10-Q/A 1 d10qa.txt FORM 10Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended August 3, 2002 Commission File Number: 21859 FACTORY CARD & PARTY OUTLET CORP. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3652087 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2727 Diehl Road, Naperville, IL 60563-2371 -------------------------------------------------------------------------------- (Address of principal executive offices, zip code) Registrant's telephone number, including area code: (630) 579-2000 Factory Card Outlet Corp. ------------------------- (Former Name) Indicate by check mark whether this registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No __ The number of shares of the Registrant's Common Stock outstanding as of September 12, 2002 was 1,512,448. Factory Card & Party Outlet Corp. Form 10-Q/A For the Quarter Ended August 3, 2002 Index
Page Explanatory Note 2 Cautionary Statement Regarding Forward-Looking Statements 3 Part I Financial Information Item 1 Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) - as of August 3, 2002 (Successor Company) and as of February 2, 2002 (Predecessor Company) 4 Condensed Consolidated Statements of Operations (Unaudited) - three months ended August 3, 2002, four months ended August 3, 2002 (Successor Company), three months ended August 4, 2001, two months ended April 6, 2002 (as restated) and six months ended August 4, 2001 (Predecessor Company) 5 Condensed Consolidated Statements of Cash Flows (Unaudited) - four months ended August 3, 2002 (Successor Company), two months ended April 6, 2002 (as restated) and six months ended August 4, 2001 (Predecessor Company) 6 Notes to Condensed Consolidated Financial Statements - (Unaudited) 7-16 Item 2 Management's Discussion and Analysis of Financial Condition And Results of Operations 17-24 Item 3 Quantitative and Qualitative Disclosures About Market Risk 24 Part II Other Information Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25-26 Signatures 27 Certifications 28
1 FACTORY CARD & PARTY OUTLET CORP. EXPLANATORY NOTE The purpose of this amendment to our Quarterly Report on Form 10-Q is to amend and restate the reorganization items recorded in the two months ended April 6, 2002 (Predecessor Company) as previously filed in our Quarterly Report on Form 10-Q on September 16, 2002. Subsequent to the issuance of our condensed consolidated financial statements for the quarterly period ended May 4, 2002, we determined that our reorganization items recorded in the two months ended April 6, 2002 (Predecessor Company) need to be restated. In connection with the reorganization, we issued 1,349,995 shares of our new common stock to certain of the unsecured creditors. The fair value of these shares was $9.5 million. We initially recorded the issuance of these shares as a charge to stockholders' equity. We have determined that the fair value of the shares issued should have also been recorded as a reorganization item in the Condensed Consolidated Statement of Operations in the two months ended April 6, 2002. As a result, we have restated our Condensed Consolidated Statements of Operations and Cash Flows for the two months ended April 6, 2002 (Predecessor Company). The Condensed Consolidated Statements of Operations and Cash Flows for the four months ended August 3, 2002 (Successor Company) as well as the Condensed Consolidated Balance Sheet at August 3, 2002 (Successor Company) are not affected by the aforementioned restatement. Additionally, the restatement has no effect on our liquidity or cash position. See note (10) in the Notes to Condensed Consolidated Financial Statements for summary of the significant effects of the restatement. This Quarterly Report on Form 10-Q/A does not reflect events occurring after the filing of our Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2002, or materially modify or update those disclosures, except as discussed above. 2 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/A. 3 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 Predecessor Company Company ---------------- --------------- August 3, February 2, 2002 2002 ---------------- --------------- ASSETS Current assets: Cash $ 187 $ 182 Merchandise inventories 47,165 59,496 Prepaid expenses and other 4,228 2,949 ---------------- --------------- Total current assets 51,580 62,627 Fixed assets, net 6,309 18,414 Other assets 414 258 ---------------- --------------- Total assets $ 58,303 $ 81,299 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Debt $ 17,090 $ - Debtor-in-possession financing - 27,260 Accounts payable 12,401 8,071 Accrued expenses 7,183 9,698 Current portion of long term debt and capital lease obligations 431 305 ---------------- --------------- Total current liabilities 37,105 45,334 ---------------- --------------- Long term debt and capital lease obligations 6,070 338 Deferred rent liabilities 726 - Liabilities subject to compromise - 54,560 ---------------- --------------- Total liabilities 43,901 100,232 Stockholders' equity (deficit) 14,402 (18,933) ---------------- --------------- Total liabilities and stockholders' equity (deficit) $ 58,303 $ 81,299 ================ ===============
