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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 May 3, 2003
Commission File Number: 21859
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FACTORY CARD & PARTY OUTLET CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3652087
- ------------------------------- ---------------------------------------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification Number)
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)
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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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
The number of shares of the Registrant's Common Stock outstanding as of June 12,
2003 was 1,508,591.
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Factory Card & Party Outlet Corp.
Form 10-Q
For the Quarter Ended May 3, 2003
Index
Page
Cautionary Statement Regarding Forward-Looking Statements 2
Part I Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited) - as of
May 3, 2003 (Successor Company) and as of February 1, 2003
(Successor Company) 3
Condensed Consolidated Statements of Operations
(Unaudited) - three months ended May 3, 2003, one month
ended May 4, 2002 (Successor Company) and two months ended
April 6, 2002 (Predecessor Company) 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) - three months ended May 3, 2003, one month
ended May 4, 2002 (Successor Company) and two months ended
April 6, 2002 (Predecessor Company) 5
Notes to Condensed Consolidated Financial Statements -
(Unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
Item 4 Controls and Procedures 23
Part II Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 26
Certifications 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
(Unaudited)
(Dollar amounts in thousands)
Successor Successor
Company Company
------------ ------------
May 3, February 1,
2003 2003
------------ ------------
ASSETS
Current assets:
Cash $ 328 $ 196
Merchandise inventories, net 46,807 48,190
Prepaid expenses and other 3,851 4,088
------------ ------------
Total current assets 50,986 52,474
Fixed assets, net 6,957 6,801
Other assets 362 389
Deferred tax asset, net 480 376
------------ ------------
Total assets $ 58,785 $ 60,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt $ 13,344 $ 17,528
Accounts payable 15,143 12,965
Accrued expenses 7,331 6,465
Current portion of long term debt and
capital lease obligations 449 440
------------ ------------
Total current liabilities 36,267 37,398
------------ ------------
Long term debt and capital lease obligations 5,799 5,889
Deferred rent liabilities 1,685 1,599
------------ ------------
Total liabilities 43,751 44,886
Stockholders' equity 15,034 15,154
------------ ------------
Total liabilities and stockholders' equity $ 58,785 $ 60,040
============ ============
See accompanying notes to condensed consolidated financial statements.
3
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollar amounts in thousands, except per share data)
Successor Successor Predecessor
Company Company Company
------------- ------------ ------------
Three One Two
Months Ended Month Ended Months Ended
May 3, May 4, April 6,
2003 2002 2002
------------- ------------ ------------
Net sales $ 54,541 $ 18,187 $ 40,837
Cost of sales 36,014 11,597 26,991
------------- ------------ ------------
Gross profit 18,527 6,590 13,846
Selling, general and administrative expenses 17,995 5,697 12,212
Depreciation 448 100 1,030
Reorganization items -- -- (18,840)
Interest expense 343 154 374
------------- ------------ ------------
Income (loss) before income tax expense
(benefit) (259) 639 19,070
Income tax expense (benefit) (104) 249 (360)
------------- ------------ ------------
Net income (loss) $ (155) $ 390 $ 19,430
============= ============ ============
Net income (loss) per share - basic $ (0.11) $ 0.27
------------- ------------
Weighted average shares outstanding - basic 1,442,743 1,424,548
------------- ------------
Net income (loss) per share - diluted $ (0.11) $ 0.27
------------- ------------
Weighted average shares outstanding - diluted 1,442,743 1,424,548
------------- ------------
See accompanying notes to condensed consolidated financial statements.
