<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended May 1, 1999
Commission File Number: 21859
FACTORY CARD 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
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 |_|
The number of shares of the Registrant's Common Stock outstanding as of June 4,
1999 was 7,503,098.
<PAGE>
Factory Card Outlet Corp.
(Debtor in possession effective March 23, 1999)
Form 10-Q
For the Quarter Ended May 1, 1999
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of May 1, 1999 and January 30, 1999 3
Consolidated Statements of Operations for the three fiscal months
ended May 1, 1999 and May 2, 1998 4
Consolidated Statements of Cash Flows for the three fiscal months
ended May 1, 1999 and May 2, 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
Part II Other Information 13
Signatures 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
---------------------- --------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash $ 1,282 $ 3,597
Merchandise inventories 52,066 61,658
Refundable income taxes 747 747
Prepaid expenses and other 1,439 980
---------------------- -------------------
Total current assets 55,534 66,982
Fixed assets, net 33,817 39,585
Other assets 1,151 1,004
---------------------- -------------------
Total assets $ 90,502 $ 107,571
====================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise
Current liabilities:
Accounts payable $ 3,142 $ 33,089
Current maturities of long-term obligations - 2,161
Accrued expenses 5,302 8,755
---------------------- -------------------
Total current liabilities 8,444 44,005
---------------------- -------------------
Noncurrent liabilities:
Revolving credit note payable 19,414 20,653
Long-term obligations - 1,670
Term loan, net of discount - 9,669
Deferred rent liabilities 6,731 7,396
---------------------- -------------------
Total noncurrent liabilities 26,145 39,388
---------------------- -------------------
Liabilities subject to compromise 47,809 -
---------------------- -------------------
Stockholders' equity:
Common stock - $.01 par value at May 1, 1999 and January 30, 1999.
Voting class - authorized 15,000,000 shares; 7,503,098 shares issued and
outstanding at May 1, 1999 and January 30, 1999, respectively.
Non-voting class - authorized 205,000 shares, no shares issued or 75 75
outstanding.
Additional paid-in capital 52,035 52,021
Retained earnings (deficit) (44,006) (27,918)
---------------------- -------------------
Total stockholders' equity 8,104 24,178
---------------------- -------------------
Total liabilities and stockholders' equity $ 90,502 $ 107,571
====================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three fiscal months ended
----------------------------------------------
May 1, May 2,
1999 1998
------------------- -------------------
(Unaudited)
<S> <C> <C>
Net sales $ 52,533 $ 49,862
Cost of sales 28,120 24,387
------------------- -------------------
Gross profit 24,413 25,475
Selling, general and administrative expenses 25,768 23,747
Interest expense 894 781
------------------- -------------------
(Loss) income before reorganization items, income taxes,
and extraordinary item (2,249) 947
Reorganization items, net 12,547 -
------------------- -------------------
(Loss) income before income taxes and extraordinary item (14,796) 947
Income taxes - 379
------------------- -------------------
(Loss) income before extraordinary item (14,796) 568
Extraordinary item-loss on early retirement of debt 1,292 -
------------------- -------------------
Net (loss) income $ (16,088) $ 568
=================== ===================
(Loss) earnings per share -
Basic $ (2.14) $ .08
=================== ===================
Diluted $ (2.14) $ .07
=================== ===================
Weighted average shares outstanding -
Basic 7,503,098 7,354,386
=================== ===================
Diluted 7,503,098 8,096,974
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three fiscal months ended
-----------------------------
May 1, May 2,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (16,088) $ 568
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization of fixed assets 1,975 1,612
Amortization of deferred finance cost and debt discount 166 -
Other 20 142
Reorganization items, net 12,547 -
Extraordinary loss on early retirement of debt 1,292 -
Change in assets and liabilities:
(Increase) decrease in assets:
Receivables 16 (825)
Merchandise inventories 5,650 (6,185)
Prepaid expenses (833) 192
Other assets (1,049) (116)
Increase (decrease) in liabilities:
Accounts payable (29,947) 3,434
Accrued expenses (4,081) (1,230)
Deferred rent liabilities 167 593
Liabilities subject to compromise 40,046 -
Income taxes payable - 379
------------- ------------
Net cash (used in) provided by operating activities 9,881 (1,436)
------------- ------------
Net cash (used in) investing activities - purchase of fixed assets, net (324) (3,366)
------------- ------------
Cash flows from financing activities:
Borrowings under revolving credit note 68,630 24,638
Repayment of borrowings under revolving credit note (80,395) (19,370)
Payment of long-term obligations (107) (442)
Proceeds from exercise of employee stock options - 110
------------- ------------
Net cash (used in) provided by financing activities (11,872) 4,936
------------- ------------
Net (decrease) increase in cash (2,315) 134
Cash at beginning of period 3,597 30
------------- ------------
Cash at end of period $ 1,282 $ 164
============= ============
Supplemental cash flow information:
Interest paid $ 1,056 $ 737
Income taxes paid (received) - (205)
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
(1) Organization and Basis of Presentation
The consolidated unaudited financial statements include the accounts
of Factory Card Outlet Corp. and its wholly owned subsidiary, Factory Card
Outlet of America Ltd. (collectively the "Company"). The Company is a chain
of company-owned superstores offering an extensive selection of greeting
cards, giftwrap, balloons, party supplies and other special occasion
merchandise at everyday value prices. 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
January 30, 1999 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.
