AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FAMILY CHRISTIAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 5942 38-3200794
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
Incorporation or Organization) Classification Code Number) Identification
Number)
5300 PATTERSON AVE. S.E.
GRAND RAPIDS, MICHIGAN 49530
(616) 554-8700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MR. LESLIE E. DIETZMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FAMILY CHRISTIAN STORES, INC.
5300 PATTERSON AVE. S. E.
GRAND RAPIDS, MICHIGAN 49530
(616) 554-8700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
William R. Kunkel, Esq. Lawrence D. Levin, Esq.
Skadden, Arps, Slate, Meagher & Flom Herbert S. Wander, Esq.
(Illinois)
333 West Wacker Drive Katten Muchin & Zavis
Chicago, Illinois 60606-1285 525 West Monroe Street, Suite 1600
(312) 407-0700 Chicago, Illinois 60661-3693
(312) 902-5200
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / 333-_______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / 333-_______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / 333-_______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
Class A Common Stock, par value $.01 per share........................ $45,000,000 $13,275
(1) Includes shares of Common Stock being offered by the Selling Shareholders
and shares issuable upon exercise of the Underwriters' over-allotment
option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED AUGUST 6, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SHARES
[LOGO]
CLASS A COMMON STOCK
OF THE SHARES OF CLASS A COMMON STOCK ("CLASS A COMMON STOCK")
OFFERED HEREBY, SHARES ARE BEING SOLD BY THE COMPANY AND SHARES
ARE BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY'S COMMON STOCK ("COMMON STOCK") CONSISTS OF CLASS A COMMON STOCK
AND CLASS B COMMON STOCK ("CLASS B COMMON STOCK"). THE RIGHTS OF EACH SHARE OF
COMMON STOCK ARE SIMILAR OTHER THAN WITH RESPECT TO VOTING RIGHTS. THE CLASS A
COMMON STOCK ENTITLES THE HOLDERS THEREOF TO ONE VOTE PER SHARE, AND THE CLASS B
COMMON STOCK ENTITLES THE HOLDERS THEREOF TO TEN VOTES PER SHARE. UPON THE
CLOSING OF THE OFFERING, THE HOLDERS OF CLASS B COMMON STOCK WILL REPRESENT
APPROXIMATELY % OF THE TOTAL VOTING POWER OF THE OUTSTANDING COMMON STOCK
(APPROXIMATELY % IF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS EXERCISED IN
FULL) AND WILL THEREFORE EXERCISE CONTROL OVER THE BUSINESS AND AFFAIRS OF THE
COMPANY. EACH SHARE OF CLASS B COMMON STOCK CONVERTS AUTOMATICALLY INTO ONE
SHARE OF CLASS A COMMON STOCK UPON SALE OR OTHER TRANSFER TO A PARTY OTHER THAN
PERMITTED TRANSFEREES (AS DEFINED HEREIN). SEE "DESCRIPTION OF CAPITAL STOCK."
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE OF THE CLASS A COMMON STOCK WILL BE BETWEEN $ AND $ PER
SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE FOR
QUOTATION OF THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "FMLY."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
PER SHARE.................. $ $ $ $
TOTAL(3)................... $ $ $ $
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
AN ADDITIONAL SHARES OF CLASS A COMMON STOCK AT THE PRICE TO PUBLIC
LESS THE UNDERWRITING DISCOUNT SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF
THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL
TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , PROCEEDS TO
COMPANY WILL TOTAL $ AND PROCEEDS TO SELLING SHAREHOLDERS WILL NOT BE
AFFECTED. SEE "PRINCIPAL AND SELLING SHAREHOLDERS" AND "UNDERWRITING."
THE SHARES OF CLASS A COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED
HEREIN WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT
TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE
OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES REPRESENTING THE
SHARES WILL BE MADE AGAINST
PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR
ABOUT , 1998.
-------------------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
BT Alex. Brown
, 1998
[MISSION STATEMENT; VISION STATEMENT; STORE SCHEMATIC;
INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF
PRODUCTS/CUSTOMERS/EMPLOYEES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING
SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
-------------------
Family Christian Stores-Registered Trademark-, Family Bookstores-Registered
Trademark- and Joshua's Christian Stores-TM- are trademarks
owned by the Company. All other trademarks and trade names referred to in this
Prospectus
are the property of their respective owners.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO
FISCAL YEARS OF THE COMPANY ARE TO THE COMPANY'S 52- OR 53-WEEK FISCAL YEAR,
WHICH ENDS ON THE LAST SUNDAY IN JANUARY OF EACH YEAR AND IS IDENTIFIED AS THE
FISCAL YEAR FOR THE IMMEDIATELY PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE FISCAL
YEAR ENDED JANUARY 25, 1998, IS REFERRED TO AS "FISCAL 1997." REFERENCES TO
FISCAL YEARS OF JOSHUA'S CHRISTIAN STORES ("JOSHUA'S") ARE TO JOSHUA'S TWELVE
MONTHS ENDED MARCH 31 AND ARE IDENTIFIED AS THE FISCAL YEAR FOR THE IMMEDIATELY
PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE TWELVE MONTHS ENDED MARCH 31, 1998, IS
REFERRED TO AS "FISCAL 1997." EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN
THIS PROSPECTUS: (I) REFLECTS A -FOR-1 STOCK SPLIT OF THE COMMON STOCK TO BE
EFFECTED PRIOR TO THE CLOSING OF THE OFFERING; (II) REFLECTS THE FILING OF THE
RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS OF THE COMPANY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING; (III) REFLECTS THE AUTOMATIC
CONVERSION OF ALL OF THE COMPANY'S CURRENTLY OUTSTANDING COMMON STOCK INTO
SHARES OF NEWLY CREATED CLASS B COMMON STOCK UPON THE FILING OF THE RESTATED
ARTICLES OF INCORPORATION; (IV) ASSUMES THE EXERCISE OF ALL OUTSTANDING WARRANTS
TO PURCHASE COMMON STOCK; AND (V) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. EXCEPT AS OTHERWISE INDICATED IN THIS PROSPECTUS OR THE
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS, ALL REFERENCES TO
"FAMILY" AND THE "COMPANY" REFER TO FAMILY CHRISTIAN STORES, INC., FORMERLY
FAMILY BOOKSTORES COMPANY, INC.
THE COMPANY
Family Christian Stores, Inc. ("Family" or the "Company") is the largest
retailer in the United States dedicated solely to Christian-related products.
The Company, as the category-dominant retailer of Christian books and Bibles,
gifts and cards, music, children's merchandise and church supplies, seeks to
fulfill the growing demand for products that address Christian and family
values. The Company's net sales increased from $126.1 million in fiscal 1995 to
$168.1 million in fiscal 1997, representing a compound annual growth rate of
15.4%. Operating income increased from a loss of $2.5 million to income of $5.5
million over the same period. The growth has been driven by comparable store
sales, acquisitions and new store openings. As of July 31, 1998, the Company
operated 276 stores in 36 states, having grown from 148 stores in 28 states,
which the Company acquired from the Family Bookstores Division of The Zondervan
Corporation ("Zondervan") on October 31, 1994.
Family is the primary consolidator in the Christian retail industry, which
is highly fragmented and characterized by numerous small independent operators.
On June 1, 1998, the Company completed the acquisition of Joshua's Christian
Stores, a leading retailer of Christian-related products with 56 stores. The
Joshua's acquisition expands Family's presence in both new and existing markets
and provides an opportunity to capture greater operating efficiencies across its
expanded store base. On a pro forma basis, after giving effect to the
acquisition of Joshua's, the Company had net sales of $197.8 million in fiscal
1997. The Company believes that numerous opportunities exist to continue making
acquisitions and opening new stores and plans to continue its strategy of
clustering stores in both new and existing markets.
The Company differentiates itself from other retailers of Christian-related
products by offering products to consumers of all ages and denominations in the
environment of a focused specialty retailer with value pricing. The Company's
mission is to offer an extensive selection of high-quality, Christian-related
products of exceptional value in a warm, family atmosphere. In addition, Family
seeks to reinforce Christian and family values as well as impact the lives of
its customers by offering meaningful and inspirational products. The Company's
core customers are individuals who characterize themselves as active Christians,
as well as others who are searching for meaning in their lives. The Company
believes that its ability to deliver an extensive product assortment to a broad
range of consumers provides it with a competitive advantage in the Christian
retail industry.
The Company's principal objective is to enhance its position as the leading
provider of Christian-related products in the United States. Family's business
strategy includes maintaining category dominance,
3
serving a diverse Christian customer base, providing the highest value to its
customers, promoting recognition of its brand name and implementing its guiding
principles throughout its business. The Company's growth strategy includes
increasing sales and profitability in its existing stores, expanding its store
base through focused acquisitions and new store openings as well as utilizing
additional distribution channels.
RECENT DEVELOPMENTS
JOSHUA'S ACQUISITION. On June 1, 1998, Family acquired Joshua's, a division
of The Development Association, Inc., a subsidiary of Tandycrafts, Inc. Joshua's
was a leading Christian retail chain headquartered in Fort Worth, Texas that
operated 56 stores in 10 states, including a major presence in Texas, Georgia,
Colorado and Southern California. For its fiscal year ended March 31, 1998,
Joshua's had net sales of $32.0 million. The acquisition expands Family's
presence in new and existing markets and creates a stronger platform for future
growth. Management has completed several important steps to integrate Joshua's
operations, including the introduction of the Company's (i) point-of-sale,
automatic product replenishment and information systems, (ii) enhanced product
assortment and (iii) targeted marketing and preferred customer programs. To
date, 90% of the acquired stores have been renamed Family Christian Stores and
exterior signage has been changed. In addition, all store managers of former
Joshua's stores who are currently employed by Family have completed the
Company's formal management training. The Company believes that the successful
integration of Joshua's will enhance its existing store base and result in
future operating efficiencies and increased brand awareness. See "Pro Forma
Combined Condensed Financial Statements (unaudited)" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OTHER ACQUISITIONS AND OPENINGS. Since January 25, 1998, in addition to the
Joshua's acquisition, the Company has acquired 22 stores and opened two new
stores. The Company is operating these stores under the Family Christian Stores
name, has completed a limited amount of remodeling and has integrated these
stores into its point-of-sale, automatic product replenishment and information
systems.
The Company was incorporated in Michigan in 1994. The Company's executive
office is located at 5300 Patterson Avenue, S.E., Grand Rapids, Michigan 49530,
and its telephone number is (616) 554-8700.
THE OFFERING
Class A Common Stock offered
by the Company............................. shares
by the Selling Shareholders................ shares
Common Stock to be outstanding after the Offering(1)
Class A Common Stock....................... shares
Class B Common Stock....................... shares
Use of proceeds.............................. To finance store acquisitions and new store
openings and to repay outstanding bank
indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... FMLY
- ------------------------------
(1) Excludes: (i) shares of Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans as of ,
1998, with a weighted average exercise price of $ per share; (ii)
shares of Common Stock issuable upon exercise of options to be
granted under the Company's stock option plans upon the closing of the
Offering, with an exercise price per share equal to the initial public
offering price; and (iii) shares reserved for issuance pursuant to
the Company's stock option plans. See "Capitalization,"
"Management--Employee Benefit Plans" and Note J of the Notes to the
Company's Consolidated Financial Statements.
4
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements that are based
on the beliefs of, as well as assumptions made by and information currently
available to, the Company's management. The words "believe," "anticipate,"
"intend," "estimate," "expect" and similar expressions are intended to identify
such forward-looking statements, but are not the exclusive means of identifying
such statements. Such statements reflect the current views of the Company or its
management and are subject to certain risks, uncertainties and assumptions,
including, but not limited to, those set forth under the heading "Risk Factors."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements in 1998 and beyond could differ materially from
those expressed in, or implied by, such forward-looking statements. The Company
undertakes no obligation to release publicly any revisions to any such
forward-looking statements that may reflect events or circumstances after the
date of this Prospectus.
RISK FACTORS
An investment in the Class A Common Stock offered hereby involves a high
degree of risk. For a discussion of certain risks that a potential investor
should evaluate carefully prior to making an investment in the Class A Common
Stock, see "Risk Factors."
5
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
THREE MONTHS ENDED
FISCAL YEAR -------------------------------------
-------------------------------------------- PRO FORMA
PRO FORMA APRIL 27, APRIL 26, APRIL 26,
1995 1996 1997 1997(1) 1997 1998 1998(1)
--------- --------- --------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 126,125 $ 139,280 $ 168,063 $ 197,786 $ 32,438 $ 38,257 $ 44,623
Gross profit........................... 35,158 39,058 49,590 58,143 8,498 10,741 12,416
Store contribution(2).................. 12,009 15,298 21,571 23,589 2,325 3,300 3,358
Store opening expenses................. 991 414 739 739 152 356 356
Operating income (loss)................ (2,516) 891 5,487 5,945 (1,429) (1,028) (1,439)
Net earnings (loss).................... (5,134) (1,844) 2,693 2,456 (2,154) (1,675) (2,260)
Net earnings (loss) per
share--diluted........................ $ (3.33) $ (1.18) $ 1.22 $ 1.11 $ (1.38) $ (0.96) $ (1.29)
Weighted average common shares
outstanding--diluted(3)............... 1,541 1,559 2,215 2,215 1,566 1,752 1,752
SELECTED OPERATING DATA:
Number of stores open at end of
period................................ 174 184 197 255 187 211 267
Net sales growth....................... 20.1% 10.4% 20.7% 42.0% 18.3% 17.9% 37.6%
Comparable store sales increase(4)..... 1.2% 3.1% 12.8% 11.2% 12.4% 8.2% 6.6%
Average gross square feet per store at
end of period......................... 4,268 4,382 4,593 4,287 4,435 4,587 4,314
Average net sales per square foot(5)... $ 177 $ 178 $ 194 $ 188 $ 205 $ 210 $ 205
APRIL 26, 1998
-------------------------------------
PRO AS
ACTUAL FORMA(6) ADJUSTED(7)
--------- ----------- -------------
BALANCE SHEET DATA:
Working capital....................................................................
$ 6,169 $ 7,903 $
Total assets.......................................................................
66,551 76,029
Total debt.........................................................................
25,387 34,665
Redeemable common stock warrants(8)................................................
12,878 12,878
Shareholders' equity (deficit).....................................................
(10,441) (10,441)
- ------------------------------
(1) Pro Forma Combined Condensed Statement of Operations data reflects the
acquisition of Joshua's on June 1, 1998, as if it had occurred at the
beginning of the earliest period presented. See "Pro Forma Combined
Condensed Financial Statements (unaudited)" including the notes thereto.
(2) Store contribution represents gross profit less direct selling expenses
which include store labor, point-of-sale information system rental and
maintenance and other direct store expenses.
(3) Weighted average diluted common shares outstanding excludes the effect of
employee stock options and redeemable common stock warrants for periods with
a net loss since such inclusion would be antidilutive.
(4) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(5) Average net sales per square foot is calculated by dividing total net sales
by the weighted average gross square footage of stores open during the
period. Periods less than a full year are annualized based on historical
seasonal trends. See "Business-- Properties."
(6) The pro forma balance sheet data reflects the acquisition of Joshua's on
June 1, 1998.
(7) Adjusted to reflect the sale of shares of Common Stock at an
assumed initial public offering price of $ per share and the estimated
net proceeds therefrom after deducting the estimated underwriting discount
and the estimated expenses of this Offering. See "Use of Proceeds." Also
adjusted to reflect the conversion of redeemable common stock warrants in
connection with the closing of the Offering.
(8) Redeemable common stock warrants were issued in connection with the
Company's senior subordinated notes. Subsequent to December 31, 1999, the
holder may, at its option, require the Company to purchase the warrants at
fair value. As a result, the redeemable common stock warrants are recorded
at estimated fair value at the respective balance sheet dates.
6
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS; POSSIBLE INABILITY TO
MANAGE GROWTH
The Company's growth has been achieved primarily through acquisitions.
Certain of these acquisitions, including the acquisition of Joshua's, were large
transactions which involve significant risks and uncertainties for the Company.
The success of past and future acquisitions is largely dependent on the ability
of Family to integrate the operations of the acquired companies into Family's
operations in an efficient manner and to manage its larger store base
effectively. Most of the acquisition candidates that may be available to the
Company in the future are small chains or independent stores. The lack of large
acquisition candidates will require the Company to make many small acquisitions
in order to achieve its growth strategy, which may make integration more
difficult. There can be no assurance that the Company's acquisitions will be
successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions will be realized. Failure to effectively accomplish the
integration of acquired companies could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's business has grown considerably in size and geographic scope,
increasing from 148 stores located in 28 states at October 31, 1994, to its
current size of 276 stores in 36 states. The Company's continued growth may
place a significant strain on the Company's management and operating systems.
There can be no assurance that the Company will anticipate all of the changing
demands of its expanding operations and adapt systems and procedures
accordingly. To support its planned store growth, the Company will be required
to hire and train a substantial number of additional store managers and store
employees, and there can be no assurance that the training and supervision of a
larger number of employees will not adversely affect the performance of the
Company's stores or the level of customer service that the Company seeks to
maintain in such stores. The Company's inability to manage growth effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business."
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY
The Company intends to continue to pursue an aggressive growth strategy. The
Company's ability to continue to expand its operations depends upon a number of
factors, including its ability to: (i) locate acquisition targets and negotiate
acceptable acquisition terms; (ii) hire, train and integrate management and
store employees; (iii) access adequate capital resources; (iv) identify markets
that meet its site selection criteria; (v) locate suitable store sites and
negotiate acceptable lease terms; and (vi) expand into new markets. There can be
no assurance that the Company will be able to identify additional acquisition
candidates or locate appropriate sites for new stores or for relocation of
existing stores. The Company believes that, other than Family, the largest
Christian retail chain is comprised of approximately 75 stores. The lack of
large acquisition candidates could have an adverse effect on the ability of the
Company to realize its growth strategy. The Company pursues a strategy of
clustering stores in each of its markets to increase overall sales, achieve
operating efficiencies and further penetrate markets. In the past, the Company
has opened additional stores in markets where it has existing store locations.
The Company plans to continue doing so, which may result in a decline in the net
sales and operating results at its existing stores in these markets.
The Company anticipates opening five new stores and acquiring nine
additional stores during the remainder of fiscal 1998 and opening or acquiring
approximately 40 to 50 stores in fiscal 1999. Certain of these stores may be in
areas where the Company currently has no operations. There can be no assurance
7
that the Company will achieve its planned expansion in existing markets, enter
new markets or integrate and operate its newly-opened or newly-acquired stores
profitably. Failure to do so could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business-- Growth Strategy."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales and net earnings. Similar to
many retailers, the Company typically realizes a significant portion of its net
sales and all of its net earnings in the fourth quarter of its fiscal year
primarily as a result of the holiday selling season. Any significant adverse
trend in net sales for such period would have a material adverse effect on the
Company's results of operations for the full fiscal year. Historically, the
first and third quarters of the Company's fiscal year have been the weakest
quarters. Due to the fluctuations in net sales and net earnings, the results of
operations of any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year or any future quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Fluctuations."
FLUCTUATIONS IN COMPARABLE STORE SALES
The Company's results of operations have fluctuated and are expected to
continue to fluctuate significantly from period to period as the result of a
number of factors, including: (i) the number and timing of store openings and
acquisitions and related expenses; (ii) the number of relocated and remodeled
stores; (iii) the integration of new stores into the operations of the Company;
(iv) the relative mix of store types; (v) the opening of stores by the Company
or its competitors in markets where the Company has existing stores; and (vi)
the timing of new releases. In addition, the results of comparable store sales
differ from period to period, due to a variety of factors, including the
relative proportion of new stores to mature stores, the timing of promotional
events, the Company's ability to execute its operating strategy effectively,
changes in consumer preferences for Christian retail products and general
economic conditions. There can be no assurance that comparable store sales for
any particular period will not decrease in the future. As a result, following
the Offering, the Company's comparable store sales could cause the price of the
Class A Common Stock to fluctuate substantially. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Christian retail industry is highly competitive. Historically,
competition has included independent stores and franchises, with an increasing
presence from large retail chains, including those primarily focused on the sale
of secular books and merchandise. Many independent stores and regional chains
across the country have become more aggressive in their approach to retail,
growing the size and improving the look of their stores through expansion and
remodeling. Many independent stores are becoming more aggressive in their
marketing as well, by utilizing extensive mailing lists and by participating in
marketing groups. The largest marketing group, Parable Group, Inc. ("Parable"),
is reported to presently consist of approximately 330 stores.
The growing market for Christian-related products has attracted competition
in the area of books and music from retailers whose primary focus is secular
merchandise. Large retailers such as Barnes & Noble, Inc. ("Barnes & Noble"),
Media Play, Inc. ("Media Play"), Borders Group, Inc. ("Borders") and
Books-A-Million, Inc. ("Books-A-Million") are expanding their selection of
Christian books and music while also increasing the size and number of their
stores. Discount store chains, such as Target Stores, Inc. ("Target"), The
Wal-Mart Stores, Inc. ("Wal-Mart") and Best Buy Co., Inc. ("Best Buy"), as well
as Internet retailers, such as Amazon.com, Inc. ("Amazon.com"), direct marketers
and book clubs present additional competition. In order to remain competitive in
certain markets, the Company may be required to implement price reductions,
which could have an adverse impact on its business, financial condition and
8
results of operations. As Family enters new geographic markets, its success will
depend in part on its ability to gain market share from established competitors,
some of which are larger and have substantially greater resources than the
Company. The Company expects competition from both new and existing competitors
to increase, and there can be no assurance that the Company will be able to
compete effectively in the future. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the leadership
and performance of the Company's senior management, particularly Mr. Leslie E.
Dietzman, Family's President and Chief Executive Officer. The loss of the
services of Mr. Dietzman or any of the Company's other key personnel could have
a material adverse effect on the Company. In addition, as the Company grows, it
will be required to continue to hire management personnel and other employees.
Given its dedication to Christian and family values, the Company seeks to hire
experienced professionals who also demonstrate a commitment to such principles.
There can be no assurance that the Company will be able to attract and retain
sufficient qualified employees. See "Management."
DEPENDENCE ON VENDORS; POSSIBLE DISRUPTIONS OF PRODUCT SUPPLY
The Company's business is dependent on its ability to purchase Christian
books, music, gifts and other products in sufficient quantities at competitive
prices. The Company relies upon a small number of major publishers and
distributors and a large number of relatively small vendors for its merchandise.
During the Company's 1997 fiscal year, four vendors supplied approximately 34%
of the Company's products. The Company has no material supply contracts, and any
vendor or distributor could discontinue selling to the Company at any time. The
Company is dependent on its major distributors for products which are available
only from a limited number of sources. The failure of one of these major vendors
or distributors to meet the Company's demands could disrupt store-level
merchandise selection. Any such disruption in its product supply could have a
material adverse effect on the Company's business, financial condition and
results of operations. For other products the Company relies upon a larger
number of relatively small vendors. Although the Company believes it has access
to alternative sources of supply among these small vendors, there can be no
assurance that smaller suppliers will be able to meet the Company's needs as the
Company grows. See "Business--Purchasing and Distribution."
CONSUMER TRENDS AND SPENDING PATTERNS
Although interest in Christian and family values in the United States has
been increasing, there can be no assurance that such trend will continue. Sales
of Christian books, music, gifts and other products are dependent upon
discretionary consumer spending, which may be affected by general economic
conditions such as employment levels, business conditions, interest rates,
availability of credit, inflation and taxation, consumer confidence and other
factors beyond the control of the Company. The Company's failure to anticipate,
identify and react appropriately to changing consumer preferences, or a decline
in consumer spending on Christian merchandise generally, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON THIRD PARTY FOR SUPPORT OF MANAGEMENT INFORMATION SYSTEMS
The Company's information systems are currently managed by Andersen
Consulting ("Andersen") pursuant to a consulting agreement that is scheduled to
terminate in 2001. Andersen is responsible for maintaining the Company's current
systems, developing new systems and enhanced programs to support the Company's
growth and working with the Company's management in using the systems for
inventory and price management, sales tracking, merchandise planning and
accounting. The Company is dependent on the satisfactory performance of Andersen
for the continued successful management of its information systems and on its
ability to provide such services at prices acceptable to the Company. Although
the
9
Company has dedicated systems personnel who assist Andersen and believes that
its relationship with Andersen is good, there can be no assurance that Andersen
will continue to supply information services successfully or will not terminate
its arrangement with Family, either of which could have a material adverse
effect on the Company's operating systems and on the Company's business,
financial condition and results of operations. See "Business--Management
Information Systems."
YEAR 2000 IMPACT
The Company's computer systems, software products and other business
systems, as well as those of its major vendors, may experience problems in
connection with processing dates on or after January 1, 2000. The Company
currently is conducting a review of the impact of such Year 2000 issues on its
information systems to determine whether its systems will retain functionality
subsequent to December 31, 1999. Although the Company believes that its Year
2000 compliance program can be completed by the beginning of fiscal 1999, there
can be no assurance that the process will be completed by that date. In
addition, the Company has communicated with other entities with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which the Company is vulnerable to any third-party Year 2000 issues.
There can be no assurance that the systems of such other companies will be
converted in a timely manner. Any failure by the Company or such other companies
to successfully convert could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Effects of Year 2000."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
Holders of the Company's Class A Common Stock are entitled to one vote per
share, and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Immediately following the Offering, through their ownership of
all of the shares of Class B Common Stock outstanding, the directors,
executive officers and current shareholders of the Company will represent, in
the aggregate % of the outstanding Common Stock. As a result, the holders of
Class B Common Stock will be able to effectively control the Company and direct
its affairs and business, including any determination with respect to
significant corporate transactions and the election of directors. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing a change in control of the Company, including transactions in which
the holders of Class A Common Stock might receive a premium for their shares
over prevailing market prices. Pursuant to an agreement to be entered into by
the Company and certain investors upon the closing of the Offering, the Company
will agree to nominate one director designated by such investors to the Board of
Directors for so long as such investors hold more than 5% of the outstanding
Common Stock. See "Principal and Selling Shareholders" and "Description of
Capital Stock."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Class A Common Stock at a premium over the
market price of the Class A Common Stock and may adversely affect the market
price of the Class A Common Stock and the voting and other rights of the holders
of the Class A Common Stock. These provisions include, but are not limited to, a
classified Board of Directors and the authority of the Board of Directors to
issue shares of Preferred Stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the shareholders. The rights of the holders of Class A
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The Company
has no present plans to issue shares of Preferred Stock. Furthermore, the loan
agreement with respect to the Company's existing indebtedness contains certain
covenants restricting the sale of assets. These restrictions may have the effect
of delaying or preventing a sale of the Company. See
10
"--Covenant Restrictions." In addition, certain provisions of Michigan law
applicable to the Company could have the effect of discouraging certain attempts
to acquire the Company which could deprive the Company's shareholders of the
opportunities to sell their shares of Class A Common Stock at prices higher than
prevailing market prices. See "Description of Capital Stock."
