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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 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-22834
SUCCESSORIES, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2520 DIEHL ROAD
AURORA, ILLINOIS 60504
(Address of principal executive offices) (Zip Code)
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 13, 1999, based upon the last reported
sale price on that date on the Nasdaq National Market of $2.75 per share, was
approximately $15,290,443.
Registrant had 6,922,988 shares of $.01 par value Common Stock, outstanding
as of April 13, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days of January 30, 1999, are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Successories, Inc., an Illinois Corporation, ("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 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).
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 in October 1990 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.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES products and franchised
retail stores. As a result, the Company began plans, which were in progress as
of January 30, 1999, to divest its golf catalog business and to convert its
company-owned retail stores to franchise owner-operators.
PRODUCTS
A majority of the Company's sales are derived from proprietary products that
have either been internally developed or designed, or individually customized.
All products are designed to have a positive motivational or self-improvement
theme that can be used in businesses to reinforce basic business goals such as
customer service, attitude and teamwork, and 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 30, 1999, the Company offered approximately 3,100
stock-keeping units ("SKUs"). SUCCESSORIES retail stores generally carry an
average of 900 SKUs while kiosks carry an average of 700 SKUs. The Company's
SUCCESSORIES catalog carries approximately 660 SKUs in its 52-page edition and
500 SKUs in its 40-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. Framed art comes either with an aluminum frame
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with an electroplated high-gloss black finish or a wood frame. 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.
Although the major product category is wall decor, the Company also sells
watches, pens, wall plaques, clocks, chairs, lamps, books, planners, keepsake
wooden boxes, display racks and cabinets, glasses, mugs, jewelry and other
related products.
PRODUCT DEVELOPMENT
The Company tries to expand its product line 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.
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 that may
lead to future catalog sales.
For the fiscal year ended January 30, 1999, direct marketing sales accounted
for approximately 55% of the Company's product sales, while retail sales from
Company-owned stores were approximately 31% of
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the total. Wholesale distribution sales, including product sales to franchisees,
were approximately 14% 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 30, 1999.
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 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 who have favorable demographic profiles or purchasing
patterns. 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. A group of corporate sales representatives
handle larger corporate accounts through telemarketing.
The Company's SUCCESSORIES 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. When a prospect makes a purchase,
they are promoted to the 52-page catalog using selection criteria based on
purchase history. During the fiscal year ended January 30, 1999, the Company
mailed approximately 9.5 million SUCCESSORIES catalogs.
In August 1997 the Company created an interactive Internet web site,
www.successories.com. Visitors to the web site are able to view product
offerings and place orders for products featured in the Company's catalogs.
Customer interest in the site has steadily increased. For example, Internet
sales during the 1998 holiday season increased by approximately $150,000, or
200%, as compared to the same period in 1997. In addition, about 86% of the
Company's Internet customers were first-time buyers. Although these 1998 holiday
sales were slightly greater than two percent of the Company's domestic direct
marketing holiday sales, these results and national trends indicating increasing
customer interest in electronic commerce have led the Company to begin
implementation during 1999 of an expanded and improved web site.
In January 1999, the Company introduced a recognition awards catalog
offering a wide range of proprietary awards and gifts that can be engraved or
personalized.
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. In addition in November 1997, the Company executed a
license agreement with the New York Times Magazine Group, Inc. in connection
with the development of THE GOLF COMPANY FROM GOLF DIGEST catalog. During the
fiscal year ended January 30, 1999, the Company mailed approximately 2.5 million
golf catalogs under the British Links and THE GOLF COMPANY FROM GOLF DIGEST
names.
RETAIL
The Company-owned retail locations consist of stores and kiosks primarily
located in shopping malls. The Company's stores were introduced in early 1991.
As of January 30, 1999, the Company owned a total
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of 36 retail locations, including 31 stores and 5 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 1, 1997............................................. 9 14 51
January 31, 1998............................................. 3 11 43
January 30, 1999............................................. 7 14 36
</TABLE>
As of January 30, 1999, the Company's retail locations are located in Canada
and the following states:
<TABLE>
<S> <C> <C>
Arizona Maryland New York
California Massachusetts Pennsylvania
Florida Michigan Texas
Illinois Minnesota Virginia
Indiana
</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.
WHOLESALE
The Company sells products to a number of wholesale customers. Wholesale
customers include other direct marketing distributors and distributors who have
acquired distribution rights for the Company's products in other countries.
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.
FRANCHISE
As of January 30, 1999, there were 49 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 1, 1997............................................. 6 2 49
January 31, 1998............................................. 4 10 43
January 30, 1999............................................. 13 7 49
</TABLE>
Product sales to franchisees are typically made at a discount to retail or
at product cost plus a certain percentage.
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
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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 $25,000 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 $2,000
to $3,000 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.
STRATEGIC CHANGES
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES products and franchised
retail stores.
As a result, the Company began plans, which were in progress as of January
30, 1999, to divest its golf catalog business and to convert its company-owned
retail stores to franchise owner-operators. These plans included the retention
of an investment banking firm, specializing in direct marketing, to market the
golf catalog business. Also, the Company has hired a consultant with experience
in marketing franchises to assist with the conversion of the Company-owned
retail stores. In addition, the Company has reduced overhead expenses not
related to the core business. The Company has yet to sell the golf catalog
business. In fiscal 1998, the Company has converted five of its Company-owned
retail stores to franchised stores.
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.
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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,
stationery 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 Item 7 "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"
in Class 42 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 30, 1999, the Company employed 464 persons, 269 of whom were
employed full time. Of this total, 252 were employed at the corporate
headquarters in marketing, manufacturing, order fulfillment or administrative
capacities, and 212 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.
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The Company leases all 36 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
In August 1998, James M. Beltrame, the Company's former president and chief
executive officer ("Claimant"), filed a Demand for Arbitration dated August 11,
1998 with the American Arbitration Association (Case No. 51-160-00347-98).
Claimant was separated from employment with the Company on June 26, 1998 and now
seeks arbitration pursuant to an Employment Agreement dated June 1, 1996 between
the Company and Claimant. Claimant alleges and seeks lost compensation and
benefits due and owing to him from the Company in an amount claimed to be in
excess of $400,000. The Company has responded to the claim with what the Company
believes is a meritorious defense. The arbitration is in the discovery stage and
the initial April 19, 1999 hearing in Chicago, Illinois is in the process of
being rescheduled. The Company believes the new hearing date will be in late
June 1999. At January 30, 1999, the Company recorded a provision for the
estimated liability associated with the legal proceeding.
In a related matter, the Company has filed a complaint on December 9, 1998,
against James M. Beltrame in the Circuit Court of the Eighteenth Judicial
Circuit in DuPage County, Wheaton, Illinois (Case No. 98L01282). The Company
alleges non-payment of principal and interest due on a promissory note executed
by Mr. Beltrame. The Company seeks judgment against Mr. Beltrame in the
principal amount of $107,625 plus interest at a rate of 7% through June 30,
1998, and thereafter at a rate of 10%, together with costs and attorney fees.
The case is in the discovery stage.
With regard to the above-referenced matters, the Company and Mr. Beltrame
are involved in settlement negotiations. If a settlement is not reached, the
Company intends to vigorously defend itself against the claims made by Mr.
Beltrame and also pursue its own claims against him.
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company,
filed a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortuous interference of contract and violation of the Wisconsin Fair Dealership
Act. Wascher alleges and seeks an award in an amount in excess of $250,000 plus
costs, disbursements and attorney's fees, an award of both treble and punitive
damages, and such other relief deemed just and equitable.
The hearing dates for Wascher were originally scheduled for January 20, 21,
22 and 25, 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
Except as noted above, there are no other 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
- ---------------------------- --- -----------------------------------------------------------------------------
<S> <C> <C>
Arnold M. Anderson.......... 54 Chief Executive Officer, Chairman of the Board and Director since June 1998;
prior thereto, Chairman of the Board and Director since May 1997; prior
thereto, Chief Executive Officer, Chairman of the Board and Director since
June 1995; 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.
Gary J. Rovansek............ 56 President and Chief Operating Officer for the Company since November 1998;
prior thereto, President and Director of J.C. Whitney & Co. since February
1994; prior thereto, President of the Horticultural Division of Foster &
Gallagher, Inc. since 1993; prior thereto, President of Reliable
Corporation since 1988.
Steven D. Kuptsis........... 43 Senior Vice President and Chief Administrative Officer for the Company since
September 1997; prior thereto, General Manager of Chadwick-Miller, 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.
Michael H. McKee............ 45 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.............. 45 Senior Vice President, Direct Marketing Division for the Company since
September 1996; prior thereto, Vice President of Marketing for Foster &
Gallagher, Inc. since January 1985.
Kenneth R. Taylor........... 47 Vice President, Operations for the Company since September 1998; prior
thereto, Director of Manufacturing for the Company since May 1997; prior
thereto, Director of Operations for Echo Star, Inc. since 1996; prior
thereto, Director of Quality for Josten, Inc. since 1992.
Gregory J. Nowak............ 38 Vice President, General Counsel and Corporate Secretary for the Company since
October 1998; prior thereto, Vice President and Associate Counsel of
Scudder Kemper Investments, Inc. since 1995; prior thereto, Counsel to
Kemper Corporation since 1992.
</TABLE>
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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
--------- ---------
<S> <C> <C>
Fiscal Year Ended January 31, 1998
First Quarter............................................................ $ 7.250 $ 5.750
Second Quarter........................................................... 6.375 5.000
Third Quarter............................................................ 7.375 5.563
Fourth Quarter........................................................... 7.750 5.750
Fiscal Year Ended January 30, 1999
First Quarter............................................................ $ 6.625 $ 5.375
Second Quarter........................................................... 5.500 3.625
Third Quarter............................................................ 4.000 1.375
Fourth Quarter........................................................... 4.125 1.375
</TABLE>
As of April 13, 1999, the number of holders of record of the Company's
common stock was approximately 603, and there were approximately 649 beneficial
owners of the Company's common stock. As of the same date, the bid price for the
Company's common stock was $2.75.
