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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 November 2, 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 December
12, 2002 was 1,512,448.
Factory Card & Party Outlet Corp.
Form 10-Q
For the Quarter Ended November 2, 2002
Index
Page
Cautionary Statement Regarding Forward-Looking Statements 2
Part I Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets - as of November 2, 2002 (Unaudited)
(Successor Company) and as of February 2, 2002 (Predecessor Company) 3
Condensed Consolidated Statements of Operations (Unaudited) - three
months ended November 2, 2002, seven months ended November 2, 2002 (Successor Company),
three months ended November 3, 2001, two months ended April 6, 2002 and nine
months ended November 3, 2001 (Predecessor Company) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - seven months ended
November 2, 2002 (Successor Company), two months ended April 6, 2002 and
nine months ended November 3, 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 15-21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
Item 4 Controls and Procedures 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 22-23
Signatures 24
Certifications 25-27
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
-------------- --------------
November 2, February 2,
2002 2002
-------------- --------------
ASSETS (Unaudited)
Current assets:
Cash $ 191 $ 182
Merchandise inventories 52,832 59,496
Prepaid expenses and other 4,116 2,949
-------------- --------------
Total current assets 57,139 62,627
Fixed assets, net 6,548 18,414
Other assets 383 258
-------------- -------------
Total assets $ 64,070 $ 81,299
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt $ 18,875 $ -
Debtor-in-possession financing - 27,260
Accounts payable 15,407 8,071
Accrued expenses 7,741 9,698
Current portion of long term debt and capital lease obligations 407 305
Total current liabilities -------------- -------------
42,430 45,334
-------------- -------------
Long term debt and capital lease obligations
Deferred rent liabilities 5,991 338
Liabilities subject to compromise 1,308 -
- 54,560
-------------- -------------
Total liabilities
49,729 100,232
Stockholders' equity (deficit)
14,341 (18,933)
-------------- -------------
Total liabilities and stockholders' equity
$ 64,070 $ 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
-------------- ------------- -------------- -------------- -------------
Seven Two
Three Months Three Months Months Months Nine Months
Ended Ended Ended Ended Ended
November 2, November 3, November 2, April 6, November 3,
2002 2001 2002 2002 2001
-------------- ------------- -------------- -------------- -------------
Net sales $ 48,942 $ 51,480 126,862 $ 40,837 $ 164,729
Cost of sales 32,540 34,665 81,945 26,991 108,609
-------------- ------------- -------------- -------------- -------------
Gross profit 16,402 16,815 44,917 13,846 56,120
Selling, general and administrative expenses 15,919 15,872 39,485 12,212 48,794
Depreciation 393 1,697 849 1,030 5,194
Reorganization items - 1,711 - (28,383) 4,334
Interest expense 419 666 985 374 2,117
-------------- ------------- -------------- -------------- -------------
Income (loss) before income tax expense (benefit) (329) (3,131) 3,598 28,613 (4,319)
Income tax expense (benefit) (132) - 1,428 (360) -
-------------- ------------- -------------- -------------- -------------
Net income (loss) $ (197) $ (3,131) 2,170 $ 28,973 $ (4,319)
============== ============= ============== ============== =============
Net income (loss) per share - basic $ (0.14) $ 1.51
-------------- --------------
Weighted average shares outstanding - basic 1,437,448 1,433,578
-------------- --------------
Net income (loss) per share - diluted $ (0.14) $ 1.44
-------------- --------------
Weighted average shares outstanding - diluted 1,437,448 1,501,830
-------------- --------------
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 Seven
Months Ended For the Two For the Nine
November 2, Months Ended Months Ended
2002 April 6, 2002 November 3, 2001
---------------- ----------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,170 $ 28,973 $ (4,319)
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 849 1,030 5,194
Amortization of deferred bank costs 57 26 508
Amortization of deferred compensation 82 - -
Non cash portion of reorganization items - 1,275 1,447
Benefit of pre-confirmation net operating
losses 1,952 - -
Changes in assets and liabilities:
Merchandise inventories (1,241) 2,212 (6,097)
Prepaid expenses and other assets 1,135 (2,594) (967)
Accounts payable 4,045 3,336 3,810
Accrued expenses (4,793) 2,020 61
Deferred rent obligation 1,308 - -
Liabilities subject to compromise - - 40
---------------- ----------------- ----------------
Net cash provided by (used in) operating activities 5,564 4,837 (323)
---------------- ----------------- ----------------
Net cash used in investing activities - purchase of
fixed assets, net (1,557) (257) (883)
---------------- ----------------- ----------------
Cash flow provided by (used in) financing activities:
Borrowings 129,827 38,381 174,874
Repayment of debt (133,695) (42,898) (173,569)
Payment of capital lease obligations (311) (56) (184)
Increase in long term debt 77 - -
Cash received from exercise of management stock
warrants 97 - -
---------------- ----------------- ----------------
Net cash provided by (used in) financing activities (4,005) (4,573) 1,121
---------------- ----------------- ----------------
Net increase (decrease) in cash 2 7 (85)
Cash at beginning of period 189 182 281
---------------- ----------------- ----------------
Cash at end of period $ 191 $ 189 $ 196
---------------- ----------------- ----------------
Supplemental Cash Flow Information:
Interest paid $ 707 $ 334 $ 1,689
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 482 564 -
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 November
2, 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.