COVENANT RESTRICTIONS
The Company's Amended and Restated Loan Agreement, dated as of October 31,
1994, and amended and restated on July 17, 1998 (the "Amended and Restated Loan
Agreement"), contains certain restrictive financial and operating covenants with
respect to liens, indebtedness, capital expenditures, sales of assets,
investments, prepayments of debt, dividends, requirements to maintain certain
financial ratios and certain other corporate actions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The ability of the Company to
comply with these covenants will depend on its future performance, which will,
in part, be subject to prevailing economic, financial and business factors
beyond the Company's control. These restrictions also could prohibit the Company
from taking actions which would otherwise be in the best interests of the
Company, including limiting the Company's ability to implement its new store
expansion plan to the extent that the provisions that limit capital expenditures
and additional indebtedness, among others, are insufficient to accommodate such
plan. Management believes that the Company will be able to comply with such
provisions while implementing its growth strategy; however, there can be no
assurance that it will be able to do so. Pursuant to the Securities Purchase
Agreement, dated as of November 14, 1994 (the "Securities Agreement"), between
the Company and its existing shareholders, the Company is subject to covenant
restrictions that are substantially similar to those of the Amended and Restated
Loan Agreement. Upon the exercise of the Company's outstanding warrants, such
covenants will no longer apply.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. Accordingly, there can be no assurance that an active trading
market for the Class A Common Stock will develop or be sustained upon completion
of the Offering. The initial public offering price of the shares of Class A
Common Stock offered hereby will be established by negotiations among the
Company, the Selling Shareholders and the representatives of the Underwriters.
See "Underwriting" for factors to be considered in determining the initial
public offering price. The market price of the shares of Class A Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors, including conditions in the Christian
retail market. In addition, the stock market in recent years has experienced
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of companies. These fluctuations, as well as a
shortfall in net sales or net earnings compared to public market analysts'
expectations, fluctuations in the Company's comparable store sales, changes in
analysts' recommendations or projections and general economic and market
conditions, may adversely affect the market price of the Class A Common Stock.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering or the perception that such sales could occur
could adversely affect the market price of the Common Stock. Upon the closing of
the Offering, the Company will have outstanding an aggregate of shares
of Common Stock ( shares if the Underwriters' over-allotment option is
exercised in full). In addition, the Company has reserved for issuance
shares issuable upon exercise of outstanding options. The shares of
Common Stock sold in the Offering will be freely transferable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act.
11
The remaining shares of Common Stock held by existing shareholders
are "restricted securities" as that term is defined in Rule 144 ("Restricted
Shares"), and may be sold in the public market only if they are registered or if
they qualify for exemption from registration under Rules 144 or 701 under the
Securities Act. Restricted Shares are subject to lock-up agreements
pursuant to which the holders have agreed not to sell or otherwise dispose of
any of their shares of Common Stock for a period of 180 days following the date
of this Prospectus without the prior written consent of NationsBanc Montgomery
Securities LLC. Following the 180-day period, Restricted Shares will be
eligible for sale in the public market without restriction under Rule 144(k).
Restricted Shares will be eligible for sale subject to the volume and
other limitations of Rule 144. Of the Restricted Shares held by existing
shareholders not subject to lock-up agreements, shares will be eligible
for immediate sale in the public market without restriction under Rule 144(k).
The remaining Restricted Shares not subject to lock-up agreements will
become eligible for sale, subject to certain volume, manner of sale and other
limitations, under Rule 144 commencing 90 days following the date of this
Prospectus. The Company intends to file one or more registration statements on
Form S-8 to register shares of Common Stock authorized for issuance
under the Company's equity incentive plans. See "Management--Employee Benefit
Plans," "Description of Capital Stock--Registration Rights," and "Shares
Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The proposed initial public offering price per share of Class A Common Stock
is substantially higher than the net tangible book value per share of the Class
A Common Stock. Purchasers of shares of the Class A Common Stock offered hereby
will incur immediate and substantial dilution of $ per share. See
"Dilution."
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Class A Common Stock offered by the Company hereby (at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discount and estimated Offering expenses) are estimated to be $ million
($ million if the Underwriters' over-allotment option is exercised in full).
The Company will not receive any proceeds from the sale of the shares
of Class A Common Stock offered by the Selling Shareholders hereby. See
"Principal and Selling Shareholders."
The Company intends to use approximately $12.0 million of the net proceeds
from the Offering to finance new store openings and store acquisitions over the
next 12 to 18 months. Family plans to open five additional stores and acquire
nine additional stores during the second half of fiscal 1998 and anticipates
opening or acquiring approximately 40 to 50 stores in fiscal 1999. Although the
Company has no present commitments or agreements with respect to any
acquisitions planned for fiscal 1999, funds will be used in connection with
future acquisitions if such opportunities develop. Costs to acquire stores could
vary materially from the cost of opening new stores. There can be no assurance
that the Company will achieve its planned expansion in existing markets or enter
new markets.
Approximately $5.7 million of the net proceeds will be used to fund
obligations under the financing provided in connection with the Joshua's
acquisition. The note evidencing such obligations was entered into by the
Company on June 1, 1998, has an interest rate of 7.25% and requires annual
payments of $2.9 million on December 31, 1998 and 1999 and $2.8 million on
December 31, 2000. The final payment is subject to acceleration upon the closing
of the Offering.
In addition, the Company intends to use approximately $10.0 million of the
net proceeds of the Offering to repay certain bank indebtedness. Such repayment
will first be applied to a $5 million term note bearing interest at the greater
of (i) the lender's prime rate or (ii) the Federal Funds Rate plus .50% (each,
as applicable, the "Base Rate"), plus 2.00%, with interest payable quarterly and
a final maturity of May 31, 2004. The repayment of bank indebtedness will next
be applied to a $9.5 million term note bearing interest at the Base Rate plus
1.00% with interest payable quarterly and quarterly principal payments totaling
$0.5 million in fiscal 1999, $1.0 million in fiscal 2000 and $2.67 million in
each of fiscal 2001, 2002 and 2003 and with a final maturity date of May 31,
2004.
The Company intends to use the remaining proceeds of approximately $
million to repay amounts outstanding under the Company's revolving line of
credit (the "Revolving Line"), which bears interest at LIBOR plus 3.25% or the
Base Rate plus .50% and has a final maturity of May 31, 2004, subject to
one-year extensions as agreed upon by the parties. Upon the consummation of the
Offering and the application of the net proceeds therefrom, the Revolving Line
will bear interest at LIBOR plus 2.75% or the Base Rate. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company. In addition, the Company's
current Revolving Line contains various financial covenants which restrict,
among other things, the Company's ability to pay dividends. As of the date of
this Prospectus, the Company may not pay dividends pursuant to the terms of the
Revolving Line. Upon completion of the Offering and the application of the net
proceeds therefrom as described in "Use of Proceeds," the Company may pay
dividends, subject to certain limitations of the Revolving Line. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
26, 1998: (i) on an actual basis and (ii) as adjusted to reflect the sale of the
shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discount and estimated Offering expenses), and the application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the Company's Financial Statements and Notes thereto and the Pro Forma
Combined Condensed Financial Statements (unaudited) included elsewhere in this
Prospectus.
APRIL 26, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Current portion of long-term debt........................................................ $ 2,000 $
Long-term debt........................................................................... 23,387
Redeemable common stock warrants......................................................... 12,878
Shareholders' equity (deficit)(1)(2):
Class A Common stock, $.01 par value; 10,000,000 shares authorized; no shares issued,
pro forma; shares issued, pro forma as adjusted.............................. 1,697
Class B Common stock, $.01 par value; 10,000,000 shares authorized; shares
issued, pro forma; shares issued, pro forma as adjusted...................... 55
Additional paid-in capital............................................................. 7,083
Retained earnings (deficit)............................................................ (18,923)
Notes receivable from shareholders..................................................... (353)
---------- -----------
Total shareholders' equity (deficit)................................................. (10,441)
---------- -----------
Total capitalization............................................................... $ 27,824 $
---------- -----------
---------- -----------
- ------------------------------
(1) Excludes: (i) shares of Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans as of
, 1998 with a weighted average exercise price of $ per share;
(ii) shares of Common Stock issuable upon exercise of options to be
granted under the Company's stock option plans upon the closing of the
Offering, with an exercise price per share equal to the initial public
offering price; and (iii) shares reserved for issuance pursuant to
the Company's stock option plans. See "Management--Employee Benefit Plans"
and Note J of the Notes to the Company's Consolidated Financial Statements.
(2) Share numbers are presented on a pro forma basis to give effect to the
conversion of the Company's currently outstanding common stock into shares
of newly created Class B Common Stock concurrently with the closing of the
Offering.
14
DILUTION
The pro forma net tangible book value of the Company as of April 26, 1998
was approximately $ million or $ per share. Pro forma net tangible
book value per share is equal to net tangible assets (tangible assets of the
Company less total liabilities) divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible book
value after April 26, 1998, other than to give effect to the sale by the Company
of the shares of Class A Common Stock offered by the Company hereby (at
an assumed initial public offering price of $ per share) and the receipt
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company as of April 26, 1998, would be approximately $ million, or
$ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
Assumed initial public offering price per share...................................... $
Pro forma net tangible book value per share before the Offering.................... $
Increase per share attributable to new investors...................................
---------
Pro forma net tangible book value per share after the Offering.......................
---------
Dilution per share to new investors.................................................. $
---------
---------
The following table summarizes, on a pro forma basis as of April 26, 1998,
the total number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the investors purchasing shares of Class A Common Stock in
the Offering (based upon an assumed initial public offering price of $
per share):
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ---------- ----------- -------------
Existing shareholders(1).................................. % $ % $
New investors.............................................
----- ----- ---------- -----
Total................................................... 100.0% $ 100.0%
----- ----- ---------- -----
----- ----- ---------- -----
- ------------------------------
(1) Sales by the Selling Shareholders in the Offering will reduce the number of
shares held by the existing shareholders to or % ( or %
if the over-allotment option is exercised in full) of the total number of
shares of Common Stock to be outstanding after the Offering and will
increase the number of shares to be purchased by new investors to or
% ( or % if the over-allotment option is exercised in full) of
the total shares of Common Stock to be outstanding. See "Principal and
Selling Shareholders."
The foregoing discussion and table include on a pro forma basis as of April
26, 1998, the acquisition of Joshua's on June 1, 1998, and exclude
shares of Common Stock issuable upon exercise of options outstanding under the
Company's stock option plans as of , 1998, with a weighted average
exercise price of $ per share and shares reserved for issuance
pursuant to the Company's stock option plans. To the extent such options are
exercised in the future, there will be further dilution to new investors. See
"Capitalization," "Management--Employee Benefit Plans" and Note J of the Notes
to the Company's Consolidated Financial Statements.
15
SELECTED FINANCIAL AND OPERATING DATA OF FAMILY CHRISTIAN STORES, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
The statement of operations and balance sheet data have been derived from
the audited financial statements of the Company. The selected financial data for
the three months ended April 26, 1998, and April 27, 1997, have been derived
from the unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for those periods. Operating
results for the three months ended April 26, 1998, are not necessarily
indicative of the results that may be expected for the full year or for any
future period. The selected operating data for all periods presented below have
been derived from internal records of the Company's operations. The data set
forth below should be read in conjunction with the Financial Statements of
Family Christian Stores, Inc., including notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
THREE MONTHS ENDED
FISCAL YEAR ------------------------
-------------------------------------------- APRIL 27, APRIL 26,
1994(1) 1995 1996 1997 1997 1998
----------- --------- --------- --------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 41,612 $ 126,125 $ 139,280 $ 168,063 $ 32,438 $ 38,257
Cost of products sold, including store occupancy costs.... 30,708 90,967 100,222 118,473 23,940 27,516
----------- --------- --------- --------- ----------- -----------
Gross profit.............................................. 10,904 35,158 39,058 49,590 8,498 10,741
Operating expenses:
Selling, general and administrative expenses............ 10,155 34,283 34,923 40,284 9,050 10,643
Depreciation and amortization........................... 504 2,400 2,830 3,080 725 770
Store opening expenses.................................. 167 991 414 739 152 356
----------- --------- --------- --------- ----------- -----------
10,826 37,674 38,167 44,103 9,927 11,769
----------- --------- --------- --------- ----------- -----------
Operating income (loss)................................... 78 (2,516) 891 5,487 (1,429) (1,028)
Interest expense, net..................................... 329 2,618 2,735 2,794 725 647
----------- --------- --------- --------- ----------- -----------
Earnings (loss) before income taxes....................... (251) (5,134) (1,844) 2,693 (2,154) (1,675)
Income tax provision...................................... -- -- -- -- -- --
----------- --------- --------- --------- ----------- -----------
Net earnings (loss)....................................... $ (251) $ (5,134) $ (1,844) $ 2,693 $ (2,154) $ (1,675)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Net earnings (loss) per share:
Basic................................................... $ (0.17) $ (3.33) $ (1.18) $ 1.63 $ (1.38) $ (0.96)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Diluted................................................. $ (0.17) $ (3.33) $ (1.18) $ 1.22 $ (1.38) $ (0.96)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Weighted average common shares outstanding:
Basic................................................... 1,500 1,541 1,559 1,653 1,566 1,752
Diluted................................................. 1,500 1,541 1,559 2,215 1,566 1,752
SELECTED OPERATING DATA:
Number of stores open at end of period.................... 153 174 184 197 187 211
Net sales growth.......................................... n/a 20.1% 10.4% 20.7% 18.3% 17.9%
Comparable store sales increase(2)........................ 10.0% 1.2% 3.1% 12.8% 12.4% 8.2%
Average gross square feet per store at end of period...... 4,107 4,268 4,382 4,593 4,435 4,587
Average net sales per square foot(3)...................... $ 178 $ 177 $ 178 $ 194 $ 205 $ 210
BALANCE SHEET DATA:
Working capital........................................... $ 7,887 $ 6,529 $ 219 $ 739 $ 1,981 $ 6,169
Total assets.............................................. 47,195 56,587 52,383 61,286 59,161 66,551
Total debt................................................ 16,808 22,163 20,518 16,973 25,032 25,387
Redeemable common stock warrants(4)....................... 1,317 1,499 5,519 9,199 5,519 12,878
Shareholders' equity (deficit)............................ 4,149 (866) (6,657) (5,128) (8,803) (10,441)
- ------------------------------
(1) Family Christian Stores, Inc., formerly Family Bookstores Company, Inc., was
formed for the purpose of acquiring substantially all of the assets of the
Family Bookstores Division of The Zondervan Corporation on October 31, 1994.
Amounts reported for fiscal 1994 represent results of operations for the
period from October 31, 1994 to January 29, 1995.
(2) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(3) Average net sales per square foot is calculated by dividing total sales by
the weighted average gross square footage of stores open during the period.
Periods less than a full year are annualized based on historical seasonal
trends. See "Business--Properties."
(4) Redeemable common stock warrants were issued in connection with the
Company's senior subordinated notes. Subsequent to December 31, 1999, the
holder may, at its option, require the Company to purchase the warrants at
fair value. As a result, the redeemable common stock warrants are recorded
at estimated fair value at the respective balance sheet dates.
16
SELECTED FINANCIAL AND OPERATING DATA OF JOSHUA'S CHRISTIAN STORES
(IN THOUSANDS, EXCEPT OPERATING DATA)
The statement of operations and balance sheet data as of and for the twelve
months ended March 31, 1998 (fiscal 1997), have been derived from the audited
financial statements of Joshua's Christian Stores. The selected financial data
for the three months ended April 30, 1998, have been derived from the unaudited
financial statements of Joshua's Christian Stores and include all adjustments,
consisting only of normal recurring adjustments, that the management of Joshua's
considers necessary for a fair presentation of the financial position and
results of operations for the period. The selected operating data presented
below have been derived from internal records of Joshua's. The data set forth
below should be read in conjunction with the Financial Statements Joshua's
Christian Stores, including notes thereto included elsewhere in this Prospectus.
FISCAL THREE MONTHS ENDED
1997 APRIL 30, 1998
--------- --------------------
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................ $ 32,007 $ 6,578
Cost of products sold, including store occupancy costs (1)....................... 22,934 4,862
--------- -------
Gross profit..................................................................... 9,073 1,716
Operating expenses:
Selling, general and administrative expenses................................... 8,126 2,011
Depreciation and amortization.................................................. 612 130
--------- -------
8,738 2,141
--------- -------
Earnings (loss) before income taxes.............................................. 335 (425)
Income tax provision (benefit)................................................... 11 (145)
--------- -------
Net earnings (loss).............................................................. $ 324 $ (280)
--------- -------
--------- -------
SELECTED OPERATING DATA:
Number of stores open at end of period........................................... 58 56
Net sales growth (decrease)...................................................... 1.3% (9.7)%
Comparable store net sales increase (decrease) (2)............................... 8.6% (1.3)%
Average gross square feet per store at end of period............................. 3,247 3,286
Average net sales per square foot (3)............................................ $ 159 $ 179
BALANCE SHEET DATA:
Working capital.................................................................. $ 4,675 $ 4,615
Total assets..................................................................... 12,110 11,613
- ------------------------------
(1) The historical financial statements of Joshua's Christian Stores have been
adjusted to reclassify store occupancy costs to cost of products sold in
order to conform to the presentation used by the Company.
(2) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(3) Average net sales per square foot is calculated by dividing total net sales
by the weighted average gross square footage of stores open during the
period. See "Business--Properties."
17
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On June 1, 1998, the Company acquired the assets of Joshua's Christian
Stores in a transaction accounted for as a purchase. The pro forma combined
condensed balance sheet as of April 26, 1998, the end of Family's first quarter
of fiscal 1998, gives effect to the acquisition of Joshua's and the related
financing, as if such events had occurred on that date. The pro forma combined
condensed statements of operations for fiscal 1997 and the three months ended
April 26, 1998 give effect to the acquisition of Joshua's as if the transaction
had occurred at the beginning of those periods. The pro forma financial
statements do not give effect to other acquisitions completed by the Company
during this period as they were immaterial both individually and in the
aggregate.
In the opinion of the Company all adjustments necessary to present fairly
such pro forma combined financial statements have been made. These unaudited pro
forma financial statements are not necessarily indicative of what actual results
would have been had the transactions occurred at the beginning of the respective
periods nor do they purport to indicate the results of future operations of the
Company. These unaudited pro forma financial statements should be read in
conjunction with the accompanying notes and the historical financial statements
and notes thereto of Family Christian Stores, Inc. and Joshua's Christian
Stores, respectively, included elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
18
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
HISTORICAL
----------------------------------------------
FAMILY CHRISTIAN JOSHUA'S CHRISTIAN
STORES STORES
APRIL 26, MARCH 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
--------------------- ----------------------- ----------- -----------
ASSETS
Current assets:
Cash................................ $ 2,222 $ 125 $ (125)(a) $ --
(2,222)(c)
Inventories......................... 38,654 7,442 (469)(a) 45,627
Other............................... 3,859 969 (886)(a) 3,942
------- ------- ----------- -----------
Total current assets.............. 44,735 8,536 (3,702) 49,569
Property and equipment, net........... 13,017 2,204 (472)(a) 14,749
Intangible assets, net................ 8,319 1,355 (1,355)(a) 11,231
2,912(b)
Deposits and other assets............. 480 15 (15)(a) 480
------- ------- ----------- -----------
Total assets........................ $ 66,551 $ 12,110 $ (2,632) $ 76,029
------- ------- ----------- -----------
------- ------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ 30,579 $ 2,367 $ (2,367)(a) $ 30,579
Accrued liabilities................. 5,987 1,494 (1,494)(a) 6,187
200(b)
Current portion of long term debt... 2,000 -- 2,900(c) 4,900
------- ------- ----------- -----------
Total current liabilities......... 38,566 3,861 (761) 41,666
Long-term debt, less current
maturities........................... 23,387 -- 6,378(c) 29,765
Other liabilities..................... 2,161 -- -- 2,161
------- ------- ----------- -----------
Total liabilities................... 64,114 3,861 5,617 73,592
Redeemable common stock warrants...... 12,878 -- -- 12,878
Investment by parent.................. -- 8,249 (8,249)(d) --
Shareholders' equity (deficit):
Common stock........................ 1,752 1,752
Additional paid-in capital.......... 7,083 7,083
Retained earnings (deficit)......... (18,923) (18,923)
Notes receivable from shareholders.. (353) (353)
------- ------- ----------- -----------
Shareholders' equity (deficit).... (10,441) (10,441)
------- ------- ----------- -----------
Total liabilities and shareholders'
equity (deficit).................. $ 66,551 $ 12,110 $ (2,632) $ 76,029
------- ------- ----------- -----------
------- ------- ----------- -----------
- ------------------------------
(a) Represents the elimination of assets or liabilities which were not acquired
or assumed in the acquisition of Joshua's.
(b) To record the excess of cost over fair value of assets acquired resulting
from purchase price allocation:
Cash purchase price...................................................................... $ 2,900
Note payable to seller................................................................... 8,600
Fees and expenses........................................................................ 200
---------
Total purchase price..................................................................... 11,700
Historical net assets of Joshua's less assets and liabilities not acquired............... 8,788
---------
Excess of cost over fair value of net assets acquired.................................... $ 2,912
---------
---------
(c) Represents amounts to be recorded in connection with the seller's financing
of the purchase of Joshua's. Payments on note payable to seller of $8,600 is
due in installments of $2,900 on December 31, 1998 and 1999, and $2,800 on
December 31, 2000. The final payment on the seller financing will become due
within 30 days of the successful completion of the Offering. Additional cash
required to finance the acquisition in excess of available cash ($678) is
assumed to be financed using existing revolving credit facilities.
(d) Represents the elimination of investment by parent resulting from
adjustments (a) and (b) above.
19
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR FISCAL YEAR 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
HISTORICAL
-----------------------
FAMILY JOSHUA'S
CHRISTIAN CHRISTIAN PRO FORMA PRO FORMA
STORES STORES ADJUSTMENTS COMBINED
---------- ----------- ------------- -----------
Net sales...................................................... $ 168,063 $ 32,007 $ (2,284)(a) $ 197,786
Cost of products sold, including store occupancy costs......... 118,473 22,934 (1,764)(a) 139,643
---------- ----------- ------------- -----------
Gross profit................................................... 49,590 9,073 (520)(a) 58,143
Operating expenses:
Selling, general and administrative expenses................. 40,284 8,126 (658)(a) 47,752
Depreciation and amortization.................................. 3,080 612 (68)(a) 3,707
83(b)
Store opening expenses......................................... 739 739
---------- ----------- ------------- -----------
44,103 8,738 (643) 52,198
---------- ----------- ------------- -----------
Operating income............................................... 5,487 335 123 5,945
Interest expense, net.......................................... 2,794 -- 695(c) 3,489
---------- ----------- ------------- -----------
Income before income taxes..................................... 2,693 335 (572) 2,456
Income tax expense............................................. -- 11 (11)(d) --
---------- ----------- ------------- -----------
Net earnings................................................... $ 2,693 $ 324 $ (561) $ 2,456
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
Net earnings per share:
Basic........................................................ $ 1.63 $ 1.49
---------- -----------
---------- -----------
Diluted...................................................... $ 1.22 $ 1.11
---------- -----------
---------- -----------
Weighted average common shares outstanding:
Basic........................................................ 1,653 1,653
---------- -----------
---------- -----------
Diluted...................................................... 2,215 2,215
---------- -----------
---------- -----------
20
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 26, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
HISTORICAL
------------------------
FAMILY JOSHUA'S
CHRISTIAN CHRISTIAN PRO FORMA PRO FORMA
STORES STORES ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
Net sales......................................................... $ 38,257 $ 6,578 $ (212)(a) $ 44,623
Cost of products sold, including store occupancy costs............ 27,516 4,862 (171)(a) 32,207
----------- ----------- ------ -----------
Gross profit...................................................... 10,741 1,716 (41)(a) 12,416
Operating expenses:
Selling, general and administrative expenses.................... 10,643 2,011 (70)(a) 12,584
Depreciation and amortization..................................... 770 130 (6)(a) 915
21(b)
Store opening expenses............................................ 356 -- -- 356
----------- ----------- ------ -----------
11,769 2,141 (55) 13,855
----------- ----------- ------ -----------
Operating loss.................................................... (1,028) (425) 14 (1,439)
Interest expense, net............................................. 647 -- 174(c) 821
----------- ----------- ------ -----------
Loss before income taxes.......................................... (1,675) (425) (160) (2,260)
Income tax benefit................................................ -- (145) 145(d) --
----------- ----------- ------ -----------
Net loss.......................................................... $ (1,675) $ (280) $ (305) $ (2,260)
----------- ----------- ------ -----------
----------- ----------- ------ -----------
Net loss per share:
Basic........................................................... $ (0.96) $ (1.29)
----------- -----------
----------- -----------
Diluted......................................................... $ (0.96) $ (1.29)
----------- -----------
----------- -----------
Weighted average common shares outstanding:
Basic........................................................... 1,752 1,752
-----------
-----------
Diluted......................................................... 1,752 1,752
----------- -----------
----------- -----------
- ------------------------------
(a) Historical financial statements for Joshua's for the year ended March 31,
1998, include the operation of 71 stores and for the three months ended
April 26, 1998, include the operation of 58 stores. Since Family acquired
only the 56 stores open at the acquisition date, June 1, 1998, a pro forma
adjustment was recorded to remove the operating results directly
attributable to stores not acquired in the asset purchase.
(b) Amortization of the incremental excess of the acquisition cost over the
related net book value of assets acquired, totaling $2,912, over 35 years on
a straight-line basis, in connection with the Joshua's acquisition.