See accompanying notes to condensed consolidated financial statements. 4 FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY Condensed Consolidated Statements of Operations (Unaudited) (Dollar amounts in thousands, except per share data)
Successor Predecessor Successor Predecessor Predecessor Company Company Company Company Company ------------- ------------- ------------- ------------- ------------ Three Three Four Two Six Months Months Months Months Months Ended Ended Ended Ended Ended August 3, August 4, August 3, April 6, August 4, 2002 2001 2002 2002 2001 ------------- ------------- ------------- ------------- ------------ [as restated - see note (10)] Net sales $ 59,733 $ 57,013 $ 77,920 $ 40,837 $ 113,249 Cost of sales 37,808 36,403 49,405 26,991 73,945 ------------- ------------- ------------- ------------- -------------- Gross profit 21,925 20,610 28,515 13,846 39,304 Selling, general and administrative expenses 17,869 15,848 23,566 12,212 32,922 Depreciation 356 1,745 456 1,030 3,497 Reorganization items - 1,218 - (18,840) 2,622 Interest expense 412 627 566 374 1,451 ------------- ------------- ------------- ------------- -------------- Income (loss) before income tax expense (benefit) 3,288 1,172 3,927 19,070 (1,188) Income tax expense (benefit) 1,311 - 1,560 (360) - ------------- ------------- ------------- ------------- -------------- Net income (loss) $ 1,977 $ 1,172 $ 2,367 $ 19,430 $ (1,188) ============= ============= ============= ============= ============== Net income per share - basic $ 1.38 $ 1.65 ------------- ------------- Weighted average shares outstanding - basic 1,432,486 1,430,619 ------------- ------------- Net income per share - diluted $ 1.35 $ 1.62 ------------- ------------- Weighted average shares outstanding - diluted 1,463,555 1,461,688 ------------- -------------
See accompanying notes to condensed consolidated financial statements. 5 FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar amounts in thousands)
Successor Predecessor Predecessor Company Company Company -------------- -------------- -------------- For the Four For the Two For the Six Months Ended Months Ended Months Ended August 3, 2002 April 6, 2002 August 4, 2001 -------------- -------------- -------------- [as restated - see note (10)] Cash flows from operating activities: Net income (loss) $ 2,367 $ 19,430 $ (1,188) 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 456 1,030 3,497 Amortization of deferred financing costs 30 26 376 Amortization of deferred compensation 47 - - Non cash portion of reorganization items - 1,275 772 Benefit of pre-confirmation net operating losses 1,850 - - Changes in assets and liabilities: Merchandise inventories 4,425 2,212 2,025 Prepaid expenses and other assets 1,019 (2,594) 651 Accounts payable 1,039 3,336 2,331 Accrued expenses (5,351) 2,020 (1,315) Deferred rent obligation 726 - - Liabilities subject to compromise - - 99 -------------- -------------- -------------- Net cash provided by operating activities 6,608 4,837 7,248 -------------- -------------- -------------- Net cash used in investing activities - purchase of fixed assets, net (924) (257) (550) -------------- -------------- -------------- Cash flow provided by (used in) financing activities: Borrowings 76,632 38,381 112,822 Repayment of debt (82,285) (42,898) (119,524) Payment of capital lease obligations (176) (56) (104) Increase in long term debt 46 - - Cash received from exercise of management stock warrants 97 - - -------------- -------------- -------------- Net cash used in financing activities (5,686) (4,573) (6,806) -------------- -------------- -------------- Net increase (decrease) in cash (2) 7 (108) Cash at beginning of period 189 182 281 -------------- -------------- -------------- Cash at end of period $ 187 $ 189 $ 173 -------------- -------------- -------------- Supplemental cash flow information: Interest paid $ 221 $ 334 $ 1,121 Cash paid for reorganization items 5,233 1,055 1,497 Supplemental non cash information: Stock issued (successor company) - (10,040) - Fair value adjustments - 10,406 - Stock retired (predecessor company) and debt discharge - (22,828) - Deferred compensation 517 564 - Capital lease obligations - 56 -
See accompanying notes to condensed consolidated financial statements. 6 FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (Unaudited) (Dollar amounts in thousands, except 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, 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. 7 . 