The Company filed voluntary petitions for relief under chapter 11 of
title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") on
March 23, 1999 (the "petition date") under case numbers 99-685(JJF) and 99-
686(JJF) (the "Chapter 11 Cases"). The Company is currently operating its
business as a debtor in possession under the jurisdiction of the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court").
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern and in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code. The commencement of the Chapter 11 Cases and the net
losses resulting in a net deficit raise doubt about the Company's ability
to continue as a going concern. As discussed in Note 5, the Company has
recorded certain reorganization items during the three fiscal months ended
May 1, 1999. Additional adjustments, some of which could be material, may
be necessary as a consequence of a plan of reorganization. The continuation
of the Company's business as a going concern is contingent upon, among
other things, the ability to (1) formulate a plan of reorganization that
will be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels
of future profitable operations, (3) maintain adequate financing, and (4)
generate sufficient cash from operations to meet future obligations.
The Bankruptcy Code provides that the Company has an exclusive period
during which only it may propose, file and solicit acceptances of a plan of
reorganization. The exclusive period for the Company to propose a plan of
reorganization currently expires on July 21, 1999. The Company has the
right to request that the Bankruptcy Court grant an extension of the
exclusive period. If the Company fails to file a plan of reorganization
during the exclusive period or, after such plan has been filed, if the
Company fails to obtain acceptance of such plan from the requisite impaired
classes of creditors and equity security holders during the exclusive
period and the exclusive period is not extended, any party in interest,
including a creditor, an equity security holder, a committee of creditors
or equity security holders, or an indenture trustee, may file their own
plan of reorganization for the Company. The Company is in the process of
developing a plan of reorganization for submission to the Bankruptcy Court.
6
<PAGE>
(2) Debtor in Possession Facility
Subsequent to the commencement of the Chapter 11 Cases, the Company
entered into a Revolving Credit and Guaranty Agreement (the "Loan
Agreement") dated March 23, 1999 which provides up to $50,000 (including
$5,000 for letters of credit) to fund working capital needs and for general
corporate purposes. Borrowing under the facility is limited by inventory
levels and has an interest rate of .75% over prime or, at the Company's
option, 3.75% over the London Interbank Offered Rate. The Loan Agreement
expires on the earlier of March 23, 2001 or the date the Bankruptcy Court
confirms a plan of reorganization. Borrowings under the Loan Agreement are
secured by substantially all of the Company's assets. Certain restrictive
covenants apply, including maintenance of certain inventory levels,
achievement of specified operating results and limitations on the
incurrence of additional liens and indebtedness, capital expenditures,
asset sales and payment of dividends.
Proceeds from the Loan Agreement were used in March 1999 to repay all
borrowings under the Company's previous revolving credit agreement and term
loan. As a result, the Company recognized an extraordinary loss of $1,292
associated with the early retirement of the Company's previous revolving
credit agreement and term loan.
(3) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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 fiscal month periods
ended May 1, 1999 and May 2, 1998 include reserves for store closings and
other reorganization items, provision for shrinkage, capitalized overhead
costs related to inventory and the carrying values of inventories. Actual
results could differ from those estimates.