(c) Recording of interest on seller financing of $8,600 at the stated interest
rate of 7.25% and pro forma additional borrowings of $678 under the
Company's revolving credit facility at 10.5%.
(d) No income tax expense or benefit is recognized on a combined basis in fiscal
1997 or the first quarter of fiscal 1998 as Family is currently not
permitted to recognize the benefit of net deferred income tax assets which
includes net operating loss and credit carryforwards.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Family is the largest retailer in the United States dedicated solely to
Christian-related products. The Company was formed to acquire the Family
Bookstores Division of The Zondervan Corporation on October 31, 1994. At that
time, Family had 148 stores in 28 states. As of July 31, 1998, the Company had
276 stores in 36 states. Family is the primary consolidator in the Christian
retail industry, which is highly fragmented and characterized by numerous small
independent operators.
The Company's results of operations have been and will continue to be
affected by, among other things, the number, timing and mix of store
acquisitions, openings and closings in a given period. The Company's growth in
sales and earnings has been and is expected to continue to be driven primarily
by increased comparable store sales, increased productivity at existing stores,
acquisitions and new store openings. The Company will also cluster its stores in
certain markets, primarily by opening new stores that will provide greater
coverage in these markets.
To date, all of the Company's acquisitions have been accounted for by the
purchase method, resulting in the recording of goodwill which is amortized on a
straight-line basis over a period of 35 years.
Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired. Relocated and remodeled stores
remain in the comparable store base.
Store opening expenses include advertising, labor, supplies and certain
other costs and are expensed as incurred. Such expenses have averaged
approximately $26,000 per store over the past 18 months, although the amount per
store varies depending on the store format and whether the store is the first to
be opened in a market, or is part of a cluster of stores in that market.
ACQUISITION OF JOSHUA'S
On June 1, 1998, Family acquired Joshua's, a division of The Development
Association, Inc., a subsidiary of Tandycrafts, Inc. Joshua's was a leading
Christian retail chain headquartered in Fort Worth, Texas and operated 56 stores
in 10 states, including a major presence in Texas, Georgia, Colorado and
Southern California. For its fiscal year ended March 31, 1998, Joshua's had net
sales of $32.0 million and operating income of $335,000. The acquisition expands
Family's presence in new and existing markets and creates a stronger platform
for future growth.
Management has completed several important steps to integrate Joshua's
operations, including the introduction of the Company's (i) point-of-sale,
automatic product replenishment and information systems, (ii) enhanced product
assortment and (iii) targeted marketing and preferred customer programs. To
date, 90% of the acquired stores have been renamed Family Christian Stores and
exterior signage has been changed. In addition, all store managers of former
Joshua's stores who are currently employed by Family have completed the
Company's formal management training. The Company believes that the successful
integration of Joshua's will enhance its existing store base and result in
future operating efficiencies and increased brand awareness. In connection with
the acquisition, the Company recorded goodwill of approximately $3.3 million
which is being amortized on a straight-line basis over 35 years.
The Company will operate the former Joshua's stores under the name Family
Christian Stores, although the Joshua's Christian Stores name will be used for a
limited number of bargain-format stores in certain markets, near other Family
store locations. There can be no assurance that the Company will not encounter
unanticipated problems or liabilities in connection with the integration of
Joshua's or that the
22
integration will result in enhanced store operations or improved profitability.
See "Risk Factors--No Assurance of Successful Integration of Acquisitions;
Possible Inability to Manage Growth" and "Pro Forma Combined Condensed Financial
Statements (unaudited)."
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data as a
percentage of net sales for the periods indicated:
THREE MONTHS ENDED
FISCAL YEAR ------------------------
------------------------------- APRIL 27, APRIL 26,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED)
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold, including store
occupancy costs........................ 72.1 72.0 70.5 73.8 71.9
--------- --------- --------- ----- -----
Gross profit............................. 27.9 28.0 29.5 26.2 28.1
Operating expenses:
Selling, general and administrative
expenses............................. 27.2 25.1 24.0 27.9 27.8
Depreciation and amortization.......... 1.9 2.0 1.8 2.2 2.0
Store opening expenses................. 0.8 0.3 0.4 0.5 1.0
--------- --------- --------- ----- -----
29.9 27.4 26.2 30.6 30.8
--------- --------- --------- ----- -----
Operating income (loss).................. (2.0) 0.6 3.3 (4.4) (2.7)
Interest expense, net.................. 2.1 1.9 1.7 2.2 1.7
--------- --------- --------- ----- -----
Income (loss) before income taxes........ (4.1) (1.3) 1.6 (6.6) (4.4)
Income tax expense (benefit)............. 0.0 0.0 0.0 0.0 0.0
--------- --------- --------- ----- -----
Net earnings (loss)...................... (4.1)% (1.3)% 1.6% (6.6)% (4.4)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
Number of stores open at end of period... 174 184 197 187 211
THREE MONTHS ENDED APRIL 26, 1998 COMPARED TO THREE MONTHS ENDED APRIL 27, 1997
Net sales in the three months ended April 26, 1998, were $38.3 million,
representing an increase of $5.9 million, or 17.9%, compared to $32.4 million in
the three months ended April 27, 1997. This increase was due to comparable store
sales increases of 8.2%, the net addition of 14 stores opened during the period
and stores acquired in fiscal 1997 not yet qualifying as comparable stores. The
increase in comparable store sales is the result of (i) improved merchandising,
(ii) relocation of existing stores and (iii) increased sales generated by the
Company's preferred customer buying programs and direct marketing to customers
in these programs.
Gross profit consists of net sales less costs of goods sold and occupancy
costs. Gross profit in the three months ended April 26, 1998 was $10.7 million,
representing an increase of $2.2 million, or 26.4%, compared to $8.5 million for
the three months ended April 27, 1997. As a percent of net sales, gross profit
improved to 28.1% in the current year quarter, from 26.2% in the prior year
quarter. The increase in gross profit percentage is the result of fewer product
returns to vendors, improved control of inventory shrinkage and reduced
occupancy costs as a percent of net sales.
Selling, general and administrative expenses in the three months ended April
26, 1998, were $10.6 million, representing an increase of $1.5 million, or
17.6%, compared to $9.1 million in the three months ended April 27, 1997. The
increase is primarily attributable to increased selling costs, payroll
23
expenses and advertising costs related to the operation of a greater number of
stores and increased advertising expenses. As a percent of net sales, selling,
general and administrative expenses were 27.8% in the current year quarter,
compared with 27.9% in the prior year quarter.
Operating loss for the three months ended April 26, 1998, was $1.0 million,
representing an improvement of $0.4 million, compared to an operating loss of
$1.4 million in the three months ended April 27, 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in fiscal 1997 were $168.1 million, representing an increase of
$28.8 million, or 20.7%, compared to $139.3 million in fiscal 1996. This
increase was due to comparable store sales increases of 12.8%, the net addition
of 13 stores opened during the period and stores acquired in fiscal 1996 not yet
qualifying as comparable stores. The increase in comparable store sales is the
result of (i) increased sales generated by the Company's preferred customer
buying programs and direct marketing to customers in these programs, (ii)
relocation of existing stores and (iii) improved in-stock positions resulting
from enhancements to the Company's automatic replenishment system.
Gross profit in fiscal 1997 was $49.6 million, representing an increase of
$10.5 million, or 27.0%, compared to $39.1 million in fiscal 1996. As a percent
of net sales, gross profit improved to 29.5% in fiscal 1997, from 28.0% in
fiscal 1996. The increase in gross profit percentage is the result of reduced
occupancy costs as a percent of net sales, fewer product returns to vendors and
management's focus on tighter control of inventory shrinkage.
Selling, general and administrative expenses in fiscal 1997 were $40.3
million, representing an increase of $5.4 million, or 15.4%, compared to $34.9
million in fiscal 1996. The increase is primarily attributable to increased
selling costs, payroll expenses and advertising costs related to the operation
of a greater number of stores. As a percent of net sales, selling, general and
administrative expenses were 24.0% in fiscal 1997, compared with 25.1% in fiscal
1996. The decrease as a percentage of net sales is attributable to increased net
sales and greater store-level productivity.
Operating income in fiscal 1997 was $5.5 million, representing an increase
of $4.6 million, compared to $0.9 million in fiscal 1996. As a percentage of net
sales, operating income improved to 3.3% in fiscal 1997, compared to 0.6% in
fiscal 1996.
No income tax expense was recorded in fiscal 1997 or 1996 due to a net
operating loss incurred in fiscal 1996 and the Company's non-recognition of
deferred income tax assets for a portion of the net operating loss
carryforwards.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in fiscal 1996 were $139.3 million, representing an increase of
$13.2 million, or 10.4%, compared to $126.1 million in fiscal 1995. This
increase was due to comparable store sales increases of 3.1%, the net addition
of 10 stores opened during the period and stores acquired in fiscal 1995 not yet
qualifying as comparable stores. The increase in comparable store sales is the
result of the relocation of existing stores and improved merchandising during
the holiday selling season.
Gross profit in fiscal 1996 was $39.1 million, representing an increase of
$3.9 million, or 11.1%, compared to $35.2 million in fiscal 1995. As a percent
of net sales, gross profit improved slightly to 28.0% in 1996, compared to 27.9%
in fiscal 1995.
Selling, general and administrative expenses in fiscal 1996 were $34.9
million, representing an increase of $0.6 million, or 1.9%, compared to $34.3
million in fiscal 1995. The increase is primarily attributable to increased
payroll expenses related to the operation of a greater number of stores,
partially offset by reduced advertising costs due to improved co-op advertising
efforts. As a percent of net sales, selling, general and administrative expenses
were 25.1% in fiscal 1996, compared with 27.2% in fiscal 1995. The decrease as a
percent of net sales is attributable to increased net sales, greater store-level
productivity, reduced advertising costs and reduced corporate overhead as a
percentage of net sales.
24
Operating income was $0.9 million in fiscal 1996, representing an
improvement of $3.4 million, compared to a loss of $2.5 million in fiscal 1995.
As a percentage of net sales, operating income amounted to 0.6% in fiscal 1996.
No income tax expense was recorded in fiscal 1996 or 1995 due to net
operating losses incurred in both years. The Company had a net loss of $1.8
million in fiscal 1996, compared with a net loss of $5.1 million in fiscal 1995.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations may fluctuate significantly from
period-to-period as the result of a variety of factors, including: (i) the
number, timing and mix of store openings, acquisitions and closings; (ii) the
ratio of stores opened to stores acquired; (iii) the opening of stores by the
Company or its competitors in markets where the Company has existing stores;
(iv) comparable store sales results; and (v) the ratio of mall stores to strip
shopping center format stores. The Company incurs significant store opening
expenses and new stores sometimes experience an initial period of operating
losses. As a result, the opening of a significant number of stores in a single
period may have an adverse effect on the Company's results of operations. Due to
the foregoing factors, the Company believes that period-to-period comparisons of
its operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future financial performance.
The Company's business is highly seasonal, with significantly higher net
sales and all net earnings realized during the fourth quarter of its fiscal
year, primarily as a result of the holiday selling season. Any significant
adverse trend in net sales for such period would have a material adverse effect
on the Company's results of operations for the full fiscal year. Historically,
the first and third quarters of the Company's fiscal year have been the weakest
quarters. The following table includes certain selected unaudited financial
information for the quarters indicated.
FISCAL 1996 FISCAL 1997
-------------------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT OPERATING AND PERCENTAGE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 27,430 $ 29,560 $ 29,440 $ 52,850 $ 32,438 $ 35,270 $ 35,413
Cost of products sold, including store
occupancy costs....................... 20,003 21,454 21,604 37,161 23,940 25,598 25,762
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 7,427 8,106 7,836 15,689 8,498 9,672 9,651
Operating expenses:
Selling, general and administrative
expenses............................ 7,997 8,334 9,056 9,536 9,050 9,311 9,603
Depreciation and amortization......... 671 704 731 724 725 758 798
Store opening expenses................ 124 139 97 54 152 201 216
----------- ----------- ----------- ----------- ----------- ----------- -----------
8,792 9,177 9,884 10,314 9,927 10,270 10,617
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)................. (1,365) (1,071) (2,048) 5,375 (1,429) (598) (966)
Interest expense, net................... 686 701 712 636 725 714 776
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes.............. (2,051) (1,772) (2,760) 4,739 (2,154) (1,312) (1,742)
Income tax expense...................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)..................... $ (2,051) $ (1,772) $ (2,760) $ 4,739 $ (2,154) $ (1,312) $ (1,742)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
SELECTED OPERATING DATA:
Number of stores at end of period....... 180 182 183 184 187 192 197
Comparable store net sales increase
(decrease)............................ (0.3)% (0.6)% 6.3% 5.2% 12.4% 12.6% 12.8%
AS A PERCENTAGE OF NET SALES:
Gross profit............................ 27.1% 27.4% 26.6% 29.7% 26.2% 27.4% 27.3%
Selling, general and administrative
expenses.............................. 29.2 28.2 30.8 18.0 27.9 26.4 27.1
Operating income (loss)................. (5.0) (3.6) (7.0) 10.2 (4.4) (1.7) (2.7)
Net earnings (loss)..................... (7.5) (6.0) (9.4) 9.0 (6.6) (3.7) (4.9)
SEASONALITY:
Net sales............................... 19.7% 21.2% 21.1% 38.0% 19.3% 21.0% 21.1%
Gross profit............................ 19.0 20.7 20.1 40.2 17.1 19.5 19.5
FISCAL 1998
-----------
FOURTH FIRST
QUARTER QUARTER
----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 64,942 $ 38,257
Cost of products sold, including store
occupancy costs....................... 43,173 27,516
----------- -----------
Gross profit............................ 21,769 10,741
Operating expenses:
Selling, general and administrative
expenses............................ 12,320 10,643
Depreciation and amortization......... 799 770
Store opening expenses................ 170 356
----------- -----------
13,289 11,769
----------- -----------
Operating income (loss)................. 8,480 (1,028)
Interest expense, net................... 579 647
----------- -----------
Income before income taxes.............. 7,901 (1,675)
Income tax expense...................... -- --
----------- -----------
Net earnings (loss)..................... $ 7,901 $ (1,675)
----------- -----------
----------- -----------
SELECTED OPERATING DATA:
Number of stores at end of period....... 197 211
Comparable store net sales increase
(decrease)............................ 13.2% 8.2%
AS A PERCENTAGE OF NET SALES:
Gross profit............................ 33.5% 28.1%
Selling, general and administrative
expenses.............................. 19.0 27.8
Operating income (loss)................. 13.1 (2.7)
Net earnings (loss)..................... 12.2 (4.4)
SEASONALITY:
Net sales............................... 38.6% n/a
Gross profit............................ 43.9 n/a
25
A variety of factors affect the Company's comparable store sales results,
including, among others, the timing and frequency of store relocations, the
relative proportion of new stores to mature stores, the opening of stores in
existing markets by the Company or its competitors and the timing of promotional
events and new product releases, as well as general economic conditions. Past
increases in comparable store sales may not be indicative of future operating
performance. There can be no assurance that comparable store sales for any
particular period will not decrease in the future. See "Risk Factors--
Seasonality and Quarterly Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
Family has historically funded its growth through a combination of funds
generated from operations and its bank credit facilities. Additionally, the
Company relies on credit arrangements with vendors for purchases of inventory.
These arrangements generally provide for terms requiring payment within 90 days
of receipt of ordered merchandise, with special extended payment terms often
granted for new releases and new store or acquisition store inventory purchases.
Cash has been used primarily for financing store openings and acquisitions.
Net cash provided by operating activities was $3.3 million, $6.4 million and
$11.5 million in fiscal 1995, 1996, and 1997, respectively. For the first
quarter of fiscal 1998, cash used by operating activities was $8.1 million,
compared to $1.7 million in the prior year quarter.
Net earnings improved from a loss of $5.1 million in fiscal 1995, to a loss
of $1.8 million in fiscal 1996 and to income of $2.7 million in fiscal 1997,
contributing to the improvement in cash provided by operating activities.
Another significant influence on cash provided from operating activities was a
$5.4 million increase in accounts payable in fiscal 1997, a $1.0 million
decrease in fiscal 1996 and a $7.8 million increase in fiscal 1995. Other
operating liabilities increased by $1.8 million during fiscal 1997, $0.1 million
in fiscal 1996 and $0.6 million in fiscal 1995. A portion of the increase in
accounts payable and other operating liabilities resulted from the acquisition
of 16 stores, 11 stores, and 19 stores during fiscal 1997, 1996, and 1995,
respectively.
Acquisitions have historically been structured as asset purchases. Such
investments, primarily for inventory, store fixtures and goodwill, totaled $4.3
million in fiscal 1997, $4.5 million in fiscal 1996, and $4.8 million in fiscal
1995. Investments in fixed assets as part of Family's program to remodel or
relocate stores as leases expire, totaled $2.1 million in fiscal 1997, $1.5
million in fiscal 1996, and $2.4 million in fiscal 1995. The Company believes
that its remodel and relocation strategy has contributed to the improvement in
comparable store sales.
Cash used by financing activities totaled $1.1 million in fiscal 1997 and
$1.6 million in fiscal 1996, while financing activities provided cash of $5.4
million in fiscal 1995. Financing activities in fiscal 1997 included the
issuance of 186,381 shares of Common Stock, resulting in net proceeds to the
Company of $2.5 million. During fiscal 1997, the Company made quarterly payments
on its term note payable to a bank totaling $2.0 million, reducing the amount
outstanding on the note to $10.0 million at January 25, 1998. Other financing
activities included increased borrowing on the Company's revolving credit
facility of $5.3 million in fiscal 1995 and net reductions of $1.7 million in
fiscal 1996 and $1.6 million in fiscal 1997. The Company's borrowing needs
fluctuate seasonally, reaching their peak around October. In the Company's two
most recent fiscal years, approximately 38% of its net sales occurred in the
fourth quarter.
On July 17, 1998, the Company entered into the Amended and Restated Loan
Agreement, which includes: (i) a $22.0 million revolving credit facility with
interest payable quarterly at the Base Rate plus 0.50% or LIBOR plus 3.25% and a
final maturity of May 31, 2004, subject to one-year extensions as agreed upon by
the parties; (ii) a $9.5 million term note with interest payable quarterly at
the Base Rate plus 1.00%, and quarterly principal payments totaling $0.5 million
in fiscal 1999, $1.0 million in fiscal 2000 and $2.67 million in each of fiscal
2001, 2002 and 2003; and (iii) a $5.0 million term note with interest payable
quarterly at the Base Rate plus 2.00% and a final maturity of May 31, 2004. Upon
the closing of the
26
Offering and the Company's pro forma compliance with all loan covenants, the
revolving credit facility will automatically increase to $25.0 million and the
interest rate will be reduced to the Base Rate or LIBOR plus 2.75%.
The Amended and Restated Loan Agreement is collateralized by substantially
all the Company's assets and requires the Company to maintain certain financial
ratios and minimum levels of working capital and tangible net worth to repay the
term notes referred to above and to draw on the Revolving Line. Following the
Offering, the Company will have approximately $ million of available
borrowing capacity, subject to certain covenants and other restrictions
applicable to the Revolving Line.
The Company anticipates that it will spend approximately $3.7 million in the
second half of fiscal 1998 to acquire nine stores and open five new stores.
Since 1995, the Company's cash requirements to acquire a store, including
inventory, leasehold improvements, fixtures and goodwill have averaged
approximately $200,000, excluding store opening expenses. Store opening expenses
are approximately $26,000 per store and are expensed when incurred. The amounts
and timing of such expenditures will depend upon the timing of the consummation
of these acquisitions and other factors, including the location of the store and
whether it is in a new or existing market for the Company. There can be no
assurance that actual capital expenditures will not exceed anticipated levels.
The Company believes that the net proceeds of the Offering, together with
cash generated from operations and funds available under the Amended and
Restated Loan Agreement, will be sufficient to satisfy its cash requirements at
least through fiscal 1999.
EFFECTS OF INFLATION
The Company's management does not believe inflation has had a material
impact on its operating results or financial position for the periods presented.
EFFECTS OF YEAR 2000
The Company's computer systems, software products and other business systems
may experience problems in connection with processing dates on or after January
1, 2000. Family has conducted a review of the impact of such Year 2000 issues on
its information systems to determine whether its systems will retain
functionality subsequent to December 31, 1999. The Company is integrating
vendor-provided Year 2000 compliant programming code into its existing core
transaction processing systems. Although the Company believes that its Year 2000
compliance program can be completed by the beginning of fiscal 1999, there can
be no assurance that the process will be completed by that date. As part of its
evaluation, management is reviewing the incremental cost to the Company over the
next two years. Management does not anticipate that such costs will have a
material adverse effect on the financial position or results of operations of
the Company.
In addition, the Company has communicated with other entities with whom it
does significant business to determine their Year 2000 compliance readiness and
the extent to which the Company is vulnerable to any third-party Year 2000
issues. There can be no assurance that the systems of such other companies will
be converted in a timely manner. Any failure by the Company or such other
companies to successfully convert could have a material adverse effect on the
Company's business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
"Comprehensive Income" which is the total of net income and all other non-owner
changes in shareholders' equity and its components. The Company adopted the
standard in the first quarter of fiscal 1998.
27
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which supersedes SFAS Nos.
14, 18, 24 and 30, establishes new standards for segment reporting in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. The Company will adopt the standard in fiscal 1998 and does not
expect the new standard to have a significant effect on previously reported
information.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which provides a consistent standard
for recognition and measurement of derivatives and hedging activities. The
Company is in the process of evaluating SFAS No. 133 and its impact and plans to
adopt the standard in fiscal 2000.
28
BUSINESS
INTRODUCTION
Family Christian Stores is the largest retailer in the United States
dedicated solely to Christian-related products. The Company, as the
category-dominant retailer of Christian books and Bibles, gifts and cards,
music, children's merchandise and church supplies, seeks to fulfill the growing
demand for products that address Christian and family values. The Company's net
sales increased from $126.1 million in fiscal 1995 to $168.1 million in fiscal
1997, representing a compound annual growth rate of 15.4%. Operating income
increased from a loss of $2.5 million to income of $5.5 million over the same
period. The growth has been driven by comparable store sales, acquisitions and
new store openings. As of July 31, 1998, the Company operated 276 stores in 36
states, having grown from 148 stores in 28 states which the Company acquired
from The Zondervan Corporation on October 31, 1994.
Family is the primary consolidator in the Christian retail industry, which
is highly fragmented and characterized by numerous small independent operators.
On June 1, 1998, the Company completed the acquisition of Joshua's Christian
Stores, a leading retailer of Christian-related products with 56 stores. The
Joshua's acquisition expands Family's presence in both new and existing markets
and provides the opportunity to capture greater operating efficiencies across
its expanded store base. On a pro forma basis, after giving effect to the
acquisition of Joshua's, the Company had net sales of $197.8 million in fiscal
1997. The Company believes that numerous opportunities exist to continue making
acquisitions and opening new stores and plans to continue its strategy of
clustering stores in both new and existing markets.
The Company differentiates itself from other retailers of Christian-related
products by offering products to consumers of all ages and denominations in the
environment of a focused specialty retailer with value pricing. The Company's
mission is to offer an extensive selection of high-quality, Christian-related
products of exceptional value in a warm, family atmosphere. In addition, Family
seeks to reinforce Christian and family values and impact the lives of its
customers by offering meaningful and inspirational products. The Company's core
customers are individuals who characterize themselves as active Christians, as
well as others who are searching for meaning in their lives. The Company
believes that its ability to deliver an extensive product assortment to a broad
range of consumers provides it with a competitive advantage in the Christian
retail industry.
THE CHRISTIAN RETAIL INDUSTRY
According to a recent news report, the evangelical Christian market is
composed of approximately 88 million individuals. The growing interest in
Christian and family values in the United States is evidenced by the greater
cross-over appeal and mainstream acceptance of media and entertainment that
focus on such ideals and principles. A recent book purchasing study indicates
that the number of religious books purchased by Americans increased
approximately 52% from 1993 to 1997. Christian artists such as Amy Grant, Jars
of Clay and Michael W. Smith have become increasingly popular as their music is
embraced by audiences outside the traditional Christian market. On television, a
larger number of programs, such as "Touched By An Angel," "Promised Land" and
"7th Heaven," are focusing on family values and spiritual themes. According to
Nielsen Media Research, "Touched By An Angel" was ranked in the top ten among
prime-time programs for both the 1996-1997 and 1997-1998 television seasons. In
addition, more channel space is being devoted to programming that emphasizes
Christian and family values. Existing pay television channels, including the
Trinity Broadcasting Network and the Family Channel, will be joined by PAX NET,
the nation's seventh broadcast network, which is scheduled to launch in over 70%
of U.S. television households on August 31, 1998. PAX NET will feature existing
and original programs, as well as feature films, that emphasize family, faith
and spirituality.
Despite the growth in the Christian retail market, the industry remains
highly fragmented. The Christian retail industry today is reminiscent of other
consolidating retail sectors where disciplined national chains developed higher
standards of retailing and then pursued economies of scale through a
29
nationwide store base. CBA, an international trade association of Christian
product suppliers and retailers, estimates that the industry's annual sales are
approximately $3.0 billion. CBA estimates that the total number of retail stores
dedicated to Christian-related products is between 4,000 and 5,000. The small
independent retailers that represent a large portion of the Christian retail
industry face significant challenges in competing with mass retailers and
national and regional chains. Their smaller size and sales volume limit, among
other things, their depth and breadth of product offerings, purchasing and co-op
advertising economies, marketing and customer retention programs and ability to
invest in sophisticated information systems. Increased demand for family and
Christian-related products and the fragmented state of the industry have also
resulted in participation by mass merchandisers, most of which currently limit
their product offerings to books and music. While these mass merchants present
additional competition, the Company believes they do not generally offer the
breadth or depth of product, maintain the standards for customer service and
product knowledge or offer the inspirational store environment that Family
offers.
BUSINESS STRATEGY
Family's principal objective is to enhance its position as the leading
provider of Christian-related products in the United States. The key elements of
the Company's business strategy are as follows:
- CATEGORY DOMINANCE. The Company has grown from a traditional Christian
bookstore to its current position as the nation's largest retailer
dedicated to Christian-related products. Family seeks to offer both breadth
and depth in each of its focused product assortments, including books and
Bibles, gifts and cards, music, children's merchandise and church supplies.
