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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended August 3, 2002
Commission File Number: 21859
FACTORY CARD & PARTY OUTLET CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3652087
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2727 Diehl Road,
Naperville, IL 60563-2371
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (630) 579-2000
Factory Card Outlet Corp.
-------------------------
(Former Name)
Indicate by check mark whether this registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
The number of shares of the Registrant's Common Stock outstanding as of
September 12, 2002 was 1,512,448.
Factory Card & Party Outlet Corp.
Form 10-Q
For the Quarter Ended August 3, 2002
Index
Page
Cautionary Statement Regarding Forward-Looking Statements 2
Part I Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets - as of August 3, 2002
(Unaudited) (Successor Company) and as of February 2, 2002
(Predecessor Company) 3
Condensed Consolidated Statements of Operations (Unaudited) - three
months ended August 3, 2002, four months ended August 3, 2002
(Successor Company), three months ended August 4, 2001, two months ended
April 6, 2002 and six months ended August 4, 2001 (Predecessor Company) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - four months ended
August 3, 2002 (Successor Company), two months ended April 6, 2002 and
six months ended August 4, 2001 (Predecessor Company) 5
Notes to Consolidated Financial Statements - (Unaudited) 6-14
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations 15-20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
Part II Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21-22
Signatures 23
Certifications 24
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
As used herein, unless the context otherwise requires, the "Company," "we,"
"our" or "us" refers to Factory Card & Party Outlet Corp. and its subsidiaries.
Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to, certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," such as our ability to meet our liquidity needs, scheduled debt and
interest payments and expected future capital expenditure requirements.
The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that these statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.
Factors that could cause actual results to differ materially include, but are
not limited to the following:
. ability to meet sales plans;
. weather and economic conditions;
. dependence on key personnel;
. competition;
. ability to anticipate merchandise trends and consumer demand;
. ability to maintain relationships with suppliers;
. successful implementation of information systems;
. successful handling of merchandise logistics;
. inventory shrinkage;
. ability to meet future capital needs;
. seasonality of business;
. governmental regulations; and
. other factors both referenced and not referenced in this Form 10-Q.
2
PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Dollar amounts in thousands)
Successor Predecessor
Company Company
----------- -----------
August 3, February 2,
2002 2002
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash $ 187 $ 182
Merchandise inventories 47,165 59,496
Prepaid expenses and other 4,228 2,949
--------- ---------
Total current assets 51,580 62,627
Fixed assets, net 6,309 18,414
Other assets 414 258
--------- ---------
Total assets $ 58,303 $ 81,299
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt $ 17,090 $ -
Debtor-in-possession financing - 27,260
Accounts payable 12,401 8,071
Accrued expenses 7,183 9,698
Current portion of long term debt and capital lease
obligations 431 305
--------- ---------
Total current liabilities 37,105 45,334
--------- ---------
Long term debt and capital lease obligations 6,070 338
Deferred rent liabilities 726 -
Liabilities subject to compromise - 54,560
--------- ---------
Total liabilities 43,901 100,232
Stockholders' equity (deficit) 14,402 (18,933)
--------- ---------
Total liabilities and stockholders' equity $ 58,303 $ 81,299
========= =========
See accompanying notes to consolidated financial statements.
3
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Dollar amounts in thousands, except per share data)
(Unaudited)
Successor Predecessor Successor Predecessor Predecessor
Company Company Company Company Company
---------- ----------- ---------- ----------- -----------
Three Three Four Two Six
Months Months Months Months Months
Ended Ended Ended Ended Ended
August 3, August 4, August 3, April 6, August 4,
2002 2001 2002 2002 2001
---------- ---------- ---------- ---------- ----------
Net sales $ 59,733 $ 57,013 $ 77,920 $ 40,837 $ 113,249
Cost of sales 37,808 36,403 49,405 26,991 73,945
---------- ---------- ---------- ---------- ----------
Gross profit 21,925 20,610 28,515 13,846 39,304
Selling, general and administrative expenses 17,869 15,848 23,566 12,212 32,922
Depreciation 356 1,745 456 1,030 3,497
Reorganization items - 1,218 - (28,383) 2,622
Interest expense 412 627 566 374 1,451
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax expense (benefit) 3,288 1,172 3,927 28,613 (1,188)
Income tax expense (benefit) 1,311 - 1,560 (360) -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1,977 $ 1,172 $ 2,367 $ 28,973 $ (1,188)
========== ========== ========== ========== ==========
Net income per share - basic $ 1.38 $ 1.65
---------- ----------
Weighted average shares outstanding - basic 1,432,486 1,430,619
---------- ----------
Net income per share - diluted $ 1.35 $ 1.62
---------- ----------
Weighted average shares outstanding - diluted 1,463,555 1,461,688
---------- ----------
See accompanying notes to consolidated financial statements.
4
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Successor Predecessor Predecessor
Company Company Company
---------------- ----------------- --------------
For the Four For the Two For the Six
Months Ended Months Ended Months Ended
August 3, 2002 April 6, 2002 August 4, 2001
---------------- ----------------- --------------
(Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,367 $ 28,973 $ (1,188)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Plan of reorganization and fresh start adjustments - (31,441) -
Depreciation and amortization of fixed assets 456 1,030 3,497
Amortization of deferred bank costs 30 26 376
Amortization of deferred compensation 47 - -
Non cash portion of reorganization items - 1,275 772
Benefit of pre-confirmation net operating losses 1,850 - -
Changes in assets and liabilities:
Merchandise inventories 4,425 2,212 2,025
Prepaid expenses and other assets 1,019 (2,594) 651
Accounts payable 1,039 3,336 2,331
Accrued expenses (5,351) 2,020 (1,315)
Deferred rent obligation 726 - -
Liabilities subject to compromise - - 99
--------- --------- ---------
Net cash provided by operating activities 6,608 4,837 7,248
--------- --------- ---------
Net cash used in investing activities - purchase of fixed assets, net (924) (257) (550)
--------- --------- ---------
Cash flow provided by (used in) financing activities:
Borrowings 76,632 38,381 112,822
Repayment of debt (82,285) (42,898) (119,524)
Payment of capital lease obligations (176) (56) (104)
Increase in long term debt 46 - -
Cash received from exercise of management stock warrants 97 - -
--------- --------- ---------
Net cash used in financing activities (5,686) (4,573) (6,806)
--------- --------- ---------
Net increase (decrease) in cash (2) 7 (108)
Cash at beginning of period 189 182 281
--------- --------- ---------
Cash at end of period $ 187 $ 189 $ 173
--------- --------- ---------
Supplemental Cash Flow Information:
Interest paid $ 221 $ 334 $ 1,121
Supplemental non cash information:
Stock issued (successor company) - (10,040) -
Fair value adjustments - 10,406 -
Stock retired (predecessor company) and debt discharge - (32,371) -
Deferred compensation 517 564 -
Capital lease obligations - 56 -
See accompanying notes to consolidated financial statements.