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 cash dividends on its
common stock. Under the Company's current credit facility, cash dividends are
prohibited.
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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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS FISCAL YEAR
---------------------------------------- ENDED ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, APRIL 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net product sales........................ $ 52,864 $ 56,821 $ 56,032 $ 35,484 $ 42,809
Income (loss) before income taxes........ $ (7,276) $ 141 $ (2,347) $ (688) $ (7,745)
Income tax expense (benefit)............. $ 60 $ 54 $ (2,609) $ (1,388) $ --
Net income (loss)........................ $ (7,336) $ 87 $ 262 $ 700 $ (7,745)
Preferred stock dividends and
accretion.............................. $ -- $ (741) $ (1,126) $ -- $ --
Income (loss) available to common
stockholders........................... $ (7,336) $ (654) $ (864) $ 700 $ (7,745)
Earnings (loss) per share:
Basic.................................. $ (1.08) $ (0.10) $ (0.16) $ 0.14 $ (1.60)
Diluted................................ $ (1.08) $ (0.10) $ (0.16) $ 0.13 $ (1.60)
Weighted-average number of common shares
outstanding............................ 6,768,929 6,283,662 5,321,179 5,144,894 4,854,004
BALANCE SHEET DATA:
Total assets............................. $ 34,977 $ 40,581 $ 33,853 $ 32,166 $ 29,166
Total stockholder's equity............... $ 15,373 $ 22,434 $ 16,408 $ 13,034 $ 11,623
Long-term debt........................... $ 5,049 $ 6,561 $ 4,094 $ 8,528 $ 8,275
Redeemable preferred stock............... $ -- $ -- $ 5,472 $ -- $ --
CASH FLOW DATA:
Cash flow provided by (used in)
operations............................. $ 2,712 $ (633) $ (1,088) $ (74) $ (5,170)
</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.
Successories is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of motivational
and self-improvement products, many of which are the Company's own proprietary
designs. The Company's products include distinctive lines of wall decor, desktop
art, books, audio tapes, personalized gifts and awards, greeting cards and mugs.
In addition, the Company sells other motivational products supplied by third
parties. In-house designers create proprietary art work and designs that can be
used in conjunction with a wide variety of products. The Company will also
customize 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 channels (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 selling golf-related
10
<PAGE>
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, THE GOLF COMPANY, 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.
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.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES products and franchised
retail stores. As a result, the Company began plans, which were in progress as
of January 30, 1999, to divest its golf catalog business and to convert its
company-owned retail stores to franchise owner-operators.
For the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
net product sales for the various distribution channels were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Direct marketing--Successories........... 49% 42% 45%
Direct marketing--Golf................... 6% 6% 3%
Retail Company-owned stores.............. 31% 31% 34%
Wholesale................................ 3% 11% 8%
Sales to franchisees..................... 11% 10% 10%
</TABLE>
The gross profit margins for retail sales attributable to Company-owned
stores are slightly lower than for direct marketing due to more non-proprietary
products being sold in the retail stores. The gross profit margin for wholesale
distribution sales, including sales to franchisees, is lower than other channels
since these sales are generally made at a significant discount from retail
price.
11
<PAGE>
RESULTS OF OPERATIONS
The following tables 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 fiscal year 1998 consisted
of the 52 weeks ended January 30, 1999. The Company's fiscal year 1997 consisted
of the 52 weeks ended January 31, 1998. The Company's fiscal year 1996 consisted
of the 52 weeks ended February 1, 1997.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FISCAL YEARS ENDED INCREASE (DECREASE)
------------------------------------------ --------------------
JANUARY 30, 1999 JANUARY 31, 1998
-------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net product sales......................... $ 52,864 100.0 $ 56,821 100.0 $ (3,957) (7.0)
Cost of goods sold........................ 24,728 46.8 25,542 45.0 (814) (3.2)
--------- --------- --------- --------- ---------
Gross profit on product sales............. 28,136 53.2 31,279 55.0 (3,143) (10.0)
Fees, royalties and other income.......... 1,624 3.1 1,824 3.2 (200) (11.0)
--------- --------- --------- --------- ---------
Gross margin.............................. 29,760 56.3 33,103 58.2 (3,343) (10.1)
Operating expenses........................ 34,235 64.8 31,089 54.7 3,146 10.1
Asset impairment charge................... 1,302 2.5 -- -- 1,302 N/A
--------- --------- --------- --------- ---------
Income (loss) from operations............. (5,777) (11.0) 2,014 3.5 (7,791) (386.8)
Interest and other expenses............... (1,499) (2.8) (1,873) (3.2) (374) (20.0)
--------- --------- --------- --------- ---------
Income (loss) before income taxes......... (7,276) (13.8) 141 0.3 (7,417) (5,260.3)
Income tax expense........................ (60) (0.1) (54) (0.1) 6 11.1
--------- --------- --------- --------- ---------
Net income (loss)......................... $ (7,336) (13.9) $ 87 0.2 $ (7,423) (8,532.2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED INCREASE (DECREASE)
------------------------------------------ --------------------
JANUARY 31, 1998 FEBRUARY 1, 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........................ 31,089 54.7 31,751 56.7 (662) (2.1)
Asset impairment charge................... -- -- 1,398 2.5 (1,398) N/A
Special charge............................ -- -- 1,303 2.3 (1,303) N/A
--------- --------- --------- --------- ---------
Income (loss) from operations............. 2,014 3.5 (697) (1.3) 2,711 389.0
Interest and 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>
YEAR ENDED JANUARY 30, 1999 (FISCAL 1998), COMPARED TO YEAR ENDED JANUARY
31, 1998
(FISCAL 1997)
Net product sales were $52,864,000 for the year ended January 30, 1999,
compared to $56,821,000 for the corresponding year ended January 31, 1998. The
$3,957,000, or 7.0% decrease in sales was comprised of wholesale sales of
$4,361,000, or 70.6%, retail Company-owned store sales of $1,425,000, or 8.0%,
12
<PAGE>
franchise sales of $94,000, or 1.7%, and direct marketing-golf sales of $58,000,
or 1.7%, offset by increase in direct marketing-Successories sales of
$1,981,000, or 8.3%.
The 8.3% increase in direct marketing-Successories sales was attributable to
improved response rates and marketing strategies associated with the Company's
core customer lists. In 1998, the Company began to increase its direct marketing
customer base through prospective catalog mailings which also contributed to the
sales increase. Retail Company-owned store sales decreased by 8.0% due to fewer
stores in operation in the current year, offset by an increase in same-store
sales of 3.3% as compared to the same twelve months in the prior year. Wholesale
sales decreased by 70.6% primarily due to discontinuing the alliance with
Waldenbooks.
Gross margin, as a percent of net product sales, was 56.3% for fiscal 1998,
compared to 58.2% for fiscal 1997. The decrease in gross margin in fiscal 1998
was due to planned product promotions pursuant to market testing in the direct
marketing and retail distribution channels, offset partially by an increase in
overall gross margin due to a decrease in wholesale sales that have a lower
gross margin.
Operating expenses were $34,235,000 for fiscal 1998, compared to $31,089,000
for fiscal 1997. Operating expenses for fiscal 1998 included additional charges
of $1,108,000, which were comprised of costs associated with reduction of
corporate personnel of $350,000, provision for bad debt relating to receivables
from the Company's Australian licensee of $400,000, retail store-related
expenses of $283,000, and expected real estate costs for the closing of the
Canadian office of $75,000. Advertising expense increased to $9,561,000 for
fiscal 1998 as compared to $9,097,000 for fiscal 1997. Also, depreciation and
amortization expense increased to $2,913,000 for fiscal 1998 as compared to
$2,516,000 for fiscal 1997. Additional factors contributing to the increase
include start-up expenses for European and golf markets, expenses related to
post-installation improvements in the Company's new information systems and
expansion of the merchandising and product development departments.
During fiscal 1998, the Company recorded an asset impairment charge of
$1,302,000 related to goodwill associated with British Links Golf Classics, Inc.
Interest expense was $1,359,000 for fiscal 1998, compared to $1,561,000 for
fiscal 1997. Included in interest is the amortization of the debt discount. This
non-cash interest amounted to $114,000 and $567,000 for fiscal 1998 and 1997,
respectively.
The net loss of $7,336,000 for fiscal 1998 was less than the net income of
$87,000 for fiscal 1997, primarily due to lower wholesale distribution sales,
lower gross margin, additional operating expenses and an asset impairment charge
in fiscal 1998.
YEAR ENDED JANUARY 31, 1998 (FISCAL 1997), COMPARED TO YEAR ENDED FEBRUARY
1, 1997
(FISCAL 1996)
Net product sales were $56,821,000 for the year ended January 31, 1998,
compared to $56,032,000 for the corresponding year ended February 1, 1997. The
$789,000, or 1.4%, increase in sales was comprised of direct marketing-golf
sales of $1,823,000, or 113.4%, wholesale sales of $1,440,000, or 30.4%, and
franchise sales of $193,000, or 3.5%, offset by decrease in direct
marketing-Successories sales of $1,470,000, or 5.8%, and retail Company-owned
store sales of $1,197,000, or 6.3%.
The decrease in direct marketing-Successories sales was due to planned
reduction in catalog mailings for fiscal 1997. In fiscal 1996 the direct
marketing-golf channel was in operation for a partial year only, whereas, in
fiscal 1997 it was in operation for the full year. Retail Company-owned store
sales decreased by 6.3% due to fewer stores in operation in the current year,
offset by an increase in same-store sales of 6.7% as compared to the same twelve
months in the prior year. Wholesale sales increased by 30.4% due to business
from several major accounts.
13
<PAGE>
Gross margin, as a percent of net product sales, was 58.2% for fiscal 1997,
compared to 60.2% for fiscal 1996. The decrease in overall gross margin in
fiscal 1997 is primarily due to an increase in wholesale business which has a
lower gross margin.