The Company currently offers approximately 35,000 stock-keeping units
("SKUs") in each of its stores. In order to further enhance its category
dominance, the Company created its own private label publishing imprint,
Family Christian Press, and is continuing to develop other proprietary
products to augment its product assortment.
- DIVERSE CHRISTIAN CUSTOMER BASE. In order to address the broad-based
growth and interest in Christian and family values in the United States,
Family seeks to offer products that serve the needs of all Christian
denominations and attract customers of all age groups. The Company
continually works with its vendors to identify new product offerings and
evaluates its existing products and services in order to meet the varied
needs of its core customers and attract new customers.
- VALUE LEADER. The Company's size and leadership position in Christian
retailing allow it to leverage operating efficiencies, thereby providing
value to its customers through an extensive selection of high-quality
merchandise, low prices and a warm and inspirational environment. Family is
continually seeking opportunities to offer additional value to its
customers through efforts such as: special purchases; the Company's
proprietary publishing imprint, Family Christian Press; and its proprietary
product programs. In addition, the Company's preferred customer buying
programs, Family Perks and Pastors' Perks (collectively, "Perks"),
encourage customer loyalty and provide value for members through additional
price savings.
- BRAND NAME IDENTITY. The Company seeks to develop widespread recognition
of its Family Christian brand name, both within the Christian retail
industry and with mainstream consumers. The Company believes its store
clustering strategy enables it to maximize the impact of its marketing
efforts by supporting a targeted media advertising campaign to build brand
identity. Due to the highly fragmented nature of the Christian retail
industry, the Company believes that many of its competitors lack the
marketing power to differentiate their stores, products and services. In
addition, the Company's convenient locations and visible exterior signage
serve to provide increased name recognition within a community. The
Company's goal is to convert brand identity into brand preference, an
effort which is supported by Family Christian Press and the Company's
proprietary product programs.
30
- GUIDING PRINCIPLES. Led by an experienced management team with a shared
Christian faith, Family emphasizes Christian and family values in all
aspects of its business, including employee and vendor relations and
customer service, while maintaining its commitment to being the nation's
leading retailer of Christian merchandise. Family seeks to treat its
employees with integrity, care and respect and promotes similar treatment
of customers and business partners. The Company's employees are trained to
provide customer-oriented service and to meet customers' needs. In
addition, the Company has instituted a vendor partnership program to
develop cooperative relationships with its key vendors.
GROWTH STRATEGY
Family's growth strategy includes increasing sales and profitability in its
existing stores, expanding its store base through focused acquisitions and new
store openings as well as utilizing additional distribution channels.
- INCREASE COMPARABLE STORE SALES AND PROFITABILITY. The Company believes
that execution of its retail strategy, as well as increased interest in
Christian and family values in the United States, will generate growth in
existing store sales. Family has implemented several initiatives to
increase comparable store sales, including relocation of certain mall
stores to strip centers or freestanding locations, scheduled store
remodeling, use of preferred customer buying programs, improved
merchandising and expanded advertising efforts, including national
television campaigns. In addition, through the integration of additional
stores, the Company intends to increase profitability by realizing
operating efficiencies. Such efficiencies would include marketing,
centralized management, information systems and volume purchasing.
- EXPAND STORE BASE. Family's strategy for developing additional store
locations has two components: (i) acquiring existing Christian stores and
(ii) opening new stores. The Company expects that over the next five years
it will expand its store base primarily through acquisitions. Given the
fragmented nature of the industry and the growing trend towards
consolidation, the Company believes that many small, independent stores, as
well as certain regional chains, will be available for acquisition. The
Company's position as the primary consolidator in the industry provides
additional acquisition opportunities. In addition to acquired stores,
Family plans to open new stores, primarily in clustered markets. The
Company believes that multiple store markets will be an important component
of its future growth, increasing its ability to leverage operating costs
across its store base.
- UTILIZE ADDITIONAL DISTRIBUTION CHANNELS. The Company intends to further
increase its market share and sales by expanding its use of superstores,
college stores and the Internet. Family currently operates 15 stores which
range in size from 9,000 to 13,000 square feet and four stores which are
larger than 13,000 square feet. This larger format allows the Company to
display a broader assortment of products. As part of its effort to expand
its use of such stores, the Company intends to establish superstores to
serve as the centerpiece of a clustered market. Another growth opportunity
is the operation of college campus stores, which offer traditional college
bookstore products, such as textbooks, supplies and college logo apparel,
with the addition of Family's core product assortment. Family currently
operates one store on the campus of Cornerstone College in Grand Rapids,
Michigan and is evaluating possibilities for additional stores in response
to interest expressed by a number of the nation's Christian colleges.
College campus stores are expected to provide additional sales volume
during non-peak selling periods. The Company has a website
(WWW.FAMILYCHRISTIAN.COM) which offers substantially all of the Company's
advertised products for sale. Family believes its website will increase
brand awareness and generate incremental sales. The Company intends to
continue to evaluate the market potential for Internet selling.
31
STORE LOCATIONS
The Company currently operates 276 stores in 36 states. The following map
shows the states in which the Company operates and the number of stores located
in such states:
[MAP]
MERCHANDISING
By introducing, expanding and improving key merchandise categories, further
developing proprietary product programs and implementing standardized marketing
programs, Family is seeking to attract new customers, generate repeat business
and increase the size of the average transaction.
PRODUCT ASSORTMENT. The Company offers a broad and deep assortment of
Christian merchandise that appeals to a number of Christian denominations and
various age groups. The Company typically offers
32
approximately 35,000 SKUs in its stores. The Company's extensive product
assortment includes items in the following product categories:
PERCENT OF NET
SALES IN FISCAL
PRODUCT CATEGORY 1997 DESCRIPTION
- -------------------------- ------------------- ------------------------------------------------------------------
Books and Bibles 39.3% Written, audio and video books and Bibles
Gifts and Cards 26.8% Decorative home products; t-shirts and hats; jewelry; cards and
stationery
Music 20.5% Recorded Christian music in a variety of styles (e.g., Amy Grant,
Jars of Clay, Michael W. Smith)
Children's Merchandise 9.7% Children's books, videos, music, toys and clothing (e.g., Veggie
Tales-Registered Trademark-)
Church Supplies 3.7% Sunday school curricula and supplies; home schooling materials
The Company offers a full selection of bestselling merchandise, while
emphasizing in-stock consistency of all titles basic to the assortment. Family's
commitment to its customers includes a goal to be 100% in stock on best sellers
and at least 95% in stock on the balance of basic assortments. The Company uses
an automatic reorder system to maintain in-stock positions on over 30,000 SKUs.
A recent survey of Christian bookstores consumers, which indicated that 61% of
customers choose to shop at a Christian bookstore because they have a specific
product in mind, emphasizes the importance of the Company's in-stock policies.
The Company also offers special orders on products that are not stocked on an
everyday basis.
The Company continually seeks to update its product mix. In January 1998,
the Company established its own publishing imprint, Family Christian Press, in
order to produce titles under its own name. The ability of the Company to
identify and provide national distribution of novel merchandise with broad
consumer appeal is demonstrated by the recent retail success of products such as
WWJD-TM- (What Would Jesus Do?) products and Veggie Tales-Registered Trademark-
licensed children's products. In addition, Family has developed its own novel
products, such as its proprietary Christmas ornament. The Company believes that
items such as these will help differentiate Family from its competitors and
provide it with opportunities for higher gross profits.
VALUE PRICING. The Company believes that consumers are shopping for value
and will favor retailers who can deliver value consistently. Family is committed
to providing this value through a broad assortment of high-quality products at
low prices. In addition to its size and industry leadership position, which
offer numerous operating efficiencies, a number of the Company's strategic
initiatives are designed to increase its ability to deliver value to its
customers. These initiatives include consistent availability of products, strong
customer service and cooperative vendor partnerships.
VENDOR RELATIONSHIPS. In keeping with its guiding principles, the Company
has established a formal partnership program with several of its key vendors.
This program is designed to foster cooperation between Family and its vendors in
order to improve sales, increase operating efficiencies and provide additional
value to customers. The vendor program includes quarterly meetings between
cross-functional teams to discuss areas for improvement and progress in their
implementation.
STORE ENVIRONMENT
Family seeks to provide a unique shopping experience within a comfortable
and friendly environment. The Company's store design creates a warm, family
atmosphere with visual, audio and interactive entertainment to engage the
customer. Family's stores offer a children's area, with books, toys and apparel,
that many stores use for storytelling and other children's activities. Many
stores have listening centers in their music departments which enable customers
to sample music selections of their choice. Gift departments display a variety
of decorative home products, such as framed art and figurines. The Company's
33
stores are well-lit with wide aisles and provide clearly marked signs to assist
shoppers in locating merchandise, and, when desired, friendly and knowledgeable
sales associates are available to assist customers. Space planning and the use
of point-of-purchase materials are designed to increase the size of the average
transaction by highlighting key selling areas and promoting browsing. The
Company attempts to offer merchandise that meets a variety of its customers'
needs and has designed its stores to attract customers of all denominations and
ages to a number of different product areas.
CULTURE AND STORE OPERATIONS
In keeping with its guiding principles, the Company seeks to emphasize
Christian and family values in all aspects of its business. Family recruits
people who understand the importance of recognizing and addressing customer
needs. The Company trains its store employees and empowers them to meet each
customer's needs with friendly service. Sales associates working more than 20
hours per week participate in an incentive program that rewards them if the
store in which they work achieves its operating profit goals for the year.
Family treats store managers as partners and rewards them with a percentage of
store operating profits when performance targets are achieved. The Company
believes that its unique culture encourages greater employee loyalty, as
evidenced by its historical average annual turnover rate among store managers of
approximately 15%.
Each Family store is managed by a full-time store manager, who works with a
district manager. District managers focus on the training and development of
store managers, as well as on store standards, merchandise presentation,
inventory positioning, human resources and local marketing initiatives.
STORE FORMAT AND SITE SELECTION
Family's stores currently average approximately 4,500 square feet, with
stores ranging in size from 1,200 square feet to as large as 32,000 square feet.
The Company's prototype store is approximately 4,500 square feet, with high
visibility signage, easy access and ample parking. The Company utilizes a
standard store layout which it adapts to individual markets in order to address
local trends and preferences.
The Company's stores are generally located in the commercial district of
densely populated residential areas. Prior to opening or acquiring a store, the
Company analyzes the local market, including: (i) demographic data, such as
education levels, average income, population density and age distribution; (ii)
lifestyle data, such as church attendance; and (iii) existing competition. When
the Company acquires a store, it remodels the store in accordance with the
Company's specifications.
The Company's research indicates that its customers are primarily
destination shoppers. As a result, Family has relocated and will continue to
relocate mall stores to nearby strip shopping centers or freestanding locations,
as leases expire or when otherwise possible. Historically, the Company's
relocated stores have resulted in reduced cost per square foot, lower common
area maintenance expenses and a more enjoyable shopping experience for the
customer.
As of July 31, 1998, the Company operated 276 stores in 180 strip shopping
centers, 67 malls and 29 freestanding locations.
STORE-LEVEL ECONOMICS
The Company's 179 stores that were in operation for all of fiscal 1997
generated average net sales of approximately $880,000 and average net sales per
gross square foot of approximately $199. These stores generated average
store-level operating cash flow (defined as store operating income before
depreciation and home office allocation and excluding changes in working
capital) of approximately $106,000, or 12.0% of average net sales. There can be
no assurance that the Company will maintain such store-level averages in the
future or that such averages will not decrease.
34
MARKETING AND PROMOTION
Due to its relative size and cluster strategy, the Company believes it has a
competitive advantage within its industry to conduct coordinated and systematic
advertising and marketing campaigns. These marketing campaigns include Perks
programs, catalogs, directed mailings, advertising in Christian media, in-store
promotion and sponsored Christian-oriented community and store events. Such
efforts have permitted Family to attain broad market exposure that would not be
cost-effective for a single store or small store chain. The Company receives
substantial co-op advertising reimbursement for certain forms of general
advertising from its vendors.
FAMILY AND PASTORS' PERKS PROGRAMS. The Company's Perks database allows it
to market its products directly to existing customers. The Family Perks program
rewards frequent customers with certain promotions and discounts and currently
includes over five million members. The average Family Perks customer spends $32
per visit versus the $18 average for the Company's customers as a whole. The
Pastors' Perks program offers full-time pastors an everyday 20% discount, which
allows Family to compete effectively with mail order houses. In addition, the
Company believes that pastors provide valuable word-of-mouth publicity for the
Company to the members of their congregations.
CATALOG. The Company believes that its high-quality catalogs offer an
attractive opportunity for it to market its products. Catalogs allow the Company
to illustrate the breadth and depth of its stores' product offerings and draw
consumers into Family's stores. The Company's suppliers also rely in part on the
Company's catalog to help launch major titles. The catalog is targeted to
customers in the Company's Perks database, which allows the Company to directly
promote its product assortment in an attractive format to current Family
customers.
MAILINGS. Family utilizes direct mailings to target its Perks members. The
Company's database tracks the purchases of approximately 5 million customers by
product category, which allows quick response to specific store promotional
needs and provides additional reporting capabilities. Suppliers have been very
supportive of these targeted mailings, which has resulted in incremental vendor
co-op advertising revenue.
TELEVISION AND RADIO. Christian radio has been a primary focus in the
Company's advertising efforts and the Company plans to increase its use of
television advertising. Christian radio provides the ability to reach
individuals likely to purchase Christian-related merchandise. A research study
indicated that 55% of Family Perks customers listen to Christian radio daily and
another 21% listen weekly. In markets where Christian radio is ineffective or
unavailable, a limited use of appropriate secular radio is used. Selective
television advertising, such as Family commercials during the "Dove" awards, is
used to promote the Company's name and product focus to a targeted group of
consumers.
IN-STORE PROMOTION. Promotion of its products within its stores is an
important part of Family's strategy to increase its average transaction size.
The Company attempts to capture as many impulse sales as possible through an
ongoing, aggressive point-of-purchase campaign in partnership with its key
vendors. The Company's store design encourages customers to browse through
different departments, increasing the opportunity for multiple-item purchases.
COMMUNITY AND STORE EVENTS. Management believes that the degree to which
its stores relate to their local community serves to build customer loyalty and
encourages word-of-mouth publicity and free media coverage. Many stores have
areas dedicated to public and children's events and organize community-based
events, such as author signings, children's storytelling and live music.
PURCHASING AND DISTRIBUTION
The Company's purchasing decisions are centralized and are made by the
Company's merchandising department. The Company's buyers negotiate terms,
discounts and co-op advertising allowances for all Family's stores and decide
which products to purchase, in what quantity and for which stores. The buyers
35
use current inventory and sales information provided by the Company's in-store
point-of-sale computer system to make reorder decisions. Although the majority
of purchases are made by the five senior buyers in the Company's merchandising
department, individual store managers have the flexibility to influence
purchasing decisions in order to respond to local demand.
Substantially all product is shipped directly to the Company's stores from
vendors. No one vendor accounted for more than 10% of the Company's overall
merchandise purchases in fiscal 1997. In general, approximately 60% of the
Company's inventory, primarily books and recorded music, may be returned by the
Company for full credit, which substantially reduces the Company's risk of
inventory obsolescence.
MANAGEMENT INFORMATION SYSTEMS
Family utilizes integrated information systems centralized at the corporate
level for inventory and price management, sales tracking, merchandise planning
and accounting. The Company's systems have the capacity to manage a store base
in excess of 350 stores and can be easily expanded to manage a store base of
approximately 1,000 stores, using the current AS/400 and software. The Company
uses an automatic reorder system to maintain in-stock positions on all reorder
items. Currently, Family has over 30,000 items on automatic replenishment. The
system provides management with the information needed to determine the proper
timing and quantity of reorders. The Company's information systems are currently
managed by on-site staff members of Andersen, supported by dedicated systems
personnel of Family.
The Company's EDI capabilities include the transmission of purchase orders
directly to the Company's key vendors. Management believes the Company's EDI
efforts with vendors will continue to grow in the future as retailers and
suppliers focus on further increasing operating efficiencies. The Company plans
to require its suppliers to provide electronic invoicing by the first quarter of
fiscal 1999.
COMPETITION
Family's competition consists primarily of other retailers of
Christian-related products, primarily small independents and franchises, as well
as book and music retailers that have expanded their offerings to include
Christian merchandise. Many of the independents belong to a buying/marketing
group. The largest of these, Parable, is believed to presently consist of
approximately 330 stores.
Over the last five years, many independent Christian retailers have
continued to increase the size of their store base and improve store appearance
through expansion and remodeling, offering a more up-to-date appearance and a
better shopping experience. Many of these stores have increased their marketing
efforts by utilizing extensive mailing lists and by participating in marketing
groups and appear to be growing stronger. Consolidation trends in the industry
have put pressure on the ability of independent stores, many of which are
undercapitalized, to compete with larger, better capitalized operators. The
total number of independent outlets remains relatively unchanged. The Company
also faces competition from Christian retail chains such as Lemstone, Inc. (75
stores), The Baptist Bookstores (73 stores), Berean Christian Stores (21 stores)
and Mardel, Inc. (11 stores).
The Company also experiences competition in books and music from general
retailers. Due to the growing interest in Christian-related products, large
retailers such as Barnes & Noble, Media Play, Borders and Books-A-Million are
expanding their selection of Christian books and music while also increasing the
size and number of their stores. In addition, discount store chains such as
Target, Wal-Mart and Best Buy have become more competitive in music and video
selection and pricing. Family is responding to this competition with its
dominant product selection and low prices on new releases. The Company expects
increased competition from Internet retailers, such as Amazon.com, direct
marketers and book and music clubs in the future.
36
PROPERTIES
The Company operates 276 stores in 36 states. Family operates stores in
strip shopping centers, malls and freestanding locations. All of the Company's
stores are leased, generally with terms ranging from five to ten years. The
leases require the Company to pay a fixed minimum rental fee and/or a rental fee
based on a percentage of net sales together with certain customary costs (such
as property taxes, common area maintenance and insurance).
The Company's corporate offices are located in Grand Rapids, Michigan in a
building shared with Zondervan. The space occupied by Family comprises 51,381
square feet for office space and 9,831 square feet for warehouse space. The
space is subleased from Zondervan for a term expiring on December 31, 2001, the
expiration date of a lease Zondervan has with the property owner. All of the
leases are accounted for as operating leases. See Note E of Notes to Financial
Statements of Family Christian Stores, Inc.
EMPLOYEES
As of July 27, 1998, Family employed 725 full-time individuals and 2,802
part-time individuals. Approximately 3,345 of these employees are engaged at the
store-level and 182 are devoted to administrative and corporate support
activities. The Company believes that it maintains good relations with its
employees.
LEGAL PROCEEDINGS
From time-to-time, the Company is involved in legal proceedings that the
Company considers to be in the normal course of its business, none of which has
resulted in any material losses to date. The Company is not currently involved
in any material legal proceedings.
37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to directors
and executive officers of the Company:
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
Leslie E. Dietzman........................ 55 President, Chief Executive Officer and Director
Craig G. Wassenaar........................ 42 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
J. Hal Bailey............................. 41 Executive Vice President, Operations and Human Resources
William S. Nielsen........................ 40 Vice President, Merchandising and Marketing
Richard M. Butler......................... 54 Vice President, Administration
Craig B. Klamer........................... 42 Vice President, Merchandise Administration
George Craig(1)........................... 58 Chairman of the Board
Peter A. Carnwath(1)...................... 51 Director
Scott D. Steele(2)........................ 34 Director
Neil Topham(2)............................ 49 Director
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
LESLIE E. DIETZMAN has served as the Company's President, Chief Executive
Officer and as a Director since the Company's inception in October 1994. From
September 1992 to October 1994, Mr. Dietzman was the President of Family
Bookstores, at that time a division of Zondervan, and was a Vice President of
Zondervan. Mr. Dietzman has over 30 years of experience in retailing with
various organizations, including The Wal-Mart Stores, Inc., Ames Department
Stores, Mervyns and J.L. Hudson Department Stores in various senior management
positions.
CRAIG G. WASSENAAR has served as the Company's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary since June 1997. From January 1996 to
June 1997, Mr. Wassenaar was Vice President and Chief Financial Officer of
Ameriwood Industries International Corporation, a manufacturer of home and
office furnishing products, responsible for finance, accounting, treasury, risk
management, budgeting and information systems. From October 1994 to October
1995, Mr. Wassenaar was Vice President of Finance--Baby Care Division of Gerber
Products ("Gerber"), a manufacturer of infant care products. From May 1992 to
October 1994, Mr. Wassenaar served as Corporate Comptroller of Gerber.
J. HAL BAILEY has served as Executive Vice President, Operations and Human
Resources since January 1, 1997. Prior to 1997, Mr. Butler served the Family
Bookstores division of Zondervan in various capacities, including as Executive
Vice President, Merchandise and Marketing from July 1995 to January 1997, as
Vice President, Human Resources from December 1994 to July 1995 and as Corporate
Director of Human Resources from February 1992 to December 1994.
WILLIAM S. NIELSEN has served as the Company's Vice President, Merchandise
and Marketing since April 1997. Prior to that time, Mr. Nielsen served the
Company as Director of Marketing from August 1995 to April 1997 and as Senior
Buyer--Books from September 1994 to August 1995. From August 1989 to September
1994, Mr. Nielsen was Merchandise Manager of The Baptist Bookstores, responsible
for merchandise and marketing planning.
RICHARD M. BUTLER has served as the Company's Vice President, Administration
since October 1994. Prior to that time, Mr. Butler served the Family Bookstores
Division of Zondervan in various capacities, including as Business Manager from
May 1989 to October 1994, as Controller from March 1986 to May 1989 and as
Assistant Controller from February 1985 to March 1986.
38
CRAIG B. KLAMER has served as the Company's Vice President, Merchandise
Administration since April 1997. Prior to that time, Mr. Klamer served the
Company and the Family Bookstores Division of Zondervan in various capacities,
including as Vice President of Human Resources and Strategic Planning from July
1995 to April 1997, as Vice President of Merchandise and Marketing from June
1992 to July 1995 and as Vice President of Purchasing and Merchandising from
February 1988 to June 1992.
GEORGE CRAIG has served as the Chairman of the Board of Directors of the
Company since November 1994. From April 1988 to March 1996, Mr. Craig was
President and Chief Executive Officer of HarperCollins Publishers, Inc., a
subsidiary of News Corporation.
PETER A. CARNWATH has served as a Director of the Company since May 1997.
Since January 1988, Mr. Carnwath has been a Managing Director of Electra Fleming
Inc., an investor in private companies.
SCOTT D. STEELE has served as a Director of the Company since November 1994.
Since May 1993, Mr. Steele has been employed by Electra Fleming, Inc., an
investor in private companies, currently serving as a principal of such entity.
NEIL TOPHAM has served as a Director of the Company since November 1994.
Since April 1997, Mr. Topham has been Chief Financial Officer of Newstar Media
Inc., an independent television producer and leading independent publisher of
audio books. From April 1996 to April 1997, Mr. Topham served as a consultant,
providing business advisory services in the publishing and retail industries.
Mr. Topham was Chief Financial Officer of HarperCollins Publishers, Inc. from
August 1987 to March 1996.
In July 1998, the Company's Board of Directors approved, subject to
shareholder approval, the Company's Restated Articles of Incorporation, which
provide for, among other things, a classified Board of Directors. In accordance
with the terms of the Restated Articles of Incorporation, the terms of office of
the Board of Directors will be divided into three classes, as nearly equal in
number as possible. Class I directors have terms that expire at the annual
meeting of shareholders to be held in 1999 and will initially be . The
Class II directors have terms that expire at the annual meeting of shareholders
to be held in 2000 and will initially be and a director to be designated
by the Electra Entities (as described below). Class III directors have terms
that expire at the annual meeting of shareholders to be held in 2001 and will
initially be . At each annual meeting of shareholders beginning with the
1999 annual meeting, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election and until their successors have been
duly elected. Pursuant to an agreement to be entered into in connection with the
Offering (the "Electra Agreement"), among the Company, Electra Investment Trust
P.L.C. and Electra Associates, Inc. (collectively the "Electra Entities"), the
Company will agree to nominate to the Board of Directors one director designated
by the Electra Entities for so long as the Electra Entities collectively
beneficially own greater than 5% of the outstanding Common Stock. See
"Description of Capital Stock--Shareholders' Agreement."
The Restated Articles of Incorporation also provide for a minimum of five
directors and a maximum of nine directors, and such limits may be revised only
with the approval of 80% of the entire Board of Directors. In connection with
the Offering, the Board of Directors intends to elect at least two independent
directors. The identity of the independent directors has not yet been determined
and may not be determined until after completion of the Offering.
There is no family relationship between any of the directors or between any
director and any executive officer of the Company. For information regarding
certain business relationships between the Company and certain of its directors
and executive officers, see "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has an Audit Committee and a Compensation
Committee, the principal functions of which are described below. Each of these
committees is responsible to the full Board
39
of Directors, and its activities are subject to the approval of the Board of
Directors. The Audit Committee, among other things, makes recommendations to the
Board regarding the selection of independent auditors, reviews the results and
scope of the audit and other services provided by the Company's independent
certified public accountants and reviews the Company's accounting practices and
controls. The Audit Committee currently consists of Mr. Topham and Mr. Steele.
The Compensation Committee administers the Company's compensation and benefit
programs and makes recommendations to the Board concerning salaries and
incentive compensation for employees and consultants of the Company. The
Compensation Committee also reviews and establishes the compensation structure
for the Company's officers and directors, including salary rates, participation
in incentive compensation and benefit programs, 401(k) plans, stock purchase
plans and other forms of compensation, including stock options. The Compensation
Committee currently consists of Mr. Craig and Mr. Carnwath. In connection with
the Offering and the election of independent directors, the Audit Committee and
the Compensation Committee will be reconstituted to include only the new
independent directors.