4
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar amounts in thousands)
Successor Successor Predecessor
Company Company Company
------------- ------------- -------------
For the Three For the One For the Two
Months Ended Month Ended Months Ended
May 3, May 4, April 6,
2003 2002 2002
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (155) $ 390 $ 19,430
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Plan of reorganization and fresh start
adjustments -- -- (21,898)
Depreciation and amortization of fixed assets 448 100 1,030
Amortization of deferred financing costs 32 6 26
Amortization of deferred compensation 35 12 --
Non cash portion of reorganization items -- -- 1,275
Tax benefit of pre-confirmation net operating
losses -- 249 --
Changes in assets and liabilities:
Merchandise inventories 1,383 1,349 2,212
Prepaid expenses and other assets 128 2,575 (2,594)
Accounts payable 2,178 (2,489) 3,336
Accrued expenses 866 (2,688) 2,020
Deferred rent obligation 86 161 --
------------- ------------- -------------
Net cash provided by (used in) operating activities 5,001 (335) 4,837
------------- ------------- -------------
Net cash used in investing activities - purchase of
fixed assets, net (604) (176) (257)
------------- ------------- -------------
Cash flow provided by (used in) financing activities:
Borrowings 52,235 18,664 38,381
Repayment of debt (56,419) (18,134) (42,898)
Payment of capital lease obligations (106) (44) (56)
Increase in long term debt 25 27 --
------------- ------------- -------------
Net cash provided by (used in) financing activities (4,265) 513 (4,573)
------------- ------------- -------------
Net increase in cash 132 2 7
Cash at beginning of period 196 189 182
------------- ------------- -------------
Cash at end of period $ 328 $ 191 $ 189
------------- ------------- -------------
Supplemental cash flow information:
Interest paid $ 424 $ 129 $ 334
Cash paid for reorganization items 134 358 1,055
Supplemental non cash information:
Stock issued (Successor Company) -- -- (10,040)
Fair value adjustments -- -- 10,406
Stock retired (Predecessor Company) and debt
discharge -- -- (22,828)
Unearned restricted stock awards 411 552 564
Capital lease obligations -- -- 56
See accompanying notes to condensed consolidated financial statements.
5
FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
(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, we operated our 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, we announced that the Bankruptcy
Court confirmed our Amended Plan of Reorganization (the "Plan of
Reorganization") that we filed with the Bankruptcy Court on February 5,
2002. On April 9, 2002 (the "Effective Date") the Plan of Reorganization
became effective and we successfully emerged from Chapter 11.
Certain of the principal provisions of the Plan of Reorganization are as
follows:
. We authorized an aggregate of 10,000,000 shares of new Common
Stock, par value $0.01 per share. Our 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 our 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.
. We issued 1,349,995 shares of the new Common Stock to holders of
unsecured claims against us, or "General Unsecured Creditors."
. We issued 75,000 shares of the new Common Stock to certain members
of our management, vesting ratably over a four-year period, as
specified in the Plan, and warrants to purchase an aggregate 31,000
shares of our 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.
. We 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.
. We adopted an employee stock option plan, the 2002 Stock Option
Plan, to provide our eligible employees with the opportunity to
purchase an aggregate 166,667 shares of our new
6
Common Stock.
. We paid $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 our property.
. We 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 us.
. We entered into five separate agreements with various trade
vendors, each dated April 9, 2002, pursuant to which such trade
vendors agreed to provide us with payment terms, including extended
payment terms and seasonal advances.
(2) Business and Basis of Presentation
We are 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 June 12, 2003, we operated 171
stores in 20 states.
The consolidated unaudited financial statements include the accounts of
Factory Card & Party Outlet Corp. and our 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 1, 2003 included in our 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.
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"), we
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 was less than its post petition liabilities and allowed claims.
7
As a result of fresh-start reporting, we 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. Our reorganized enterprise value on the effective date
was established at $42,500 based upon a calculation of discounted cash
flows under our financial projections and trading multiples of comparable
companies. The effects of the Plan of Reorganization and the application of
fresh-start accounting on our pre-confirmation consolidated balance sheet
are as follows:
8
Predecessor Fresh Successor
April 6, Plan of Start April 6,
2002 Reorganization Adjustments 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 200b 440
------------ -------------- ------------ ------------
Total assets $ 80,267 $ 200 $ (17,156) $ 63,311
============ ============== ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Debt $ $ 22,743c $ $ 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 3,085e 3,085
------------ -------------- ------------ ------------
Total current liabilities 46,484 155 46,639
------------ -------------- ------------ ------------
Long term notes payable and
capital leases 1,128 5,504d,h 6,632
Deferred rent liabilities -- 6,750f (6,750)a --
Liabilities subject to compromise 54,056 (54,056)f --
------------ -------------- ------------ ------------
Total liabilities 101,668 (41,647) (6,750) 53,271
Stockholders' equity (deficit) (21,401) 41,847g (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 financing costs related to exit financing with
Wells Fargo Retail Finance LLP.