Operating expenses decreased $662,000 from fiscal 1996 to fiscal 1997. The
reduction primarily resulted from management's ongoing cost containment and
asset enhancement efforts. During fiscal 1997, the Company relocated its
multiple manufacturing/distribution facilities to a new single facility.
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 fiscal 1997,
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.
In fiscal 1996, the Company recorded an asset impairment charge of
$1,398,000 related to net book value of property and equipment related to
underperforming Company-owned stores that were planned to be closed and order
entry computer system anticipated to be replaced in 1997. Also, during fiscal
1996, the Company recorded a special charge of $1,303,000 which was comprised
of: a) $721,000 for reserve for certain costs associated with the relocation of
the Company's corporate office and manufacturing/ warehouse facilities to a new
facility; and b) $582,000 for reserve for costs associated with a plan to close
certain Company-owned stores that were underperforming. 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 fiscal 1997. 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 fiscal 1997, 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.
The Company reported net income of $87,000 and $262,000 for fiscal 1997 and
1996, respectively. The decrease in net income can be attributed to lower gross
margin and tax benefit recorded in fiscal 1996, offset by decrease in operating
expenses, asset impairment charge and special charge recorded in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements are for working capital, capital
expenditures and debt service. The Company expects to rely on cash generated
from its operations, supplemented by borrowings available on the revolving
credit loan, to fund its cash requirements.
Operating activities provided cash of $2,712,000 for the year ended January
30, 1999 (fiscal 1998), and used cash of $633,000 and $1,088,000 for the
corresponding years ended January 31, 1998 (fiscal 1997) and February 1, 1997
(fiscal 1996), respectively. The improvement in the cash flows from operating
activities was primarily attributable to a decrease in accounts and notes
receivable, and an increase in accounts payable and accrued liabilities, offset
by the net loss. The decrease in accounts and notes receivable in fiscal 1998
was primarily due to improved collections in accounts receivable after a delay
in billings in the fourth quarter of fiscal 1997 due to a system conversion.
14
<PAGE>
Investing activities used cash of $2,078,000 for fiscal 1998, compared to
$4,221,000 for fiscal 1997, and $1,125,000 for fiscal 1996. 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 Company installed new point-of-sale
computer systems in all of its retail locations in fiscal 1998. The new systems
cost approximately $500,000. Additionally, the Company opened seven
Company-owned retail stores in fiscal 1998. The Company's credit facility
limited capital expenditures to $2 million for fiscal 1998 and $1 million for
each fiscal year thereafter. The capital expenditures in fiscal 1998 exceeded
the above mentioned credit facility limit and the Company obtained a waiver from
the bank.
Financing activities used cash of $770,000 for fiscal 1998, and provided
cash of $5,432,000 and $2,156,000 for fiscal 1997 and fiscal 1996, respectively.
Scheduled debt repayments were the principal use of cash in fiscal 1998. On June
20, 1997 the Company entered into a new credit facility with a bank. Borrowings
on the new facility were the principal financing source of cash in fiscal 1997.
A portion of the funds from the new credit facility were used to payoff existing
debt and redeem a portion of the Series B convertible preferred stock in 1997.
In fiscal 1996, the Company generated cash primarily from the issuance of Series
A and B cumulative convertible preferred stock and a portion of the funds were
used to payoff existing debt.
On June 20, 1997, the Company entered into a credit facility agreement with
a bank. Per the agreement, as amended most recently on April 28, 1999, the
facility is comprised of a $7.5 million term loan and a revolving credit loan.
The revolving credit loan provides for maximum borrowings of $9 million through
May 1, 2000 and for each succeeding July 1 through December 31; the maximum
borrowings at all other times are $6 million. 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 $5 million through the year 2000 and $3 million in years
thereafter. A commitment fee of 0.5% 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 generally fluctuate based on the margin ratio, as defined, from a
minimum of prime plus 0.50% to a maximum of prime plus 3.00% on the term loan,
and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit
loan. Interest is payable monthly. At January 30, 1999, the interest rates on
the term loan and revolving credit loan were 9.00% and 8.50%, respectively; at
January 31, 1998, the interest rates on the term loan and revolving credit loan
were 9.75% and 9.25%, respectively. The term loan is payable in quarterly
installments of $125,000 through June 1, 1998, $312,500 from September 1, 1998
through June 1, 2000, and $375,000 thereafter. Prepayments on the loans are
required in certain cases including, among others, equity offerings and asset
dispositions. Further, the Company must annually prepay the loans in an amount
equal to 60% of excess cash flow, as defined. As of January 30, 1999, available
borrowings on the revolving credit loan were $1,126,000. On June 20, 1997,
warrants to purchase 150,000 shares of the Company's common stock were issued to
the bank as part of this agreement. Initially these warrants had exercise prices
ranging from $6.19 to $9.73 and expiration dates in June, 2001; however, the
exercise prices were subsequently adjusted to $2.00 and the expiration dates
were extended to June, 2005.
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 to purchase an additional 72,464 shares
were issued to the bank in connection with this amendment and initially had an
exercise price of $6.90 and an expiration date of July, 2003; however, the
exercise price was subsequently adjusted to $2.00 and the expiration date was
extended to July, 2005.
On April 28, 1999, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio, fixed charge coverage, debt to EBITDA ratio, and capital expenditure
limitation covenants for the year ended January 31, 1999, and
15
<PAGE>
adjust certain other covenants prospectively. The amended agreement requires
that (i) adjusted EBITDA, as defined, which is based on a rolling four quarter
period, may not be less than a loss of $1,565,000 for the four quarters ended
May 1, 1999, and increases each subsequent quarter to $6.8 million for the four
quarters ended October 31, 2000 and for each quarter thereafter; (ii) the
interest coverage ratio, as defined, may not be less than 0.75 to 1.0 at October
30, 1999, and increases each subsequent quarter to 5.0 to 1.0 for the quarter
ended April 30, 2000 and for each quarter thereafter; (iii) the fixed charge
coverage ratio, as defined, may not be less than 2.6 to 1.0 at January 29, 2000,
and 1.5 to 1.0 thereafter; and (iv) the debt to EBITDA ratio, as defined, may
not be greater than 3.0 to 1.0 at January 29, 2000 and thereafter. Also, in
certain cases where prepayments on the loans are made in connection with equity
offerings, the amendment provides that certain quarterly installments on the
term loan will be deferred and certain limits on borrowings relating to eligible
inventory under the revolving credit loan will be increased.
In conjunction with the April 28, 1999 amendment, warrants to purchase an
additional 300,000 shares were issued to the bank at an exercise price of $2.50
that expire in July, 2005, the expiration dates of the 150,000 warrants
previously issued to the bank on June 20, 1997 were extended an additional two
years to June, 2005, and the Company paid the bank a fee equal to 0.5% of the
aggregate commitments under the facility, or approximately $73,000.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on capital
expenditures and additional indebtedness, and restrictions on the payment of
dividends.
On May 14, 1998, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA") and interest coverage
ratio covenants for the year ended January 31, 1998, and adjust certain other
covenants. The amended agreement required 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, 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. In addition,
on September 1, 1998, the agreement was again amended to waive the EBITDA
covenant, the interest charge coverage ratio and other related covenants for the
second quarter of fiscal 1998 provided that EBITDA for the third quarter of
fiscal 1998 was not less than $1.6 million. On December 11, 1998, the Company
obtained a waiver from the bank for the EBITDA and interest coverage covenants
for the third quarter of fiscal 1998.
In conjunction with the May 14, 1998 amendment, the exercise prices of the
warrants to purchase 222,464 shares of common stock previously issued to the
bank were reduced to $5.85 and their expiration dates were extended for one
year. In conjunction with the September 1, 1998 amendment, the exercise prices
of these warrants were reduced to $3.00 and their expiration dates were extended
for another year. In conjunction with the waiver obtained on December 11, 1998,
the exercise prices of these warrants were reduced to $2.00.
16
<PAGE>
At January 30, 1999, available borrowings on the revolving credit loan were
$1,126,000. The Company believes that internally generated funds and the credit
facility will be sufficient to meet its current operating needs, fund debt
service and anticipated capital expenditures for the next year.
YEAR 2000 COMPLIANCE
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify years. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company has conducted a review of its information technology ("IT")
to identify those areas that could be affected by the Year 2000 issue. The
Company has developed a comprehensive risk-based plan. The plan addresses IT and
non-IT systems and products, as well as dependencies on those with whom the
Company does significant business.
The following table reflects the methodology and the completion status of
each phase as it applies to the key IT and non-IT systems and products:
<TABLE>
<CAPTION>
PREPARATION SURVEYING PLANNING IMPLEMENTATION
----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
FINANCIAL AND INVENTORY SYSTEMS................... Complete Complete Complete Est. Q2 - 1999
ORDER ENTRY AND FULFILLMENT....................... Complete Complete Complete Est. Q2 - 1999
TELECOMMUNICATIONS................................ Complete Complete Complete Complete
LAN/WAN........................................... Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
ANCILLARY SOFTWARE................................ Complete Complete Est. Q2 - 1999 Est. Q2 - 1999
PC SOFTWARE (NON-FINANCIAL)....................... Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
MANUFACTURING EQUIPMENT........................... Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
THIRD PARTY VENDORS............................... Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
</TABLE>
The new order entry, inventory control, manufacturing, fulfillment,
financial and point-of-sale systems are all Year 2000 compatible. The majority
of the work to be completed relates to vendor compliance issues.
Even with the above phases, the Company can not guarantee that its compliant
systems will not encounter difficulties when attempting to interface or
interconnect with third party systems, whether or not those systems are claimed
to be "compliant", and the Company can not guarantee that such failure to
interface or interconnect will not have a materially adverse effect on the
Company's operations. The Company expects to identify any significant
vendor-compliance problems by the second quarter of 1999, and to resolve those
issues by the end of the third quarter 1999. Despite this approach, there can be
no guarantee that the systems of other companies on which the Company is reliant
will be converted timely, or that a failure by another company to convert would
not have a materially adverse effect on the Company.