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 166,667 shares of the Company's new Common Stock. . The Company agreed to pay $1,000 to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an aggregate of $2,600, less any prepayments, which obligation is secured by a subordinated lien on certain of the Company's property. . The Company converted an aggregate of $3,130 post petition accounts payable into long-term convertible secured subordinated notes (the "Trade Conversion Notes") to seven trade vendors and suppliers (the "Trade Participants"). The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part, into an aggregate of 29.35% of the new Common Stock, at any time between April 9, 2005 (the third anniversary of the Plan's Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any prepayments made by the Company. . The Company entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide the Company with payment terms, including extended payment terms and seasonal advances. (2) Business and Basis of Presentation The Company is a chain of company-owned stores offering an extensive selection of party supplies, gifts, greeting cards, giftwrap, and other special occasion merchandise at everyday value prices. As of September 12, 2002, the Company operated 171 stores in 20 states. The consolidated unaudited financial statements include the accounts of Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. These financial statements have been prepared by management without audit and should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended February 2, 2002 included in the Company's Annual Report on Form 10-K. The operating results for the interim periods are not necessarily indicative of the results for the year. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all normal recurring and certain nonrecurring adjustments necessary for a fair presentation of the interim financial statements. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. Fresh Start Accounting Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the plan received less than 50% of the voting shares of the emerging entity and its reorganization value was less than its post petition liabilities and allowed claims. 8 As a result of fresh-start reporting, the Company reflected the distributions under the Plan of Reorganization in its balance sheet as of April 6, 2002 (the effective date of the consummation of the plan for accounting purposes). Accordingly, all consolidated financial statements for any period prior to April 6, 2002 are referred to as the "Predecessor Company" as they reflect the periods prior to the implementation of fresh-start reporting and are not comparable to the consolidated financial statements for periods after the implementation of fresh-start reporting. Fresh-start reporting requires that the reorganization value of the reorganized debtors be allocated to their assets in conformity with Statement of Financial Accounting Standard ("SFAS") No. 141 "Business Combinations", for transactions reported on the basis of the purchase method. Any reorganization value less than the fair value of the specific tangible or identified intangible assets is to be allocated to their non-current tangible assets on a pro rata basis after offsetting any intangible assets. The reorganized enterprise value of the Company on the effective date was established at $42,500 based upon a calculation of discounted cash flows under the Company's financial projections and trading multiples of comparable companies. The effects of the Plan of Reorganization and the application of fresh-start accounting on the Company's pre-confirmation consolidated balance sheet are as follows: 9
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 200b 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 3,085e 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 are to be 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 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. 10 Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and related disclosures. Significant estimates made as of and for the three and four fiscal months ended August 3, 2002, the two fiscal months ended April 6, 2002 and the three and six fiscal month period ended August 4, 2001 include accruals for reorganization items, provision for shrinkage, and the carrying values of inventories. Actual results could differ from those estimates. Change in Accounting Principle Prior to its emergence from bankruptcy, the Company capitalized certain buying and warehousing costs as a component of inventory. As of the emergence date, the Company discontinued this practice, recording all of the aforementioned costs in Cost of Sales. Going forward, the Company does not anticipate that the change will have a significant impact on periodic earnings. New Accounting Pronouncements In June 2001, the FASB ("Financial Accounting Standards Board") issued SFAS ("Statement of Financial Accounting Standards") No. 142 "Goodwill and Other Intangible Assets", which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, "Intangible Assets". The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. As the Company does not have goodwill 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 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 provisions of SFAS No. 143 and it did not have a material impact on the Company's 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, the Company 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 11 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. 