5
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(Unaudited)
(1) Chapter 11 Proceedings and Reorganization
On March 23, 1999 (the "petition date"), Factory Card & Party Outlet Corp.
and its wholly owned subsidiary, Factory Card Outlet of America Ltd.
(collectively the "Company"), filed voluntary petitions for relief under
chapter 11 of title 11 of the United States Code (the "Bankruptcy Code")
under case numbers 99-685(JCA) and 99-686(JCA) (the "Chapter 11 Cases").
From that time until March 20, 2002, the Company operated its business as
a debtor-in-possession subject to the jurisdiction and supervision of the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On March 20, 2002, the Company announced that the
Bankruptcy Court confirmed the Company's Amended Plan of Reorganization
(the "Plan of Reorganization") that it filed with the Bankruptcy Court on
February 5, 2002. On April 9, 2002 (the "Effective Date") the Plan of
Reorganization became effective and the Company successfully emerged from
Chapter 11. Certain of the principal provisions of the Plan of
Reorganization are as follows:
. The Company authorized an aggregate of 10,000,000 shares of new
Common Stock, par value $0.01 per share. The Company's amended
and restated certificate of incorporation prohibits the transfer
of any shares of the new Common Stock or any rights to acquire
shares of the new Common Stock to any person or group that is a
5% shareholder of Factory Card & Party Outlet Corp.
. The common stock of Factory Card & Party Outlet Corp. that was
outstanding immediately prior to the Plan becoming effective was
canceled and 74,553 shares of the Company's new Common Stock were
issued to holders of the canceled common stock at a ratio of
.00992307034 shares of new Common Stock for each share of
canceled common stock.
. The Company issued 1,349,995 shares of the new Common Stock to
holders of unsecured claims against the Company, or "General
Unsecured Creditors."
. The Company issued 75,000 shares of the new Common Stock to
certain members of management, vesting ratably over a four-year
period, as specified in the Plan, and warrants to purchase an
aggregate 31,000 shares of the Company's new Common Stock at a
purchase price of $7.52 per share. On June 7, 2002, 12,900
warrants were exercised and the remaining 18,100 warrants
expired.
. The Company issued four series of new Warrants, Series A through
D, to tendering holders of the canceled Common Stock, granting
such holders the right to purchase an aggregate of 153,467
additional shares of the new Common Stock. The Series A Warrants
are exercisable any time prior to April 9, 2006 at a price of
$11.00 per share. The Series B Warrants are exercisable at any
time prior to April 9, 2008 at a price of $16.00 per share. The
Series C Warrants are exercisable any time prior to April 9, 2010
at a price of $16.00 per share. The Series D Warrants are
exercisable any time prior to April 9, 2010 at a price of $34.00
per share.
. The Company adopted an employee stock option plan, the 2002 Stock
Option Plan, to provide the Company's eligible employees with the
opportunity to purchase an aggregate
6
166,667 shares of the Company's new Common Stock.
. The Company agreed to pay $1,000 to the General Unsecured Creditors
within 60 days of the Effective Date and agreed to pay the General
Unsecured Creditors, three years from emergence an aggregate of
$2,600, less any prepayments, which obligation is secured by a
subordinated lien on certain of the Company's property.
. The Company converted an aggregate of $3,130 post petition accounts
payable into long-term convertible secured subordinated notes (the
"Trade Conversion Notes") to seven trade vendors and suppliers (the
"Trade Participants"). The Trade Participants each have the right to
convert their Trade Conversion Notes in whole, or in part, into an
aggregate of 29.35% of the new Common Stock, at any time between
April 9, 2005 (the third anniversary of the Plan's Effective Date)
and April 9, 2006 (the fourth anniversary of such date), subject to
adjustments to reflect any prepayments made by the Company.
. The Company entered into five separate agreements with various trade
vendors, each dated April 9, 2002, pursuant to which such trade
vendors agreed to provide the Company with payment terms, including
extended payment terms and seasonal advances.
(2) Business and Basis of Presentation
The Company is a chain of company-owned stores offering an extensive
selection of party supplies, gifts, greeting cards, giftwrap, and other
special occasion merchandise at everyday value prices. As of September 12,
2002, the Company operated 171 stores in 20 states.
The consolidated unaudited financial statements include the accounts of
Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory
Card Outlet of America Ltd. These financial statements have been prepared
by management without audit and should be read in conjunction with the
consolidated financial statements and notes for the fiscal year ended
February 2, 2002 included in the Company's Annual Report on Form 10-K. The
operating results for the interim periods are not necessarily indicative
of the results for the year. All intercompany balances and transactions
have been eliminated in consolidation. In the opinion of management, the
accompanying consolidated financial statements reflect all normal
recurring and certain nonrecurring adjustments necessary for a fair
presentation of the interim financial statements. In addition, certain
prior year amounts have been reclassified to conform to the current year
presentation.