The Company presently believes, with the modifications made to existing
software, the Year 2000 problem will not pose significant operational risk.
While the Company cannot accurately predict a "worst case scenario" with regard
to its Year 2000 issues, the failure by the Company and/or vendors to complete
Year 2000 compliance work in a timely manner could have a materially adverse
effect on the Company's operations. The Company is in the process of assessing
these risks and uncertainties and finalizing appropriate contingency plans and
procedures in an attempt to minimize the effects of such a scenario. 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, and the Company expects to incur approximately $250,000 or less in
related capital expenditures in fiscal 1999.
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
17
<PAGE>
(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, and direct marketing catalog
advertising expenses as a percentage of sales are higher in the first calendar
quarter. The Company's quarterly operating results may also vary depending upon
such factors as the opening of new stores, converting Company-owned to franchise
stores, new catalog mailings, and the timing of new product introductions and
promotions by the Company. The Company's cash requirements generally reach a
seasonal peak in the fall 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 contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements may be deemed to include, among other things,
statements relating to anticipated financial performance, the management team,
management's long-term performance goals, plans to divest the Company's golf
catalog business and convert retail locations to franchised stores, programs to
reduce the Company's costs and enhance asset utilization, efficiencies realized
from new systems, the Company's generation of funds sufficient to meet its
current operating needs and to fund anticipated capital expenditures,
realization of deferred tax assets, costs associated with potential year 2000
problems, 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.
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
18
<PAGE>
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
1999 annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after January 30, 1999, 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 1999 annual meeting of stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
January 30, 1999, 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 1999
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after January 30, 1999, 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 1999 annual meeting of stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
January 30, 1999, and is incorporated herein by reference.
19
<PAGE>
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
30, 1999.
(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
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
(1) Financial Statements:
Reports of Independent Accountants................................................................... F-2
Consolidated Balance Sheets.......................................................................... F-3
Consolidated Statements of Operations................................................................ F-4
Consolidated Statements of Stockholders' Equity...................................................... F-5
Consolidated Statements of Cash Flows................................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
(2) Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts....................................................... F-28
</TABLE>
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.
F-1
<PAGE>
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 30,
1999 and January 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 30, 1999. 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 30, 1999 and January 31, 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended January 30, 1999, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The schedule on Page F-28 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the consolidated financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the 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 consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 19, 1999
(except with respect to the matters discussed in
Note 7, as to which the
date is April 28, 1999)
F-2
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,615,000 $ 1,751,000
Accounts and notes receivable, net............................................... 3,706,000 7,330,000
Inventories, net................................................................. 10,618,000 9,749,000
Prepaid catalog expenses......................................................... 1,067,000 1,439,000
Other prepaid expenses........................................................... 1,011,000 1,307,000
------------- -------------
Total current assets............................................................... 18,017,000 21,576,000
Property and equipment, net........................................................ 9,899,000 10,292,000
Notes receivable................................................................... 297,000 292,000
Deferred financing costs, net...................................................... 400,000 482,000
Intangible and other assets, net................................................... 888,000 2,600,000
Deferred income taxes.............................................................. 5,476,000 5,339,000
------------- -------------
TOTAL ASSETS....................................................................... $ 34,977,000 $ 40,581,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 6,035,000 $ 5,445,000
Accounts payable................................................................. 6,447,000 4,629,000
Accrued expenses................................................................. 2,022,000 1,160,000
------------- -------------
Total current liabilities.......................................................... 14,504,000 11,234,000
Long-term debt..................................................................... 5,049,000 6,561,000
------------- -------------
Total liabilities.................................................................. 19,553,000 17,795,000
------------- -------------
Minority interests in subsidiaries................................................. 51,000 352,000
------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized; 6,913,293 and
6,758,577 shares issued and outstanding, respectively.......................... 69,000 68,000
Common stock warrants............................................................ 1,788,000 1,584,000
Notes receivable from stockholders............................................... (273,000) (273,000)
Additional paid-in capital....................................................... 26,188,000 26,127,000
Accumulated deficit.............................................................. (12,335,000) (4,999,000)
Accumulated other comprehensive loss............................................. (64,000) (73,000)
------------- -------------
Total stockholders' equity......................................................... 15,373,000 22,434,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 34,977,000 $ 40,581,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net product sales............................................ $ 52,864,000 $ 56,821,000 $ 56,032,000
Cost of goods sold........................................... 24,728,000 25,542,000 23,557,000
--------------- --------------- ---------------
Gross profit on product sales................................ 28,136,000 31,279,000 32,475,000
Fees, royalties and other income............................. 1,624,000 1,824,000 1,280,000
--------------- --------------- ---------------
Gross margin................................................. 29,760,000 33,103,000 33,755,000
Operating expenses........................................... 34,235,000 31,089,000 31,751,000
Asset impairment charge...................................... 1,302,000 -- 1,398,000
Special charge............................................... -- -- 1,303,000
--------------- --------------- ---------------
Income (loss) from operations................................ (5,777,000) 2,014,000 (697,000)
--------------- --------------- ---------------
Other income (expense):
Minority interests in subsidiaries......................... (100,000) (269,000) (184,000)
Interest income............................................ 35,000 31,000 19,000
Interest expense........................................... (1,359,000) (1,561,000) (1,491,000)
Other...................................................... (75,000) (74,000) 6,000
--------------- --------------- ---------------
Total other expense.......................................... (1,499,000) (1,873,000) (1,650,000)
--------------- --------------- ---------------
Income (loss) before income taxes............................ (7,276,000) 141,000 (2,347,000)
Income tax benefit (expense)................................. (60,000) (54,000) 2,609,000
--------------- --------------- ---------------
Net income (loss)............................................ $ (7,336,000) $ 87,000 $ 262,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Foreign currency translation adjustment...................... 9,000 (37,000) 172,000
--------------- --------------- ---------------
Comprehensive income (loss).................................. $ (7,327,000) $ 50,000 $ 434,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Loss per share:
Basic and Diluted.......................................... $ (1.08) $ (.10) $ (.16)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER COMMON
---------------------- PAID-IN ACCUMULATED FROM COMPREHENSIVE STOCK
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS LOSS WARRANTS
--------- ----------- ---------- ------------ ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3,
1996....................... 5,208,895 $ 52,000 $16,301,000 $(3,481,000) -- $ (208,000) $ 370,000
Net income................... -- -- -- 262,000 -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- 172,000 --
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) -- $ (36,000) $ 370,000
Net income................... -- -- -- 87,000 -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- (37,000) --
Issuance of warrants......... -- -- -- -- -- -- 1,214,000
Notes receivable............. -- -- -- -- (273,000) -- --
Preferred stock transactions:
Preferred stock
dividends................ -- -- -- (153,000) -- -- --
Accretion of preferred
stock discount........... -- -- (588,000) (588,000) -- -- (588,000)
Common stock transactions:
Sales of common shares..... 44,451 1,000 215,000 -- -- -- --
Conversion of Series B
preferred stock............ 1,010,667 10,000 5,550,000 -- -- -- --
--------- ----------- ---------- ------------ ------------ -------------- ---------
Balance at January 31,
1998....................... 6,758,577 $ 68,000 $26,127,000 $(4,999,000) $ (273,000) $ (73,000) $1,584,000
Net loss..................... -- -- -- (7,336,000) -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- 9,000 --
Stock warrants............... -- -- -- -- -- -- 204,000
Common stock transactions:
Sales of common shares and
exercise of stock
options.................. 154,716 1,000 61,000 -- -- -- --
--------- ----------- ---------- ------------ ------------ -------------- ---------
Balance at January 30,
1999....................... 6,913,293 $ 69,000 $26,188,000 ($12,335,000) $ (273,000) $ (64,000) $1,788,000
--------- ----------- ---------- ------------ ------------ -------------- ---------
--------- ----------- ---------- ------------ ------------ -------------- ---------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at February 3,
1996....................... $13,034,000
Net income................... 262,000
Foreign currency translation
adjustment................. 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....................... $16,408,000
Net income................... 87,000
Foreign currency translation
adjustment................. (37,000)
Issuance of warrants......... 1,214,000
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..... 216,000
Conversion of Series B
preferred stock............ 5,560,000
------------
Balance at January 31,
1998....................... $22,434,000
Net loss..................... (7,336,000)
Foreign currency translation
adjustment................. 9,000
Stock warrants............... 204,000
Common stock transactions:
Sales of common shares and
exercise of stock
options.................. 62,000
------------
Balance at January 30,
1999....................... $15,373,000
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $(7,336,000) $ 87,000 $ 262,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 2,913,000 2,516,000 2,129,000
Deferred income tax benefit.............................. (137,000) (49,000) (2,656,000)
Amortization of debt discount............................ 114,000 567,000 308,000
Asset impairment charge.................................. 1,302,000 -- 1,398,000
Loss on disposal of property and equipment............... 69,000 -- --
--------------- --------------- ---------------
(3,075,000) 3,121,000 1,441,000
Changes in operating assets and liabilities:
Accounts and notes receivable............................ 4,013,000 (3,173,000) (853,000)
Inventories.............................................. (869,000) (779,000) 428,000
Prepaid catalog expenses................................. 372,000 567,000 1,844,000
Other prepaid expenses................................... (142,000) (473,000) (113,000)
Deferred financing costs................................. 82,000 (482,000) --
Accounts payable......................................... 1,818,000 1,138,000 (3,444,000)
Reserve for stores to be closed.......................... -- (245,000) 420,000
Reserve for relocation-related expenses.................. -- (497,000) 497,000
Accrued expenses......................................... 731,000 397,000 381,000
Minority interest........................................ (301,000) (157,000) (74,000)
Other.................................................... 83,000 (50,000) (1,615,000)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities.......... 2,712,000 (633,000) (1,088,000)
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from sale of property and equipment............... 35,000 -- --
Proceeds from notes receivable issued in connection with
sale of property and equipment........................... 85,000 -- --
Net cash paid for acquisitions............................. -- (50,000) (360,000)
Purchases of property and equipment........................ (2,198,000) (4,171,000) (765,000)
--------------- --------------- ---------------
Net cash used in investing activities...................... (2,078,000) (4,221,000) (1,125,000)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuing common stock......................... 62,000 216,000 314,000
Proceeds from issuing Series A and B preferred stock,
net...................................................... -- -- 6,382,000
Proceeds from exercise of stock options and warrants....... -- -- 202,000
Preferred stock dividends.................................. -- (153,000) (33,000)
Redemption of Series B preferred stock..................... -- (500,000) --
Notes receivable from officers............................. -- (273,000) --
Net borrowings on revolving credit loan.................... 427,000 4,447,000 --
Proceeds from long-term debt............................... -- 8,981,000 2,500,000
Repayments of long-term debt............................... (1,259,000) (7,286,000) (7,209,000)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities.......... (770,000) 5,432,000 2,156,000
--------------- --------------- ---------------
Net increase (decrease) in cash.............................. (136,000) 578,000 (57,000)
Cash and cash equivalents, beginning of period............... 1,751,000 1,173,000 1,230,000
--------------- --------------- ---------------
Cash and cash equivalents, end of period..................... $ 1,615,000 $ 1,751,000 $ 1,173,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS
Successories, Inc. (formerly Celex Group, Inc.) and its subsidiaries
(collectively 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 the SUCCESSORIES, WINNERS Collection, BRITISH LINKS and
THE GOLF COMPANY FROM GOLF DIGEST trade names through direct marketing (catalog,
electronic commerce and telemarketing), retail (Company-owned stores) and
wholesale distribution (including sales to franchisees) channels. The Company
operates a chain of Successories retail stores located primarily in the United
States. The Company also operates a franchising program whereby it sells
franchises to market the Company's products under the SUCCESSORIES trademark.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
The Company's fiscal year ends on the Saturday closest to January 31.