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 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 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. The following table summarizes the components of Short and Long Term Debt and Capital Lease Obligations at August 3, 2002. August 3, 2002 --------------- Trade conversion note $ 3,130 Discounted value of extended creditor payment 2,420 Financing agreements 803 Capital leases 148 --------------- Total $ 6,501 =============== (4) Debt On the Effective Date, obligations relating to the Company's debtor-in-possession financing facility were paid in full and the Company's secured financing facility with Wells Fargo Retail Finance, LLC (the "New Loan Agreement") became effective. The New Loan Agreement, 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 the Company's option, a variable rate based upon earnings performance and the London Interbank Offered Rate ("LIBOR") with a minimum threshold of 5.00%. The interest rate on the Company's borrowings was 5.00% at August 3, 2002. Borrowings under the Loan Agreement 12 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 August 3, 2002. A total of 1,349,995 shares were distributed in the initial distribution of stock to creditors, 75,000 shares were distributed to certain members of management which vest over a 4 year period and 74,553 shares were distributed to former equity interests. As provided in the Plan of Reorganization, the Company adopted a stock option plan, which authorizes the grant of up to 166,667 stock options to employees of the Company - 124,900 options with an exercise price of $7.52 were outstanding at August 3, 2002. The Company also issued four series of new Warrants, Series A through D, to tendering holders of the canceled Common Stock, granting such holders the right to purchase an aggregate of 153,467 additional shares of the new Common Stock. The 38,346 shares of Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $11.00 per share. The 46,256 shares of Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $16.00 per share. The 38,346 shares of Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $16.00 per share. The 30,519 shares of Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $34.00 per share. Warrants were issued to management to purchase an aggregate 31,000 shares of the Common Stock at a purchase price of $7.52 per share. On June 7, 2002, 12,900 warrants were exercised and the remaining 18,100 warrants expired. As provided in the Plan of Reorganization, the Company entered into a Trade Conversion Agreement with certain trade creditors to convert $3,130 of accounts payable into long term Trade Conversion Notes. Per the agreement, these notes will be payable on the fourth anniversary of the Effective Date and contain a conversion feature into common stock between the third and fourth anniversary of the Effective Date. 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 Stockholders' Equity is not required to be presented for interim periods. 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. 13 (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 per share basic to earnings per share diluted is as follows:
Income Shares Per share -------------- -------------- -------------- For the three fiscal months ended August 3, 2002: Earnings per share - basic: Net income $ 1,977 1,432,486 $ 1.38 Effect of dilutive securities: Stock options and warrants 31,069 Earnings per share - diluted: Net income $ 1,977 1,463,555 $ 1.35 ============== ============== ============== Income Shares Per share -------------- -------------- -------------- For the four fiscal months ended August 3, 2002: Earnings per share - basic: Net income $ 2,367 1,430,619 $ 1.65 Effect of dilutive securities: Stock options and warrants 31,069 Earnings per share - diluted: Net income $ 2,367 1,461,688 $ 1.62 ============== ============== ==============
The dilutive impact of stock options and warrants was calculated using the treasury method. The 153,467 warrants issued to old equity and the shares related to the trade conversion notes did not meet the criteria for inclusion in the diluted earning per share calculation and thus were excluded. Per share and share information for the Predecessor Company for all periods presented in the Condensed Consolidated Statements of Operations have been omitted as such information is not deemed to be meaningful. 14 (7) 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 Predecessor Predecessor Company Company Company --------------- ------------- ------------- Two Three Six months months months ended ended ended April 6, August 4, August 4, 2002 2001 2001 --------------- ------------- ------------- Professional fees $ 1,379 $ 597 $ 1,419 Severance/retention bonus 1,026 200 718 Closed store expense 311 363 406 Fresh start adjustments 10,406 - - Forgiveness of debt (41,847) - - Unsecured creditors' ownership share of reorganized Company 9,543 - - Other 342 58 79 --------------- ------------- ------------- Total $ (18,840) $ 1,218 $ 2,622 --------------- ------------- -------------