(c) Borrowings under new line of 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 were paid within 60 days of the Effective Date.
(f) To record elimination of pre-petition liabilities subject to compromise.
Pre-petition liabilities subject to compromise included deferred rent
liabilities that were not extinguished by the Bankruptcy Court.
(g) To write-off old equity upon emergence from chapter 11 and record the
issuance of new stock in accordance with the Plan of Reorganization 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 months ended May 3, 2003 and for the one month ended May 4, 2002
and the two months ended April 6, 2002 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, we capitalized certain buying and
warehousing costs as a component of inventory. As of the emergence date, we
discontinued this practice, recording all of the aforementioned costs in
Cost of Sales. Going forward, we do not anticipate that the change will
have a significant impact on periodic earnings.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 we do not
have goodwill or intangible assets recorded in the financial statements,
the adoption of SFAS No. 142 during the first quarter of fiscal 2002 did
not have an impact on our financial condition or results of operations.
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. We adopted the provisions of SFAS No. 143 and it did not have
a material impact on our consolidated financial position or results of
operations.
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, we recorded a $11,760 adjustment to fixed assets to
reflect the excess of book value over enterprise value. We have adopted the
provisions of SFAS No. 144 and it did not have a material impact on our
consolidated financial position or results of operations.
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, an 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
10
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, an
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. We were required to adopt this statement due to
the application of fresh-start accounting. The effect of this statement is
that the net gain associated with the plan of reorganization and
fresh-start adjustments is 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 we commit to a restructuring plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002
and could result in recognizing the cost of future restructuring activities
over a period of time as opposed to as a single event.
In September 2002, the FASB issued Emerging Issues Task Force ("EITF")
02-16 "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" which addresses the accounting for
cash retailers receive from vendors. The EITF concluded cash received from
a vendor is presumed to be a reduction of purchase price of goods unless
the vendor receives an identifiable benefit or there is reimbursement of a
specific incremental identifiable cost. Additionally, rebates are to be
recorded when it is probable and reasonably estimable and allocated to
transactions giving rise to the rebate. Our accounting policies relating to
cash received from vendors is consistent with the conclusions reached by
the EITF.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" - an amendment of FASB Statement
123. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" and provides alternative methods for accounting
for a change by registrants to the fair value method of accounting for
stock-based compensation. Additionally, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosure in the significant
accounting policy footnote of both the annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to
be used. SFAS No. 148 is effective for fiscal years ended after December
15, 2002, and disclosures are effective for the first quarter beginning
after December 15, 2002. We have adopted the disclosure provisions of SFAS
No. 148.
11
(3) Long Term Debt and Capital Lease Obligations
Pursuant to the Plan of Reorganization, we 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, we recorded at fair
value a $2,600 extended creditor payment to the general unsecured
creditors.
The following table summarizes the components of Long Term Debt and Capital
Lease Obligations including its current portion at May 3, 2003.
May 3,
2003
------------
Trade conversion note $ 3,130
Discounted value of extended creditor payment 2,505
Financing agreements 516
Capital leases 97
------------
Total $ 6,248
============
(4) Debt
On the Effective Date, obligations relating to our debtor-in-possession
financing facility were paid in full and our secured financing facility
with Wells Fargo Retail Finance, LLC (the "New Loan Agreement") became
effective. The New Loan Agreement, which is a line of credit, 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 our 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 our borrowings was 5.0% at May 3,
2003. Borrowings under the Loan Agreement are secured by substantially all
of our 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
We authorized an aggregate of 10,000,000 shares of new Common Stock, par
value $0.01 per share. A total of 1,348,457 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, we adopted a stock option plan,
which authorizes the grant of up to 166,667 stock options to our employees
- 158,250 options at exercise prices ranging from $5.50 to $9.43 were
outstanding at May 3, 2003.