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. 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
F-7
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $9,561,000, $9,097,000, and $11,062,000 for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively, which is included in operating expenses on the accompanying
consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for on
a straight-line basis over the estimated useful lives of the related assets,
ranging from 5 to 10 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.
Depreciation expense was $2,139,000, $1,923,000, and $1,751,000 for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively, which is included in cost of goods sold and operating expenses in
the accompanying consolidated statements of operations.
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining financing are capitalized and
amortized over the term of the related debt. Amortization expense was $82,000
and $44,000 for the years ended January 30, 1999 and January 31, 1998,
respectively, which is included in interest expense in the accompanying
consolidated statements of operations. Accumulated amortization was $126,000 and
$44,000 as of January 30, 1999 and January 31, 1998, respectively.
SOFTWARE DEVELOPMENT
The Company directly expenses all costs incurred in the development of
software for internal use.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed for Internal Use." This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
plans to adopt SOP 98-1 for the year ending January 29, 2000 and has not yet
quantified the potential impact of this SOP on the Company's results of
operations.
INTANGIBLE ASSETS
Intangible assets consist 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, see Note 8. Accumulated amortization amounted to
$1,706,000 and $1,310,000 at January 30, 1999 and January 31, 1998,
respectively.
F-8
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS PAYABLE
Checks outstanding of approximately $417,000 and $871,000, are included in
accounts payable as of January 30, 1999 and January 31, 1998, 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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost for stock options is recognized for
stock option awards granted at or above fair market value.
In October 1995 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based compensation" was issued, which established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. The Company has elected
to remain on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
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.
COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption had no impact on the Company's net income
or stockholders' equity. SFAS 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
F-9
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3. RISKS AND UNCERTAINTIES
ABSENCE OF OPERATING PROFITS
The Company has incurred a loss from operations in two of the past three
years, and has an accumulated deficit of $12,335,000 as of January 30, 1999.
While management does not expect to incur an operating loss in future years, its
ability to achieve profitability will depend on many factors including the
Company's ability to develop, manufacture, introduce and market commercially
acceptable products while controlling operating costs.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES products and franchised
retail stores. As a result, management developed plans, which were in progress
as of January 30, 1999, to divest its golf catalog business and to convert its
Company-owned retail stores to franchise owner-operators. The Company retained
an investment banking firm specializing in direct marketing to market the golf
catalog business. The Company has also hired a consultant with experience in
marketing franchises to assist with the conversion of the Company-owned retail
stores. The Company has not yet sold the golf catalog business. In fiscal 1998,
the Company converted five of its Company-owned retail stores to franchised
stores.
In addition, the Company has reduced overhead expenses and management
expects to continue expense reductions. The Company's sales and net loss for the
first two months of the fiscal year beginning January 31, 1999 were $8,105,000
(unaudited) and $417,000 (unaudited), respectively. These interim
F-10
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. RISKS AND UNCERTAINTIES (CONTINUED)
results are consistent with the Company's projections for the two month period.
It should be noted that due to seasonality, the projection for the full year
indicates a net profit. However, there can be no assurance that the Company will
achieve a profitable level of operations in fiscal 1999 or that once
profitability is achieved, that it can be sustained.
FINANCING CONSIDERATIONS
Based on current projections, management believes that there will be
sufficient cash generated from operations and borrowings under its credit
facility to enable the Company to operate for the foreseeable future. The
Company is discussing possible equity infusions with various parties. This
additional equity, if obtained, would provide additional working capital in the
event the Company does not achieve its projections.
NOTE 4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------ ------------
<S> <C> <C>
Accounts receivable............................................... $ 4,121,000 $ 7,830,000
Notes receivable.................................................. 542,000 402,000
------------ ------------
4,663,000 8,232,000
Less allowance for doubtful accounts and sales returns............ (660,000) (610,000)
------------ ------------
4,003,000 7,622,000
Less current portion.............................................. 3,706,000 7,330,000
------------ ------------
Noncurrent portion................................................ $ 297,000 $ 292,000
------------ ------------
------------ ------------
</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
are primarily from franchisees and licensees, and are generally secured by a
personal guarantee and the assets of the franchised and licensed operations.
In fiscal 1998, the Company converted five of its company-owned retail
stores to franchised stores. The aggregate price for the sale of the stores' net
assets was $512,000, of which $35,000 was paid in cash and the balance of
$477,000 was financed with promissory notes. The payments on the promissory
notes are being made monthly from July 1998 through October 2002. The interest
rates on the promissory notes range from 7% to 9%.
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
F-11
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCOUNTS AND NOTES RECEIVABLE (CONTINUED)
years each provided certain defined conditions have been fulfilled. On November
23, 1998, the above mentioned licensee was placed into voluntary administration
in Australia. At the time of administration, the licensee owed the company
approximately $514,000, consisting primarily of notes receivable, trade
receivable and royalties. During the year ended January 30, 1999, the Company
recorded a provision for doubtful accounts of $400,000 relating to the
receivables from the license, and management believes the remainder of the
outstanding balance is collectible.
NOTE 5. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods................................................... $ 8,199,000 $ 6,690,000
Raw materials.................................................... 2,638,000 3,187,000
------------- ------------
10,837,000 9,877,000
Less reserve for obsolescence.................................... (219,000) (128,000)
------------- ------------
$ 10,618,000 $ 9,749,000
------------- ------------
------------- ------------
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------- -------------
<S> <C> <C>
Leasehold improvements......................................... $ 7,822,000 $ 7,506,000
Machinery and equipment........................................ 7,049,000 5,866,000
Furniture and fixtures......................................... 4,159,000 4,200,000
Vehicles....................................................... 19,000 19,000
------------- -------------
19,049,000 17,591,000
Less accumulated depreciation and amortization................. (9,150,000) (7,299,000)
------------- -------------
$ 9,899,000 $ 10,292,000
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. DEBT
Debt is comprised of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------- -------------
<S> <C> <C>
Bank borrowings:
Term loan, net of debt discount of $477,000 and $401,000..... $ 5,800,000 $ 6,849,000
Revolving credit loan........................................ 4,874,000 4,447,000
Fixed rate loan, net of debt discount of $260,000 and
$246,000................................................... 240,000 254,000
Subordinated notes:
British Links Golf Classics, Inc. former owners.............. -- 155,000
Capital lease obligations...................................... 170,000 301,000
------------- -------------
11,084,000 12,006,000
Less current portion........................................... (6,035,000) (5,445,000)
------------- -------------
Long-term debt................................................. $ 5,049,000 $ 6,561,000
------------- -------------
------------- -------------
</TABLE>
On June 20, 1997, the Company entered into a credit facility agreement with
a bank. Per the agreement, as amended most recently on April 28, 1999, the
facility is comprised of a $7.5 million term loan and a revolving credit loan.
The revolving credit loan provides for maximum borrowings of $9 million through
May 1, 2000 and for each succeeding July 1 through December 31; the maximum
borrowings at all other times are $6 million. 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 $5 million through the year 2000 and $3 million in years
thereafter. A commitment fee of 0.5% 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 generally fluctuate based on the margin ratio, as defined, from a
minimum of prime plus 0.50% to a maximum of prime plus 3.00% on the term loan,
and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit
loan. Interest is payable monthly. At January 30, 1999, the interest rates on
the term loan and revolving credit loan were 9.00% and 8.50%, respectively; at
January 31, 1998, the interest rates on the term loan and revolving credit loan
were 9.75% and 9.25%, respectively. The term loan is payable in quarterly
installments of $125,000 through June 1, 1998, $312,500 from September 1, 1998
through June 1, 2000, and $375,000 thereafter. Prepayments on the loans are
required in certain cases including, among others, equity offerings and asset
dispositions. Further, the Company must annually prepay the loans in an amount
equal to 60% of excess cash flow, as defined. As of January 30, 1999, available
borrowings on the revolving credit loan were $1,126,000. On June 20, 1997,
warrants to purchase 150,000 shares of the Company's common stock were issued to
the bank as part of this agreement. Initially these warrants had exercise prices
ranging from $6.19 to $9.73 and expiration dates in June, 2001; however, the
exercise prices were subsequently adjusted to $2.00 and the expiration dates
were extended to June, 2005.