7
Fresh Start Accounting
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the
Company adopted fresh-start reporting because holders of existing voting
shares immediately before filing and confirmation of the plan received
less than 50% of the voting shares of the emerging entity and its
reorganization value of $42,500 is less than its post petition liabilities
and allowed claims, as shown below:
Post petition current liabilities $ 46,484
Liabilities deferred pursuant to plan of reorganization 54,056
-----------
Total post petition liabilities and allowed claims 100,540
Reorganization value (42,500)
-----------
Excess of liabilities over reorganization value $ 58,040
===========
As a result of fresh-start reporting, the Company reflected the
distributions under the Plan of Reorganization in its balance sheet as of
April 6, 2002 (the effective date of the consummation of the plan for
accounting purposes). Accordingly, all consolidated financial statements
for any period prior to April 6, 2002 are referred to as the "Predecessor
Company" as they reflect the periods prior to the implementation of
fresh-start reporting and are not comparable to the consolidated financial
statements for periods after the implementation of fresh-start reporting.
Fresh-start reporting requires that the reorganization value of the
reorganized debtors be allocated to their assets in conformity with
Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations", for transactions reported on the basis of the purchase
method. Any reorganization value less than the fair value of the specific
tangible or identified intangible assets is to be allocated to their
non-current tangible assets on a pro rata basis after offsetting any
intangible assets. The reorganized enterprise value of the Company on the
effective date was established at $42,500 based upon a calculation of
discounted cash flows under the Company's financial projections and
trading multiples of comparable companies. The effects of the Plan of
Reorganization and the application of fresh-start accounting on the
Company's pre-confirmation consolidated balance sheet are as follows:
8
Predecessor Plan of Fresh Start Successor
April 6, 2002 Reorganization Adjustments April 6, 2002
------------- -------------- ------------ -------------
ASSETS
Current assets:
Cash $ 189 $ $ $ 189
Merchandise inventories 56,987 (5,396)i 51,591
Prepaid expenses and other 5,251 5,251
------------- ------------ ----------- --------------
Total current assets 62,427 (5,396) 57,031
Fixed assets, net 17,600 (11,760)a 5,840
Other assets 240 200 b 440
------------- ------------ ----------- --------------
Total assets $ 80,267 $ 200 $ (17,156) $ 63,311
============= ============ =========== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Debt $ $ 22,743 c $ $ 22,743
Debtor-in- possession financing 22,543 (22,543)c
Accounts payable 11,407 (3,130)d 8,277
Accrued expenses 12,534 12,534
Liabilities subject to settlement 3,085 e 3,085
------------- ------------ ----------- --------------
Total current liabilities 46,484 155 46,639
------------- ------------ ----------- --------------
Long term notes payable and capital leases 1,128 5,504 d,h 6,632
Liabilities subject to compromise 54,056 (47,306)f (6,750)f
------------- ------------ ----------- --------------
Total liabilities 101,668 (41,647) (6,750) 53,271
Stockholders' equity(deficit) (21,401) 41,847 g (10,406)g 10,040
------------- ------------ ----------- --------------
Total liabilities & stockholders' equity
(deficit) $ 80,267 $ 200 $ (17,156)a $ 63,311
============= ============ =========== ==============
(a) To reduce the excess of book value over enterprise value.
(b) To record $200 of deferred bank costs related to exit financing with
Well Fargo Retail Finance LLP.
(c) Borrowings under new credit agreement with Wells Fargo Retail Finance,
LLP. Existing debtor in possession financing agreement was paid in
full upon the effective date of the Plan of Reorganization.
(d) To record the conversion of post-petition accounts payable into the
$3,130 Trade Conversion Note.
(e) To record $1,000 payable due to creditors, $1,700 payable in landlord
cure amounts, $323 payable in priority claims and $62 payable in
convenience claims. Amounts are to be paid within 60 days of the
Effective Date.
(f) To record elimination of pre-petition liabilities subject to
compromise.
(g) To write-off old equity upon emergence from chapter 11 and to adjust
the accumulated deficit by the portion of the liabilities subject to
compromise that is forgiven.
(h) To record at fair value the $2,600 creditor agreement.
(i) To eliminate the capitalization of certain buying and warehousing
costs associated with a change in accounting principle.
9
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period and related disclosures. Significant estimates made as
of and for the three and four fiscal months ended August 3, 2002, the
two fiscal months ended April 6, 2002 and the three and six fiscal
month period ended August 4, 2001 include accruals for reorganization
items, provision for shrinkage, and the carrying values of inventories.
Actual results could differ from those estimates.
Change in Accounting Principle
Prior to its emergence from bankruptcy, the Company capitalized certain
buying and warehousing costs as a component of inventory. As of the
emergence date, the Company discontinued this practice, recording all
of the aforementioned costs in Cost of Sales. Going forward, the
Company does not anticipate that the change will have a significant
impact on periodic earnings.
New Accounting Pronouncements
In June 2001, the FASB ("Financial Accounting Standards Board") issued
SFAS ("Statement of Financial Accounting Standards") No. 142 "Goodwill
and Other Intangible Assets", which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and
supercedes APB Opinion No. 17, "Intangible Assets". The provisions of
SFAS No. 142 are effective for fiscal years beginning after December
15, 2001. As the Company does not have goodwill recorded in the
financial statements, the adoption of SFAS No. 142 during the first
quarter of fiscal 2002 did not have an impact on the financial
condition or results of operations of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and (or) normal use of the asset. The Company has adopted
the provision of SFAS No. 143 and it did not have a material impact of
the Company's consolidated financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
although it retains many of the fundamental provisions of that
Statement. The provisions of SFAS No. 144 are effective for fiscal
years beginning after December 15, 2001, thereby applying to fiscal
2002. In conjunction with fresh-start reporting, the Company recorded a
$11,760 adjustment to fixed assets to reflect the excess of book value
over enterprise value. Because of this fresh-start adjustment, the
Company does not have an impairment value issue as it relates to SFAS
No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Specifically, SFAS 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt, and amendment
of APB Opinion No. 30" and SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements", as these two standards required
that all gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. Consequently,
such gains and losses will now be classified as extraordinary only if
they meet the criteria for extraordinary treatment
10
set forth in APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 145 also rescinds SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers, and amendment of Chapter 5 of ARB
No. 43 and an interpretation of APB Opinions 17 and 30", because the
event to which that Statement relates is no longer relevant. SFAS No.
