected life of 10 years for all three fiscal years; and
expected volatility of 93.94%, 98.36% and 103.10% respectively.
A summary of the status of the Option Plan as of January 31, 1998,
February 1, 1997 and February 3, 1996, and changes during the periods
then ended are as follows:
<TABLE>
<CAPTION>
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
Weighted Weighted Weighted
Average Average Average
Shares Ex. Price Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beg. of year 1,001,750 $ 6.34 821,250 $ 5.02 717,000 $ 4.72
Granted 470,000 5.85 385,000 6.95 135,250 6.83
Exercised (192,500) 1.90 (3,750) 5.33
Forfeited (178,580) 5.75 (12,000) 7.21 (27,250) 6.03
Outstanding,
end of year 1,293,170 6.24 1,001,750 6.34 821,250 5.02
Exercisable,
end of year 611,750 6.22 455,500 6.21 448,000 4.07
Weighted-average
fair value of
options granted $ 5.27 $ 5.39 $ 5.30
</TABLE>
As of January 31, 1998, 695,420 of the options outstanding have exercise
prices ranging between $5.33 and $5.75, with a weighted-average exercise
price of $5.48 and a weighted-average remaining contractual life of 5.8
years (373,750 of these options are exercisable with a weighted-average
exercise price of $5.33). The remaining 597,750 options have exercise
prices ranging between $5.75 and $14.66, with a weighted-average exercise
price of $7.13 and a weighted-average remaining contractual life of 8.1 years
(238,000 of these options are exercisable with a weighted-average exercise
price of $7.61).
The Company has also issued stock options and warrants primarily in
connection with certain financing transactions. Such options and warrants
generally vest immediately and expire five years from the date of grant.
As of January 31, 1998, stock options and warrants for 539,464 shares were
outstanding. These options and warrants have exercise prices ranging from
$4.73 to $9.73, with a weighted-average exercise price of $6.57 and a
weighted-average remaining contractual life of 4.3 years. The weighted-
average fair value of the options and warrants granted during the years ended
January 31, 1998 and February 1, 1997, were $3.23 and $3.96, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its corporate office and manufacturing/warehouse space
under the terms of a lease agreement which expires in July 2009. The
Company is responsible for all taxes, maintenance, insurance and operating
expenses. The lease provides for three renewal options of five years each.
All of the Company-owned retail locations are leased under agreements which
expire at various dates through January 2006. A number of the leases
contain renewal options and escalation clauses and generally provide that
the Company pay its proportionate share of the taxes, maintenance and
insurance costs. In addition, certain leases require contingent payments
based on sales.
The future minimum rental payments for all operating leases with
noncancelable terms in excess of one year as of January 31, 1998, are as
follows:
Office and Retail
Warehouse Locations Total
Fiscal year ending:
January 30, 1999 $ 764,000 $ 1,401,000 $ 2,165,000
January 29, 2000 764,000 1,136,000 1,900,000
February 3, 2001 749,000 943,000 1,692,000
February 2, 2002 753,000 839,000 1,592,000
February 1, 2003 771,000 785,000 1,556,000
Thereafter 5,351,000 1,357,000 6,708,000
$ 9,152,000 $ 6,461,000 $15,613,000
Rental expense for all operating leases was $2,644,000, $3,360,000, and
$3,270,000 for the years ended January 31, 1998 and February 1, 1997, and
the period from May 1, 1995 through February 3, 1996, respectively.
Capital Leases
The Company acquired certain equipment under lease arrangements which are
being accounted for as capital leases for accounting purposes. Equipment
under such leases have been recorded as property and equipment with a cost
of approximately $961,000 and $758,000 as of January 31, 1998 and February
1, 1997, respectively, and accumulated amortization of $736,000 and $621,000
at those dates.
The future minimum lease payments for all capital leases in effect as of
January 31, 1998, are as follows:
Fiscal year ending:
January 30, 1999 $ 102,000
January 29, 2000 86,000
February 3, 2001 61,000
February 2, 2002 10,000
February 1, 2003 7,000
Thereafter 63,000
Total minimum lease payments 329,000
Less amount representing interest (28,000)
Present value of net minimum lease payments $ 301,000
Employment Agreements
The Company has employment agreements with certain key officers. The
agreements provide for aggregate annual salaries of $658,000 and contain
confidentiality and noncompetition provisions. The agreements expire in 1999.