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 to purchase an additional 72,464 shares
were issued to the bank in connection with this amendment and initially had an
exercise price of $6.90 and
F-13
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. DEBT (CONTINUED)
an expiration date of July, 2003; however, the exercise price was subsequently
adjusted to $2.00 and the expiration date was extended to July, 2005.
On April 28, 1999, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio, fixed charge coverage, debt to EBITDA ratio, and capital expenditure
limitation covenants for the year ended January 31, 1999, and adjust certain
other covenants prospectively. The amended agreement requires that (i) adjusted
EBITDA, as defined, which is based on a rolling four quarter period, may not be
less than a loss of $1,565,000 for the four quarters ended May 1, 1999, and
increases each subsequent quarter to $6.8 million for the four quarters ended
October 31, 2000 and for each quarter thereafter; (ii) the interest coverage
ratio, as defined, may not be less than 0.75 to 1.0 at October 30, 1999, and
increases each subsequent quarter to 5.0 to 1.0 for the quarter ended April 30,
2000 and for each quarter thereafter; (iii) the fixed charge coverage ratio, as
defined, may not be less than 2.6 to 1.0 at January 29, 2000, and 1.5 to 1.0
thereafter; and (iv) the debt to EBITDA ratio, as defined, may not be greater
than 3.0 to 1.0 at January 29, 2000 and thereafter. Also, in certain cases where
prepayments on the loans are made in connection with equity offerings, the
amendment provides that certain quarterly installments on the term loan will be
deferred and certain limits on borrowings relating to eligible inventory under
the revolving credit loan will be increased.
In conjunction with the April 28, 1999 amendment, warrants to purchase an
additional 300,000 shares were issued to the bank at an exercise price of $2.50
that expire in July, 2005, the expiration dates of the 150,000 warrants
previously issued to the bank on June 20, 1997 were extended an additional two
years to June, 2005, and the Company paid the bank a fee equal to 0.5% of the
aggregate commitments under the facility, or approximately $73,000.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on capital
expenditures and additional indebtedness, and restrictions on the payment of
dividends.
On May 14, 1998, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA") and interest coverage
ratio covenants for the year ended January 31, 1998, and adjust certain other
covenants. The amended agreement required 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, 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. In addition,
on September 1, 1998, the agreement was again amended to waive the EBITDA
covenant, the interest charge coverage ratio and other related covenants for the
second quarter of fiscal 1998 provided that EBITDA for the third quarter of
fiscal 1998 was not less than $1.6 million. On December 11, 1998, the Company
obtained a waiver from the bank for the EBITDA and interest coverage covenants
for the third quarter of fiscal 1998.
In conjunction with the May 14, 1998 amendment, the exercise prices of the
warrants to purchase 222,464 shares of common stock previously issued to the
bank were reduced to $5.85 and their expiration dates were extended for one
year. In conjunction with the September 1, 1998 amendment, the exercise prices
of these warrants were reduced to $3.00 and their expiration dates were extended
for another year. In conjunction with the waiver obtained on December 11, 1998,
the exercise prices of these warrants were reduced to $2.00.
F-14
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. DEBT (CONTINUED)
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 were paid in three installments:
$100,000 was paid on May 1, 1997 and September 20, 1997, and the remaining
$155,000 was paid on September 20, 1998. Interest was payable at the prime rate.
The stock warrants issued in conjunction with the credit facility and
certain other financing transactions were assigned a fair value using the
Black-Scholes option pricing model. The fair value of the 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 warrants
amounted to $114,000, $567,000 and $308,000 for the years ended January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
The weighted average interest rate on borrowings outstanding as of January
30, 1999 and January 31, 1998 was 9.9% and 9.6%, respectively.
Aggregate future maturities of debt are as follows:
<TABLE>
<S> <C>
Fiscal year ending:
January 29, 2000............................................. $6,203,000
February 3, 2001............................................. 1,429,000
February 2, 2002............................................. 1,507,000
February 1, 2003............................................. 1,507,000
January 31, 2004............................................. 1,159,000
Thereafter................................................... 16,000
----------
$11,821,000
----------
----------
</TABLE>
NOTE 8: ASSET IMPAIRMENT CHARGE
In October 1996, the Company acquired the stock of British Links Golf
Classics, Inc., (British Links) a catalog company specializing in golf-related
wall decor, gifts and other collectibles for approximately $1.4 million.
Substantially all the purchase price was allocated to goodwill. Subsequently,
pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Company evaluated the
realizability of the intangibles related to its British Links business.
While the Company was able to achieve certain incremental sales of
golf-related products using its in-house mailing lists, other operating
efficiencies related to merchandising and fulfillment which were contemplated at
the time of the acquisition have not been fully realized. In September 1998, the
Company announced that it would focus its future growth on its core motivational
products business and its two most profitable distribution channels: direct
marketing and franchise. As a result, the Company developed plans, which were in
progress as of January 30, 1999, to divest its golf catalog business.
Because anticipated consumer demand for golf gifts has developed more slowly
than originally expected, and because plans to sell the golf catalog business to
a strategic buyer have yet to materialize, the Company has determined that the
estimated future value of cash flows related to British Links is below the
carrying value of the related goodwill. Given that the value of future cash
flows is uncertain due to market conditions, during the year ended January 30,
1999 the Company recorded an asset impairment charge of
F-15
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: ASSET IMPAIRMENT CHARGE (CONTINUED)
approximately $1.3 million, which represents the unamortized carrying value of
the goodwill for British Links.
In addition, during the year ended February 1, 1997 the Company recorded an
asset impairment charge of approximately $1.4 million. The asset impairment
charge related to the net book value of property and equipment associated with
the underperforming Company-owned stores that were closed and order entry
computer system replaced in 1997.
NOTE 9. SPECIAL CHARGE
The Company recorded a special charge of $1,303,000 for the year ended
February 1, 1997 which was comprised primarily of: a) $721,000 reserve for
certain costs associated with the relocation of the Company's
manufacturing/warehouse facilities and corporate office to a new facility; and
b) $582,000 for costs other than the net book value of property and equipment
associated with a plan to close certain Company-owned stores that were
underperforming. 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 10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal................................ $ -- $ -- $ --
State.................................. 11,000 18,000 47,000
Foreign................................ 186,000 85,000 --
Deferred................................. (137,000) (49,000) (2,656,000)
--------------- --------------- ---------------
$ 60,000 $ 54,000 $ (2,609,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
A reconciliation between the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
----------------- ----------------- -----------------
<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
Other, primarily permanent items......... -- (22.0) (5.6)
Valuation allowance...................... (38.2) -- --
----- ----- -----
0.8% 38.3% 111.2%
----- ----- -----
----- ----- -----
</TABLE>
F-16
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
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 30 JANUARY 31,
1999 1998
------------- ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable............................................ $ 258,000 $ 238,000
Inventories.................................................... 156,000 108,000
Depreciation and amortization.................................. -- 79,000
Impairment loss................................................ 520,000 --
Loss carryforwards............................................. 7,615,000 5,920,000
Other, primarily accruals...................................... 418,000 170,000
------------- ------------
8,967,000 6,515,000
------------- ------------
Deferred tax liabilities:
Depreciation and amortization.................................. 70,000 --
Prepaid advertising............................................ 1,206,000 1,176,000
------------- ------------
------------- ------------
$ 1,276,000 $ 1,176,000
Less valuation allowance......................................... (2,215,000) --
------------- ------------
Net deferred tax asset........................................... $ 5,476,000 $ 5,339,000
------------- ------------
------------- ------------
</TABLE>
During the year ended January 30, 1999 a valuation allowance of $2,215,000
was recorded against the benefit associated with fiscal 1998's net operating
loss and the impairment loss. At year ended February 1, 1997, the valuation
allowance associated with the net deferred tax asset was reduced by $2,635,000,
which resulted in decreasing the valuation allowance to zero. Although
realization of the net deferred tax asset is not assured, management 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, see Note 3.
F-17
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
The Company has approximately $19,525,000 of tax net operating loss
carryforwards as of January 30, 1999, which are available to reduce future
taxable income and expire as follows:
<TABLE>
<S> <C>
2009........................................................... $1,088,000
2010........................................................... $11,082,000
2011........................................................... $1,496,000
2019........................................................... $5,859,000
----------
Total.......................................................... $19,525,000
----------
----------
</TABLE>
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 11. 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Basic and diluted earnings (loss) per share:
Net income (loss).......................................... $ (7,336,000) $ 87,000 $ 262,000
Preferred stock dividends and accretion.................... -- (741,000) (1,126,000)
--------------- --------------- ---------------
Loss available to common stockholders...................... $ (7,336,000) $ (654,000) $ (864,000)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted-average shares.................................... 6,768,929 6,283,662 5,321,179
--------------- --------------- ---------------
--------------- --------------- ---------------
Basic and diluted earnings (loss) per share................ $ (1.08) $ (.10) $ (.16)
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The diluted computations for the years ended January 30, 1999, 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 loss per share.
NOTE 12. 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. See Note 19.
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 a purchase price of
approximately $230,000 and forgiveness of indebtedness owed by the franchisee.
F-18
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
A member of the Company's Board of Directors, who is also a shareholder,
serves as a consultant to the Company on various tax and financial matters. Fees
paid to his firm for these services were $179,000, $85,000, and $141,000 for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997,
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 $103,000, $151,000, and $262,000 for the years
ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
NOTE 13. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" as of January 30, 1999. This Statement
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and in interim financial
reports issued to shareholders.
The Company's reportable segments are the various distribution channels used
to market its products. The Company's products have similar purposes and uses in
each channel of distribution, but profitability varies among the channels. The
Company considers itself a single line of business with products that are
marketed through direct marketing (catalog, electronic commerce and
telemarketing), retail (Company-owned stores), wholesale and franchise channels.