We 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
12
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, we 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.
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 -
90,000 options at exercise prices ranging from $5.30 to $7.52 were
outstanding at May 3, 2003.
On January 27, 2003, the Board of Directors adopted the 2003 Equity
Incentive Plan whereby 250,000 shares would become available to our
employees and officers. The 2003 Equity Incentive Plan is subject to
stockholder approval at our annual meeting of stockholders on July 16,
2003.
A separate Statement of Stockholders' 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", 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 includes, in addition to the above, the effect of potentially
dilutive securities, if dilutive.
The reconciliation of earnings (loss) per share basic to earnings per share
diluted is as follows (in thousands, except per share amounts):
13
Net loss Shares Per share
------------ ------------ ------------
For the three months ended
May 3, 2003:
Loss per share - basic:
Net loss $ (155) 1,442,743 $ (0.11)
Effect of dilutive securities:
Stock options and warrants --
Loss per share - diluted:
------------ ------------ ------------
Net loss $ (155) 1,442,743 $ (0.11)
============ ============ ============
Net income Shares Per share
------------ ------------ ------------
For the one month ended
May 4, 2002:
Earnings per share - basic:
Net income $ 390 1,424,548 $ 0.27
Effect of dilutive securities:
Stock options and warrants --
Earnings per share - diluted:
------------ ------------ ------------
Net income $ 390 1,424,548 $ 0.27
============ ============ ============
The dilutive impact of stock options and warrants was calculated using the
treasury method. Had we reported a profit in the first quarter ended May 3,
2003, the number of average shares diluted would have increased by 2,025
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.
(7) Stock-Based Compensation
We account for stock option plans under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Pro forma information regarding net
income and earnings per share is required by SFAS No. 123 "Accounting for
Stock Based Compensation" and has been determined as if we had accounted
for our stock option plans under the fair value method of SFAS No. 123. Had
we determined compensation cost based upon the fair value at the grant date
for our stock options under SFAS No. 123, our net income would have changed
as indicated below:
14
For the three For the one
months ended month ended
May 3, 2003 May 4, 2002
------------- ------------
Net income (loss), as reported $ (155) $ 390
Deduct: Total stock-based
employee compensation expense determined
under fair value basis for all awards,
net of related tax effects 38 11
------------- ------------
Pro forma net income (loss) $ (193) $ 379
============= ============
Earnings (loss) per share:
- ------------------------------------------
Basic-as reported $ (0.11) $ 0.27
------------- ------------
Basic-pro forma $ (0.13) $ 0.27
============= ============
Diluted-as reported $ (0.11) $ 0.27
------------- ------------
Diluted-pro forma $ (0.13) $ 0.27
============= ============
The per share weighted average fair value of stock options granted during
the three months ended May 3, 2003 and for the one month ended May 4, 2002
was estimated using the Black Scholes Option-Pricing Model with the
following weighted average assumptions: expected dividend rate 0.0%, risk
free interest rate of 3.875%, volatility of 50% and an expected life of
approximately 10 years.
(8) Reorganization Items
Reorganization Items 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 Company
--------------------
Two months ended
April 6,2002
Reorganization Items:
- --------------------------------- --------------------
Professional fees $ 1,379
Severance/retention bonus 1,026
Closed store expense 311
Fresh start adjustments 10,406
Forgiveness of debt (41,847)
Unsecured creditors' ownership
share of reorganized company 9,543
Other 342
--------------------
Total Reorganization Items $ (18,840)
====================
The Successor Company has not recorded any Reorganization Items.