The Successor Company has not recorded any Reorganization Items in the four month period ended August 3, 2002. (8) Income Taxes Since the Company utilized fresh start accounting upon emerging from bankruptcy, income tax expense of $1,560 for the four months ended August 3, 2002 is offset by a direct increase in stockholders' equity due to the Company's ability to utilize prior period net operating loss benefits. Because the Company utilized net operating loss carryforwards, we did not pay federal income taxes in the four months ended August 3, 2002. The income tax benefit of $360 for the two months ended April 6, 2002 results from the realization of net operating loss carry backs due to the enactment of the Job Creation and Workers Assistance Act of 2002. The Company has recorded a valuation allowance to fully reserve for the value of net deferred tax assets that existed upon emergence from bankruptcy. These assets include remaining net operating loss carryforwards. This allowance on pre-emergence deferred tax assets is necessary, as the utilization of the Company's net loss carry forwards is dependent upon sufficient future taxable income. In the four month period ended August 3, 2002, the Company has recorded a $290 new deferred tax asset related to deferred rent liabilities which is offset by a direct increase in stockholders' equity due to the Company's ability to utilize prior period net operating loss benefits. The Company believes they will realize the benefit of the new deferred tax asset in future periods and therefore has not recorded a valuation allowance at this time. 15 (9) 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 five percent was distributed to old equity shareholders. Only one entity has an ownership interest of more than 10%. There were no purchases from that entity during the quarterly period ended August 3, 2002 and no amounts were owed at August 3, 2002. Management believes 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. (10) Restatement of Reorganization Items Subsequent to the issuance of the condensed consolidated financial statements for the quarterly period ended May 4, 2002, the Company determined that reorganization items recorded in the two months ended April 6, 2002 (Predecessor Company) need to be restated. In connection with the reorganization, 1,349,995 shares of new common stock were issued to certain of the unsecured creditors. The fair value of these shares was $9,543. The Company initially recorded the issuance of these shares as a charge to stockholders' equity. The Company has determined that the fair value of the shares issued should have also been recorded as a reorganization item in the Condensed Consolidated Statement of Operations in the two months ended April 6, 2002. As a result, the Condensed Consolidated Statements of Operations and Cash Flows for the two months ended April 6, 2002 (Predecessor Company) have been restated from the amounts previously recorded. A summary of the effects of the restatement is as follows:
Predecessor Predecessor 2002 Company 2002 Company ------------------------ ------------------ Two months ended Two months ended April 6, 2002 April 6, 2002 [as previously reported] [as restated] ------------------------ ------------------ Net sales $ 40,837 $ 40,837 Cost of sales 26,991 26,991 ------------------------ ----------------- Gross profit 13,846 13,846 Selling, general and administrative expenses 12,212 12,212 Depreciation 1,030 1,030 Reorganization items (28,383) (18,840) Interest expense 374 374 ------------------------ ----------------- Income before income tax expense 28,613 19,070 Income tax expense (benefit) (360) (360) ------------------------ ----------------- Net income $ 28,973 $ 19,430 ======================== =================
The Condensed Consolidated Statements of Operations and Cash Flows for the four months ended August 3, 2002 (Successor Company) as well as the Condensed Consolidated Balance Sheet at August 3, 2002 (Successor Company) are not affected by the aforementioned restatement. Additionally, the restatement has no effect on the Company's liquidity or cash position. 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 September 12, 2002, the Company operated 171 stores in 20 states. On March 23, 1999 the Company filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code under case numbers 99-685(JCA) and 99-686(JCA). From that time until March 20, 2002, the Company operated its business as a debtor-in-possession subject to the jurisdiction and supervision of the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On March 20, 2002, the Company announced that the Bankruptcy Court confirmed the Company's Amended Plan of Reorganization (the "Plan of Reorganization") that it filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the "Effective Date") the Plan of Reorganization became effective and the Company successfully emerged from Chapter 11. See 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. The Company has 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. The Company has 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, the Company 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, the Company's 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, the Company's 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, the Company emerged from Chapter 11 bankruptcy proceedings and implemented fresh-start accounting. Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to pre confirmation periods. However, for purposes of this discussion, the four month period ended August 3, 2002 (Successor Company) has been combined with the two month period ended April 6, 2002 (Predecessor Company) and then compared to the six months ended August 4, 2001. Differences between periods due to fresh-start accounting adjustments are explained when necessary. The lack of comparability in the accompanying unaudited consolidated financial statements is most apparent in the Company's capital costs (lease, interest, depreciation and amortization), as well as income taxes, debt restructuring and reorganization costs. As discussed in Note (10) to the Company's Condensed Consolidated Financial Statements, the Condensed Consolidated Statements of Operations and Cash Flows for the two months ended April 6, 2002 (Predecessor Company) have been restated. The following discussion and analysis gives effect to the restatement. 18 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 months ended ended Six fiscal months ended -------------- ------------- ------------------------------ Combined results August 3, August 4, August 3, August 4, 2002 2001 2002 2001 -------------- ------------- ------------ ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 63.3 63.9 64.3 65.3 -------------- ------------- ------------ ------------- Gross profit 36.7 36.1 35.7 34.7 Selling, general and administrative expenses 29.9 27.8 30.1 29.1 Depreciation 0.6 3.0 1.3 3.0 Reorganization items - 2.1 (15.9) 2.3 Interest expense 0.7 1.1 0.8 1.3 -------------- ------------- ------------ ------------- Income (loss) before income tax expense 5.5 2.1 19.4 (1.0) Income tax expense 2.2 - 1.0 - -------------- ------------- ------------ ------------- Net income (loss) 3.3% 2.1% 18.4% (1.0)% ============== ============= ============ ============= Number of stores open at end of period 171 173 171 173
THREE FISCAL MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001 Net Sales. Net sales increased $2,720 or 4.8%, to $59,733 for the three fiscal month period ended August 3, 2002 ("second quarter of fiscal 2002") from $57,013 for the three fiscal month period ended August 4, 2001 ("second quarter of fiscal 2001"). Comparable store sales increased $3,182 or 5.6%. The fluctuation relates to a strong demand for merchandise in the Company's basic party and gift categories. No new stores opened in either period and one store closed in the second quarter of fiscal 2002 and two stores closed in the second quarter of 2001. A closed store's sales are excluded from the calculation of comparable store sales in the fiscal month of the store closing. Gross Profit. Cost of sales includes merchandise, distribution and occupancy costs. Gross profit increased $1,315 or 6.4%, to $21,925 for the second quarter of fiscal 2002 from $20,610 for the second quarter of fiscal 2001. As a percentage of net sales, gross profit was 36.7% for the second quarter of fiscal 2002 compared to 36.1% in the same period in the prior year. The higher gross profit percentage was the result of improved markdown experience coupled with leveraged freight costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, advertising and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $2,021 or 12.8% to $17,869 for the second quarter of fiscal 2002 from $15,848 for the second quarter of fiscal 2001. As a percentage of net sales, selling, general and administrative expenses increased to 29.9% in the second quarter of fiscal 2002 from 27.8% in the second quarter of fiscal 2001. This increase primarily relates to a $425 increase in insurance costs, $560 increase in advertising costs and $240 of severance costs. 19 Depreciation expense. Depreciation expense was $356 in the three fiscal month period ended August 3, 2002 compared to $1,745 in the three fiscal period ended August 4, 2001. This decrease relates to the fresh-start adjustment on fixed assets of $11,760 whereby the Company adjusted for the excess of book value over enterprise value. Interest Expense. Interest expense was $412 in the second quarter of fiscal 2002 compared to $627 in the second quarter of fiscal 2001. This decrease relates to lower borrowing levels coupled with lower effective interest rates. Reorganization Items, net. The Company did not record any Reorganization costs in the second quarter of fiscal 2002. As previously discussed, the Company successfully emerged from bankruptcy on April 9, 2002. Reorganization costs in the second quarter of fiscal 2001 totaled $1,218. These costs include professional fees and other costs related to the Company's reorganization. Income taxes. Income tax expense of $1,311 for the second quarter of fiscal 2002 is offset by a direct increase in stockholders' equity due to the Company's ability to utilize prior period net operating loss benefits. SIX FISCAL MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001 Net Sales. Net sales increased $5,508 or 4.9%, to $118,757 for the six fiscal month period ended August 3, 2002 ("first half of fiscal 2002") from $113,249 for the six fiscal month period ended August 4, 2001 ("first half of fiscal 2001"). Comparable store sales increased $6,631 or 5.9%. The fluctuation relates to increases in the basic party and