145 amends SFAS No. 13, "Accounting for Leases", to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as such
transactions, and also makes certain technical corrections to a number
of existing pronouncements. The Company is required to adopt this
statement due to the application of fresh-start accounting. The effect
of this statement on the Company is that the net gain associated with
the plan of reorganization and fresh-start adjustments are reported as
a component of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement changes
the timing of recognition for certain exit costs associated with
restructuring activities, so that certain exit costs would be
recognized over the period in which the restructuring activities occur.
Currently, exit costs are recognized when the Company commits to a
restructuring plan. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002 and could result in the
Company recognizing the cost of future restructuring activities over a
period of time as opposed to as a single event.
(3) Long Term Debt and Capital Lease Obligations
Pursuant to the Plan of Reorganization, the Company converted $3,130 of
post petition trade payables into a trade conversion note, which will
be payable within 4 years of the Effective Date. In addition, the
Company recorded at fair value a $2,600 extended creditor payment to
the general unsecured creditors. Management intends to pay down the
trade conversion note within three years of the Effecitve Date.
The following table summarizes the components of Short and Long Term
Debt and Capital Lease Obligations at August 3, 2002.
August 3,
2002
-------------
Trade conversion note $ 3,130
Discounted value of extended creditor payment 2,420
Financing agreements 803
Capital leases 148
-------------
Total $ 6,501
-------------
(4) Debt
On the Effective Date, obligations relating to the Company's
debtor-in-possession financing facility were paid in full and the
Company's secured financing facility with Wells Fargo Retail Finance,
LLC (the "New Loan Agreement") became effective. The New Loan Agreement
currently provides up to $40,000 (including $10,000 for letters of
credit) to fund working capital needs and for general corporate
purposes. Borrowings under the facility are limited by a percent of
inventory levels. The Loan Agreement expires on April 8, 2005 and has a
variable interest rate based upon the Prime rate or at the Company's
option, a variable rate based upon earnings performance and the London
Interbank Offered Rate ("LIBOR") with a minimum threshold of 5.00%. The
interest rate on the Company's borrowings was 5.00% at August 4, 2002.
Borrowings under the Loan Agreement are secured by substantially all of
the Company's assets. Certain restrictive covenants apply, including
achievement
11
of specified operating results and limitations on the incurrence of
additional liens and indebtedness, capital expenditures, asset sales
and payment of dividends, all of which have been met.
(5) Stockholders' Equity
The Company has 10,000,000 shares of authorized common stock, par value
$0.01 per share, 1,512,448 of which were deemed issued and outstanding
for accounting purposes at August 3, 2002. A total of 1,349,995 shares
were distributed in the initial distribution of stock to creditors,
75,000 shares were distributed to certain members of management which
vest over a 4 year period and 74,553 shares were distributed to former
equity interests.
As provided in the Plan of Reorganization, the Company adopted a stock
option plan, which authorized the grant of up to 166,667 stock options
to employees of the Company - 124,900 options with an exercise price of
$7.52 were outstanding at August 3, 2002.
The Company also issued four series of new Warrants, Series A through
D, to tendering holders of the canceled Common Stock, granting such
holders the right to purchase an aggregate of 153,467 additional shares
of the new Common Stock. The 38,346 shares of Series A Warrants are
exercisable any time prior to April 9, 2006 at a price of $11.00 per
share. The 46,256 shares of Series B Warrants are exercisable at any
time prior to April 9, 2008 at a price of $16.00 per share. The 38,346
shares of Series C Warrants are exercisable any time prior to April 9,
2010 at a price of $16.00 per share. The 30,519 shares of Series D
Warrants are exercisable any time prior to April 9, 2010 at a price of
$34.00 per share.
Warrants were issued to management to purchase an aggregate 31,000
shares of the Common Stock at a purchase price of $7.52 per share. On
June 7, 2002, 12,900 warrants were exercised and the remaining 18,100
warrants expired.
As provided in the Plan of Reorganization, the Company entered into a
Trade Conversion Agreement with certain trade creditors to convert
$3,130 of accounts payable into long term Trade Conversion Notes. Per
the agreement, these notes will be payable on the fourth anniversary of
the Effective Date and contain a conversion feature into common stock
between the third and fourth anniversary of the Effective Date.
Management intends to pay down principal in full prior to the third
anniversary of the Effective Date.
On April 23, 2002, the Board of Directors approved the non-employee
Director Stock Option Plan, which authorized the grant of up to 150,000
common stock options to non-employee members of the Board of Directors
- 70,000 were granted with an exercise price of $7.52.
A separate Statement of Shareholders' Equity is not required to be
presented for interim periods. However, comprehensive income equaled
net income for the periods presented as the Company does not have any
currency translation adjustments, minimum pension liability adjustments
or SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" adjustments.
(6) Earnings Per Share
In accordance with SFAS No. 128, earnings per share - basic were
computed by dividing net income by the weighted average number of
common shares outstanding during the period. Earnings per share -
diluted assumes, in addition to above, a dilutive effect of common
share equivalents during the period.
12
The reconciliation of earnings per share basic to earnings per share
diluted is as follows:
Income Shares Per share
------ ------ ---------
For the three fiscal months ended August 3, 2002:
Earnings per share - basic:
Net income $ 1,977 1,432,486 $ 1.38
Effect of dilutive securities:
Stock options and warrants 31,069
Earnings per share - diluted:
Net income $ 1,977 1,463,555 $ 1.35
========= =========== ===========
Income Shares Per share
------ ------ ---------
For the four fiscal months ended August 3, 2002:
Earnings per share - basic:
Net income $ 2,367 1,430,619 $ 1.65
Effect of dilutive securities:
Stock options and warrants 31,069
Earnings per share - diluted:
Net income $ 2,367 1,461,688 $ 1.62
========= =========== ===========
The dilutive impact of stock options and warrants was calculated using the
treasury method. The 153,467 warrants issued to old equity and the shares
related to the trade conversion notes did not meet the criteria for
inclusion in the diluted earning per share calculation and thus were
excluded.