15
(9) Income Taxes
We have 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 three months ended May 3, 2003, we recorded $104 in
new deferred tax assets, of which $35 related to deferred rent liabilities
with the remaining $69 representing a new net operating loss carryforward.
We have not recorded a valuation allowance on these new deferred tax assets
as we anticipate that we will realize these deferred tax assets in the
future.
We recorded an income tax benefit of $104 for the three months ended May 3,
2003 and income tax expense of $249 for the one month ended May 4, 2002. As
we realize the benefits of cumulative temporary differences and net
operating loss carryforwards that existed at the date of emergence, we will
report those benefits as an addition to paid-in-capital rather than as a
reduction to the tax provisions in the future statement of operations.
We recorded an income tax benefit of $360 for the two months ended April 6,
2002 which resulted from the realization of net operating loss carry backs
due the enactment of the Job Creation and Workers Assistance Act of 2002.
(10) Related Party Transactions
As described in the Plan of Reorganization, 90% of the new Common Stock was
distributed to unsecured creditors, five percent was distributed to our
management and 5 % was distributed to old equity shareholders. Only one
entity has an ownership interest of more than 10%. Total purchases from
that entity were $760 during the three months ended May 3, 2003 and amounts
owed to that entity as of May 3, 2003 were $342. There were no purchases
from this entity during the three months ended May 4, 2002. We believe
transactions with former unsecured creditors, as well as other vendors, are
deemed to be consummated on terms equivalent to those prevailing in an
arm's length transaction.
(11) Contingencies
In 2003 we implemented an in-house program to sort merchandise by store in
our warehouse facility. Prior to this program, a third party logistical
vendor performed the sorting of this merchandise. We have a contract with
this vendor to perform certain logistical services requested by us that
expires on January 31, 2004. This vendor has continued to over bill us for
sort and various other charges. At May 3, 2003 these charges were
approximately $1,600. We believe these disputed charges are without merit
and are in violation of the terms of our agreement. Consequently, these
charges are not accrued at May 3, 2003.
16
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 June 11, 2003, 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, we announced that the Bankruptcy Court
confirmed our 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 we
successfully emerged from Chapter 11. See Note (1) to the Notes to the Condensed
Consolidated Financial Statements for a summary of the principal provisions of
the Plan of Reorganization.
Critical Accounting Policies
Critical Accounting Policies are defined as those that are reflective of
significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. We have
prepared the accompanying financial statements in conformity with accounting
principles generally accepted in the United States of America, which require
management to make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. Actual results could differ
from those estimates under different assumptions or conditions. We have
identified the following critical accounting policies utilized in the
preparation of these financial statements.
Fresh Start Accounting
As is more fully discussed in Note 2 - "Business and Basis of Presentation"
in our Notes to Condensed Consolidated Financial Statements, we adopted fresh
start accounting pursuant to the American Institute of Certified Public
Accountant's Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), during the first quarter
of fiscal 2002 resulting in a change in the basis of accounting of our
underlying assets and liabilities at the Effective Date. Accordingly, our
financial statements before and after the Effective Date are not comparable. The
operating results for the two months ended April 6, 2002 were significantly
impacted by items associated with emerging from bankruptcy including debt
forgiveness, restructuring activities and certain changes to record the excess
of book value over enterprise value. Upon implementation of fresh start
accounting, our total assets and total liabilities and stockholders' equity were
adjusted downward by approximately $17,000.
17
Fresh-start Reporting; Factors Affecting Comparability of Financial Information
Effective April 9, 2002, we 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 one month period ended May 4, 2002 (Successor Company) has been
combined with the two month period ended April 6, 2002 (Predecessor Company) and
then compared to the three months ended May 3, 2003. 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 our capital costs (lease, interest,
depreciation and amortization), as well as income taxes, debt restructuring and
reorganization costs.
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.