Fresh Start Accounting
Pursuant to the guidance provided by the American Institute of
Certified Public Accountants in
7
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
=========
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 seven fiscal month period ended November 2, 2002, the two
fiscal month period ended April 6, 2002 and the three and nine fiscal month
period ended November 3, 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
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 Effective Date.
The following table summarizes the components of Long Term Debt and
Capital Lease Obligations including its current portion at November 2,
2002.
November 2,
2002
---------------
Trade conversion note $ 3,130
Discounted value of extended creditor payment 2,451
Financing agreements 710
Capital leases 107
----------------
Total $ 6,398
================
(4) Debt
On the Effective Date, obligations relating to the Company's
debtor-in-possession financing facility
11
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 5.1% at November 2, 2002.
Borrowings under the Loan Agreement are secured by substantially all of the
Company's assets. Certain restrictive covenants apply, including
achievement 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 November 2, 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 November 2, 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.
12
(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.
The reconciliation of earnings per share basic to earnings per share
diluted is as follows:
Income (loss) Shares Per share
------------- ------ ---------
For the three fiscal months ended November 2, 2002:
Earnings per share - basic:
Net loss $ (197) 1,437,448 $ (0.14)
Effect of dilutive securities:
Stock options and warrants -
Earnings per share - diluted:
------------ ---------- -------------
Net loss $ (197) 1,437,448 $ (0.14)
============ ========== =============
Income Shares Per share
------ ------ ---------
For the seven fiscal months ended November 2, 2002:
Earnings per share - basic:
Net income $ 2,170 1,433,578 $ 1.51
Effect of dilutive securities:
Stock options and warrants 68,252
Earnings per share - diluted:
------------ ---------- -------------
Net income $ 2,170 1,501,830 $ 1.45
============ ========== =============
The dilutive impact of stock options and warrants was calculated using the
treasury method. Had the Company reported a profit in the third fiscal
quarter ended November 2, 2002, the number of average shares diluted would
have been increased by 67,811 shares. 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:
Successor Predecessor Successor Predecessor Predecessor
Company Company Company Company Company
------------ ------------ ------------- -------------- --------------
Three Three
months months Seven months Nine months
ended ended ended Two months ended
November 2, November 3, November 2, ended April 6, November 3,
2002 2001 2002 2002 2001
------------ ------------ ------------- -------------- --------------
Professional fees $ - $ 1,090 $ - $ 1,379 $ 2,509
Severance/retention bonus - 675 - 1,026 1,394
Closed store expense - - - 311 344
Fresh start adjustments - - - 10,406 -
Plan of reorganization -
primarily related to
debt forgiveness - - - (41,847) -
Other - 54 - 342 87
------------ ------------ ------------- -------------- --------------
Total $ - $ 1,711 $ - $ (28,383) $ 4,334
============ ============ ============= ============== ==============
The Successor Company has not recorded any Reorganization costs.