Per share and share information for the Predecessor Company for all periods
presented in the Condensed Consolidated Statements of Operations have been
omitted as such information is not deemed to be meaningful.
13
(7) Reorganization Items
Reorganization costs consisted of professional fees related to legal,
accounting and consulting services directly attributable to the Plan of
Reorganization and employee retention bonuses. In addition, Reorganization
Items include the write-off of old equity upon emergence from chapter 11
and the elimination of pre-petition obligations during the two-month period
ended April 6, 2002. The components of Reorganization Items are as follows:
Predecessor Predecessor Predecessor
Company Company Company
------------- ------------- --------------
Three
Two months months
ended April ended Six months
6, August 4, ended August
2002 2001 4, 2001
------------- ------------- --------------
Professional fees $ 1,379 $ 597 $ 1,419
Severance/retention bonus 1,026 200 718
Closed store expense 311 363 406
Fresh start adjustments 10,406 - -
Plan of reorganization - primarily related to
debt forgiveness (41,847) - -
Other 342 58 79
------------- ------------- --------------
Total $ (28,383) $ 1,218 $ 2,622
------------- ------------- --------------
The Successor Company has not recorded any Reorganization costs in the four
month period ended August 3, 2002.
(8) Income Taxes
Since the Company utilized fresh start accounting upon emerging from
bankruptcy, income tax expense of $1,560 for the four months ended August
3, 2002 is offset by a direct increase in stockholders' equity due to the
Company's ability to utilize prior period net operating loss benefits.
Until the benefits of the net operating loss carry forwards are fully
utilized, the Company does not expect to pay federal income tax. The income
tax benefit of $360 for the two months ended April 6, 2002 results from the
realization of net operating loss carry backs due to the enactment of the
Job Creation and Workers Assistance Act of 2002.
The Company has recorded a valuation allowance to fully reserve for the
value of net deferred tax assets that existed upon emergence from
bankruptcy. These assets include remaining net operating loss
carryforwards. This allowance on pre-emergence deferred tax assets is
necessary, as the utilization of the Company's net loss carry forwards is
dependent upon sufficient future taxable income. In the four month period
ended August 3, 2002, the Company has recorded a $290 new deferred tax
asset related to deferred rent liabilities which is offset by a direct
increase in stockholders' equity due to the Company's ability to utilize
prior period net operating loss benefits. The Company believes they will
realize the benefit of the new deferred tax asset in future periods and
therefore has not recorded a valuation allowance at this time.
14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollar amounts in thousands)
The Company is a chain of company-owned stores offering an extensive
selection of party supplies, gifts, greeting cards, giftwrap and other special
occasion merchandise at everyday value prices. As of September 12, 2002, the
Company operated 171 stores in 20 states.
On March 23, 1999 the Company filed voluntary petitions for relief
under chapter 11 of title 11 of the United States Code under case numbers
99-685(JCA) and 99-686(JCA). From that time until March 20, 2002, the Company
operated its business as a debtor-in-possession subject to the jurisdiction and
supervision of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). On March 20, 2002, the Company announced that the
Bankruptcy Court confirmed the Company's Amended Plan of Reorganization (the
"Plan of Reorganization") that it filed with the Bankruptcy Court on February 5,
2002. On April 9, 2002 (the "Effective Date") the Plan of Reorganization became
effective and the Company successfully emerged from Chapter 11. See footnote (1)
to the Notes to the Consolidated Financial Statements for a summary of the
principal provisions of the Plan of Reorganization.
Fresh-start Reporting; Factors Affecting Comparability of Financial
Information
Effective April 9, 2002, the Company emerged from Chapter 11 bankruptcy
proceedings and implemented fresh-start accounting. Accordingly, all assets and
liabilities were restated to reflect their respective fair values. The
consolidated financial statements after that date are those of a new reporting
entity and are not comparable to pre confirmation periods. However, for purposes
of this discussion, the four month period ended August 3, 2002 (Successor
Company) has been combined with the two month period ended April 6, 2002
(Predecessor Company) and then compared to the six months ended August 4, 2001.
Differences between periods due to fresh-start accounting adjustments are
explained when necessary.
The lack of comparability in the accompanying unaudited consolidated
financial statements is most apparent in the Company's capital costs (lease,
interest, depreciation and amortization), as well income taxes, debt
restructuring and reorganization costs.
15
Results of Operations
The following table sets forth, for the periods indicated, selected
statements of operations data expressed as a percentage of net sales and the
number of stores open at the end of each period. The following table is included
solely for use in comparative analysis of results of operations and to
complement management's discussion and analysis.
Three fiscal Three fiscal
months ended months ended Six fiscal months ended
-------------- ------------- --------------------------------
Combined
results
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------- ------------- ----------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 63.3 63.9 64.3 65.3
-------------- ------------- ----------- -------------
Gross profit 36.7 36.1 35.7 34.7
Selling, general and administrative expenses 29.9 27.8 30.1 29.1
Depreciation 0.6 3.0 1.3 3.0
Reorganization items - 2.1 (23.9) 2.3
Interest expense 0.7 1.1 0.8 1.3
-------------- ------------- ----------- -------------
Income (loss) before income tax expense 5.5 2.1 27.4 (1.0)
Income tax expense 2.2 - 1.0 -
-------------- ------------- ----------- -------------
Net income (loss) 3.3 % 2.1 % 26.4 % (1.0)%
============== ============= =========== =============
Number of stores open at end of period 171 173 171 173
Three Fiscal Months Ended August 3, 2002 and August 4, 2001
Net Sales. Net sales increased $2,720 or 4.8%, to $59,733 for the three
fiscal month period ended August 3, 2002 ("second quarter of fiscal 2002") from
$57,013 for the three fiscal month period ended August 4, 2001 ("second quarter
of fiscal 2001"). Comparable store sales increased $3,182 or 5.6%. The
fluctuation relates to a strong demand for merchandise in the Company's basic
party and gift categories. No new stores opened in either period and one store
closed in the second quarter of fiscal 2002 and two stores closed in the second
quarter of 2001. A closed store's sales are excluded from the calculation of
comparable store sales in the fiscal month of the store closing.