Combined
results -
Three months three months
ended ended
------------ ------------
May 3, May 4,
2003 2002
------------ ------------
Net sales 100.0% 100.0%
Cost of sales 66.0 65.4
------------ ------------
Gross profit 34.0 34.6
Selling, general and administrative expenses 33.0 30.3
Depreciation 0.8 1.9
Reorganization items -- (31.9)
Interest expense 0.6 0.9
------------ ------------
Income (loss) before income tax benefit (0.4) 33.4
Income tax benefit (0.2) (0.2)
------------ ------------
Net income (loss) (0.2)% 33.6%
============ ============
Number of stores open at end of period 171 172
Three Months Ended May 3, 2003 and May 4, 2002
Net Sales. Net sales decreased $4,483 or 7.6% to $54,541 for the three
month period ended May 3, 2003 ("first quarter of fiscal 2003") from $59,024 for
the three month period ended May 4, 2002 ("first quarter of fiscal 2002"). All
major product categories experienced decreased sales with our gift and novelty
category contributing the largest decrease. During the first quarter of 2003, we
completed our juvenile party initiative whereby we expanded our product
assortment by over 30%. This expansion partially attributed to the decrease in
our gift and novelty category as we phased out product to accommodate the
expansion of juvenile party merchandise. Comparable store sales decreased 7.1%
as a result of a challenging retail environment, weakening consumer confidence
and the business interruption experienced during our juvenile party initiative.
No stores opened or closed in either period. Please note we closed one store in
the second quarter of fiscal 2002.
18
Gross Profit. Cost of sales includes merchandise, distribution and store
occupancy costs. Gross profit decreased $1,909 or 9.3%, to $18,527 for the first
quarter of fiscal 2003 from $20,436 for the first quarter of fiscal 2002. The
decrease was primarily due to decreased sales volume coupled with an increase in
store occupancy costs. As a percentage of net sales, gross profit was 34.0% for
the first quarter of fiscal 2003 compared to 34.6% in the same period in the
prior year. The 0.6% decrease in gross profit percent can be attributed to
negative variances in store occupancy and distribution costs offset by an
increase in inventory gross margins as we experience improved markdown and
shrinkage results.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising and other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $86 or 0.5% to $17,995 for the first quarter
of fiscal 2003 from $17,909 for the first quarter of fiscal 2002. As a
percentage of net sales, selling, general and administrative expenses increased
to 33.0% in the first quarter of fiscal 2003 from 30.3% in the first quarter of
fiscal 2002. The increase in percent is attributable to increases in advertising
costs and remodel/re-merchandising costs of $401 and $332, respectively, coupled
with not leveraging other store and administrative expenses against decreased
sales volume. Furthermore, the increase in our remodel/re-merchandising costs of
$332 is due to the expansion of our juvenile party assortment which was
completed in the first quarter of fiscal 2003.
Depreciation expense. Depreciation expense was $448 in the first quarter of
fiscal 2003 compared to $1,130 in the first quarter of fiscal 2002. The decrease
is primarily due to the fresh-start adjustment on fixed assets of $11,760
resulting from the write down of fixed assets for the excess of book value over
enterprise value.
Interest Expense. Interest expense was $343 in the first quarter of fiscal
2003 compared to $528 in the first quarter of fiscal 2002. Decreases in
inventory levels coupled with increases in accounts payable translated to lower
borrowing levels.
Reorganization Items, net. Reorganization Items recognized in first quarter
of fiscal 2002 resulted in a gain of $18,840. The major components of
Reorganization Items are as follows:
Combined
results
Three months
ended May 4,
Reorganization Items: 2002
- --------------------------------------- ------------
Professional fees $ 1,379
Severance/retention bonus 1,026
Closed store expense 311
Fresh start adjustments 10,406
Forgiveness of debt (41,847)
Unsecured creditors' ownership share of
reorganized Company 9,543
Other 342
------------
Total $ (18,840)
------------
The Successor Company has not recorded any Reorganization Items.
Income Taxes. Income tax benefit was $104 in the first quarter of fiscal
2003 compared to income tax expense of $249 in one month ended May 4, 2002.
These amounts represent approximately 40% of our pre tax income (loss) for the
period described.