DIRECTOR COMPENSATION
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Non-employee directors
receive an annual retainer of $ per year. Messrs. Craig and Topham also
each receive compensation of $75,000 per year in payment for strategic planning,
financial and investment advisory services rendered to the Company by them in
their capacities as directors. See "Certain Transactions." In addition, each
non-employee director receives $ for attendance at each meeting of the
Board of Directors and $ for attendance at each committee meeting. The
Chairman of each committee receives $ for each committee meeting
attended. The Company reimburses its non-employee directors for the reasonable
out-of-pocket expenses incurred in connection with attending meetings of the
Board of Directors and its committees. Pursuant to the 1998 Stock Plan (as
defined), each non-employee director will be granted an option on the date of
each annual meeting of shareholders to purchase shares of Common Stock.
The per share exercise price of options granted to directors under the 1998
Stock Plan will be 100% of the fair market value of the Common Stock on the date
each option is granted. See "--Stock Option and Restricted Stock Plan of 1998."
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Restated Articles of Incorporation and Bylaws provide that directors and
officers of the Company shall be indemnified against liabilities arising from
their service as directors and officers of the Company to the fullest extent
permitted by the Michigan Business Corporation Act ("MBCA"). Additionally, the
Company will enter into indemnification agreements with each of its executive
officers and directors to reimburse them for certain liabilities incurred in
connection with the performance of their fiduciary duties. The MBCA provides
that a director of a corporation will not be personally liable for monetary
damages to the corporation or its shareholders for breach of fiduciary duty as a
director, except for liability for (i) the amount of a financial benefit
received by a director to which he or she is not entitled; (ii) intentional
infliction of harm to the corporation or its shareholders; (iii) a violation of
Section 551 of the MBCA (relating to unlawful declaration of dividends and
distributions); or (iv) an intentional criminal act. The MBCA further provides
that a corporation may not limit a director's liability for violation of, or
otherwise relieve its directors from the necessity of complying with, federal or
state securities laws, or affect the availability of non-monetary remedies such
as injunctive relief or rescission.
The provisions are intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, shareholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such
40
actions. If equitable remedies are found not to be available to shareholders in
any particular situation, shareholders may not have an effective remedy against
a director in connection with such conduct.
As permitted by the MBCA, the Company's Bylaws provide that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to (i) any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise and (ii) any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses (including attorneys' fees), judgments,
fines and amount paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct was unlawful.
However, no claim for indemnification by any person pursuant to (ii) shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Company. The Company has purchased and
maintains insurance on behalf of its directors and officers against any
liability asserted against them in any such capacity, or arising out of their
status as such, whether or not the Company would have the power to indemnify
such directors and officers against such liabilities under the Bylaws.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. In the last completed fiscal year, matters with respect to the
compensation of executive officers of the Company were determined by the full
Board of Directors.
41
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
January 25, 1998 for the Company's Chief Executive Officer and each of its four
most highly compensated executive officers whose annual salary and bonus
exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- -------------------------------------------------------- ---------- --------- ------------- ----------------
Leslie E. Dietzman,
President and Chief Executive Officer.................. $ 262,053 $ 83,030 $ 23,309(1)
Craig G. Wassenaar
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (2)............................ 95,497 24,696 (3) 1,834(4)
J. Hal Bailey
Executive Vice President, Operations
and Human Resources.................................... 114,066 30,337 -- 9,004(5)
Richard M. Butler
Vice President, Administration......................... 97,189 25,814 -- 12,608(6)
Craig B. Klamer
Vice President, Merchandise Administration............. 93,028 24,749 -- 7,374(7)
- ------------------------------
(1) Consists of $14,675 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Dietzman and $8,634 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Dietzman has been allocated an
interest in the cash surrender value under such policy.
(2) Mr. Wassenaar commenced employment with the Company on June 23, 1997. The
amounts reported for Mr. Wassenaar are for services rendered to the Company
from June 23, 1997, until January 25, 1998.
(3) Mr. Wassenaar was granted an option to purchase shares of Common Stock
with an exercise price of $ per share at the commencement of his
employment with the Company. Such option vests at the rate of 20% per year
on each of the first five anniversaries of the date of his employment.
(4) Consists of premiums paid by the Company for life insurance, a portion of
which was paid with respect to term life insurance and a portion of which
Mr. Wassenaar has been allocated an interest in the cash surrender value
under such policy.
(5) Consists of $7,496 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Bailey and $1,508 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Bailey has been allocated an
interest in the cash surrender value under such policy.
(6) Consists of $10,772 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Butler and $1,836 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Butler has been allocated an
interest in the cash surrender value under such policy.
(7) Consists of $5,582 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Klamer and $1,792 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Klamer has been allocated an
interest in the cash surrender value under such policy.
42
The following tables set forth information with respect to stock options
granted to and exercised by the Named Executive Officers during the fiscal year
ended January 25, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR GRANT DATE
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($)(1)
- ------------------------------------ ------------------ --------------- ----------- ----------- ------------------
Leslie E. Dietzman(2)............... 14.3% $ 1/22/03 $
Craig G. Wassenaar(3)............... 85.7 None
- ------------------------------
(1) Based on the Black-Scholes option pricing model expressed as a ratio of
times the number of shares. The actual value, if any, an option holder may
realize will depend on the excess of the stock price over the exercise price
on the date the option is exercised, so that there is no assurance the value
realized by an option holder will be at or near the value estimated by the
Black-Scholes model. No adjustments were made for the non-transferability of
the options or to reflect any risk of forfeiture before vesting. The
Company's use of the Black-Scholes model to indicate the present value of
each grant is not an endorsement of this valuation method.
(2) The per share exercise price of the option is equal to the market value of
Common Stock on the date each option was granted. The outstanding option has
a five year term.
(3) The option granted to Mr. Wassenaar vests at the rate of 20% per year on
each of the first five anniversaries of the date of his employment and has
no expiration date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
Leslie E. Dietzman........................................ -- $ $
Craig G. Wassenaar........................................ --
- ------------------------------
(1) Based on the fair market value as of January 25, 1998 ($ per share),
minus the per share exercise price multiplied by the number of shares.
EMPLOYMENT AGREEMENTS
In connection with the closing of the Offering, the Company will enter into
employment agreements with each of Messrs. Dietzman, Wassenaar, Bailey, Butler
and Klamer. Each employment agreement will provide for a term of three years,
with automatic one-year extensions until either the executive or the Company
notifies the other of its desire not to extend the agreement. Pursuant to their
respective employment agreements, Messrs. Dietzman, Wassenaar, Bailey, Butler
and Klamer will be paid base salaries of $ , $ , $ , $ and
$ per year respectively. In addition, such agreements will provide for
discretionary annual bonuses as determined by the Board of Directors and target
bonuses of up to % of the executive's base salary based on the attainment of
certain criteria determined by the Board of Directors. The employment agreements
will also provide for standard employee benefits including, participation in the
Company's welfare and stock incentive plans. In addition, the Company will
maintain, during the executive's term of employment, a term life insurance
policy with a face value of times the executive's base salary, provided such
premiums do not exceed $ .
43
Each of the employment agreements will provide that if the Company
terminates the executive's employment without "cause" (as defined in the
employment agreements), then such executive shall be entitled to receive his
base salary at the rate then in effect for the remainder of the term (or for a
period of months if greater), a bonus equal to his highest annual
discretionary bonus in the preceding three-year period prior to such termination
for each fiscal year during the Severance Period (as defined in the employment
agreements), continuation of all life insurance premium payments and vesting of
all outstanding equity awards. Pursuant to the terms of the employment
agreements and subject to the approval of the Board of Directors, Messrs.
Dietzman, Wassenaar, Bailey, Butler and Klamer will receive a one-time option
grant to purchase , , , and shares of common
stock, respectively. In addition, on each anniversary date of the employment
agreement, each executive will be eligible to receive a grant of options to
purchase up to shares of common stock. The per share exercise price of
such grants will equal of the fair market value of the options on the date
such options are granted.
The employment agreements will provide that during the term of employment,
each executive will be subject to certain confidentiality and non-solicitation
restrictions.
EMPLOYEE BENEFIT PLANS
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1998. In , the Company's
Board of Directors adopted, and the shareholders approved, the Family Christian
Stores 1998 Stock Option and Restricted Stock Plan (the "1998 Stock Plan"). The
1998 Stock Plan will be administered by the Compensation Committee of the Board
of Directors (the "Committee"). All officers (including officers who are also
directors), employees, consultants and advisors of the Company are eligible for
discretionary awards under the 1998 Stock Plan. The 1998 Stock Plan provides for
stock-based incentive awards, including incentive stock options, non-qualified
stock options, restricted stock, performance shares, stock appreciation rights
and deferred stock. The 1998 Stock Plan permits the Board of Directors, or the
Committee, as the case may be, to select eligible persons to receive awards and
to determine certain terms and conditions of such awards, including the vesting
schedule and exercise price of each award, and whether such award shall
accelerate upon the occurrence of a change in control of the Company. Under the
1998 Stock Plan, options to purchase Class A Common Stock may be granted with an
option exercise price that is less than the then current market value of such
stock.
Under the 1998 Stock Plan, options, restricted stock, performance shares or
stock appreciation rights covering no more than % of the shares reserved
for issuance under the 1998 Stock Plan may be granted to any participant in any
one year. A total of shares have been reserved for issuance under the 1998
Stock Plan. Pursuant to such discretionary awards, the Company has granted to
certain officers, employees, advisors and consultants, options to purchase an
aggregate of approximately shares of Class A Common Stock under the 1998
Stock Plan at the initial public offering price.
The 1998 Stock Plan may be amended, suspended or terminated at any time.
However, the maximum number of shares that may be sold or issued under the 1998
Stock Plan may not be increased, nor may the class of persons eligible to
participate in the 1998 Stock Plan be altered, without the approval of the
Company's shareholders; provided, however, that adjustments to the number of
shares subject to the 1998 Stock Plan and to individual awards thereunder and/or
to the exercise price of awards previously granted are permitted without
shareholder approval upon the occurrence of certain events affecting the capital
structure of the Company. With respect to any other amendments to the 1998 Stock
Plan, the Board of Directors or the Committee may, in its discretion, determine
that such amendment shall become effective only upon approval by the
shareholders of the Company if the Board of Directors or the Committee
determines that such shareholder approval may be advisable, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
federal or state securities law, federal or state tax laws or any other laws or
for the purpose of satisfying applicable stock exchange listing requirements.
44
MANAGEMENT STOCK OPTION PLAN. The Company's Management Stock Option Plan
(the "Management Plan") was adopted by the Board of Directors on November 21,
1997, to be effective as of November 1, 1994. The Management Plan provides for
the issuance of stock options on a fully-diluted basis upon the attainment of
certain performance goals. Options issued under the Management Plan are intended
to provide performance-based compensation under Section 162(m) of the Code. A
maximum of 5% of the Company's outstanding shares of Common Stock as of November
17, 1994 (subject to adjustment) (currently shares of Common Stock), is
available for grant under the Management Plan.
The Management Plan is administered by the Compensation Committee.
Participation in the Management Plan is limited to senior Company officers
authorized by the Compensation Committee as participants and other senior
Company officers named as initial participants in the Management Plan. Options
granted under the Management Plan have a price per share of $ and are
exercisable on the date of the Company's public announcement of an initial
public offering, or earlier upon the occurrence of certain events set forth in
the Management Plan. All exercise rights under the Management Plan terminate
five years after the consummation of an initial public offering, or earlier upon
the occurrence of certain events set forth in the Management Plan.
The Board may amend the Management Plan provided that an amendment may not
increase the benefits to participants, increase the number of shares of stock
available or modify the eligibility requirements unless approved by
shareholders. The Management Plan will terminate when all shares subject to
options that have become exercisable have been purchased or the rights to
purchase such stock have expired or been forfeited. Upon certain changes in
control of the Company, including a reorganization, reclassification, merger or
consolidation, the successor corporation must assume the duty to observe and
perform the terms and conditions of any outstanding options under the Management
Plan and all obligations and liabilities thereof.
INCENTIVE GROUP STOCK OPTION PLAN. The Company's Incentive Group Stock
Option Plan (the "Incentive Plan") was adopted by the Board of Directors on
November 21, 1997, to be effective as of November 1, 1994. The Incentive Plan is
administered by the Compensation Committee. Participation in the Incentive Plan
is limited to members of middle and senior management of the Company. A maximum
of 3% of the Company's outstanding shares of Common Stock as of November 17,
1994 (subject to adjustment) (currently, shares of Common Stock), is
available for stock options under the Incentive Plan. The Incentive Plan will
terminate when all shares subject to options that have become exercisable have
been purchased or the rights to purchase such shares have expired or been
forfeited.
The Incentive Plan has substantially similar terms and conditions to those
described above in "Management Stock Option Plan," including those with respect
to exercise price and powers of the Compensation Committee.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "Employee Stock Plan") was adopted by the Board of Directors
on November 21, 1997, to be effective as of November 30, 1997. A maximum of
shares of the Company's Class A Common Stock is available under the
Employee Stock Plan (subject to adjustment). The Employee Stock Plan is
administered by the Compensation Committee. The Employee Stock Plan provides for
the purchase of Class A Common Stock by employees of the Company. Purchases are
made from an individual participant's contribution account funded through
payroll deductions. The Employee Stock Plan is not intended to qualify as an
employee stock purchase plan under Section 423 of the Code. Subject to certain
conditions and limitations, all employees of the Company are eligible to
participate in the Employee Stock Plan. The purchase price per share for the
first $2,000 of Class A Common Stock purchased pursuant to the Employee Stock
Plan by any participant in any calendar year is 85% of the established value on
the commencement date of the plan quarter. The price per share for Class A
Common Stock purchased in excess of $2,000 in a calendar year is 100% of the
established value. Following the consummation of the Offering, the Company
intends to amend the Employee Stock Plan to provide that the purchase price for
45
the first $2,000 is 85% of the average of the low and high sales price reported
on The Nasdaq Stock Market on the last day of a plan quarter and 100% of such
price for amounts over $2,000. No employee may acquire the right to purchase
Class A Common Stock pursuant to the Employee Stock Plan if (i) immediately
after receiving the right, the employee would own 5% or more of the total
combined voting power or value of all classes of stock of the Company, (ii) the
right would permit the employee to own an aggregate cumulative value of Class A
Common Stock in excess of $50,000 or (iii) the purchase would result in the
purchase of Class A Common Stock with an aggregate purchase price in excess of
$5,000 in any calendar year.
The Board of Directors may amend the Employee Stock Plan at any time;
subject to certain limitations. The Board of Directors can suspend operation of
the Employee Stock Plan for any period. The Employee Stock Plan automatically
terminates upon the earlier of the purchase by participants of all shares of
Class A Common Stock subject to the Employee Stock Plan or November 30, 2007.
46
CERTAIN TRANSACTIONS
On November 14, 1994, the Company entered into an agreement (the
"Shareholders' Agreement") with certain shareholders of the Company, including
the Electra Entities, which provides for, among other things, a maximum number
of directors, the election of up to two directors at the direction of the
Electra Entities and certain preemptive rights. Upon consummation of the
Offering, the Shareholders' Agreement will be terminated and the Company will
enter into the Electra Agreement which will provide for, among other things, the
nomination by the Company to the Board of Directors of a director designated by
the Electra Entities.
On July 31, 1997, shares of Common Stock were issued to Mr. Topham,
a director of the Company, as payment for consulting and other services provided
to the Company in connection with the private placement of Common Stock on
August 31, 1997.
In connection with the purchase of shares of Common Stock by Mr.
Dietzman, Chief Executive Officer, President and a director of the Company, on
November 14, 1994, the Company entered into a term loan with Mr. Dietzman in the
amount of $225,000, with an annual rate of interest of 8%, which loan matures on
November 14, 2001. The loan is payable in full in annual installments of
$43,216, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Dietzman on July 31, 1997, the Company entered into a term loan with Mr.
Dietzman in the amount of $37,500, with an annual rate of interest of 8%, which
loan matures on July 31, 2004. The loan is payable in full in annual
installments of $7,000, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Bailey, Executive Vice President, Operations and Human Resources of the Company,
on November 14, 1994, the Company entered into a term loan with Mr. Bailey in
the amount of $60,000, with an annual rate of interest of 8%, which loan matures
on November 14, 2001. The loan is payable in full in equal annual installments
of $11,524, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Butler, Vice President, Administration of the Company, on November 14, 1994, the
Company entered into a term loan with Mr. Butler in the amount of $80,000, with
an annual rate of interest of 8%, which loan matures on November 14, 2001. The
loan is payable in full in equal annual installments of $15,366, principal and
interest.
In connection with the purchase of shares of Common Stock by Mr.
Klamer, Vice President, Merchandise Administration of the Company, on November
14, 1994, the Company entered into a term loan with Mr. Klamer in the amount of
$50,000, with an annual rate of interest of 8%, which loan matures on November
14, 2001. The loan is payable in full in equal annual installments of $9,604,
principal and interest.
Messrs. Topham and Craig, directors of the Company, are parties to
consulting agreements, each dated November 2, 1994, which provide that in
exchange for their services as consultants and directors, the Company will pay
them $100,000 and $50,000, respectively. On November 21, 1997, the Company
extended the terms of such agreements to November 30, 2000, and adjusted the
annual payments to $75,000 for each of Messrs. Topham and Craig.
Messrs. Carnwath and Steele, directors of the Company, are Managing Director
and Principal, respectively, of Electra. Pursuant to the Securities Agreement,
on November 15, 1994, the Electra Entities purchased the Company's Senior
Subordinated Notes due 2003, in the aggregate principal amount of $5.0 million
(which notes were repaid in connection with the execution of the Company's
Amended and Restated Loan Agreement) and warrants to purchase Common Stock. The
Electra Entities received certain anti-dilution, registration, and other rights
in connection with their purchase of the notes and
47
warrants. See "Description of Capital Stock--Warrants", "--Registration Rights"
and "--Shareholders' Agreement."
Pursuant to the terms of an agreement, between the Company and Electra Inc.,
an affiliate of the Electra Entities, dated as of November 14, 1994 (the
"Advisory Agreement"), the Company is required to pay Electra Inc. an annual fee
of $100,000, plus all reasonable expenses related thereto for providing
consulting services to the Company. This obligation will terminate upon
consummation of the Offering.
Pursuant to Buy and Sell Agreements among the Company and its existing
shareholders, including the Electra Entities, dated as of November 14, 1994 and
May 4, 1995 (collectively, the "Buy and Sell Agreements"), existing shareholders
(other than the Electra Entities) are restricted from transferring (other than
to Permitted Transferees, as defined therein) their shares of Common Stock
unless they obtain the consents of (A) (i) 75% of the shares held by non-Electra
entities, (ii) the Electra Entities and (iii) the Company (in the case of
certain transfers) or (B) (i) the Electra Entities and (ii) the Company (in the
case of certain other transfers). Pursuant to the terms of one of such
agreements the Electra Entities have certain "tag-along" rights and may
participate in a proposed sale of shares to a third party on a pro rata basis.
If a shareholder proposed to transfer any of its shares, then in certain
circumstances the Electra Entities also have the option to purchase such shares.
The Buy and Sell Agreements automatically terminate upon the consummation of the
Offering. See "Description of Capital Stock--Buy and Sell Agreement."
48
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on the date of this Prospectus and as
adjusted to reflect the sale of the Common Stock offered hereby of (i) each
shareholder of the Company selling Common Stock in this Offering (a "Selling
Shareholder"), (ii) each person known to the Company to be the beneficial owner
of 5% or more of the outstanding shares of Common Stock, (iii) each of the Named
Executive Officers, (iv) each director of the Company and (v) all executive
officers and directors of the Company as a group.
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP AFTER OFFERING(2)(3)
BEFORE OFFERING -------------------------------
---------------------- PERCENT PERCENT
PERCENT NUMBER OF SHARES OF OF
OF TO BE SOLD EQUITY VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES CLASS IN THE OFFERING SHARES INTEREST INTEREST
- ----------------------------------------- ----------- --------- ----------------- --------- --------- ---------
Cayman National Trust Co. Ltd.(4)........
Fourth Floor, Cayman National Building
Elgin Avenue
Georgetown, Grand Cayman
Electra Investment Trust P.L.C.(5).......
320 Park Avenue - 28th
New York, NY 10022
Electra Associates, Inc.(6)..............
320 Park Avenue - 28th
New York, NY 10022
Greta Pofcher............................
12 Loch Lane
Greenwich, CT 06830
Bruce E. and Jeralyn G. Ryskamp(7).......
5300 Patterson SE
Grand Rapids, MI 49530
Charles E. Cook..........................
James G. and Pamela B. Reimann...........
The Jeffrey R. Smith Trust...............
The Susan K. Smith Trust.................
Leslie E. Dietzman(8)(9).................
Craig G. Wassenaar.......................
J. Hal Bailey(9).........................
William S. Nielsen.......................
Richard M. Butler(9).....................
Craig B. Klamer(9).......................
George Craig(4)..........................
Peter A. Carnwath(10)....................
Scott D. Steele(11)......................
Neil Topham..............................
All executive officers and directors of
the Company as a group
(10 persons)...........................
- --------------------------
* Less than one percent.
(FOOTNOTES ON FOLLOWING PAGE)
49
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the Company believes that each
shareholder named in this table has sole investment and voting power with
respect to the shares set forth opposite such shareholder's name. The
percentages included in the table are based on the assumption that the
outstanding warrants have been exercised.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) All existing shares of Common Stock outstanding prior to the Offering will
be converted into the same number of shares of Class B Common Stock upon
the consummation of the Offering.
(4) Consists of shares of Common Stock owned by the Cayman National Trust
Co. Ltd., as trustee for the Jamestown Trust, of which Mr. Craig is a
beneficiary.
(5) Includes shares of Common Stock issuable upon exercise of warrants
owned by Electra Investment Trust P.L.C. which are exercisable within 60
days of , 1998. Also includes shares of Common Stock held by
Electra Associates, Inc., an affiliate of Electra Investment Trust P.L.C.
(6) Consists of shares of Common Stock issuable upon exercise of warrants
owned by Electra Associates, Inc. which are exercisable within 60 days of
, 1998. Also includes shares of Common Stock held by Electra
Investment Trust P.L.C., an affiliate of Electra Associates, Inc.
(7) Includes shares of Common Stock owned by the Bruce E. Ryskamp Living
Trust and shares of Common Stock owned by the Jeralyn G. Ryskamp
Living Trust, for each of which Mr. and Mrs. Ryskamp act as co-trustees.
(8) Includes shares of Common Stock issuable upon exercise of outstanding
stock options which are exercisable within 60 days of , 1998.
(9) Consists of shares of Common Stock issuable upon exercise of
outstanding stock options which are exercisable within 60 days
of , 1998.
(10) Does not include shares of Common Stock owned by Electra Investment
Trust P.L.C. and Electra Associates, Inc. Mr. Carnwath is a Managing
Director of Electra Fleming, Inc. Electra Fleming, Inc. is 50% owned by
Electra Investment Trust P.L.C. and manages all of its assets. However,
Electra Fleming, Inc. does not control the voting power of the shares of
Common Stock owned by Electra Investment Trust P.L.C. Mr. Carnwath
disclaims beneficial ownership of such shares.
(11) Does not include shares of Common Stock owned by Electra Investment
Trust P.L.C. and Electra Associates, Inc. Mr. Steele is a Principal of
Electra Fleming, Inc. Electra Fleming, Inc. is 50% owned by Electra
Investment Trust P.L.C. and manages all of its assets. However, Electra
Fleming, Inc. does not control the voting power of the shares of Common
Stock owned by Electra Investment Trust P.L.C. Mr. Steele disclaims
beneficial ownership of such shares.
50
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Articles of Incorporation and Bylaws is a
summary and is qualified in its entirety by reference to the provisions of the
Restated Articles of Incorporation and Bylaws, which have been filed as exhibits
to the Company's Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Restated Articles of Incorporation authorize the issuance of 10,000,000
shares of Class A Common Stock and 10,000,000 shares of Class B Common Stock.
Upon the consummation of the Offering, each share of the Company's existing
Common Stock will be converted into one share of Class B Common Stock.
VOTING. The holders of Common Stock will generally be entitled to vote as a
single class on all matters upon which shareholders have a right to vote,
subject to the requirements of the applicable laws and the rights of any series
of Preferred Stock to a separate class vote. Each share of Class A Common Stock
entitles its holder to one vote and each share of Class B Common Stock entitles
its holder to 10 votes. Unless otherwise required by law, and so long as their
rights would not be adversely affected, the holders of Common Stock will not be
entitled to vote on any amendment to the Restated Articles of Incorporation that
relates solely to the terms of one or more outstanding series of Preferred
Stock.
DIVIDENDS AND OTHER DISTRIBUTIONS. The holders of Class A Common Stock and
Class B Common Stock will be entitled to equal dividends when declared by the
Board of Directors, except that all dividends payable in Common Stock will be
paid in the form of Class A Common Stock to holders of Class A Common Stock and
in the form of Class B Common Stock to holders of Class B Common Stock. Neither
class of Common Stock may be split, divided or combined unless the other class
isproportionally split, divided or combined.
In the event of a liquidation or winding up of the Company, the holders of
Class A Common Stock and Class B Common Stock will be treated on an equal per
share basis, and will be entitled to receive all of the remaining assets of the
Company following distribution of the preferential and/or other amounts to be
distributed to any holders of preferred stock.
ISSUANCE OF CLASS B COMMON STOCK, OPTIONS, RIGHTS OR WARRANTS. Subject to
certain provisions regarding dividends and other distributions described above,
the Company will not be entitled to issue additional shares of Class B Common
Stock, or issue options, rights or warrants to subscribe for additional shares
of Class B Common Stock, except that the Company may make a pro rata offer to
all holders of Common Stock of rights to purchase additional shares of the class
of Common Stock held by them. The Class A Common stock and the Class B Common
Stock will be treated equally with respect to any offer by the Company to
holders of Common Stock of options, rights or warrants to subscribe for any
other capital stock of the Company.
MERGER. In the event of a merger, the holders of Class A Common Stock and
Class B Common Stock will be entitled to receive the same per share
consideration, if any, except that if such consideration includes voting
securities (or the right to acquire voting securities or securities exchangeable
for or convertible into voting securities), the Company may (but is not required
to) provide for the holders of Class B Common Stock to receive consideration
entitling them to 10 times the number of votes per share as the consideration
being received by holders of the Class A Common Stock.