Gross Profit. Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $1,315 or 6.4%, to $21,925 for the
second quarter of fiscal 2002 from $20,610 for the second quarter of fiscal
2001. As a percentage of net sales, gross profit was 36.7% for the second
quarter of fiscal 2002 compared to 36.1% in the same period in the prior year.
The higher gross profit percentage was the result of improved markdown
experience coupled with leveraged freight costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising, depreciation, other
store operating and corporate administrative expenses. Selling, general and
administrative expenses increased $2,021 or 12.8% to $17,869 for the second
quarter of fiscal 2002 from $15,848 for the second quarter of fiscal 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 29.9% in the second quarter of fiscal 2002 from 27.8% in the second quarter
of fiscal 2001. This increase primarily relates to a $425 increase in insurance
costs, $560 increase in advertising costs and $240 of severance costs.
Depreciation expense. Depreciation expense was $356 in the three fiscal
month period ended August
16
3, 2002 compared to $1,745 in the three fiscal period ended August 4, 2001. This
decrease relates to the fresh-start adjustment on fixed assets of $11,760
whereby the Company adjusted for the excess of book value over enterprise value.
Interest Expense. Interest expense was $412 in the second quarter of
fiscal 2002 compared to $627 in the second quarter of fiscal 2001. This decrease
relates to lower borrowing levels coupled with lower effective interest rates.
Reorganization Items, net. The Company did not record any
Reorganization costs in the second quarter of fiscal 2002. As previously
discussed, the Company successfully emerged from bankruptcy on April 9, 2002.
Reorganization costs in the second quarter of fiscal 2001 totaled $1,218. These
costs include professional fees and other costs related to the Company's
reorganization.
Income taxes. Income tax expense of $1,311 for the second quarter of
fiscal 2002 is offset by a direct increase in stockholders' equity due to the
Company's ability to utilize prior period net operating loss benefits.
Six Fiscal Months Ended August 3, 2002 and August 4, 2001
Net Sales. Net sales increased $5,508 or 4.9%, to $118,757 for the six
fiscal month period ended August 3, 2002 ("first half of fiscal 2002") from
$113,249 for the six fiscal month period ended August 4, 2001 ("first half of
fiscal 2001"). Comparable store sales increased $6,631 or 5.9%. The fluctuation
relates to increases in the basic party and gift categories. No new stores
opened in either period, one store closed in the first half of fiscal 2002 and
two stores closed in the first half of fiscal 2001. A closed store's sales are
excluded from the calculation of comparable store sales in the fiscal month of
the store closing.
Gross Profit. Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $3,057 or 7.8%, to $42,361 for the first
half of fiscal 2002 from $39,304 for the first half of fiscal 2001. As a
percentage of net sales, gross profit was 35.7% for the first half of fiscal
2002 compared to 34.7% in the same period in the prior year. The higher gross
profit percentage relates to improved shrink experience coupled with leveraged
freight and distribution costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising, depreciation, other
store operating and corporate administrative expenses. Selling, general and
administrative expenses increased $2,856 or 8.7%, to $35,778 for the first half
of fiscal 2002 from $32,922 for the first half of fiscal 2001. As a percentage
of net sales, selling, general and administrative expenses increased to 30.1% in
the first half of fiscal 2002 from 29.1% in the first half of fiscal 2001. This
increase relates primarily to a $758 increase in insurance costs and $381 of
remodel costs.
Depreciation expense. Depreciation expense was $1,486 in the first half
of fiscal 2002 compared to $3,497 in the first half of fiscal 2001. This
decrease relates to the fresh-start adjustment of $11,760 on fixed assets
whereby the Company adjusted for the excess of book value over enterprise value.
Interest Expense. Interest expense was $940 in the first half of fiscal
2002 compared to $1,451 in the first half of fiscal 2001. This decrease relates
to lower effective interest rates and decreases in borrowing levels.
Reorganization Items, net. Reorganization costs decreased $31,005 for
the first half of fiscal 2002 from $2,622 for the first half of fiscal 2001. The
decrease relates to the gain related to the discharge of indebtedness that
resulted from the forgiveness of certain liabilities in accordance with the
Company's Plan of
17
Reorganization and fresh-start adjustments. The major components of
Reorganization costs are as follows:
FiscalYear 2002 Fiscal 2001
Combined Results Predecessor
Company
------------------- --------------------
Six Months ended Six Months Ended
August 3, 2002 August 4, 2001
------------------- --------------------
Professional fees $ 1,379 $ 1,419
Severance/retention bonus 1,026 718
Closed store expense 311 406
Fresh start adjustments 10,406 -
Plan of reorganization - primarily related to debt
Forgiveness (41,847) -
Other 342 79
------------------- --------------------
Total $ (28,383) $ 2,622
------------------- --------------------
The Successor Company has not recorded any Reorganization costs in the four
month period ended August 3, 2002.
Income Taxes. Income tax expense of $1,560 for the four fiscal months
ended August 4, 2002 is offset by a direct increase in stockholders' equity due
to the Company's ability to utilize prior period net operating loss benefits.
The income tax benefit of $360 for the two months ended April 6, 2002 results
from the realization of net operating loss carry backs due to the enactment of
the Job Creation and Workers Assistance Act of 2002.