19
The income tax benefit of $360 for the two months ended April 6, 2002
results from the realization of net operating loss carrybacks due to the
enactment of the Job Creation and Workers Assistance Act of 2002.
Liquidity and Capital Resources
Our uses of capital for the remainder of fiscal 2003 are expected to
include working capital for operating expenses and satisfaction of current
liabilities, expenditures related to maintaining and refurbishing existing
stores, opening new stores and interest payments on outstanding borrowings.
On April 9, 2002, obligations relating to our debtor-in-possession
financing facility were paid in full and our secured financing facility with
Wells Fargo Retail Finance, LLC (the "New Loan Agreement") became effective. The
New Loan Agreement, which is a line of credit, 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 our option, a
variable rate based upon earnings performance and the London Interbank Offered
Rate ("LIBOR") with a minimum threshold of 5.0%. The interest rate on our
borrowings was 5.0% at May 3, 2003. Borrowings under the New Loan Agreement are
secured by substantially all of our assets.
The New Loan Agreement contains certain restrictive covenants, which, among
other things, require us to maintain certain inventory levels and achieve
specified operating results. The restrictive covenants also limit our capital
expenditures, asset sales and dividends and our ability grant liens and incur
additional indebtedness.
Pursuant to the Plan of Reorganization, we 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, we recorded at fair value the
$2,600 extended creditor payment payable to the general unsecured creditors.
As of May 3, 2003, we had $13,344 in borrowings outstanding under the New
Loan Agreement and had utilized approximately $92 under the New Loan Agreement
to issue letters of credit.
The following table sets forth certain consolidated statements of cash flows:
FY2003 FY2002
------------ ------------
Combined
results-
Three months Three months
ended ended
May 3, 2003 May 4, 2002
------------ ------------
Cash provided by operating activities $ 5,001 $ 4,502
------------ ------------
Cash used in investing activities $ (604) $ (433)
------------ ------------
Cash used in financing activities $ (4,265) $ (4,060)
------------ ------------
At May 3, 2003 our working capital was $14,719. Net cash provided by
operating activities for the three month period ended May 3, 2003 was $5,001
compared to $4,502 of net cash provided by operating activities during the three
month period ended May 4, 2002. Cash provided for the current period is related
to decreases in inventory balances coupled with increases in accounts payable
and accrued expenses.
20
Net cash used in investing activities during the three month period ended
May 3, 2003 and the three month period ended May 4, 2002 was $604 and $433,
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 three month period ended
May 3, 2003 was $4,265 compared to $4,060 during the three month period ended
May 4, 2002. Amounts are attributable to the level of borrowings and repayments.
We do not intend to pay cash dividends in the foreseeable future and our
current Loan Agreement restricts us from paying dividends on our capital stock.
In 2003 we implemented an in-house program to sort merchandise by store in
our warehouse facility. Prior to this program, a third party logistical vendor
performed the sorting of this merchandise. We have a contract with this vendor
to perform certain logistical services requested by us that expires on
January 31, 2004. This vendor has continued to over bill us for sort and various
other charges. At May 3, 2003 these charges were approximately $1,600. We
believe these disputed charges are without merit and are in violation of the
terms of our agreement. Consequently, these charges are not accrued at May 3,
2003.
Our 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 our
control. Based upon current levels of operation and anticipated growth, we
believe 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 our business will
continue to generate sufficient cash flow from operations in the future to
service our debt and make necessary capital expenditures after satisfying
certain liabilities arising in the ordinary course of business. If unable to do
so, we 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
Our business is highly seasonal, with operating results varying from
quarter to quarter. We historically have experienced higher sales during the
second and fourth fiscal quarters due to increased demand by customers for our
products attributable to special occasions and holiday seasons during these
periods. Our fiscal 2003 quarters are defined as follows: first fiscal quarter
is February 2, 2003 to May 3, 2003, second fiscal quarter is May 4, 2003 to
August 2, 2003, third fiscal quarter is August 3, 2003 to November 1, 2003 and
fourth fiscal quarter is November 2, 2003 to January 31, 2004. Our fiscal year
ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to
January 31/st/.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 we do not have goodwill or
intangible assets recorded in the financial statements, the adoption of SFAS No.