CONVERSION OF CLASS B COMMON STOCK. The Class B Common Stock will be
convertible into Class A Common Stock on a share-for-share basis (i) at the
option of the holder thereof at any time, (ii) upon transfer of a person or
entity which is not a Permitted Transferee (as defined in the Restated Articles
of Incorporation), (iii) at such time as a corporation, partnership, limited
liability company, trust or charitable organization ceases to be 100% controlled
by Permitted Transferees and (iv) on the date on which the number of shares of
Class B Common Stock outstanding is less than 15% of the then outstanding shares
of
51
Common Stock (without regard to voting rights). In general, Permitted
Transferees will include natural persons who currently hold shares of Class B
Common Stock, their spouses, ancestors and descendants, their descendant's
spouses and certain charitable organizations and trusts (including charitable
trusts) or other entities controlled by such persons.
PREEMPTIVE RIGHTS. The holders of shares of capital stock of the Company
will not have any preemptive rights with respect to any outstanding or newly
issued capital stock of the Company.
PREFERRED STOCK
Upon the approval of 80% of the entire Board of Directors of the Company,
the Board of Directors is authorized to issue, without further shareholder
approval, up to 5,000,000 shares of Preferred Stock, no par value, from time to
time in one or more series and to fix such designations, powers, preferences and
relative voting, distribution, dividend, liquidation, transfer, redemption,
conversion and other rights, preferences, qualifications, limitations or
restrictions thereon. Any such Preferred Stock could have priority over Common
Stock as to dividends and as to the distribution of the Company's assets upon
any liquidation, dissolution or winding up of the Company. The Company has no
present plan to issue any shares of preferred stock. See "Certain Charter and
Bylaws Provisions--Blank Check Preferred Stock."
WARRANTS
In connection with the Company's formation, the Company entered into the
Securities Agreement with certain shareholders including the Electra Entities.
Under the terms of the Securities Agreement, the Electra Entities received
warrants to purchase up to 28% of the fully diluted Common Stock of the Company
at an exercise price of $.01 per share. The warrants were exercisable as to 18%
of the shares of Common Stock outstanding as of November 14, 1994 ("Series A
Warrants") and as to the following amounts based upon the timing of a
"Triggering Event": (i) an additional 2% of the total shares of Common Stock
outstanding on December 31, 1996 if a Triggering Event did not occur by December
31, 1996 ("Series B Warrants"), which warrants have been issued to the Electra
Entities; (ii) an additional 4% of the total shares of Common Stock outstanding
on December 31, 1998 if a Triggering Event does not occur by December 31, 1998;
and (iii) an additional 4% of the total shares of Common Stock outstanding on
December 31, 1999 if a Triggering Event does not occur by December 31, 1999. The
Securities Agreement defines a "Triggering Event" as the occurrence of (i) the
payment in full of all of the senior subordinated notes which are the subject of
the Securities Agreement and (ii) either (a) an initial public offering or (b) a
sale of all or substantially all of the capital stock or assets of the Company
for certain specified amounts. Upon consummation of the Offering, the Company
will not be required to issue additional warrants under the Securities
Agreement. The expiration date of all of the described warrants is November 14,
2004. The Series A Warrants and the Series B Warrants currently are exercisable.
The Electra Entities have informed the Company that they will exercise the
Series A Warrants and the Series B Warrants upon consummation of the Offering.
SHAREHOLDERS' AGREEMENT
Pursuant to the terms of the Shareholders' Agreement, the maximum number of
directors comprising the Board of Directors of the Company may not exceed five
prior to an initial public offering, and eight after the consummation of an
initial public offering, provided that the Electra Entities and any permitted
transferees (the "Institutional Investors") own at least 10% of the fully
diluted shares of the Company. The Shareholders' Agreement further provides that
the current shareholders will elect two directors (the "Institutional
Directors") designated by the Institutional Investors to the Board. If the
Institutional Investors cease to hold at least (i) 10% of the fully diluted
shares of the Company, then the current shareholders must elect only one
Institutional Director or (ii) 5% of the fully diluted shares, then the current
shareholders have no obligation to elect an Institutional Director. The
Institutional Investors also have certain rights to direct voting as to all
matters submitted to a shareholder vote for shareholder consent. See
"Description of Capital Stock--Registration Rights." Upon the consummation of
the Offering, the Shareholders' Agreement will terminate and the Electra
Entities and the Company will enter
52
into the Electra Agreement. The Electra Agreement will provide for, among other
things, the Electra Entities to designate one director to be nominated by the
Company, so long as the Electra Entities collectively beneficially own greater
than 5% of the Common Stock.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the Electra Entities covering in the
aggregate shares of Common Stock. The Registration Rights Agreement
provides that upon request from a holder or holders ("Initiating Holders") of
certain amounts of registrable securities, requesting that the Company effect
the registration under the Securities Act of all or any part of the Initiating
Holders' registrable securities, the Company will effect the registration under
the Securities Act of (i) the registrable securities which the Company has been
requested to register by the Initiating Holders, and (ii) all other registrable
securities which the Company has been requested to register by other holders
thereof. The Company has agreed to pay all costs associated with these
registrations.
BUY AND SELL AGREEMENTS
Pursuant to the Buy and Sell Agreements, existing shareholders (other than
the Electra Entities) are restricted from transferring (other than to Permitted
Transferees, as defined therein) their shares of Common Stock unless they obtain
the consents of (A) (i) 75% of the shares held by non-Electra Entities, (ii) the
Electra Entities and (iii) the Company (in the case of certain transfers) or (B)
(i) the Electra Entities and (ii) the Company (in the case of certain other
transfers). The Company has the option to purchase shares proposed to be
transferred by any shareholder and, if the Company does not do so, the remaining
shareholders have a similar option. If neither the Company nor shareholders
exercise their options to purchase shares proposed to be sold by an existing
shareholder to a third party under one of such agreements, then the Electra
Entities have certain "tag-along" rights and may participate in the sale on a
pro rata basis. Certain Shareholders also are subject to certain "drag-along"
provisions, which provide that in the event 50% or more of the Common Stock is
transferred, such shareholders may be required to sell also. The Buy and Sell
Agreements automatically terminate upon the consummation of the Offering. See
"Certain Transactions."
CERTAIN CHARTER AND BYLAW PROVISIONS
In addition to the control of the Company that the holders of Class B Common
Stock will have upon consummation of the Offering, the following provisions of
the Company's Restated Articles of Incorporation and Bylaws could have the
effect of discouraging, delaying or making more difficult certain attempts to
acquire the Company or to remove an incumbent director even if the majority of
shareholders were to deem such an attempt to be in the best interests of the
Company and its shareholders.
PROVISIONS REGARDING THE BOARD OF DIRECTORS. The Company's Restated
Articles of Incorporation will provide that the Company's Board of Directors be
classified into three classes serving staggered, three-year terms. As a result,
only one class of directors will be elected at each annual meeting of
shareholders of the Company, with the other classes continuing for their
respective terms. See "Management."
The Company's Restated Articles of Incorporation and Bylaws will establish
an advance notice procedure for nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors and for
submission of shareholder proposals to be considered at meetings of
shareholders. In general, notice of intent to nominate a director or raise
business at such meeting must be received by the Company not less than 120 days
prior to the date of an annual meeting and must contain certain specified
information concerning the person to be nominated or the matter to be brought
before the meeting.
The Company's Restated Articles of Incorporation will provide, subject to
the rights of any series of Preferred Stock then outstanding, that directors may
be removed from office only for cause and only upon the affirmative vote of at
least a majority of the total number of directors then in office, or by at least
a
53
majority vote of the shares of the Company then entitled to vote at an election
for directors. Vacancies on the Board of Directors, including those resulting
from an increase in the number of directors, may be filled only by the remaining
directors, not by shareholders.
SUPERMAJORITY VOTE PROVISIONS. The Restated Articles of Incorporation will
provide that, in addition to any vote required by law or other provisions of the
Restated Articles of Incorporation, the affirmative vote of not less than 80% of
the outstanding shares of voting stock is required for the approval of certain
business combinations between the Company or a subsidiary and any interested
shareholder. The provisions would not apply if the proposed transaction is
approved by a majority of continuing directors who are unaffiliated with the
interested shareholder.
AMENDMENTS TO THE RESTATED ARTICLES OF INCORPORATION. Certain provisions of
the Company's Restated Articles of Incorporation, including those relating to
powers of the Board of Directors, indemnification, actions by written consent of
shareholders, classification of the Board of Directors, the removal of directors
and limitations of certain director liability may only be amended by (i) the
affirmative vote of the holders of not less than two-thirds of the outstanding
stock of the Company entitled to vote for the election of directors, or (ii) the
affirmative vote of a majority of the full Board of Directors and of the holders
of a majority of the outstanding stock of the Company entitled to vote for the
election of directors.
ACTION BY SHAREHOLDERS; SPECIAL MEETING OF SHAREHOLDERS. The Restated
Articles of Incorporation will provide that shareholders are permitted to take
action only at a duly called annual or special meeting of shareholders and may
not take action by consent in writing by shareholders except by unanimous
written consent. The Restated Bylaws will not grant the shareholders the right
to call a special meeting of shareholders. Under the Restated Bylaws, special
meetings of shareholders may be called only by the Company's President or the
Board of Directors.
BLANK CHECK PREFERRED STOCK. The Restated Articles of Incorporation will
provide for authorized shares of Preferred Stock, none of which has been
issued. The existence of authorized but unissued Preferred Stock may enable the
Board of Directors to render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations, the
Board of Directors were to determine that a takeover proposal is not in the
Company's best interests, the Board of Directors could cause shares of Preferred
Stock to be issued without shareholder approval in one or more private offerings
or other transactions that might dilute the voting or other rights of the
proposed acquirer or insurgent shareholder or shareholder group. In this regard,
the Restated Articles of Incorporation will provide the Board of Directors broad
power to establish the rights and preferences of authorized but unissued
Preferred Stock. The issuance of shares of Preferred Stock pursuant to the Board
of Directors' authority described above could decrease the amount of earnings
and assets available for distribution to holders of Common Stock and adversely
affect the rights of, including voting rights in the event a particular series
of Preferred Stock is given a disproportionately large number of votes per
share, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company that may be favored by certain
shareholders. The Board of Directors does not currently intend to seek
shareholder approval prior to any issuance of Preferred Stock, unless required
by law.
CERTAIN STATUTORY PROVISIONS
The Company is subject to Chapter 7A of the MBCA, which provides that
business combinations subject to Chapter 7A between a Michigan corporation and a
beneficial owner of shares entitled to 10% or more of the voting power of such
corporation generally require the affirmative vote of 90% of the votes of each
class of stock entitled to vote, and not less than 2/3 of each class of stock
entitled to vote (excluding voting shares owned by such 10% owner), voting as a
separate class. Such requirements do not apply if (i) the corporation's board of
directors approves the transaction prior to the time the 10% owner becomes such
or (ii) the transaction satisfies certain fairness standards, certain other
conditions are met and the 10% owner has been such for at least five years.
54
Chapter 7B of the MBCA provides that, unless a corporation's articles of
incorporation or bylaws provide that Chapter 7B does not apply, "control shares"
of a corporation acquired in a control share acquisition have no voting rights
except as granted by the shareholders of the corporation. "Control shares" are
shares which, when added to shares previously owned by a shareholder, increase
such shareholder's ownership of voting stock to more than 20% but less than
33 1/3%, more than 33 1/3% but less than a majority, or more than a majority, of
the votes to which all of the capital stock of the corporation is entitled. A
control share acquisition must be approved by the affirmative vote of a majority
of all shares entitled to vote excluding voting shares owned by the acquiror and
certain officers and directors. However, no such approval is required for gifts
or other transactions not involving consideration, for a merger to which the
corporation is a party or certain other transactions described in Chapter 7B.
The bylaws of the Company currently contain a provision pursuant to which the
Company has opted not to be subject to Chapter 7B, but the board of directors
may, in its sole discretion, elect to become subject to Chapter 7B by amending
such bylaws.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York has been appointed as the transfer
agent and registrar for the Company's Common Stock.
55
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Class A Common Stock by the Company's current
shareholders could adversely affect the market price of the Class A Common
Stock. Upon the closing of the Offering, based upon the number of shares
outstanding at , 1998, the Company will have outstanding an aggregate of
shares of Class A Common Stock ( shares if the Underwriters'
over-allotment option is exercised in full). In addition, based upon the number
of shares outstanding at , 1998, the Company has reserved for issuance
shares issuable upon exercise of outstanding options. The shares of
Class A Common Stock offered hereby will be freely transferable without
restriction or further registration under the Securities Act, except for such
shares acquired by affiliates of the Company. Shares purchased by affiliates of
the Company would be subject to certain volume and other restrictions upon
resale as described below. The remaining shares of Class A Common Stock
and shares of Class B Common Stock held by existing shareholders are
"restricted securities" as that term is defined by Rule 144 under the Securities
Act. Pursuant to certain "lock-up" agreements, the Company's directors, officers
and certain of its shareholders who collectively hold an aggregate of
shares of Class A Common Stock and shares of Class B Common Stock,
together with the Company, have agreed that they will not offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Class A Common Stock, other than the
shares of Class A Common Stock offered hereby, without the prior written consent
of NationsBanc Montgomery Securities LLC for a period of 180 days following the
date of this Prospectus. Following the 180-day period, approximately
shares of Class A Common Stock will be eligible for sale in the public market
without restriction pursuant to Rule 144(k), and an additional shares will
be eligible for sale under Rule 144, subject to certain volume, manner of sale
and other restrictions of Rule 144. Of the shares of restricted Class A
Common Stock held by existing shareholders of the Company not subject to lock-up
agreements, shares will be eligible for immediate sale in the public
market without restriction under Rule 144(k). The remaining shares of
Class A Common Stock not subject to lock-up agreements will become eligible for
sale, subject to certain volume, manner of sale and other limitations under Rule
144 commencing 90 days following the date of this Prospectus. In addition,
holders of stock options, exercisable for an aggregate of shares of Class
A Common Stock, have entered into agreements prohibiting the sales of the
underlying Class A Common Stock for 180 days following the date of this
prospectus. See "Principal and Selling Shareholders" and "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any person who has beneficially owned restricted
securities for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Company's Class A Common Stock (approximately
shares immediately after the Offering); or (ii) the average weekly trading
volume of the Company's Class A Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned the shares proposed to be sold for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Company intends to file registration statements under the Securities Act
covering shares of Class A Common Stock reserved for issuance under the
Company's stock plans. Based on the options outstanding and shares reserved for
issuance as of the date of this Prospectus, such registration statements would
cover approximately shares. Such registration statements are expected to
be filed and to become effective as soon as practicable after the date of this
Prospectus. Shares registered in such registration will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market upon expiration of the contractual restrictions discussed above.
56
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and BT
Alex. Brown Incorporated (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement (the
"Underwriting Agreement") by and among the Company, the Selling Shareholders and
the Underwriters, to purchase from the Company and the Selling Shareholders the
number of shares of Common Stock indicated below opposite their respective
names, at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares,
if any are purchased.
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------- -----------
NationsBanc Montgomery Securities LLC..............................................
BancAmerica Robertson Stephens.....................................................
BT Alex. Brown Incorporated........................................................
-----------
Total............................................................................
-----------
-----------
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the shares of Class A Common
Stock to the public on the terms set forth on the cover page of this Prospectus.
The Underwriters may allow selected dealers a concession of not more than
$ per share and the Underwriters may allow, and such dealers may reallow,
a concession of not more than $ per share to certain other dealers. After
the public offering, the offering price and other selling terms may be changed
by the Representatives. The Class A Common Stock is offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of additional shares of Class A Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
Each director and executive officer and certain other shareholders of the
Company have agreed, subject to certain limited exceptions, that they will not,
without the prior written consent of NationsBanc Montgomery Securities LLC
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose
of any shares of Class A Common Stock, options or warrants to acquire shares of
Class A Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Class A Common Stock, currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under the Exchange
Act) by such party, or publicly announce such party's intention to do any of the
foregoing, for a period of 180 days after the date of this Prospectus. In
addition, the Company has agreed in the Underwriting Agreement that, during the
period of 180 days after the date of this Prospectus, without the prior written
consent of NationsBanc Montgomery Securities LLC (which consent may be withheld
in its sole discretion), it will not, directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of
57
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any Registration Statement under the
Securities Act in respect of, any shares of the Company's Class A Common Stock,
options or warrants to acquire shares of the Class A Common Stock or securities
exchangeable or exercisable for or convertible into shares of Class A Common
Stock. NationsBanc Montgomery Securities LLC may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
these Lock-up Agreements. See "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain civil liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including over-allotment, stabilizing transactions, syndicate-covering
transactions and penalty bids. In an over-allotment, the Underwriters would
allot more shares of Common stock to their customers in the aggregate than are
available for purchase by the Underwriters under the Underwriting Agreement. A
stabilizing transaction means the placing of any bid, or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of a
security. In a syndicate-covering transaction, the Underwriters would place a
bid or effect a purchase to reduce a short position created in connection with
this offering. Pursuant to a penalty bid, NationsBanc Montgomery Securities LLC,
on behalf of the Underwriters, would be able to reclaim a selling concession
from shares of Common Stock sold by such Underwriter that are purchased in
syndicate-covering transactions. These transactions may result in the price of
the Common Stock originally being higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise and, if commenced,
may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to confirm sales of Class A Common Stock to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
Class A Common Stock offered hereby.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares of Class A Common Stock
(5% of the shares offered in the Offering) for employees, directors and certain
other persons associated with the Company who have expressed an interest in
purchasing such shares of Class A Common Stock in the Offering. The number of
shares available for sale to the general public in the Offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same terms as the other shares offered hereby.
Prior to this Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price will be determined
by negotiations among the Representatives of the Underwriters, the Company and
the Selling Shareholders. Among the factors to be considered in such negotiation
will be the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present earnings and the trend of such earnings, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of securities markets at the time of the Offering and the
market price of publicly traded stock of comparable companies in recent periods.
58
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Skadden, Arps, Slate, Meagher and Flom (Illinois), Chicago,
Illinois. Certain legal matters relating to the offering will be passed upon for
the Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The financial statements of Family Christian Stores, Inc. at January 25,
1998 and January 26, 1997 and for each of the three fiscal years in the period
ended January 25, 1998 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The financial statements of Joshua's Christian Stores (a division of The
Development Association, Inc.) as of March 31, 1998 and for the twelve months
then ended included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (as amended and together with all
exhibits thereto, the "Registration Statement") under the Securities Act, with
respect to the shares of Class A Common Stock offered by this Prospectus. This
Prospectus constitutes a part of the Registration Statement and does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted from this Prospectus as permitted by the rules and regulations
of the SEC. Statements in this Prospectus about the contents of any contract or
other document are not necessarily complete; reference is made in each instance
to the copy of the contract or other document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by such
reference. The Registration Statement and accompanying exhibits and schedules
may by inspected and copies may be obtained (at prescribed rates) at the public
reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. Copies of the Registration Statement also may be
inspected at the SEC's regional offices at 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. In addition, the Common Stock will be listed on
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006-1500,
where such material also may be inspected and copied.
As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities and regional offices
referred to above. In addition, these reports, proxy statements and other
information also may be obtained from the web site that the SEC maintains at
www.sec.gov.
The Company intends to furnish its shareholders annual reports containing
consolidated financial statements certified by its independent auditors and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information.
59
FAMILY CHRISTIAN STORES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
FAMILY CHRISTIAN STORES, INC.
Audited Financial Statements:
Report of Independent Auditors........................................................................... F-2
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statements of Shareholders' Equity (Deficit)............................................................. F-5
Statements of Cash Flows................................................................................. F-6
Notes to Financial Statements............................................................................ F-7
Unaudited Interim Financial Statements:
Balance Sheets........................................................................................... F-16
Statements of Operations................................................................................. F-17
Statements of Cash Flows................................................................................. F-18
Notes to Financial Statements............................................................................ F-19
JOSHUA'S CHRISTIAN STORES
Audited Financial Statements:
Report of Independent Accountants........................................................................ F-21
Statement of Income...................................................................................... F-22
Balance Sheet............................................................................................ F-23
Statement of Cash Flows.................................................................................. F-24
Statement of Changes in Investment by Parent............................................................. F-25
Notes to Financial Statements............................................................................ F-26
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Family Christian Stores, Inc.
We have audited the accompanying balance sheets of Family Christian Stores,
Inc. as of January 26, 1997 and January 25, 1998, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
fiscal years in the period ended January 25, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Family Christian Stores,
Inc. at January 26, 1997 and January 25, 1998, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended
January 25, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
March 2, 1998
F-2
FAMILY CHRISTIAN STORES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 26, JANUARY 25,
1997 1998
------------- ---------------
ASSETS
Current assets:
Cash............................................................................. $ 1,398 $ 5,370
Accounts receivable, less allowance for doubtful accounts
(1997--$66; 1998--$89)......................................................... 1,276 1,498
Merchandise inventories.......................................................... 28,247 32,109
Prepaid store rent............................................................... 1,187 1,279
Other............................................................................ 952 588
------------- ---------------
Total current assets............................................................. 33,060 40,844
Fixed assets:
Leasehold improvements........................................................... 7,314 8,338
Fixtures and equipment........................................................... 9,723 11,415
------------- ---------------
17,037 19,753
Less accumulated depreciation.................................................... 5,143 7,540
------------- ---------------
11,894 12,213
Other assets:
Intangible assets................................................................ 6,913 7,782
Deposits and miscellaneous....................................................... 516 447
------------- ---------------
7,429 8,229
------------- ---------------
$ 52,383 $ 61,286
------------- ---------------
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 25,809 $ 31,238
Compensation and payroll taxes................................................... 1,929 3,137
Other accrued liabilities........................................................ 3,103 3,730
Current maturities of long-term debt............................................. 2,000 2,000
------------- ---------------
Total current liabilities........................................................ 32,841 40,105
Long-term debt, less current maturities.......................................... 18,518 14,973
Deferred rent liability.......................................................... 1,782 1,771
Other liabilities................................................................ 380 366
Redeemable common stock warrants................................................. 5,519 9,199
Shareholders' equity (deficit):
Class A voting common stock, par value $1 per share--authorized 3,000,000 shares;
issued and outstanding: 1997--1,510,750 shares; 1998--1,697,131 shares......... 1,511 1,697
Class B nonvoting common stock, par value $1 per share--authorized 3,000,000
shares; issued and outstanding: 1997 and 1998--55,000 shares................... 55 55
Additional paid-in capital....................................................... 4,727 7,083
Retained earnings (deficit)...................................................... (12,582) (13,569)
Notes receivable from shareholders............................................... (368) (394)
------------- ---------------
(6,657) (5,128)
------------- ---------------
$ 52,383 $ 61,286
------------- ---------------
------------- ---------------
See accompanying notes to financial statements
F-3
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Net sales....................................................... $ 126,125 $ 139,280 $ 168,063
Costs of products sold, including store occupancy costs......... 90,967 100,222 118,473
-------------- -------------- --------------
Gross profit.................................................... 35,158 39,058 49,590
Operating expenses:
Selling, general and administrative expenses.................... 34,283 34,923 40,284
Depreciation and amortization................................... 2,400 2,830 3,080
Store opening expenses.......................................... 991 414 739
-------------- -------------- --------------
37,674 38,167 44,103
-------------- -------------- --------------
Operating income (loss)......................................... (2,516) 891 5,487
Other expense (income):
Interest expense................................................ 2,660 2,771 2,858
Interest income................................................. (42) (36) (64)
-------------- -------------- --------------
2,618 2,735 2,794
-------------- -------------- --------------
Net earnings (loss)............................................. $ (5,134) $ (1,844) $ 2,693
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) per share--basic............................ $ (3.33) $ (1.18) $ 1.63
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) per share--diluted.......................... $ (3.33) $ (1.18) $ 1.22
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to financial statements.
F-4
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
CLASS A CLASS B NOTES TOTAL
VOTING NONVOTING ADDITIONAL RETAINED RECEIVABLE SHAREHOLDERS'
COMMON COMMON PAID-IN EARNINGS FROM EQUITY
STOCK STOCK CAPITAL (DEFICIT) SHAREHOLDERS (DEFICIT)
----------- ------------- ----------- ---------- ------------- -------------
Balances at January 30, 1995................... $ 1,500 $ 4,500 $ (1,402) $ (449) $ 4,149
Net loss....................................... (5,134) (5,134)
Issuance of 55,000 shares related to store
acquisition.................................. $ 55 195 250
Net payments from shareholders................. 51 51
Change in value of redeemable common stock
warrants..................................... (182) (182)
----------- --- ----------- ---------- ----- -------------
Balances at January 28, 1996................... 1,500 55 4,695 (6,718) (398) (866)
Net loss....................................... (1,844) (1,844)
Purchase and retirement of 18,000 shares....... (18) (54) (72)
Issuance of 28,750 shares...................... 29 86 115
Net payments from shareholders................. 30 30
Change in value of redeemable common stock
warrants..................................... (4,020) (4,020)
----------- --- ----------- ---------- ----- -------------
Balances at January 26, 1997................... 1,511 55 4,727 (12,582) (368) (6,657)
Net earnings................................... 2,693 2,693
Issuance of 186,381 shares..................... 186 2,356 (52) 2,490
Net payments from shareholders................. 26 26
Change in value of redeemable common stock
warrants..................................... (3,680) (3,680)
----------- --- ----------- ---------- ----- -------------
Balances at January 25, 1998................... $ 1,697 $ 55 $ 7,083 $ (13,569) $ (394) $ (5,128)
----------- --- ----------- ---------- ----- -------------
----------- --- ----------- ---------- ----- -------------
- ------------------------
( ) Denotes deduction.
See accompanying notes to financial statements.