gift categories. No new stores opened in either period, one store closed in the first half of fiscal 2002 and two stores closed in the first half of fiscal 2001. A closed store's sales are excluded from the calculation of comparable store sales in the fiscal month of the store closing. Gross Profit. Cost of sales includes merchandise, distribution and occupancy costs. Gross profit increased $3,057 or 7.8%, to $42,361 for the first half of fiscal 2002 from $39,304 for the first half of fiscal 2001. As a percentage of net sales, gross profit was 35.7% for the first half of fiscal 2002 compared to 34.7% in the same period in the prior year. The higher gross profit percentage relates to improved shrink experience coupled with leveraged freight and distribution costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, advertising and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $2,856 or 8.7%, to $35,778 for the first half of fiscal 2002 from $32,922 for the first half of fiscal 2001. As a percentage of net sales, selling, general and administrative expenses increased to 30.1% in the first half of fiscal 2002 from 29.1% in the first half of fiscal 2001. This increase relates primarily to a $758 increase in insurance costs and $381 of remodel costs. Depreciation expense. Depreciation expense was $1,486 in the first half of fiscal 2002 compared to $3,497 in the first half of fiscal 2001. This decrease relates to the fresh-start adjustment of $11,760 on fixed assets whereby the Company adjusted for the excess of book value over enterprise value. Interest Expense. Interest expense was $940 in the first half of fiscal 2002 compared to $1,451 in the first half of fiscal 2001. This decrease relates to lower effective interest rates and decreases in borrowing levels. 20 Reorganization Items, net. Reorganization Items fluctuated $21,462 for the first half of fiscal 2002 from $2,622 for the first half of fiscal 2001. The change 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 and fresh-start adjustments. The major components of Reorganization Items are as follows:
Six Months ended Six Months Ended August 3, 2002 August 4, 2001 ---------------- ---------------- Professional fees $ 1,379 $ 1,419 Severance/retention bonus 1,026 718 Closed store expense 311 406 Fresh start adjustments 10,406 - Forgiveness of debt (41,847) - Unsecured creditors' ownership share of reorganized Company 9,543 - Other 342 79 ---------------- ---------------- Total $ (18,840) $ 2,622 ---------------- ----------------
The Successor Company has not recorded any Reorganization Items in the four month period ended August 3, 2002. Income Taxes. Income tax expense of $1,560 for the four fiscal months ended August 3, 2002 is offset by a direct increase in stockholders' equity due to the Company's ability to utilize prior period net operating loss benefits. 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, 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 the Company's option, a variable rate based upon earnings performance and the London Interbank Offered Rate ("LIBOR") with a minimum threshold of 5.00%. The interest rate on the Company's borrowings was 5.00% at August 3, 2002. Borrowings under the New Loan Agreement are secured by substantially all of the Company's assets. 21 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 August 3, 2002, the Company had $17,090 borrowings outstanding under the New Loan Agreement and had utilized approximately $2,420 under the New Loan Agreement to issue letters of credit. The following table sets forth certain consolidated statements of cash flows: Six months Six months ended August ended August 3, 2002 4, 2001 ------------- ------------- Cash provided by operating activities $ 11,445 $ 7,248 ------------- ------------- Cash used in investing activities $ (1,181) $ (550) ------------- ------------- Cash used in financing activities $ (10,259) $ (6,806) ------------- ------------- At August 3, 2002 the Company's working capital was $14,475. Net cash provided by operating activities for the first half of fiscal 2002 was $11,445 compared to $7,248 of net cash provided by operating activities during the first half of fiscal 2001. The fluctuation is related to changes in inventory and accounts payable coupled with the Company utilizing pre-confirmation net operating losses in the 4 month period ended August 3, 2002. Net cash used in investing activities during the first half of fiscal 2002 and 2001 was $1,181 and $550, respectively. Net cash used in investing activities was primarily for capital expenditures for computer equipment, store remodeling and warehouse equipment for the distribution center. Net cash used in financing activities during the first half of fiscal 2002 was $10,259 compared to $6,806 of net cash used in financing activities during the first half of fiscal 2001. Amounts are attributable to the level of borrowings and repayments. The Company does not intend to pay cash dividends in the foreseeable future and under its current Loan Agreement is restricted from paying dividends on its capital stock. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, indebtedness or to fund planned capital expenditures, will depend upon future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond the Company's control. Based upon current levels of operation 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. 22 Seasonality The Company's business is highly seasonal, with operating results varying from quarter to quarter. The Company historically experienced higher sales during the second and fourth fiscal quarters due to increased demand by customers for the Company's products attributable to special occasions and holiday seasons during these periods. The Company's fiscal 2002 quarters are as defined as follows: first fiscal quarter is February 3, 2002 to May 4, 2002, second fiscal quarter is May 5, 2002 to August 3, 2002, third fiscal quarter is August 4, 2002 to November 2, 2002 and fourth fiscal quarter is November 3, 2002 to February 1, 2003. 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 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 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 provisions of SFAS No. 143 and it did not have a material impact of the Company's 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, the Company 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. 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 is reported as a component of operations. 23 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. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is subject to market risks from changes in interest rates. As of August 3, 2002, the interest rate on the Company's revolving credit facilities, which represents a significant portion of the Company's outstanding debt, is variable based upon earnings performance and the London Interbank Offered Rate ("LIBOR"). A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during the two months ended April 6, 2002 and the four months ended August 3, 2002 would not have had a material impact on our financial position or results of operations. 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. The Company is not aware of any 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 24 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. 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). 25 Exhibit 10.6 (1) Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd and James D. Constantine. Exhibit 10.7 (1) Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd and Timothy F. Gower. Exhibit 10.8 (1) Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd and Gary W. Rada. Exhibit 10.9 (2) Form of Factory Card & Party Outlet Corp. 2002 Non- Employee Directors Stock Option Plan. Exhibit 10.10 (2) First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan. Exhibit 10.11 (2) Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan. Exhibit 99.1 Independent Accountants' Report from Deloitte & Touche, LLP. Exhibit 99.2 Acknowledgement of Awareness Letter from Deloitte & Touche, LLP dated September 16, 2002 (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 Company's current Report on Form 8-K filed on June 13, 2002 - Changes in Registrant's Certifying Accountant. 26 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: April 30, 2003 By: /s/ Gary W. Rada ----------------- Gary W. Rada President and Chief Executive Officer Dated: April 30, 2003 By: /s/ James D. Constantine ------------------------- James D. Constantine Executive Vice President and Chief Financial and Administrative Officer [Principal Accounting Officer] 27 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, as amended, on Form 10-Q/A of Factory Card & Party Outlet Corp.; 2. Based on my knowledge, this quarterly report, as amended, 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, as amended; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, as amended, 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, as amended. 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, as amended, 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, as amended, (the "Evaluation Date"); and c) presented in this quarterly report, as amended, 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, as amended, 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: April 30, 2003 /s/ Gary W. Rada ------------------------------------- Gary W. Rada President and Chief Operating Officer 28 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, as amended, on Form 10-Q/A of Factory Card & Party Outlet Corp.; 2. Based on my knowledge, this quarterly report, as amended, 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, as amended, and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, as amended, 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, as amended. 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, as amended, 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, as amended (the "Evaluation Date"); and c) presented in this quarterly report, as amended, 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, as amended, 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: April 30, 2003 /s/ James D. Constantine ------------------------ James D. Constantine Executive Vice President and Chief Financial and Administrative Officer