142 during the first quarter of fiscal 2002 did not have an impact on our
financial condition or results of operations.
21
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. We have
adopted the provisions of SFAS No. 143 and it did not have a material impact on
our consolidated financial position or results of operations.
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, we recorded a $11,760
adjustment to fixed assets to reflect the excess of book value over enterprise
value. We have adopted the provisions of SFAS No. 144 and it did not have a
material impact on our consolidated financial position or results of operations.
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, an 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, an 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. We were required
to adopt this statement due to the application of fresh-start accounting. The
effect of this statement is that our net gain associated with the plan of
reorganization and fresh-start adjustments is 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 we
commit to a restructuring plan. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002 and could result in recognizing the
cost of future restructuring activities over a period of time as opposed to as a
single event.
In September 2002, the FASB issued Emerging Issues Task Force ("EITF")
02-16 "Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" which addresses the accounting for cash retailers
receive from vendors. The EITF concluded cash received from a vendor is presumed
to be a reduction of purchase price of goods unless the vendor receives an
identifiable benefit or there is reimbursement of a specific incremental
identifiable cost. Additionally, rebates are to be recorded when it is probable
and reasonably estimable and allocated to transactions giving rise to the
rebate. Our accounting policies relating to cash received from vendors is
consistent with the conclusions reached by the EITF.
22
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" - an amendment of FASB Statement 123.
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosure in the significant accounting policy footnote of both the
annual and interim financial statements of the method of accounting for
stock-based compensation and the related pro-forma disclosures when the
intrinsic value method continues to be used. SFAS No. 148 is effective for
fiscal years ended after December 15, 2002, and disclosures are effective for
the first quarter beginning after December 15, 2002. We have adopted the
disclosure provisions of SFAS No. 148.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to market risks from changes in interest rates. As of May 3,
2003, 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. A hypothetical 10 percent increase to the average interest rate
under the credit facilities applied to the average outstanding balance during
the three months ended May 3, 2003, the one month ended May 4, 2002 and two
months ended April 6, 2002 would not have had a material impact on our financial
position or results of operations.
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, our principal executive officer and principal financial
officer have concluded that our 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 our
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.
We are from time to time involved in litigation, either asserted or
unasserted, incidental to the conduct of our business. While the outcome of
these matters cannot be predicted with certainty, we do not believe that the
outcome of these matters will have a material adverse effect on our consolidated
financial position, results of operations or cash flow.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
23
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).
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.
24
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 December 9, 2002 (March 5, 2003 as to the effect of
the restatement described in Note 10) Concerning Unaudited Interim
Financial Information.
Exhibit 99.3 Certifications under Section 906 of the Sarbanes-Oxley Act
of 2002.
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
10-Q as filed on June 18, 2002.
(b) Reports on 8-K
Current Report on Form 8-K filed on May 23, 2003 announcing the date of
our meeting of shareholders.
Current Report on Form 8-K filed on April 30, 2003 announcing the
restatement of financial results related to pre-emergence
reorganization gain.
Current Report on Form 8-K filed on March 6, 2003 announcing our fourth
quarter results and expansion of our juvenile party selection.
25
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: June 12, 2003 By: /s/ Gary W. Rada
-------------------------------------
Gary W. Rada
President and Chief Executive Officer
Dated: June 12, 2003 By: /s/ James D. Constantine
-------------------------------------
James D. Constantine
Executive Vice President and Chief
Financial and Administrative Officer
[Principal Accounting Officer]
26
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: June 12, 2003
By: /s/ Gary W. Rada
-------------------------------------
Gary W. Rada
President and Chief Executive Officer
27
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: June 12, 2003
By: /s/ James D. Constantine
-------------------------------------
James D. Constantine
Executive Vice President and Chief
Financial and Administrative Officer
28