F-5
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEAR
-------------------------------
1995 1996 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net earnings (loss)............................................................... $ (5,134) $ (1,844) $ 2,693
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation...................................................................... 2,118 2,491 2,667
Amortization of intangible assets................................................. 282 339 413
Amortization of software and other costs.......................................... 124 129 128
Amortization of debt discount..................................................... 55 55 55
Store rent expense in excess of (less than) amounts paid.......................... 153 59 (11)
Changes in operating assets and liabilities:
Accounts receivable............................................................... 519 (206) (161)
Merchandise inventories........................................................... (2,380) 6,155 (1,912)
Other current assets.............................................................. (902) 106 310
Accounts payable.................................................................. 7,834 (1,005) 5,429
Other operating liabilities, excluding debt....................................... 592 77 1,846
--------- --------- ---------
Net cash provided by operating activities......................................... 3,261 6,356 11,457
INVESTING ACTIVITIES
Store acquisitions................................................................ (4,830) (4,501) (4,326)
Additions to fixed assets......................................................... (2,399) (1,497) (2,122)
Other............................................................................. (77) 47
--------- --------- ---------
Net cash used in investing activities............................................. (7,306) (5,998) (6,401)
FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................... 10,000 11,300 10,400
Payments on revolving credit facility............................................. (4,700) (13,000) (12,000)
Payments on term note............................................................. (2,000)
Purchase of shares of common stock................................................ (72)
Issuance of shares of common stock................................................ 115 2,490
Net payments on shareholder notes receivable...................................... 51 30 26
--------- --------- ---------
Net cash provided by (used in) financing activities............................... 5,351 (1,627) (1,084)
--------- --------- ---------
Increase (decrease) in cash....................................................... 1,306 (1,269) 3,972
Cash at beginning of fiscal year.................................................. 1,361 2,667 1,398
--------- --------- ---------
Cash at end of fiscal year........................................................ $ 2,667 $ 1,398 $ 5,370
--------- --------- ---------
--------- --------- ---------
OTHER CASH FLOW INFORMATION
Interest payments................................................................. $ 2,508 $ 2,712 $ 2,794
Income taxes paid (refunds)....................................................... 65 (100) 90
- ------------------------
( ) Denotes reduction in cash.
See accompanying notes to financial statements.
F-6
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 25, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Family Christian Stores, Inc. (the Company) is the largest retailer in the
United States dedicated solely to Christian-related products. The Company
operated 197 stores in 33 states at the end of fiscal 1997. Product offerings
include Christian books and Bibles, gifts and cards, music, children's
merchandise and church supplies.
FISCAL YEAR END
The Company's fiscal year is the 52- or 53-week period that ends on the last
Sunday in January and is identified as the fiscal year for the immediately
preceding calendar year. The fiscal years ended January 28, 1996, January 26,
1997 and January 25, 1998 were all 52-week periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of first-in, first-out cost
or market and are composed of product offerings available for retail sale.
FIXED ASSETS
Fixed assets are stated at cost and include costs for major renewals and
betterments. Expenditures for normal repairs and maintenance are charged to
expense as incurred. Depreciation is computed using the straight-line method
over estimated useful lives for fixtures and equipment (3 to 10 years) and over
the lease term for leasehold improvements (3 to 15 years).
ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to $2,850,000 in
fiscal 1995, $2,138,000 in fiscal 1996 and $2,280,000 in fiscal 1997.
STOCK OPTIONS
The Company follows Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its employee stock
options. The Company has not adopted the fair value method encouraged, but not
required, by Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
F-7
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Financing costs incurred in obtaining the Company's credit facilities were
capitalized and are being amortized using the interest method over the term of
the debt agreement. Covenants not to compete related to store acquisitions are
being amortized using the straight-line method over periods ranging from three
to five years.
Goodwill arose from the excess of the cost of acquisitions over the
estimated fair value of the underlying net assets acquired and is being
amortized using the straight-line method over 35 years.
The Company evaluates the recoverability of goodwill not allocable to
acquired business assets and considers whether this goodwill should be
completely or partially written off or the amortization periods accelerated. The
Company assesses the recoverability of this goodwill based upon several factors,
including management's intention with respect to the acquired operations and
those operations' projected undiscounted cash flows.
STORE OPENING EXPENSES
Costs incurred in connection with the start-up and promotion of a new store
are expensed as incurred.
DEFERRED RENT LIABILITY
Store rent expense related to fixed lease obligations is recognized using
the straight-line method over the lease term. Deferred rents payable represent
the cumulative difference between recorded rent expense and the fixed rent
payments, which may vary over the lease term.
INCOME TAXES
A provision for income taxes is provided based on the earnings or loss
reported in the financial statements. A deferred income tax asset or liability
is determined by applying currently enacted tax laws and rates to the cumulative
temporary differences between the carrying value of assets and liabilities for
financial reporting and income tax purposes. Deferred income tax expense or
credit is measured by the change in the deferred income tax asset or liability
during the period.
FINANCIAL INSTRUMENTS
The Company's financial instruments, as defined by SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, consist of cash, accounts receivable,
notes receivable, accounts payable and short-and long-term debt. The Company's
estimate of the fair value of these financial instruments approximates their
carrying amounts at January 26, 1997, and January 25, 1998. The fair value of
long-term debt was determined using discounted cash flow analyses and current
interest rates for similar instruments.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE, which simplifies the standards for computing earnings
per share, replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share are computed by dividing earnings
F-8
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share are computed similar to
fully diluted earnings per share pursuant to APB Opinion No. 15, EARNINGS PER
SHARE, which is superseded by SFAS No. 128. All earnings per share amounts for
all periods have been presented to conform to the SFAS No. 128 requirements.
NOTE B--STORE ACQUISITIONS
During fiscal 1997, in 13 separate transactions, the Company acquired 16
existing retail stores serving the Christian market. Purchases are typically
made for cash ($4,830,000, $4,501,000 and $4,326,000 in the aggregate during
fiscal 1995, 1996 and 1997, respectively) and are accounted for using the
purchase method, whereby the acquisition cost is allocated to the net assets
acquired based on their relative fair values. Goodwill in the amount of
$586,000, $1,208,000 and $1,091,000 was recognized as a result of new store
acquisitions in 1995, 1996 and 1997, respectively.
In one of these transactions during fiscal 1995, the Company acquired the
outstanding common stock of a retailer in exchange for $1,176,000 in cash and
55,000 shares of Class B nonvoting common stock. The acquisition was accounted
for by the purchase method and resulted in recording goodwill of $586,000.
Reported net sales would have approximated $152.7 million in fiscal 1996 and
$171.9 million in fiscal 1997 on a pro forma basis, if the fiscal 1996 and 1997
acquisitions had occurred at the beginning of fiscal 1996. Pro forma net
earnings (loss) would not have been materially different from reported amounts.
NOTE C--INTANGIBLE ASSETS
Intangible assets are composed of the following (in thousands):
ACCUMULATED
COST AMORTIZATION NET
--------- ------------- ---------
JANUARY 26, 1997
Deferred financing costs........................................................ $ 626 $ 176 $ 450
Covenants not to compete........................................................ 374 153 221
Goodwill........................................................................ 6,592 350 6,242
--------- ------ ---------
$ 7,592 $ 679 $ 6,913
--------- ------ ---------
--------- ------ ---------
JANUARY 25, 1998
Deferred financing costs........................................................ $ 626 $ 254 $ 372
Covenants not to compete........................................................ 565 278 287
Goodwill........................................................................ 7,683 560 7,123
--------- ------ ---------
$ 8,874 $ 1,092 $ 7,782
--------- ------ ---------
--------- ------ ---------
F-9
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--LONG-TERM DEBT
Long-term debt consists of the following obligations (in thousands):
JANUARY 26, JANUARY 25,
1997 1998
----------- -----------
Revolving credit facility, maturing in October 2002, with interest payable quarterly at
the prime rate (8.5% at January 25, 1998) plus 2%..................................... $ 3,600 $ 2,000
Term note payable to bank under senior credit facility, with quarterly principal
payments of $500 commencing January 31, 1997 and interest payable quarterly at the
prime rate plus 2%, through October 2002.............................................. 12,000 10,000
$5,000 senior subordinated notes, maturing in May 2003, net of unamortized discount of
$82 in fiscal 1996 and $27 in fiscal 1997............................................. 4,918 4,973
Less current maturities................................................................. (2,000) (2,000)
----------- -----------
$ 18,518 $ 14,973
----------- -----------
----------- -----------
The Company has a senior credit facility with a bank consisting of a
$12,000,000 revolving credit facility and a term loan that are collateralized by
substantially all the Company's assets. The Company is obligated to pay a
facilities fee equal to 0.5% of the unused revolving credit balance and an
annual agent's fee of $50,000.
The Company issued $5,000,000 in senior subordinated notes to an investor
group in connection with the initial acquisition of its net assets in 1994. The
notes are due in May 2003 with interest payable quarterly at 8% through December
1996, 11% through November 1998 and 14% thereafter. Redeemable common stock
warrants were issued in connection with the notes, with an estimated fair value
of $206,000 at issuance. The resulting debt discount is based on an imputed
interest rate of 12% and is being amortized over the expected life of the notes
through July 1998. The Company is also required to pay an affiliate of the
investor group an annual advisory fee of $100,000. Future maturities of
long-term debt for years subsequent to fiscal 1998 are as follows:
1999--$2,000,000; 2000--$2,000,000; 2001--$2,000,000; 2002-- $4,000,000;
2003--$5,000,000.
The senior credit facility and senior subordinated notes contain restrictive
covenants that, among other things, require the Company to maintain certain
financial ratios and minimum levels of working capital and tangible net worth.
NOTE E--LEASES
The Company has operating lease arrangements for the rental of retail store
space as well as computer and other equipment for periods ranging from three to
ten years. Store lease agreements require the payment of fixed and, in certain
instances, contingent amounts based on individual store sales volumes. Many of
the store leases obligate the Company to pay real estate taxes, insurance and
maintenance costs and also contain renewal options.
F-10
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E--LEASES (CONTINUED)
Fixed and contingent rent expense was as follows (in thousands):
FISCAL YEAR
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
Fixed rent expense.................................................. $ 10,847 $ 12,180 $ 13,251
Contingent rent expense............................................. 137 135 256
------------- ------------- -------------
$ 10,984 $ 12,315 $ 13,507
------------- ------------- -------------
------------- ------------- -------------
Aggregate annual minimum lease obligations for all operating leases
subsequent to January 25, 1998 are as follows (in thousands):
STORE EQUIPMENT
FISCAL YEAR LEASES LEASES TOTAL
- --------------------------------------------------------------------- ------------- ------------ -------------
1998................................................................. $ 10,416 $ 1,370 $ 11,786
1999................................................................. 9,515 360 9,875
2000................................................................. 8,081 113 8,194
2001................................................................. 6,342 6,342
2002................................................................. 4,954 4,954
Thereafter........................................................... 12,443 12,443
------------- ------------ -------------
$ 51,751 $ 1,843 $ 53,594
------------- ------------ -------------
------------- ------------ -------------
NOTE F--SERVICE CONTRACT FOR INFORMATION SYSTEMS SUPPORT
The Company entered into an agreement with a national consulting firm to
outsource its information systems development and support functions. The
consulting firm incurred certain up-front system development, software licensing
and implementation costs, which a third party has financed through a licensing
agreement. Payment for these services represents noncancelable obligations of
the Company that are payable in monthly installments of $66,000 through June
1998, increasing to $98,000 through June 2001. Annual noncancelable license fee
payments subsequent to January 25, 1998 are as follows: 1998-- $1,016,000;
1999--$1,180,000; 2000--$1,180,000; 2001--$492,000.
In addition, a service agreement requires the Company to pay monthly fees
ranging from $110,000 to $200,000 through June 2001 for system maintenance and
other support services related to the retail information system. The service
agreement expires in June 2001, with an option to extend the agreement for four
consecutive three-year periods.
NOTE G--SHAREHOLDERS' EQUITY
On July 31, 1997, the Company announced a fifty-for-one stock split on
shares of common stock outstanding on July 31, 1997. All share and per share
data included in the financial statements have been retroactively adjusted for
the increased shares resulting from the stock split.
On August 31, 1997, the Company completed an equity offering of 186,381
shares of common stock that generated net proceeds of $2,490,000 after deducting
expenses. The net proceeds were used for the acquisition of new stores.
F-11
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SHAREHOLDERS' EQUITY (CONTINUED)
Notes receivable from shareholders represent amounts due from employees for
the purchase of common stock and are payable over a seven-year period ending in
August 2004 in equal annual installments of principal and interest at 8%.
The individual shareholders have entered into stock repurchase agreements
with the Company and each other whereby the Company will have a first option and
the shareholders a second option to purchase shares tendered by existing
shareholders. The tendered shares will be purchased at an amount as defined in
the agreements. The agreements terminate upon the occurrence of a Triggering
Event, which is defined as a repayment in full of the senior subordinated notes
and either (1) an Initial Public Offering or (2) a sale of the Company at
certain predetermined valuation levels.
Pursuant to the issuance of senior subordinated notes, the Company entered
into a Securities Purchase Agreement that granted the lender warrants to
purchase common stock with an exercise price of $0.01 per share. At January 25,
1998, warrants to purchase common stock totaling 367,950 shares are outstanding
which, if exercised, would represent 17.4% of the Company's equity.
In the absence of a Triggering Event, additional warrants to purchase common
stock will be granted to the lender equal to 4% of outstanding common stock at
December 31, 1998 and 4% of outstanding common stock at December 31, 1999. The
additional warrants are considered in the computation of diluted net earnings
per share. Also, subsequent to December 31, 1999, in the absence of a Triggering
Event, the lender may at its option require the Company to purchase the warrants
at an amount representing the fair value at the date of exercise. The redeemable
common stock warrants are recorded at estimated fair value in the accompanying
balance sheets.
The payment of dividends is not permitted under the Company's financing
arrangements.
NOTE H--FEDERAL INCOME TAXES
No income tax expense was recorded in fiscal 1995, 1996 or 1997 due to
operating losses incurred and the Company's nonrecognition of deferred income
tax assets for a portion of the net operating loss carryforwards. A
reconciliation of the Company's total federal income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to earnings
(loss) before income taxes is as follows (in thousands):
FISCAL YEAR
--------------------------------------
1995 1996 1997
------------- ----------- ----------
Income tax expense (credit) at statutory rate............................. $ (1,746) $ (627) $ 916
Reconciling items:
Impact of net operating loss carryforward not recognized (recognized)..... 1,703 597 (945)
Items not deductible for tax purposes..................................... 43 30 29
------------- ----------- ----------
Federal income tax expense................................................ $ -- $ -- $ --
------------- ----------- ----------
------------- ----------- ----------
F-12
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--FEDERAL INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax assets and
liabilities are as follows (in thousands):
JANUARY 26, JANUARY 25,
1997 1998
------------ ------------
Deferred income tax assets:
Net operating loss carryforward....................................................... $ 3,170 $ 1,984
General business credit carryforward.................................................. 230 230
Accrued expenses not deductible until paid............................................ 566 587
Store rent expense not deductible until paid.......................................... 606 602
Accounts receivable and inventory valuation adjustments............................... 201 203
Inventory costs capitalized for tax purposes.......................................... 311 276
Other................................................................................. 22 198
------------ ------------
Total deferred income tax assets...................................................... 5,106 4,080
Deferred income tax liabilities:
Information system costs currently deductible......................................... 1,338 1,207
Other................................................................................. 87 17
------------ ------------
Total deferred income tax liabilities................................................. 1,425 1,224
Valuation allowance................................................................... (3,681) (2,856)
------------ ------------
Net deferred income tax assets........................................................ $ -- $ --
------------ ------------
------------ ------------
The valuation allowance has been recorded, since recognition of the net
deferred income tax assets is dependent upon the Company's ability to generate
future taxable income. Deferred income tax assets include the income tax benefit
of net operating loss carryforwards that are available to reduce future taxable
income of approximately $5,836,000. These carryforwards will begin expiring in
2011. Also, general business credit carryforwards of approximately $230,000 are
available to reduce future income tax obligations and begin expiring in 2009.
In the event that deferred income tax assets can be recognized in future
years, the reversal of the valuation allowance of $865,000 recorded at the
Company's formation date in 1994 will be recognized as a reduction of goodwill.
NOTE I--EMPLOYEE BENEFITS
The Company has a 401(k) retirement plan covering substantially all
employees who meet certain eligibility requirements. The Company contributes
$0.50 for each $1.00 contributed by employees. Employee contributions eligible
for matching contributions are limited to 6% of annual compensation. In
addition, the Plan provides for defined contributions based on age and service.
Charges of $630,000 $613,000 and $675,000 related to the Plan were recognized
for fiscal 1995, 1996 and 1997, respectively. Employee contributions and Company
matching contributions vest immediately, while any other employer contributions
under the Plan are subject to a five-year vesting period.
On January 31, 1998, the Company's shareholders approved an employee stock
purchase plan under which 60,000 shares of the Company's Class B nonvoting
common stock are reserved for purchase by
F-13
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--EMPLOYEE BENEFITS (CONTINUED)
employees. The first $2,000 of each eligible employee's purchases is at 85% of
the fair market value of the common stock and the remainder of the allowable
$5,000 in annual purchases is at fair market value.
NOTE J--STOCK OPTION PLANS
The Company currently has two incentive plans approved by shareholders on
January 31, 1998, under which stock options may be granted to officers and key
employees of the Company, the 1997 Management Stock Option Plan and the 1997
Incentive Group Stock Option Plan.
Options to purchase common shares under the plans generally are granted only
if certain performance objectives are achieved. The options are granted at $0.01
per share and vest over the period from the date of grant through December 31,
2001, with accelerated vesting under certain conditions, including an initial
public offering. Options expire on December 31, 2004, also subject to
acceleration under certain conditions.
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations for its stock option grants. Generally,
compensation expense is recognized for stock option grants under the plans over
the vesting period based on the fair market value of the underlying stock on the
date it becomes apparent that the performance objective has been achieved.
Options to purchase 73,171 shares of Class A common stock were granted
subsequent to January 25, 1998, under the two incentive plans. Compensation
expense of approximately $200,000 per year will be recognized ratably over the
vesting period, which is generally fiscal 1998 through fiscal 2001. Under the
two plans, which provide for annual performance periods through fiscal 1998,
options to purchase a total of an additional 32,927 shares may be granted.
In addition to the two incentive plans, the Company has granted stock
options to certain key executives. The vesting terms and contractual lives of
these grants are similar to that of the incentive plans. In June 1997, options
to purchase 30,000 shares of Class A common stock had been granted, vesting
ratably over the period through fiscal 2002, at a price of $0.01 per share. The
value of these options at the date of grant is $15 per share. Compensation
expense is being recognized over the vesting period and was not significant in
fiscal 1997.
In addition, options to purchase 5,000 shares at a price of $25 per share
were granted in fiscal 1997 with an initial term of five years. Since the
options were granted at a fixed price not less than the fair market value of the
Company's common stock on the date of grant, no compensation expense has been
recognized.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires disclosure
of the pro forma impact of recording compensation expense for such options using
an appropriate option valuation model. The fair value of stock options
calculated using the Black Scholes option pricing model would not differ
materially from the amounts recorded as compensation expense in the financial
statements under APB No. 25.
F-14
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (dollars in thousands, except share and per share data):
FISCAL
------------------------------------------
1995 1996 1997
------------- ------------- ------------
Numerator:
Net earnings (loss)................................................... $ (5,134) $ (1,844) $ 2,693
------------- ------------- ------------
------------- ------------- ------------
Denominator:
Basic--weighted average shares........................................ 1,541,250 1,558,603 1,653,312
Effect of dilutive securities:
Warrants.............................................................. 544,201
Employee stock options................................................ 17,885
------------- ------------- ------------
Diluted............................................................... 1,541,250 1,558,603 2,215,398
------------- ------------- ------------
------------- ------------- ------------
Basic earnings (loss) per share....................................... $ (3.33) $ (1.18) $ 1.63
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings (loss) per share..................................... $ (3.33) $ (1.18) $ 1.22
------------- ------------- ------------
------------- ------------- ------------
NOTE L--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information for each of the last two fiscal
years is as follows (dollars in thousands, except per share data):
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------- ------------- ------------- --------------
FISCAL 1996
Net sales........................... $ 27,430 $ 29,560 $ 29,440 $ 52,850 $ 139,280
Gross profit........................ 7,427 8,106 7,836 15,689 39,058
Operating income (loss)............. (1,365) (1,071) (2,048) 5,375 891
Net earnings (loss)................. (2,051) (1,772) (2,760) 4,739 (1,844)
Basic net earnings (loss) per
share............................. (1.32) (1.14) (1.77) 3.03 (1.18)
Diluted net earnings (loss) per
share (1.32) (1.14) (1.77) 2.30 (1.18)
FISCAL 1997
Net sales.................... $ 32,438 $ 35,270 $ 35,413 $ 64,942 $ 168,063
Gross profit................. 8,498 9,672 9,651 21,769 49,590
Operating income (loss)...... (1,429) (598) (966) 8,480 5,487
Net earnings (loss).......... (2,154) (1,312) (1,742) 7,901 2,693
Basic net earnings (loss) per
share...................... (1.38) (0.84) (0.99) 4.51 1.63
Diluted net earnings (loss)
per share.................. (1.38) (0.84) (0.99) 3.38 1.22
Quarterly basic per share amounts do not add up to the full year per share
amount due to the timing of the issuance of new shares. Diluted net earnings
(loss) per share for periods with a net loss do not include the impact of
warrants and employee stock options since such inclusion would be antidilutive.
F-15
FAMILY CHRISTIAN STORES, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 25, APRIL 26,
1998 1998
----------- -----------
(AUDITED) (UNAUDITED)
ASSETS
Current Assets:
Cash.................................................................................. $ 5,370 $ 2,222
Merchandise Inventories............................................................... 32,109 38,654
Other................................................................................. 3,365 3,859
----------- -----------
Total Current Assets................................................................ 40,844 44,735
----------- -----------
Fixed assets, net....................................................................... 12,213 13,017
Intangible assets, net.................................................................. 7,782 8,319
Deposits and miscellaneous.............................................................. 447 480
----------- -----------
Total Assets............................................................................ $ 61,286 $ 66,551
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable...................................................................... $ 31,238 $ 30,579
Accrued liabilities................................................................... 6,867 5,987
Current portion of long-term debt..................................................... 2,000 2,000
----------- -----------
Total current liabilities........................................................... 40,105 38,566
----------- -----------
Long-term debt, less current maturities................................................. 14,973 23,387
Deferred rent and other liabilities..................................................... 2,137 2,161
Redeemable common stock warrants........................................................ 9,199 12,878
Shareholders' Equity (Deficit):
Common stock.......................................................................... 1,752 1,752
Additional paid-in capital............................................................ 7,083 7,083
Retained earnings (deficit)........................................................... (13,569) (18,923)
Notes receivable from shareholders.................................................... (394) (353)
----------- -----------
Total Shareholders' Equity (Deficit)................................................ (5,128) (10,441)
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit).................................... $ 61,286 $ 66,551
----------- -----------
----------- -----------
See accompanying notes.
F-16
FAMILY CHRISTIAN STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
--------------------
APRIL 27, APRIL 26,
1997 1998
--------- ---------
Net sales................................................................................... $ 32,438 $ 38,257
Cost of products sold, including store occupancy costs...................................... 23,940 27,516
--------- ---------
Gross profit................................................................................ 8,498 10,741
--------- ---------
Operating Expenses:
Selling, general and administrative expenses.............................................. 9,050 10,643
Depreciation and amortization............................................................. 725 770
Store opening expenses.................................................................... 152 356
--------- ---------
9,927 11,769
--------- ---------
Operating loss.............................................................................. (1,429) (1,028)
Interest expense, net....................................................................... 725 647
--------- ---------
Net loss.................................................................................... $ (2,154) $ (1,675)
--------- ---------
--------- ---------
Net loss per share--basic................................................................... $ (1.38) $ (0.96)
--------- ---------
--------- ---------
Net loss per share--diluted................................................................. (1.38) (0.96)
--------- ---------
--------- ---------
See accompanying notes.
F-17
FAMILY CHRISTIAN STORES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
--------------------
APRIL 27, APRIL 26,
1997 1998
--------- ---------
Cash Flows from Operating Activities:
Net loss................................................................................... $ (2,154) $ (1,675)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation............................................................................. 630 679
Amortization of software and other costs................................................. 18 18
Amortization of intangible assets........................................................ 95 91
Amortization of debt discount............................................................ 14 14
Changes in operating assets and liabilities:
Merchandise inventories.................................................................. (4,562) (5,121)
Other current assets..................................................................... (143) (582)
Accounts payable......................................................................... 3,854 (659)
Other operating liabilities, excluding debt.............................................. 527 (880)
--------- ---------
Net cash used by operating activities.................................................. (1,721) (8,115)
--------- ---------
Cash Flows from Investing Activities:
Store acquisitions......................................................................... (1,848) (2,691)
Additions to fixed assets.................................................................. (410) (783)
--------- ---------
Net cash used by investing activities.................................................. (2,258) (3,474)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from revolving credit facility, net............................................... 5,000 8,900
Payments on term note...................................................................... (500) (500)
Net payments on shareholder notes receivable............................................... 8 41
--------- ---------
Net cash provided by financing activities.............................................. 4,508 8,441
--------- ---------
Net increase (decrease) in cash and equivalents.............................................. 529 (3,148)
Cash and Equivalents at Beginning of Period.................................................. 1,398 5,370
--------- ---------
Cash and Equivalents at End of Period........................................................ $ 1,927 $ 2,222
--------- ---------
--------- ---------
Other cash flow information:
Interest payments........................................................................ $ 600 $ 503
Income taxes refunded.................................................................... (12) --
See accompanying notes.
F-18
FAMILY CHRISTIAN STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 26, 1998
NOTE 1--GENERAL
The accompanying financial statements reflect the accounts of Family
Christian Stores, Inc. (the Company). The Company is the largest retailer in the
United States dedicated solely to Christian-related products. Product offerings
include Christian books and Bibles, gifts and cards, music, children's
merchandise and church supplies.
The unaudited statements as of April 26, 1998, and April 27, 1997, include,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position of the Company as of April 26, 1998, and the results of operations and
cash flows for the three months ended April 26, 1998 and April 27, 1997. These
financial statements are condensed and therefore do not include all of the
information and footnotes required by generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Accordingly, actual results could differ
from those estimates.
Due to the seasonal nature of the Company's business, the results of
operations for the three months ended April 26, 1998, are not necessarily
indicative of the results of operations to be achieved for the fiscal year
ending January 31, 1999.
NOTE 2--EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding during the
periods presented (1,752,000 at April 26, 1998, and 1,566,000 at April 27, 1997,
basic and diluted). The effects of stock options and redeemable common stock
warrants are not included in the computation of diluted earnings per share
because they are anti-dilutive for all periods presented.