The Company has five reportable segments--Direct Marketing--Successories, Direct
Marketing--Golf, Retail Company-owned stores, Wholesale and Sales to
Franchisees.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on income(loss) before
other income(expense) and income taxes.
F-19
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SEGMENT AND RELATED INFORMATION (CONTINUED)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" row includes corporate
related items not allocated to reportable segments.
<TABLE>
<CAPTION>
NET SEGMENT TOTAL CAPITAL DEPRECIATION
SALES PROFIT (LOSS) ASSETS EXPENDITURES AND AMORTIZATION
------------- ------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
Direct Marketing Successories...... $ 25,740,000 $ 4,519,000 $ 2,066,000 $ -- $ 32,000
Direct Marketing Golf.............. 3,372,000 (2,479,000) 764,000 -- 88,000
Retail Company-owned stores........ 16,330,000 (824,000) 6,527,000 1,245,000 763,000
Wholesale.......................... 1,814,000 (236,000) 1,079,000 -- --
Sales to Franchisees............... 5,608,000 1,373,000 1,456,000 -- 19,000
Other.............................. -- (9,689,000) 23,085,000 953,000 2,011,000
CONSOLIDATED..................... $ 52,864,000 $ (7,336,000) $ 34,977,000 $2,198,000 $ 2,913,000
FISCAL 1997:
Direct Marketing Successories...... $ 23,759,000 $ 4,833,000 $ 4,705,000 $ -- $ 47,000
Direct Marketing Golf.............. 3,430,000 (410,000) 2,043,000 -- 33,000
Retail Company-owned stores........ 17,755,000 1,078,000 7,007,000 318,000 872,000
Wholesale.......................... 6,173,000 1,460,000 2,849,000 -- --
Sales to Franchisees............... 5,704,000 1,878,000 1,093,000 -- 19,000
Other.............................. -- (8,752,000) 22,884,000 3,853,000 1,545,000
CONSOLIDATED..................... $ 56,821,000 $ 87,000 $ 40,581,000 $4,171,000 $ 2,516,000
FISCAL 1996:
Direct Marketing Successories...... $ 25,229,000 $ 2,847,000 $ 4,395,000 $ -- $ 60,000
Direct Marketing Golf.............. 1,607,000 291,000 1,906,000 -- 1,000
Retail Company-owned stores........ 18,952,000 (391,000) 7,176,000 193,000 1,024,000
Wholesale.......................... 4,733,000 1,458,000 1,047,000 -- --
Sales to Franchisees............... 5,511,000 2,142,000 700,000 -- 19,000
Other.............................. -- (6,085,000) 18,629,000 572,000 1,025,000
CONSOLIDATED..................... $ 56,032,000 $ 262,000 $ 33,853,000 $ 765,000 $ 2,129,000
</TABLE>
The Company utilizes its facilities and the majority of its assets
interchangeably among each distribution channel. Assets that relate specifically
to a reportable segment have been included in the above table. Assets identified
to the reportable segments are primarily cash, receivables, inventory, prepaid
catalogs, property and equipment, and intangibles.
F-20
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. SEGMENT AND RELATED INFORMATION (CONTINUED)
The following table presents the details for "Other" segment profit (loss).
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Corporate expenses................................. $ 6,723,000 $ 5,670,000 $ 4,535,000
Unallocated depreciation and amortization
expense.......................................... 1,407,000 1,155,000 952,000
Unallocated asset impairment and special charge.... -- -- 1,557,000
Other expense...................................... 1,499,000 1,873,000 1,650,000
Income tax expense (benefit)....................... 60,000 54,000 (2,609,000)
------------ ------------ -------------
$ 9,689,000 $ 8,752,000 $ 6,085,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Corporate expenses are primarily charges for those functions not
specifically attributable to any specific segment; these functions include the
merchandising, information systems, accounting, legal, human resource and
executive departments. Included in the expenses associated with these functions
are payroll and related costs, professional fees, information system maintenance
costs, office occupancy costs, and property and casualty insurance.
The Company's operations are principally in the United States. Operations
outside of the United States are primarily in Europe, United Kingdom and
Australia. No single foreign country or geographic area is significant to the
consolidated operations. Foreign operations' net sales were $480,000, $534,000,
and $795,000, for fiscal 1998, 1997 and 1996, respectively. Long-lived assets
are all located in the United States.
The Company's products include distinctive lines of wall decor, desktop art,
books and greeting cards, computer and audio products, personalized gifts and
awards, and mugs. In addition, the Company sells other motivational products
supplied by third parties. In fiscal 1998 sales by product categories comprised
of approximately 44% wall decor, 23% desktop art, 17% books and greeting cards,
4% computer and audio products, 9% personalized gifts and awards and 3% other
products. Information pertaining to sales by product categories for fiscal 1997
and 1996 was not available due to system limitations.
In fiscal 1998, 1997 and 1996, no single customer or group under common
control represented 10% or more of the Company's sales.
F-21
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statements of cash flows are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR-ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes........................... $ 26,000 $ 10,000 $ 11,000
Interest............................... 1,188,000 958,000 1,277,000
Noncash investing and financing
activities:
Equipment purchased under capital
leases............................... -- $ 203,000 $ 64,000
Notes receivable issued on sale of
property and equipment............... $ 477,000 -- --
Acquisitions of businesses:
Fair value of assets acquired........ -- 230,000 1,710,000
Liabilities assumed.................. -- -- (450,000)
Subordinated notes issued............ -- -- (400,000)
Common stock issued.................. -- -- (500,000)
</TABLE>
NOTE 15. 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. On July 22, 1998, the number of Company's common stock shares
available for grant under the Option Plan increased from 1,450,000 to 1,700,000
shares. 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 20,850, 48,394 and 65,079 for
the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
The Company measures 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
F-22
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. OPTIONS AND WARRANTS (CONTINUED)
No. 123, the Company's net income (loss) and loss per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR-ENDED
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss):
As reported............................ $ (7,336,000) $ 87,000 $ 262,000
Pro forma.............................. (7,905,000) (494,000) (392,000)
Basic and diluted loss per share:
As reported............................ (1.08) (.10) (.16)
Pro forma.............................. (1.17) (.18) (.29)
</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 30, 1999, January 31, 1998 and February 1, 1997: risk-free
interest rate of 4.71%, 6.61% and 6.24%, 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 88.63%, 93.94% and 98.36%, respectively.
A summary of the status of the Option Plan as of January 30, 1999, January
31, 1998, and February 1, 1997, and changes during the periods then ended are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
---------------------- ---------------------- ----------------------
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................ 1,293,170 $ 6.24 1,001,750 $ 6.34 821,250 $ 5.02
Granted.................................. 206,000 3.00 470,000 5.85 385,000 6.95
Exercised................................ -- -- -- -- (192,500) 1.90
Forfeited................................ (32,914) 6.41 (178,580) 5.75 (12,000) 7.21
Expired/canceled......................... (29,728) 6.26 -- -- -- --
--------- --------- ---------
Outstanding, end of year................. 1,436,528 5.77 1,293,170 6.24 1,001,750 6.34
Exercisable, end of year................. 869,006 6.25 611,750 6.22 455,500 6.21
Weighted-average fair value of options
granted................................ $ 2.62 $ 5.27 $ 5.39
</TABLE>
As of January 30, 1999, 181,000 of the options outstanding have exercise
prices ranging between $2.125 and $5.32, with a weighted-average exercise price
of $2.55 and a weighted-average remaining contractual life of 9.7 years (none of
these options are exercisable). In addition 1,012,528 options have exercise
prices ranging between $5.33 and $6.875, with a weighted-average exercise price
of $5.79 and a weighted-average remaining contractual life of 6.2 years (660,806
of these options are exercisable with a weighted-average exercise price of
$5.65). The remaining 243,000 options have exercise prices ranging between
$6.876 and $14.66, with a weighted average exercise price of $8.09 and a
weighted average remaining contractual life of 7.0 years (208,200 of these
options are exercisable with a weighted average exercise price of $8.17).
F-23
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. OPTIONS AND WARRANTS (CONTINUED)
During the year ended January 30, 1999, an executive officer of the company
exercised stock options granted prior to the adoption of the Option Plan. In
November 1996, the Company received shares of common stock in exchange for
options to purchase 165,000 shares of common stock. Options to purchase 31,350
shares were exercised in November 1996. Options to purchase the remaining
133,650 shares were exercised on January 15, 1999.
The Company has also issued stock warrants primarily in connection with
certain financing transactions. Such warrants generally vest immediately and
expire five to eight years from the date of grant. As of January 30, 1999, stock
warrants for 222,464 shares were outstanding. These warrants have a weighted-
average exercise price of $2.00 and a weighted-average remaining contractual
life of 5.2 years. The weighted-average fair value of the warrants granted
during the years ended January 30, 1999 and January 31, 1998, were $1.58 and
$3.23, respectively.
The fair value of each warrant is estimated on the date of issue using the
Black-Scholes pricing model with the following assumptions for the years ended
January 30, 1999 and January 31, 1998: risk-free interest rate of 4.71% and
6.61%, respectively; expected dividend yield of 0% for both fiscal years;
expected life of 5 years for both fiscal years; and expected volatility of 59.5%
and 60.8%, respectively.
NOTE 16. 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 17. 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, April 1st, July 1st, or October 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
F-24
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. 401(K) PLAN (CONTINUED)
401(K) Plan were $36,000, $29,000, and $30,000 for the years ended January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
NOTE 18. 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 $1,400,000. 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. Subsequent to the acquisition, the Company recorded an asset
impairment charge for the carrying value of the goodwill during the year ended
January 30, 1999, see Note 8.