(8) Income Taxes
Since the Company utilized fresh start accounting upon emerging from
bankruptcy, income tax expense of $1,428 for the seven months ended
November 2, 2002 results in a direct increase in stockholders' equity
due to the Company's ability to utilize pre-emergence 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 which is not
reasonably assured. In the seven month period ended November 2, 2002,
the Company has recorded $523 in new deferred tax assets related to
deferred rent liabilities which results in a direct increase in
stockholders' equity due to the Company's ability to utilize
pre-emergence 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 November 2, 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 seven month period ended November 2, 2002 (Successor
Company) has been combined with the two month period ended April 6, 2002
(Predecessor Company) and then compared to the nine months ended November 3,
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 Nine fiscal months ended
------------- ------------- -----------------------------
Combined
results
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------------- ------------- ----------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 66.5 67.3 65.0 65.9
------------- ------------- ------------ ------------
Gross profit 33.5 32.7 35.0 34.1
Selling, general and administrative expenses 32.5 30.9 30.8 29.6
Depreciation 0.8 3.3 1.1 3.2
Reorganization items - 3.3 (16.9) 2.6
Interest expense 0.9 1.3 0.8 1.3
------------- ------------- ------------ ------------
Income (loss) before income tax expense (0.7) (6.1) 19.2 (2.6)
Income tax expense (benefit) (0.3) - 0.6 -
------------- ------------- ------------ ------------
Net income (loss) (0.4)% (6.1)% 18.6 % (2.6)%
============= ============= ============ ============
Number of stores open at end of period 171 173 171 173
Three Fiscal Months Ended November 2, 2002 and November 3, 2001
Net Sales. Net sales decreased $2,538 or 4.9% to $48,942 for the three
fiscal month period ended November 2, 2002 ("third quarter of fiscal 2002") from
$51,480 for the three fiscal month period ended November 3, 2001 ("third quarter
of fiscal 2001"). Comparable store sales decreased $2,058 or 4.0% as a result of
a challenging retail environment and weakening consumer confidence. No new
stores opened or closed in either period. However, one store closed in January
2002 and one store closed in June 2002. 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 decreased $413 or 2.5%, to $16,402 for the third
quarter of fiscal 2002 from $16,815 for the third quarter of fiscal 2001. As a
percentage of net sales, gross profit was 33.5% for the third quarter of fiscal
2002 compared to 32.7% in the same period in the prior year. The higher gross
profit percentage was the result of improved markdown and inventory shrinkage
offset by increases in occupancy costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising, other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $47 or 0.3% to $15,919 for the third quarter
of fiscal 2002 from $15,872 for the third quarter of fiscal 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 32.5% in the third quarter of fiscal 2002 from 30.9% in the third quarter of
fiscal 2001. This fluctuation primarily relates to increases in insurance,
repairs and maintenance and store remodel expenses and the impact of not
leveraging store payroll against decreased sales volume.
Depreciation expense. Depreciation expense was $393 in the third
quarter of fiscal 2002 compared to
16
$1,697 in the third quarter of fiscal 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 $419 in the third quarter of
fiscal 2002 compared to $666 in the third 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 third quarter of fiscal 2002. As previously
discussed, the Company successfully emerged from bankruptcy on April 9, 2002.
Reorganization costs in the third quarter of fiscal 2001 totaled $1,711. These
costs include professional fees and other costs related to the Company's
reorganization.
Income taxes. Income tax benefit of $132 for the third quarter of
fiscal 2002 represents a reduction of the expense for the seven month period.
This reduction in expense results in a direct decrease to stockholders' equity
due to a reduction in the utilization of pre-emergence net operating losses.
Nine Fiscal Months Ended November 2, 2002 and November 3, 2001
Net Sales. Net sales increased $2,970 or 1.8%, to $167,699 for the nine
fiscal month period ended November 2, 2002 from $164,729 for the nine fiscal
month period ended November 3, 2001. Comparable store sales increased $4,573 or
2.8%. A better merchandise assortment in the basic party and gift categories
translated into improved sales. No new stores opened in either period, one store
closed in the nine fiscal month period ended November 2, 2002 and two stores
closed in the nine fiscal month period ended November 3, 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 $2,643 or 4.7%, to $58,763 for the nine
fiscal month period ended November 2, 2002 from $56,120 for the nine fiscal
month period ended November 3, 2001. As a percentage of net sales, gross profit
was 35.0% for the nine fiscal month period ended November 2, 2002 compared to
34.1% in the same period in the prior year. The higher gross profit percentage
relates to improved inventory shrinkage and markdown experience.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising, other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $2,903 or 5.9%, to $51,697 for the nine fiscal
month period ended November 2, 2002 from $48,794 for the nine fiscal month
period ended November 3, 2001. As a percentage of net sales, selling, general
and administrative expenses increased to 30.8% in the nine fiscal month period
ended November 2, 2002 from 29.6% in the nine fiscal month period ended November
3, 2001. This fluctuation relates primarily to increases in store payroll,
insurance and advertising of $782, $1,085 and $148, respectively.