Purchase Commitments
The Company has commitments to purchase new point-of-sale systems for the
Company-owned retail locations for approximately $500,000. The systems will
be installed in May 1998.
Letter of Credit
The Company has a standby letter of credit outstanding in the amount of
$500,000 that is secured by a certificate of deposit. The letter of credit
serves as security for the lease of the Company's corporate office and
manufacturing/warehouse facility.
Legal Matters
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits related to its business. The Company does not
believe that the ultimate resolution of these matters will, individually or
in the aggregate, be material to its consolidated financial position or
results of operations.
NOTE 13. PREFERRED STOCK
In September 1996, the Company sold 400 shares of Series A cumulative
convertible preferred stock in an off-shore transaction to a non-U.S. person
pursuant to Regulation S under the United States Securities Act of 1933, as
amended. In December 1996, the Company sold 1,212 shares of Series B
cumulative convertible preferred stock in a transaction exempt from
registration pursuant to Regulation D under the Securities Act. Each share
had a liquidation preference of $5,000 and a par value of $100. Dividends
were payable quarterly at the cash rate, as defined. Each holder had the
same voting rights as a holder of the number of common shares would own if
the preferred shares were converted. The preferred stock was convertible
into the number of shares of common stock obtained by dividing the liquidation
preference amount by the conversion price, as defined. In the event that
the Company entered into a transaction to sell its assets or in the event of
a change in control, the preferred stock was required to be redeemed at the
option of the holder at the redemption price, as defined.
The 400 shares of Series A cumulative convertible preferred stock were
converted into 300,661 shares ($2,000,000) of common stock during the
year ended February 1, 1997. During the year ended January 31, 1998, 100
shares ($500,000) of the Series B cumulative convertible preferred stock was
redeemed and the balance was converted into 1,010,667 shares ($5,560,000) of
common stock.
Because the proceeds from the issuance of the Series A and B preferred
stock were less than the mandatory redemption and conversion amounts, the
carrying amounts were increased by periodic accretion so that the carrying
amounts equaled the redemption or conversion amounts at the mandatory
redemption or conversion date.
NOTE 14. 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 earnings (loss) per share are as follows:
May 1, 1995
Year Ended Year Ended through
January 31, 1998 February 1, 1997 February 3, 1996
Basic earnings (loss) per share:
Net income $ 87,000 $ 262,000 $ 700,000
Preferred stock dividends
and accretion (741,000) (1,126,000)
Income (loss) available to
common stockholders $ (654,000) $ (864,000) $ 700,000
Weighted-average shares 6,283,662 5,321,179 5,144,894
Basic earnings (loss)
per share $ (.10) $ (.16) $ .14
Diluted earnings (loss) per share
Income (loss) available
to common stockholders $ (654,000) $ (864,000) $ 700,000
Weighted-average shares 6,283,662 5,321,179 5,144,894
Plus shares from assumed
exercise of stock options
and warrants 209,634
Adjusted weighted-average
shares 6,283,662 5,321,179 5,354,528
Diluted earnings (loss)
per share $ (.10) $ (.16) $ .13
The diluted computations for the years ended January 31, 1998 and February 1,
1997, did not assume the exercise of stock options and warrants, nor the
conversion of preferred stock due to their antidilutive effect on earnings
(loss) per share.
NOTE 15. SPECIAL CHARGE
The Company recorded a special charge of $2,701,000 for the year ended
February 1, 1997 which was comprised primarily of: a) reserve for certain
costs associated with the relocation of the Company's manufacturing/warehouse
facilities and corporate office to a new facility; b) costs associated with
a plan to close certain Company-owned stores that were underperforming; and
c) write-down of the order entry computer system in anticipation of replacing
it during 1997. During the year ended January 31, 1998, the Company decided
not to close two of the aforementioned Company-owned stores and accordingly,
reduced the related reserve by $227,000.
NOTE 16. 401(K) PLAN
The Company has a 401(K) Retirement Savings Plan in which all full-time
employees who have completed one year of service are eligible to participate.
Enrollment is open on the January 1st or July 1st immediately following one
year of service. The Company matches 20% of each employee's contribution,
up to a maximum of 6% of base salary. The Company's contributions to the
401(K) Plan were $29,000, $30,000 and $37,000 for the years ended January
31, 1998 and February 1, 1997, and the period from May 1, 1995 through
February 3, 1996, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Successories, Inc.