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 19. 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 2008. 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 30, 1999, are as
follows:
<TABLE>
<CAPTION>
OFFICE AND RETAIL
WAREHOUSE LOCATIONS TOTAL
------------ ------------ -------------
<S> <C> <C> <C>
Fiscal year ending:
January 29, 2000................................ $ 785,000 $ 1,113,000 $ 1,898,000
February 3, 2001................................ 758,000 898,000 1,656,000
February 2, 2002................................ 753,000 842,000 1,595,000
February 1, 2003................................ 771,000 811,000 1,582,000
January 31, 2004................................ 790,000 727,000 1,517,000
Thereafter...................................... 4,561,000 841,000 5,402,000
------------ ------------ -------------
$ 8,418,000 $ 5,232,000 $ 13,650,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-25
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rental expense for all operating leases was $2,561,000, $2,644,000, and
$3,360,000, for the years ended January 30, 1999, January 31, 1998 and February
1, 1997, 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 as of both January 30, 1999 and January 31, 1998, and
accumulated amortization of $885,000 and $736,000 at those dates, respectively.
The future minimum lease payments for all capital leases in effect as of
January 30, 1999, are as follows:
<TABLE>
<S> <C>
Fiscal year ending:
January 29, 2000............................................... $ 82,000
February 3, 2001............................................... 57,000
February 2, 2002............................................... 10,000
February 1, 2003............................................... 10,000
January 31, 2004............................................... 10,000
Thereafter..................................................... 23,000
---------
Total minimum lease payments..................................... 192,000
Less amount representing interest................................ (22,000)
---------
Present value of net minimum lease payments...................... $ 170,000
---------
---------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers. The
agreements provide for aggregate annual salaries of $600,000 and contain
confidentiality and noncompetition provisions. The agreements expire in 2001.
ROYALTY AGREEMENT
The Company is obligated under a royalty agreement to pay a minimum royalty
in the amount of $200,000, $250,000, $300,000 and $400,000 for the calendar
years 1999, 2000, 2001 and 2002, respectively. The Company has the right to
terminate the agreement for the years after 1999 by providing written notice
prior to September 30, 1999.
LETTER OF CREDIT
The Company has a standby letter of credit outstanding in the amount of
$400,000 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 August 1998, James M. Beltrame, the Company's former president and chief
executive officer ("Claimant"), filed a Demand for Arbitration dated August 11,
1998 with the American Arbitration
F-26
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Association (Case No. 51-160-00347-98). Claimant was separated from employment
with the Company on June 26, 1998 and now seeks arbitration pursuant to an
Employment Agreement dated June 1, 1996 between the Company and Claimant.
Claimant alleges and seeks lost compensation and benefits due and owing to him
from the Company in an amount claimed to be in excess of $400,000. The Company
has responded to the claim with what the Company believes is a meritorious
defense. The arbitration is in the discovery stage and the initial April 19,
1999 hearing in Chicago, Illinois is in the process of being rescheduled. The
Company believes the new hearing date will be in late June 1999. At January 30,
1999, the Company recorded a provision for the estimated liability associated
with the legal proceeding.
In a related matter, the Company has filed a complaint on December 9, 1998,
against James M. Beltrame in the Circuit Court of the Eighteenth Judicial
Circuit in DuPage County, Wheaton, Illinois (Case No. 98L01282). The Company
alleges non-payment of principal and interest due on a promissory note executed
by Mr. Beltrame. The Company seeks judgment against Mr. Beltrame in the
principal amount of $107,625 plus interest at a rate of 7% through June 30,
1998, and thereafter at a rate of 10%, together with costs and attorney fees.
The case is in the discovery stage.
With regard to the above-referenced matters, the Company and Mr. Beltrame
are involved in settlement negotiations. If a settlement is not reached, the
Company intends to vigorously defend itself against the claims made by Mr.
Beltrame and also pursue its own claims against him.
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company,
filed a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortuous interference of contract and violation of the Wisconsin Fair Dealership
Act. Wascher alleges and seeks an award in an amount in excess of $250,000 plus
costs, disbursements and attorney's fees, an award of both treble and punitive
damages, and such other relief deemed just and equitable.
The hearing dates for Wascher were originally scheduled for January 20, 21,
22 and 25, 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
In the ordinary course of conducting its business, the Company becomes
involved in various other 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.
F-27
<PAGE>
SUCCESSORIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND (1) AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
January 30, 1999
Allowance for doubtful accounts........................ $ 126,000 $ 584,000 $ (195,000) $ 515,000
Reserve for sales returns.............................. 484,000 1,128,000 (1,467,000) 145,000
Reserve for obsolescence............................... 128,000 91,000 -- 219,000
Tax valuation allowance................................ -- 2,215,000 -- 2,215,000
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
Tax valuation allowance................................ -- -- -- --
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
Tax valuation allowance................................ 2,635,000 -- 2,635,000 --
</TABLE>
- ------------------------
(1) Write-offs, net of recoveries
F-28
<PAGE>
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.
<TABLE>
<S> <C> <C>
SUCCESSORIES, INC.
Date: April 30, 1999 By: /s/ ARNOLD M. ANDERSON
-----------------------------------------
Arnold M. Anderson
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE DATE
-------------------------- -------------------
<S> <C>
/s/ ARNOLD M. ANDERSON April 30, 1999
--------------------------
Arnold M. Anderson
CHIEF EXECUTIVE OFFICER,
CHAIRMAN OF THE BOARD AND
DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
/s/ GARY ROVANSEK April 30, 1999
--------------------------
Gary Rovansek
PRESIDENT, CHIEF OPERATING
OFFICER AND DIRECTOR
/s/ STEVEN D. KUPTSIS April 30, 1999
--------------------------
Steven D. Kuptsis
SENIOR VICE PRESIDENT AND
CHIEF ADMINISTRATIVE
OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER)
/s/ MICHAEL H. MCKEE April 30, 1999
--------------------------
Michael H. McKee
SENIOR VICE PRESIDENT,
CREATIVE AND DIRECTOR
/s/ MERVYN C. PHILLIPS, April 30, 1999
JR.
--------------------------
Mervyn C. Phillips, Jr.
DIRECTOR
/s/ C. JOSEPH LABONTE April 30, 1999
--------------------------
C. Joseph LaBonte
DIRECTOR
/s/ SEAMAS T. COYLE April 30, 1999
--------------------------
Seamas T. Coyle
DIRECTOR
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE DATE
-------------------------- -------------------
<S> <C>
/s/ GUY E. SNYDER April 30, 1999
--------------------------
Guy E. Snyder
DIRECTOR
/s/ STEVEN B. LARRICK April 30, 1999
--------------------------
Steven B. Larrick
DIRECTOR
/s/ TIMOTHY C. DILLON April 30, 1999
--------------------------
Timothy C. Dillon
DIRECTOR
</TABLE>
F-30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
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)
1.3 Certificate of Designation creating the Company's Series A Cumulative Convertible Preferred Stock (2)
1.4 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)
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.18 Employment Agreement with Arnold M. Anderson dated March 1, 1996 (10)
10.19 Employment Agreement with James M. Beltrame dated June 1, 1996 (10)
10.20 Employment Agreement with Michael H. McKee dated June 1, 1996 (10)
10.21 Common Stock Option Agreement granted to James M. Beltrame dated June 17, 1996 (10)
10.22 Agreement and Plan of Merger among Successories, Inc., British Links Acquisition Corp., British Links
Golf Classics, Inc., David J. Houston and Michael McArthur dated October 1, 1996 (11)
10.23 Regulations S Securities Subscription Agreement between Successories, Inc. and Seacrest Capital
Limited and Farring Capital Limited dated September 16, 1996 (2)
10.24 Registration Rights Agreement dated as of December 17, 1996, by and among Successories, Inc.,
Infinity Investors Limited and Seacrest Capital Limited (2)
10.25 Form of Subordinated Note Extensions, Stock Options and Subordination Agreement relating to the
extension of $1,250,000 of Subordinated Notes, and options to purchase 125,000 shares of the
Company's Common Stock (2)
10.26 Fourth Amendment to the Credit Agreement between the Company and American National Bank & Trust
Company of Chicago dated as of December 16, 1996 (12)
10.27 Fifth Amendment to the Credit Agreement between the Company and American National Bank & Trust
Company of Chicago dated as of December 17, 1996 (12)
10.28 Sixth Amendment to the Credit Agreement between the Company and American National Bank & Trust
Company of Chicago dated as of January 30, 1997 (12)
10.29 Credit Agreement between the Company and The Provident Bank dated as of June 20, 1997 (13)
10.30 First Amendment to Credit Agreement between the Company and The Provident Bank dated as of July 16,
1997 (13)
10.31 Lease Agreement between LaSalle National Trust, N.A. as Trustee under Trust No. 120358 (14)
10.32 Second Amendment to Credit Agreement between the Company and the Provident bank dated as of May 14,
1998 (14)
10.33 Third Amendment to Credit Agreement between the Company and the Provident Bank dated as of September
1, 1998 (15)
10.34 Employment Agreement with Gary Rovansek dated October 29, 1998 (15)
21.1 Subsidiaries (4)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
- ------------------------
(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.
F-32
<PAGE>
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter ended
July 31, 1995 and incorporated herein by reference.
(6) Previously filed with the Company's Form 8-K on June 7, 1995, reporting
Date of Event May 26, 1995, and incorporated herein by reference.
(7) Previously filed with the Annual Report on Form 10-K for the year ended
April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q for the quarter ended October
28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for the year
ended February 3, 1996, and incorporated herein by reference.
(10) Previously filed with the Company's Form 10-Q for the quarter ended August
3, 1996 and incorporated herein by reference.
(11) Previously filed with the Company's Form 10-Q for the quarter ended
November 2, 1996 and incorporated herein by reference.
(12) Previously filed with the Company's Annual Report on Form 10-K for the
year ended February 1, 1997, and incorporated herein by reference.
(13) Previously filed with the Company's Form 10-Q for the quarter ended August
2, 1997, and incorporated herein by reference.
(14) Previously filed with the Company's Form 10-Q for the quarter ended May 2,
1998, and incorporated herein by reference.
(15) Previously filed with the Company's Form 10-Q for the quarter ended
October 31, 1998, and incorporated herein by reference.
F-33
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