Depreciation expense. Depreciation expense was $1,879 in the nine
fiscal month period ended November 2, 2002 compared to $5,194 in the nine fiscal
month period ended November 3, 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 $1,359 in the nine fiscal month
period ended November 2, 2002 compared to $2,117 in the nine fiscal month period
ended November 3, 2001. This decrease relates to lower effective interest rates
and decreases in borrowing levels.
Reorganization Items, net. Reorganization costs decreased $32,717 for
the nine fiscal month period ended November 2, 2002 from $4,334 for the nine
fiscal month period ended November 3, 2001. The decrease
17
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
Reorganization offset by fresh-start adjustments. The major components of
Reorganization costs are as follows:
FiscalYear 2002 Fiscal 2001
Combined Results Predecessor
Company
------------------- --------------------
Nine Months ended Nine Months Ended
November 2, 2002 November 3, 2001
------------------- --------------------
Professional fees $ 1,379 $ 2,509
Severance/retention bonus 1,026 1,394
Closed store expense 311 344
Fresh start adjustments 10,406 -
Plan of reorganization - primarily related to debt
forgiveness (41,847) -
Other 342 87
------------------- --------------------
Total $ (28,383) $ 4,334
=================== ====================
Income Taxes. Income tax expense of $1,428 for the seven fiscal month
period ended November 2, 2002 results in a direct increase in stockholders'
equity due to the Company's ability to utilize pre-emergence 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 5.1% at November 2, 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.
As of November 2, 2002, the Company had $18,875 in borrowings
outstanding under the New Loan
18
Agreement and had utilized approximately $1,626 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
------------ -------------
Nine months Nine months
ended ended
November 2, November 3,
2002 2001
------------ -------------
Cash provided by (used in) operating activities $ 10,401 $ (323)
------------ -------------
Cash used in investing activities $ (1,814) $ (883)
------------ -------------
Cash provided by (used in) financing activities $ (8,578) $ 1,121
------------ -------------
At November 2, 2002 the Company's working capital was $14,709. Net cash
provided by operating activities for the nine fiscal month period ended November
2, 2002 was $10,401 compared to $323 of net cash used in operating activities
during the nine fiscal month period ended November 3, 2001. The fluctuation is
related improved operating results and to decreases in inventory and increases
in accounts payable coupled with the Company's ability to utilize
pre-confirmation net operating losses in the 7 fiscal month period ended
November 2, 2002.
Net cash used in investing activities during the nine fiscal month
period ended November 2, 2002 and the nine fiscal month period ended November 3,
2001 $1,814 and $883, 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 nine fiscal month
period ended November 2, 2002 was $8,578 compared to $1,121 net cash provided by
financing activities during the nine fiscal month period ended November 3, 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
19
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.
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 November 2, 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, the London Interbank Offered
Rate ("LIBOR") and the prime rate.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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
21
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).
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.
22
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 dated December 12, 2002
Announcing Third 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
Current Report on Form 8-K filed on September 16, 2002 to report the
certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, of the President and Chief Operating
Officer and Executive Vice President and Chief Financial and
Administrative Officer for Factory Card & Party Outlet's quarterly
period ended August 3, 2002.
23
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: December 12, 2002 By: /s/ Gary W. Rada
------------------
Gary W. Rada
President and Chief Executive Officer
Dated: December 12, 2002 By: /s/ James D. Constantine
--------------------------
James D. Constantine
Executive Vice President and Chief Financial
and Administrative Officer
[Principal Accounting Officer]
24
CERTIFICATIONS
I, Gary W. Rada, President and Chief Executive 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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 12, 2002
/s/ Gary W. Rada
------------------
Gary W. Rada
President and Chief Executive Officer
25
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.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 12, 2002
/s/ James D. Constantine
------------------------
James D. Constantine
Executive Vice President and Chief Financial and
Administrative Officer
26
[Correspondence]
CERTIFICATION UNDER SECTION 906 of the SARBANES-OXLEY ACT OF 2002
I, Gary W. Rada, President and Chief Executive Officer of Factory Card & Party
Outlet Corp. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended November 2, 2002 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 12, 2002 /s/ Gary W. Rada
------------------
Gary W. Rada
President and Chief Executive Officer
[Correspondence]
CERTIFICATION UNDER SECTION 906 of the SARBANES-OXLEY ACT OF 2002
I, James D. Constantine, Executive Vice President and Chief Financial and
Administrative Officer of Factory Card & Party Outlet Corp. (the "Company"),
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended November 2, 2002 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 12, 2002 /s/ James D. Constantine
------------------------
James D. Constantine
Executive Vice President and Chief
Financial and Administrative Officer
1