Liquidity and Capital Resources
The Company's uses of capital for the remainder of fiscal 2002 are
expected to include working capital for operating expenses and satisfaction of
current liabilities, expenditures related to maintaining and refurbishing
existing stores and interest payments on outstanding borrowings.
On April 9, 2002, obligations relating to the Company's
debtor-in-possession financing facility were paid in full and the Company's
secured financing facility with Wells Fargo Retail finance, LLC (the "New Loan
Agreement") became effective. The New Loan Agreement currently provides up to
$40,000 (including $10,000 for letters of credit) to fund working capital needs
and for general corporate purposes. Borrowings under the facility are limited by
a percent of inventory levels. The New Loan Agreement expires on April 8, 2005
and has a variable interest rate based upon the Prime rate or at the Company's
option, a variable rate based upon earnings performance and the London Interbank
Offered Rate ("LIBOR") with a minimum threshold of 5.00%. The interest rate on
the Company's borrowings was 5.00% at August 3, 2002. Borrowings under the New
Loan Agreement are secured by substantially all of the Company's assets.
The New Loan Agreement contains certain restrictive covenants, which,
among other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of the
Company to grant liens and incur additional indebtedness.
Pursuant to the Plan of Reorganization, the Company converted $3,130 of
post petition trade payables into a trade conversion note, which will be payable
within 4 years of the Effective Date. In addition, the Company recorded at fair
value the $2,600 extended creditor payment payable to the general unsecured
creditors. Management intends to pay down the trade conversion note within three
years of the Effective Date.
18
As of August 3, 2002, the Company had $17,090 borrowings outstanding
under the New Loan Agreement and had utilized approximately $2,420 under the New
Loan Agreement to issue letters of credit. The following table sets forth
certain consolidated statements of cash flows:
Fiscal Year Fiscal Year
2002 2001
Combined Predecessor
Results Company
---------------- -----------------
Six months Six months
ended August ended August
3, 2002 4, 2001
--------------- ----------------
Cash provided by operating activities $ 11,445 $ 7,248
--------------- ----------------
Cash used in investing activities $ (1,181) $ (550)
--------------- ----------------
Cash used in financing activities $ (10,259) $ (6,806)
--------------- ----------------
At August 3, 2002 the Company's working capital was $14,475. Net cash
provided by operating activities for the first half of fiscal 2002 was $11,445
compared to $7,248 of net cash provided by operating activities during the first
half of fiscal 2001. The fluctuation is related to changes in inventory and
accounts payable coupled with the Company utilizing pre-confirmation net
operating losses in the 4 month period ended August 3, 2002.
Net cash used in investing activities during the first half of fiscal
2002 and 2001 was $1,181 and $550, respectively. Net cash used in investing
activities was primarily for capital expenditures for computer equipment, store
remodeling and warehouse equipment for the distribution center.
Net cash used in financing activities during the first half of fiscal
2002 was $10,259 compared to $6,806 of net cash used in financing activities
during the first half of fiscal 2001. Amounts are attributable to the level of
borrowings and repayments.
The Company does not intend to pay cash dividends in the foreseeable
future and under its current Loan Agreement is restricted from paying dividends
on its capital stock.
The Company's ability to make scheduled payments of principal of, or to
pay the interest on, or to refinance, indebtedness or to fund planned capital
expenditures, will depend upon future performance, which, in turn, is subject to
general economic, financial, competitive and other factors that are beyond the
Company's control. Based upon current level of operations and anticipated
growth, the Company believes that future cash flow from operations, together
with available borrowings under the New Loan Agreement, will be adequate to meet
anticipated requirements for capital expenditures, working capital, interest
payments and scheduled principal payments. There can be no assurance that the
Company's business will continue to generate sufficient cash flow from
operations in the future to service the Company's debt and make necessary
capital expenditures after satisfying certain liabilities arising in the
ordinary course of business. If unable to do so, the Company may be required to
refinance all or a portion of its existing debt, sell assets or obtain
additional financing. There can be no assurance that any refinancing would be
available or that any sales of assets or additional financing could be obtained.
Seasonality
The Company's business is highly seasonal, with operating results
varying from quarter to quarter. The Company historically experienced higher
sales during the second and fourth fiscal quarters due to increased demand by
customers for the Company's products attributable to special occasions and
holiday seasons during these periods. The Company's fiscal 2002 quarters are as
defined as follows: first fiscal quarter is February 3, 2002 to May 4, 2002,
second fiscal quarter is May 5, 2002 to August 3, 2002, third fiscal quarter is
August 4, 2002 to November 2, 2002 and fourth fiscal quarter is November 3, 2002
to February 1, 2003.
19
New Accounting Pronouncements
In June 2001, the FASB ("Financial Accounting Standards Board") issued
SFAS ("Statement of Financial Accounting Standards") No. 142 "Goodwill and Other
Intangible Assets", which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supercedes APB Opinion No. 17,
"Intangible Assets". The provisions of SFAS No. 142 are effective for fiscal
years beginning after December 15, 2001. As the Company does not have goodwill
recorded in the financial statements, the adoption of SFAS No. 142 during the
first quarter of fiscal 2002 did not have an impact on the financial condition
or results of operations of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset. The
Company has adopted the provision of SFAS No. 143 and it did not have a material
impact of the Company's consolidated financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", although it retains many of the
fundamental provisions of that Statement. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001, thereby applying
to fiscal 2002. In conjunction with fresh-start reporting, the Company recorded
a $11,760 adjustment to fixed assets to reflect the excess of book value over
enterprise value. Because of this fresh-start adjustment, the Company does not
have an impairment value issue as it relates to SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Specifically, SFAS 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt, and amendment of APB Opinion No. 30" and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", as these two standards required that all gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. Consequently, such gains and losses will now be classified
as extraordinary only if they meet the criteria for extraordinary treatment set
forth in APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." SFAS No. 145 also rescinds
SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers, and amendment
of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions 17 and 30",
because the event to which that Statement relates is no longer relevant. SFAS
No. 145 amends SFAS No. 13, "Accounting for Leases", to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as such transactions, and also
makes certain technical corrections to a number of existing pronouncements. The
Company is required to adopt this statement due to the application of
fresh-start accounting. The effect of this statement on the Company is that the
net gain associated with the plan of reorganization and fresh-start adjustments
are reported as a component of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement changes the timing
of recognition for certain exit costs associated with restructuring activities,
so that certain exit costs would be recognized over the period in which the
restructuring activities occur. Currently, exit costs are recognized when the
Company commits to a restructuring plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002 and could result in the
Company recognizing the cost of future restructuring activities over a period of
time as opposed to as a single event.