Our audit of the consolidated financial statements referred to in our report
dated April 26, 1996 appearing on Page F-3 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule of Successories,
Inc. for the period May 1, 1995 through February 3, 1996 listed in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
April 26, 1996
SUCCESSORIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance
beginning costs and other (1) at end of
Description of Period Expenses Accounts Deductions Period
January 31, 1998
Allowance for
doubtful accounts $ 196,000 $ 425,000 $ -- $(495,000) $ 126,000
Reserve for sales
returns 310,000 842,000 -- (668,000) 484,000
Reserve for
obsolescence 168,000 -- -- (40,000) 128,000
February 1, 1997
Allowance for
doubtful accounts 221,000 246,000 -- (271,000) 196,000
Reserve for sales
returns 279,000 244,000 -- (213,000) 310,000
Reserve for
obsolescence 151,000 31,000 -- (14,000) 168,000
February 3, 1996
Allowance for
doubtful Accounts 489,000 (145,000) -- (123,000) 221,000
Reserve for sales
returns 230,000 894,000 -- (845,000) 279,000
Reserve for
obsolescence 250,000 -- -- (99,000) 151,000
(1) Write-offs, net of recoveries
SIGNATURES
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.
SUCCESSORIES, INC.
Date: May 15, 1998 By: /s/ Arnold M. Anderson
Arnold M. Anderson
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Date
/s/ Arnold M. Anderson May 15, 1998
Arnold M. Anderson
Chairman of the Board and Director
/s/ James M. Beltrame May 15, 1998
James M. Beltrame
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Steven D. Kuptsis May 15, 1998
Steven D. Kuptsis
Senior Vice President and Chief Administrative Officer
(Principal Financial and Accounting Officer)
/s/ Michael H. McKee May 15, 1998
Michael H. McKee
Senior Vice President, Creative Department and Director
/s/ Timothy C. Dillon May 15, 1998
Timothy C. Dillon
Senior Vice President, General Counsel, Secretary and Director
/s/ Mervyn C. Phillips, Jr. May 15, 1998
Mervyn C. Phillips, Jr.
Director
/s/ C. Joseph LaBonte May 15, 1998
C. Joseph LaBonte
Director
/s/ Seamas T. Coyle May 15, 1998
Seamas T. Coyle
Director
/s/ Guy E. Snyder May 15, 1998
Guy E. Snyder
Director
/s/ Steven B. Larrick May 15, 1998
Steven B. Larrick
Director
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)
21.1 Subsidiaries (4)
23.1 Consent of Arthur Andersen LLP (filed herewith)
23.2 Consent of Price Waterhouse LLP (filed herewith)
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.
19
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements for the year ended January 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 1,751,000
<SECURITIES> 0
<RECEIVABLES> 7,940,000
<ALLOWANCES> (610,000)
<INVENTORY> 9,749,000
<CURRENT-ASSETS> 21,576,000
<PP&E> 17,491,000
<DEPRECIATION> 7,199,000
<TOTAL-ASSETS> 40,581,000
<CURRENT-LIABILITIES> 11,234,000
<BONDS> 0
0
0
<COMMON> 68,000
<OTHER-SE> 22,366,000
<TOTAL-LIABILITY-AND-EQUITY> 40,581,000
<SALES> 56,821,000
<TOTAL-REVENUES> 58,645,000
<CGS> 25,542,000
<TOTAL-COSTS> 56,631,000
<OTHER-EXPENSES> 312,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,561,000
<INCOME-PRETAX> 141,000
<INCOME-TAX> 54,000
<INCOME-CONTINUING> 87,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,000
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (registration nos. 33-73510 and 33-77464).
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 14, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-73510 and 33-77464) of Successories, Inc.
of our report dated April 26, 1996 except as to a) the pro forma amounts for
the period May 1, 1995 through February 3, 1996 presented in Note 11, the
date of which is April 18, 1997 and b) the basic and diluted earnings per
share amounts for the period May 1, 1995 through February 3, 1996 presented
in the consolidated statements of operations and in Notes 11 and 14, the
date of which is April 24, 1998, appearing on page F-3 of this Annual Report
on Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 14, 1998