NOTE 3--INCOME TAXES
No income tax provision was recorded for the three months ended April 26,
1998, and April 27, 1997 due to operating losses incurred and the Company's
nonrecognition of deferred income tax assets for a portion of net operating loss
carryforwards.
NOTE 4--COMPREHENSIVE INCOME (LOSS)
At the beginning of fiscal 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
display of "comprehensive income," which is the total of net income (loss) and
all other non-owner changes in shareholders' equity (deficit) and its
components. The Company has no components of comprehensive income (loss) other
than its net loss, and consequently its comprehensive loss is equal to its net
loss for all periods presented.
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131, which supersedes SFAS Nos. 14,
F-19
FAMILY CHRISTIAN STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
APRIL 26, 1998
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
18, 24 and 30, establishes new standards for segment reporting in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. The Company will adopt the standard by the end of fiscal 1998 and
does not expect the new standard to have a significant effect on previously
reported information.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES
INSTRUMENTS AND HEDGING ACTIVITIES, which provides a consistent standard for
recognition and measurement of derivatives and hedging activities. The Company
is in the process of evaluating SFAS No. 133 and its impact and plans to adopt
the standard in fiscal 2000.
NOTE 6--ACQUISITION AND REFINANCING
On June 1, 1998, the Company acquired Joshua's Christian Stores (Joshua's)
for $11.5 million. Joshua's is a leading Christian retail chain headquartered in
Fort Worth, Texas, with sales of $32.0 million for its fiscal year ended March
31, 1998. The transaction will be accounted for as a purchase during the second
quarter of the Company's fiscal year.
On July 17, 1998, the Company amended and restated its outstanding long-term
credit facility. The restated loan agreement provides for a revolving credit
facility of $22 million and term notes payable of $9.5 million and $5 million,
and is collateralized by substantially all of the Company's assets.
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tandycrafts, Inc.
In our opinion, the accompanying balance sheet and related statement of
income, changes in investment by parent and cash flows present fairly, in all
material respects, the financial position of Joshua's Christian Stores (a
division of Development Association, Inc.) at March 31, 1998, and the results of
its operations and its cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Joshua's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Fort Worth, Texas
May 27, 1998
F-21
JOSHUA'S CHRISTIAN STORES
STATEMENT OF INCOME
TWELVE MONTHS ENDED MARCH 31, 1998
Net sales...................................................................... $32,006,948
Cost of goods sold............................................................. 19,184,638
----------
Gross profit................................................................... 12,822,310
Expenses:
Selling, general and administrative.......................................... 11,875,229
Depreciation and amortization................................................ 611,661
----------
Total expenses............................................................. 12,486,890
----------
Income before provision for income taxes....................................... 335,420
Provision for income taxes..................................................... 11,020
----------
Net income............................................................... $ 324,400
----------
----------
The accompanying notes are an integral part
of these financial statements
F-22
JOSHUA'S CHRISTIAN STORES
BALANCE SHEET
MARCH 31, 1998
ASSETS
Current assets:
Cash......................................................................... $ 125,728
Trade accounts receivable, net............................................... 84,843
Inventories.................................................................. 7,441,783
Other current assets......................................................... 883,837
----------
Total current assets....................................................... 8,536,191
----------
Property and equipment, at cost................................................ 5,330,637
Accumulated depreciation....................................................... (3,127,084)
----------
Property and equipment, net................................................ 2,203,553
----------
Other assets................................................................... 15,285
Goodwill....................................................................... 1,354,774
----------
$12,109,803
----------
----------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................................................. 2,366,817
Payable to affiliates........................................................ 60,962
Accrued payroll and bonuses.................................................. 610,062
Accrued liabilities and other................................................ 823,304
----------
Total current liabilities.................................................. 3,861,145
----------
Investment by Parent........................................................... 8,248,658
----------
$12,109,803
----------
----------
The accompanying notes are an integral part
of these financial statements
F-23
JOSHUA'S CHRISTIAN STORES
STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED MARCH 31, 1998
Cash flows from operating activities:
Net income.................................................................... $ 324,400
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 611,661
Changes in operating assets and liabilities:
Receivables............................................................... (5,191)
Inventories............................................................... 3,104,340
Other current assets...................................................... 167,569
Accounts payable and accrued expenses..................................... (788,947)
---------
Net cash flows from operating activities........................................ $3,413,832
---------
Cash flows from investing activities:
Additions to property and equipment........................................... (439,595)
---------
Net cash used for investing activities.......................................... (439,595)
---------
Cash flows from financing activities:
Repayments to Parent.......................................................... (3,447,033)
---------
Net cash used by financing activities........................................... (3,447,033)
---------
Decrease in cash................................................................ (472,796)
Balance, beginning of period.................................................... 598,524
---------
Balance, end of period.......................................................... $ 125,728
---------
---------
The accompanying notes are an integral part
of these financial statements
F-24
JOSHUA'S CHRISTIAN STORES
STATEMENT OF CHANGES IN INVESTMENT BY PARENT
MARCH 31, 1998
Balance at March 31, 1997...................................................... $11,371,291
Repayments to Parent......................................................... (3,447,033)
Net income................................................................... 324,400
----------
Balance at March 31, 1998...................................................... $8,248,658
----------
----------
The accompanying notes are an integral part
of these financial statements
F-25
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Joshua's Christian Stores ("Joshua's" or "Company") is a retail chain of 58
stores specializing in inspirational books, music and gifts. Joshua's is a
division of The Development Association, Inc., which is a wholly-owned
subsidiary of Tandycrafts, Inc. ("Parent"). Under this corporate structure, the
Parent incurs various costs in connection with the operations of Joshua's. The
accompanying financial statements include an allocation of such costs on a
reasonable basis in order to present the stand-alone historical operations of
the Company. See Note 3 for further discussion of these allocated expenses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
INVENTORIES
Inventories consist entirely of finished goods and are stated at the lower
of average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment is depreciated using the straight-line method over
its estimated useful life, ranging from 3 to 10 years. Expenditures for
maintenance, repairs, renewals and betterments which do not materially prolong
the useful lives of the assets are charged to income as incurred.
GOODWILL
The cost of stores and/or businesses acquired in excess of the fair value of
the net identifiable assets acquired has been allocated to goodwill. Goodwill is
amortized using the straight-line basis over the estimated useful life of forty
years. Accumulated goodwill amortization at March 31, 1998 was $211,747.
Goodwill amortization expense for the twelve months ended March 31, 1998
approximated $37,000.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events indicate the
carrying value of an asset or group of assets may not be recoverable. The
impairment review includes a comparison of future cash flows expected to be
generated by the asset or group of assets with their associated net book values.
If the net book value exceeds expected undiscounted cash flows, an impairment
loss is recognized to the extent net book value exceeds fair value.
PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are expensed as incurred.
ADVERTISING EXPENSES
Advertising costs are expensed the first time the advertising takes place.
Advertising expense for the twelve months ended March 31, 1998 was $798,450.
Prepaid advertising costs at March 31, 1998 were approximately $107,000.
F-26
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are recorded at cost, which approximates fair
value due to the short maturities of these instruments. During the twelve months
ended March 31, 1998, no financial instruments were held or issued for trading
purposes.
INCOME TAXES
Income taxes are calculated in accordance with the liability method which
requires that deferred tax assets and liabilities be recognized based on
differences between financial statement and tax bases of assets and liabilities
using presently enacted rates. Joshua's is included in the consolidated federal
tax return filed by the Parent. The income tax provision included in the
accompanying financial statements is based on items attributable to Joshua's
which are anticipated to be utilized in the consolidated tax return. Valuation
allowances are provided when in the opinion of management, it is more likely
than not that deferred tax assets will not be realized at the consolidated
level. The payable or receivable arising from the intercompany income tax
allocation is recorded as an increase or decrease in Investment by Parent.
NOTE 2--SUBSEQUENT EVENT
On April 20, 1998, Tandycrafts announced that it had signed a Definitive
Agreement to sell Joshua's to Family Christian Stores for $11,500,000, subject
to contractual adjustments. The sale is expected to close on or about June 1,
1998.
NOTE 3--RELATED PARTY TRANSACTIONS
The Company has received services provided by the Parent which include
employee benefits administration, treasury, risk management, payroll and human
resource administration, tax compliance, management information services and
other miscellaneous services. The costs associated with these services have been
allocated to the Company based on expenses incurred by the Parent directly
related to the Company or the Company's proportionate share of the Parent's
costs related to these services. The total amount allocated from the Parent for
the twelve months ended March 31, 1998 approximated $1,017,500.
The Company also leases office and distribution space from the Parent at its
headquarters in Fort Worth, Texas. The lease is a month-to-month lease and
during the twelve months ended March 31, 1998, the Company paid rent of $157,000
to the Parent under this lease arrangement.
All cash advances from the Parent to the Company outstanding at March 31,
1998 are considered to be permanent advances and, as such, are classified as
Investment by Parent in the accompanying balance sheet. Interest expense has not
been allocated to the Company.
NOTE 4--REPOSITIONING CHARGE
During the quarter ended March 31, 1997, the Company recorded a
repositioning charge of $5,300,000 in cost of sales and selling, general and
administrative expenses to write-down and liquidate discontinued inventory and
to close certain underperforming stores. During the twelve months ended March
31, 1998, a significant portion of the discontinued inventory was liquidated and
thirteen underperforming stores were closed. Sales and operating losses for the
twelve months ended March 31, 1998 for the thirteen stores closed or targeted
for closure were $1,609,800 and $222,600, respectively. Due
F-27
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--REPOSITIONING CHARGE (CONTINUED)
to favorable settlements on leases of closed stores, during the twelve months
ended March 31, 1998, the Company reversed $250,000 of the reserve initially
established for lease terminations and has included such amount as a credit to
selling, general and administrative expenses.
NOTE 5--PROPERTY AND EQUIPMENT
AS OF MARCH 31, 1998:
Property and equipment, at cost:
Fixtures and equipment........................................ $4,531,467
Leasehold improvements........................................ 799,170
----------
5,330,637
Less accumulated depreciation................................... (3,127,084)
----------
Property and equipment, net..................................... $2,203,553
----------
----------
NOTE 6--ACCRUED LIABILITIES
ACCRUED LIABILITIES CONSISTED OF THE FOLLOWING AT MARCH 31, 1998:
Store closing accrual............................................. 212,707
Accrued rent...................................................... 211,311
Other............................................................. 399,286
---------
$ 823,304
---------
---------
NOTE 7--INCOME TAXES
The provision for income taxes for the twelve months ended March 31, 1998 is
as follows:
Current tax expense (benefit).................................... $(917,994)
Deferred tax expense............................................. 929,014
---------
Total provision.................................................. $ 11,020
---------
---------
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
Statutory U.S. tax provision..................................... $ 114,043
Increase (decrease) in rates resulting from:
Charitable contribution of inventory........................... (116,325)
Other.......................................................... 13,302
---------
Tax provision.................................................... $ 11,020
---------
---------
Deferred tax assets and liabilities classified as Investment by Parent on
the accompanying balance sheet totaled $889,896 (net of a valuation allowance of
$282,950) and $200,447, respectively, at March 31,
F-28
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
1998. Deferred tax assets result from differences in the timing of the
recognition of inventory reserves, store closing accruals and goodwill
amortization for financial and tax purposes, as well as charitable contribution
carryforwards. Deferred tax liabilities result from differences in depreciation
of fixed assets for financial and tax purposes.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company leases certain properties, primarily retail stores, under
operating leases which expire through November 2005. Real estate taxes,
maintenance and certain other costs are generally borne by the Company. The
composition of total rent expense for operating leases for the twelve months
ended March 31, 1998 is as follows:
Rentals:
Minimum....................................................... $2,469,135
Contingent (percentage of sales).............................. 37,262
---------
$2,506,397
---------
---------
Minimum rental commitments for noncancellable operating leases (retail store
leases only) at March 31, 1998 are summarized as follows:
YEAR ENDED MARCH 31,
- --------------------------------------------------------------------------------
1999............................................................................ $ 1,965,500
2000............................................................................ 1,694,100
2001............................................................................ 1,405,300
2002............................................................................ 1,126,600
2003............................................................................ 811,900
2004 and thereafter............................................................. 1,725,800
------------
$ 8,729,200
------------
------------
NOTE 9--TANDYCRAFTS RETIREMENT SAVINGS PLAN
All eligible employees of Joshua's may participate in the Tandycrafts
Retirement Savings Plan. Participants may contribute between 3% and 15% of gross
salary and wages into the 401(k) portion of the plan which becomes immediately
vested. Participants also have the ability to direct their contributions into
various investment options. The Company's matching contribution is 100% of the
first 5% of the participant's contribution and is invested in the Parent's
common stock. The Company's contribution becomes vested upon the completion of
five years of credited service. The employee and Company contributions are
maintained by a corporate trustee. Company contributions to the plan for the
twelve months ended March 31, 1998 totaled $108,288.
F-29
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
----------------------
PAGE
----
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 7
USE OF PROCEEDS........................................................... 13
DIVIDEND POLICY........................................................... 13
CAPITALIZATION............................................................ 14
DILUTION.................................................................. 15
SELECTED FINANCIAL AND OPERATING DATA OF FAMILY CHRISTIAN STORES, INC..... 16
SELECTED FINANCIAL AND OPERATING DATA OF JOSHUA'S CHRISTIAN STORES........ 17
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS......................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 22
BUSINESS.................................................................. 29
MANAGEMENT................................................................ 38
CERTAIN TRANSACTIONS...................................................... 47
PRINCIPAL AND SELLING SHAREHOLDERS........................................ 49
DESCRIPTION OF CAPITAL STOCK.............................................. 51
SHARES ELIGIBLE FOR FUTURE SALE........................................... 56
UNDERWRITING.............................................................. 57
LEGAL MATTERS............................................................. 59
EXPERTS................................................................... 59
ADDITIONAL INFORMATION.................................................... 59
INDEX TO FINANCIAL STATEMENTS............................................. F-1
----------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO]
CLASS A COMMON STOCK
----------------------
PROSPECTUS
--------------------
NationsBanc Montgomery
Securities LLC
BancAmerica Robertson Stephens
BT Alex. Brown
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq application fee.
SEC registration fee............................................... $ 13,275
NASD filing fee.................................................... 5,000
Nasdaq application fee............................................. *
Blue sky qualification fee and expenses............................ *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer agent, custodian and registrar fees....................... *
Miscellaneous...................................................... *
---------
Total.............................................................. $ *
---------
---------
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 561 of the Michigan Business Corporation Act ("MBCA") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Registrant's Restated Articles of Incorporation and
Bylaws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from time
to time, to the fullest extent permitted by the MBCA. The Registrant will enter
into indemnification agreements with its directors and certain of its officers,
employees and agents, which will provide that the Registrant shall indemnify
such parties pursuant to Section 561 of the MBCA.
The MBCA permits a Michigan corporation to include in its certificate of
incorporation a provision eliminating or limiting a director's liability to a
corporation or its shareholders for monetary damages for breaches of fiduciary
duty. The enabling statute provides, however, that a corporation may indemnify
such persons for liability for the amount of a financial benefit received by a
director to which he or she is not entitled, intentional infliction of harm to
the Company or its shareholders, a violation of Section 551 of the MBCA, or an
intentional criminal act cannot be eliminated or limited in this manner. The
Registrant's Restated Articles of Incorporation and Bylaws include a provision
which eliminates, to the fullest extent permitted, director liability for
monetary damages for breaches of fiduciary duty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 21, 1998, the Registrant issued shares of Common Stock to its
employees pursuant to the terms of its Employee Stock Purchase Plan. The shares
of Common Stock were issued in reliance upon the exemption from registration
available under Rule 701 of the Securities Act of 1933 and Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
II-1
On March 20, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Incentive Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On March 20, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Management Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On February 2, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Incentive Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On February 2, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Management Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On August 31, 1997, the Registrant completed a private placement of
shares of Common Stock at a price of $ per share. The shares of Common
Stock issued in connection with the August 31, 1997 offering were offered and
sold by the Registrant without registration, in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act and Rules
501-503 and 506-508 of Regulation D promulgated thereunder.
On August 31, 1997, the Registrant issued shares of Common Stock to Neil
Topham, a director, as payment for consulting services rendered. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On July 31, 1997, the Registrant sold shares of Common Stock to Leslie
E. Dietzman, an officer, at a purchase price of $ per share. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On July 31, 1997, the Registrant sold shares of Common Stock to Richard
M. Butler, an officer, at a purchase price of $ per share. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On June 23, 1997, the Registrant granted an option to purchase
shares of Common Stock, at an exercise price of $ per share, to Craig G.
Wassenaar as consideration for entering into an employment agreement. Such
option becomes exercisable at a rate of 20% per year on the first five
anniversaries of the date of grant. On June 23, 1998, Mr. Wassenaar exercised
such option to purchase shares of Common Stock, at an aggregate
purchase price of $ . Such option and shares of Common Stock were not
registered under the Securities Act, in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
On September 27, 1996, the Registrant sold shares of Common Stock at a
purchase price of $ per share to certain employees who were appointed to the
Company's senior management team. The
II-2
shares of Common Stock issued in connection with the payment for services were
offered and sold by the Registrant without registration, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the Underwriters*
3.1 Articles of Incorporation
3.2 Bylaws
3.3 Form of Restated Articles of Incorporation
3.4 Form of Bylaws
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Counsel*
10.1 Incentive Group Stock Option Plan*
10.2 Management Stock Option Plan*
10.3 1997 Employee Stock Purchase Plan*
10.4 Stock Option and Restricted Stock Plan of 1998*
10.5 Amended and Restated Loan Agreement among the Registrant, certain financial institutions and Bank of
Scotland, dated as of October 31, 1994 and amended and restated on July 17, 1998
10.6 Amended and Restated Promissory Note (Tranche A Term Note) issued by the Registrant to the Bank of
Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17, 1998
10.7 Promissory Note (Tranche B Term Note) issued by the Registrant to the Bank of Scotland, as Agent, dated
July 17, 1998
10.8 Amended and Restated Promissory Note (Revolving Credit Note) issued by the Registrant to the Bank of
Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17, 1998
10.9 General Security Agreement between the Registrant and the Bank of Scotland, as Agent, dated as of
October 31, 1994
10.10 Amendment to Security Agreement and Acknowledgment of Security Interests, dated as of July 17, 1998
10.11 Securities Purchase Agreement among the shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994*
10.12 Shareholders' Agreement among the shareholders of the Registrant, including Electra Investment Trust,
P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994 (the Shareholders'
Agreement)
10.13 Amendment No. 1 to the Shareholders' Agreement, dated May 1, 1995
II-3
10.14 Buy and Sell Agreement among the Shareholders of the Registrant, including Electra Investment Trust,
P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14,1994
10.15 Asset Purchase Agreement among the Registrant, Tandycrafts, Inc. and The Development Association, Inc.,
dated April 19, 1998
10.16 Series A Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of November 17,
1994
10.17 Series A Warrant issued by the Registrant to Electra Associates, Inc., dated as of November 17, 1994
10.18 Series B Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of December 31,
1996
10.19 Series B Warrant issued by the Registrant to Electra Associates, Inc., dated as of December 31, 1996
10.20 Base Software License Agreement between Andersen Consulting and The Zondervan Corporation, dated May 9,
1994
10.21 Strategic Technology License and Services Agreement between Andersen Consulting and The Zondervan
Corporation, dated May 9, 1994
10.22 Modification Agreement between Andersen Consulting, Zondervan Corporation, HarperCollins Publishers
Inc., General Electric Capital Computer Leasing Corporation and the Registrant, dated November 1, 1994
10.23 Advisory Agreement between the Registrant and Electra Inc., dated as of November 14, 1994
10.24 Form of Lease
10.25 Form Director and Officer Indemnity Agreement*
10.26 Promissory Note, dated November 14, 1994, between the Registrant and Leslie E. Dietzman
10.27 Promissory Note, dated November 14, 1994, between the Registrant and Richard M. Butler
10.28 Promissory Note, dated November 14, 1994, between the Registrant and J. Hal Bailey
10.29 Promissory Note, dated November 14, 1994, between the Registrant and Craig B. Klamer
10.30 Form of Employment Agreement for Executive Officers*
10.31 Consulting Agreement, dated November 2, 1994, between the Registrant and George Craig*
10.32 Consulting Agreement, dated November 2, 1994, between the Registrant and Neil Topham*
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1)*
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts and Reserves.
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
II-4
UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant further undertakes that:
(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as
part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of the registration statement as of the time it was declared
effective;
(2) for the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(3) insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Grand Rapids, County of
Kent, State of Michigan, on the 6th day of August, 1998.
FAMILY CHRISTIAN STORES, INC.
By: /s/ LESLIE E. DIETZMAN
-----------------------------------------
Leslie E. Dietzman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Craig G. Wassenaar with full power to act alone,
his true and lawful attorney-in-fact, with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President and Chief
/s/ LESLIE E. DIETZMAN Executive Officer and
- ------------------------------ Director (Principal August 6, 1998
Leslie E. Dietzman Executive Officer)
Senior Vice President,
/s/ CRAIG G. WASSENAAR Chief Financial Officer,
- ------------------------------ Secretary and Treasurer August 6, 1998
Craig G. Wassenaar (Principal Financial and
Accounting Officer)
/s/ GEORGE CRAIG
- ------------------------------ Chairman of the Board August 6, 1998
George Craig
/s/ PETER A. CARNWATH
- ------------------------------ Director August 6, 1998
Peter A. Carnwath
/s/ SCOTT D. STEELE
- ------------------------------ Director August 6, 1998
Scott D. Steele
/s/ NEIL TOPHAM
- ------------------------------ Director August 6, 1998
Neil Topham
II-5
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Family Bookstores Company, Inc.
We have audited the financial statements of Family Christian Stores, Inc. as of
January 25, 1998 and January 26, 1997, and for each of the three fiscal years in
the period ended January 25, 1998 and have issued our report thereon dated
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
March 2, 1998
S-1
FAMILY CHRISTIAN STORES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS FOR
BEGINNING COSTS AND ACCOUNTS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES WRITTEN OFF END OF PERIOD
- --------------------------------------------------------- ----------- ----------- --------------- -------------
RESERVES DEDUCTED FROM ASSETS
Fiscal year ended January 25, 1998
Allowance for doubtful accounts........................ $ 66 $ 36 $ 13 $ 89
Allowance for sales returns............................ 30 10 -- 40
Allowance for inventory obsolescence and shrinkage..... 1,294 2,173 1,713 1,754
Fiscal year ended January 26, 1997
Allowance for doubtful accounts........................ 73 10 17 66
Allowance for sales returns............................ 30 -- -- 30
Allowance for inventory obsolescence and shrinkage..... 1,226 2,831 2,763 1,294
Fiscal year ended January 28, 1996
Allowance for doubtful accounts........................ 67 15 9 73
Allowance for sales returns............................ 30 -- -- 30
Allowance for inventory obsolescence and shrinkage..... 902 2,566 2,242 1,226
S-2
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the
Underwriters*
3.1 Articles of Incorporation
3.2 Bylaws
3.3 Form of Restated Articles of Incorporation
3.4 Form of Bylaws
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Counsel*
10.1 Incentive Group Stock Option Plan*
10.2 Management Stock Option Plan*
10.3 1997 Employee Stock Purchase Plan*
10.4 Stock Option and Restricted Stock Plan of 1998*
10.5 Amended and Restated Loan Agreement among the Registrant, certain financial institutions and
Bank of Scotland, dated as of October 31, 1994 and amended and restated on July 17, 1998
10.6 Amended and Restated Promissory Note (Tranche A Term Note) issued by the Registrant to the Bank
of Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17, 1998
10.7 Promissory Note (Tranche B Term Note) issued by the Registrant to the Bank of Scotland, as
Agent, dated July 17, 1998
10.8 Amended and Restated Promissory Note (Revolving Credit Note) issued by the Registrant to the
Bank of Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17,
1998
10.9 General Security Agreement between the Registrant and the Bank of Scotland, as Agent, dated as
of October 31, 1994
10.10 Amendment to Security Agreement and Acknowledgment of Security Interests, dated as of July 17,
1998
10.11 Securities Purchase Agreement among the shareholders of the Registrant, including Electra
Investment Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14,
1994*
10.12 Shareholders' Agreement among the shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994 (the
Shareholders' Agreement)
10.13 Amendment No. 1 to the Shareholders' Agreement, dated May 1, 1995
10.14 Buy and Sell Agreement among the Shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14,1994
10.15 Asset Purchase Agreement among the Registrant, Tandycrafts, Inc. and The Development
Association, Inc., dated April 19, 1998
10.16 Series A Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of
November 17, 1994
10.17 Series A Warrant issued by the Registrant to Electra Associates, Inc., dated as of November 17,
1994
10.18 Series B Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of
December 31, 1996
10.19 Series B Warrant issued by the Registrant to Electra Associates, Inc., dated as of December 31,
1996
10.20 Base Software License Agreement between Andersen Consulting and The Zondervan Corporation, dated
May 9, 1994
EXHIBIT
NUMBER DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
10.21 Strategic Technology License and Services Agreement between Andersen Consulting and The
Zondervan Corporation, dated May 9, 1994
10.22 Modification Agreement between Andersen Consulting, Zondervan Corporation, HarperCollins
Publishers Inc., General Electric Capital Computer Leasing Corporation and the Registrant,
dated November 1, 1994
10.23 Advisory Agreement between the Registrant and Electra Inc., dated as of November 14,1994
10.24 Form of Lease*
10.25 Form Director and Officer Indemnity Agreement*
10.26 Promissory Note, dated November 14, 1994, between the Registrant and Leslie E. Dietzman
10.27 Promissory Note, dated November 14, 1994, between the Registrant and Richard M. Butler
10.28 Promissory Note, dated November 14, 1994, between the Registrant and J. Hal Bailey
10.29 Promissory Note, dated November 14, 1994, between the Registrant and Craig B. Klamer
10.30 Form of Employment Agreement for Executive Officers*
10.31 Consulting Agreement, dated November 2, 1994, between the Registrant and George Craig*
10.32 Consulting Agreement, dated November 2, 1994, between the Registrant and Neil Topham*
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1)*
27 Financial Data Schedule
- ------------------------
* To be filed by amendment.