20
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks from changes in interest rates.
As of August 3, 2002, the interest rate on the Company's revolving credit
facilities, which represents a significant portion of the Company's outstanding
debt, is variable based upon earnings performance and the London Interbank
Offered Rate ("LIBOR").
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company from time to time is involved in routine litigation
incidental to the conduct of its business. As of the date of this Quarterly
Report on Form 10-Q, the Company is aware of no material existing or threatened
litigation to which it is or may be a party.
Item 2. Changes in Securities
On June 7, 2002, the Company issued 12,900 shares of Common Stock upon
exercise of warrants previously issued to management. The Company received the
exercise price of $7.52 per share. Exemption from registration is claimed
pursuant to Section 4(2) of the Securities Act of 1933, as amended, no public
sale having been involved.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 3.1 (1) Certificate on Incorporation of Factory Card & Party
Outlet Corp.
Exhibit 3.2 (1) Bylaws of Factory Card & Party Outlet Corp.
Exhibit 4.1 (1) Warrant Agreement, dated April 9, 2002, between Factory
Card & Party Outlet and Wells Fargo Bank Minnesota, N.A.
Exhibit 4.2 (1) Form of New Management Warrant, dated April 9, 2002.
Exhibit 4.3 (1) Schedule of New Management Warrants (pursuant to
Instruction 2 of Item 601).
Exhibit 4.4 (1) Trade Conversion Note of Factory Card & Party Outlet
Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for
the benefit of CSS Industries, Inc.
Exhibit 4.5 (1) Schedule of Trade Conversion Notes (pursuant to
Instruction 2 of Item 601).
21
Exhibit 4.6 (1) Trade Conversion Agreement, dated as of April 9, 2002,
among Factory Card & Party Outlet Corp., Factory Card Outlet of
America. Ltd., Amscan, Inc., Creative Expressions Group, Inc., Images
and Editions Limited, Unique Industries, Inc., CSS Industries, Inc.,
P.S. Greetings, Inc., and Maryland Plastics, Inc.
Exhibit 10.1 (1) Loan and Security Agreement, dated as of April 9,
2002, among Factory Card Outlet of America, Ltd., as borrower, the
lenders thereto as Wells Fargo Retail Finance, LLC, as arranger,
collateral agent and administrative agent.
Exhibit 10.2 (1) Security Agreement, dated April 9, 2002, among Factory
Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in
favor of William Kaye, as Collateral Trustee.
Exhibit 10.3 (1) Form of Factory Card & Party Outlet Corp. 2002 Stock
Incentive Plan.
Exhibit 10.4 (1) Trade Vendor Supply Agreement, dated April 9, 2002,
between Factory Card & Party Outlet Corp., Factory Card Outlet of
America, Ltd and Maryland Plastics.
Exhibit 10.5 (1) Schedule of Trade Vendor Supply Agreements (pursuant
to Instruction 2 of Item 601).
Exhibit 10.6 (1) Employment Agreement, dated as of April 9, 2002,
between Factory Card Outlet of America, Ltd and James D. Constantine.
Exhibit 10.7 (1) Employment Agreement, dated as of April 9, 2002,
between Factory Card Outlet of America, Ltd and Timothy F. Gower.
Exhibit 10.8 (1) Employment Agreement, dated as of April 9, 2002,
between Factory Card Outlet of America, Ltd and Gary W. Rada.
Exhibit 10.9 (2) Form of Factory Card & Party Outlet Corp. 2002 Non-
Employee Directors Stock Option Plan.
Exhibit 10.10 (2) First Amendment to the Factory Card & Party Outlet
Corp. 2002 Stock Incentive Plan.
Exhibit 10.11 (2) Second Amendment to the Factory Card & Party Outlet
Corp. 2002 Stock Option Plan.
Exhibit 99.1 Independent Accountants' Report from Deloitte & Touche,
LLP.
Exhibit 99.2 Acknowledgement of Awareness Letter from Deloitte &
Touche, LLP dated September 16, 2002 Concerning Unaudited Interim
Financial Information.
Exhibit 99.3 Press Release of the Company Announcing Second Quarter
Results.
Notes
(1) Incorporated by reference to the Company's Current Report on Form
8-K as filed on April 23,2002
(2) Incorporated by reference to the Company's Current Report on Form
10Q as filed on June 18, 2002.
(b) Reports on 8-K
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FACTORY CARD & PARTY OUTLET CORP.
Dated: September 12, 2002 By: /s/ Gary W. Rada
-----------------
Gary W. Rada
President and Chief Operating Officer
Dated: September 12, 2002 By: /s/ James D. Constantine
-------------------------
James D. Constantine
Executive Vice President and Chief Financial
and Administrative Officer
[Principal Accounting Officer]
23
CERTIFICATIONS
I, Gary W. Rada, President and Chief Operating Officer of Factory Card & Party
Outlet Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Factory Card &
Party Outlet Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 12, 2002
/s/ Gary W. Rada
----------------
Gary W. Rada
President and Chief Operating Officer
I, James D. Constantine, Executive Vice President and Chief Financial and
Administrative Officer of Factory Card & Party Outlet Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Factory Card &
Party Outlet Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 12, 2002
/s/ James D. Constantine
----------------------------
James D. Constantine
Executive Vice President and Chief
Financial and Administrative Officer
24