(4) Liabilities Subject to Compromise
Liabilities subject to compromise refer to liabilities incurred prior
to the commencement of the Chapter 11 Cases. These liabilities consist
primarily of amounts outstanding for accounts payable, amounts accrued for
rejected leases, other accrued expenses and obligations under capital
leases. These amounts represent management's best estimate of known or
potential claims to be resolved in connection with the Chapter 11 Cases.
Such claims remain subject to future adjustments based on negotiations,
actions of the Bankruptcy Court, further developments with respect to
disputed claims or other events. The terms for the satisfaction of these
claims will be established in connection with the Chapter 11 Cases.
The Company has received approval from the Bankruptcy Court to pay or
otherwise honor certain of its prepetition obligations, including
prepetition wages, employee benefits and reimbursement of employee business
expenses, costs to transport merchandise, sales and use taxes and
insurance.
7
<PAGE>
(5) Reorganization Items
In April, 1999, the Company obtained approval from the Bankruptcy
Court to close and conduct closing sales at 27 stores that are in markets
the Company does not intend to continue to operate in or are
underperforming or unprofitable. During the three fiscal months ended May
1, 1999, the Company recorded a provision for reorganization costs relating
to these store closings of approximately $11,365. This provision included
the write-down of fixed assets, estimated lease rejection claims and the
estimated loss on the disposition of merchandise inventory.
In addition to the provision for the store closing, reorganization
costs for professional fees and other costs related to the Company's
reorganization were recorded in the three fiscal months ended May 1, 1999
of $1,182.
(6) Income Taxes
In assessing the realization of deferred tax assets, management
considers the likelihood that those assets will be realized through future
taxable income. Because the realization of the deferred tax assets may be
limited by events involving the Chapter 11 Cases or other events related to
the ownership of the Company, the Company has recorded a valuation
allowance to fully reserve for the value of the net deferred tax assets at
May 1, 1999 and January 30, 1999.
(7) Earnings Per Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, earnings per share - basic were computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Earnings per share - diluted includes the effect of stock
options and warrants.
The reconciliation of earnings per share - basic to earnings per share -
diluted is as follows:
<TABLE>
<CAPTION>
Income Per
(loss) Shares share
------------ --------- ---------
<S> <C> <C> <C>
For the three fiscal months ended May 1, 1999 -
(Loss) earnings per share - basic and diluted:
----------------------------------------------
Net income available to common stockholders $ (16,088) 7,503,098 $ (2.14)
=========== ========= =========
For the three fiscal months ended May 2, 1998 -
Earnings per share - basic:
---------------------------
Net income $ 568 7,354,386 $ .08
Effect of dilutive securities
Stock options 666,384
Warrants 76,204
---------
Earnings per share - diluted:
-----------------------------
Net income available to common stockholders and assumed conversions $ 568 8,096,974 $ .07
=========== ========= =========
</TABLE>
For the quarter ended May 2, 1998, 3,500 options to purchase common
stock outstanding during the period presented above was not included in the
computation of earnings per share - diluted because the option price was
greater than the average market price of the common shares. For the quarter
ended May 1, 1999, no options to purchase common stock were included in the
computation of earnings per share - diluted because the effect would be
antidilutive.
During the quarter ended May 2, 1998, 45,172 shares were issued upon
the exercise of stock options.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollar amounts in thousands)
Certain statements in the following discussion and analysis constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. On March 23, 1999, the
Company filed a petition for reorganization under chapter 11 of title 11 of the
United States Code and is operating as a debtor in possession. All forward-
looking statements relating to aspects of any plan of reorganization submitted
in connection with its chapter 11 proceedings are dependent upon, among other
things, further improvements in the Company's store-level operating performance,
the formation of an acceptable reorganization plan and the bankruptcy court
approval of the reorganization plan.
In general, the results, performance or achievements of the Company and its
stores and the value of the Company's common stock are dependent upon a number
of factors including, without limitation, the following: effects resulting from
the commencement and completion of the chapter 11 proceedings; 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; governmental regulations;
ability to complete corrective action necessary to address Year 2000 issues; the
continued listing of the Company's common stock on the NASDAQ National Market;
and other factors both referenced and not referenced in this Form 10-Q. When
used in this Report on Form 10-Q, the words "estimate," "project," "anticipate,"
"expect," " intend," "believe," and similar expressions are intended to identify
forward-looking statements.
On May 6, 1999, the Company announced that it received affirmation that
NASDAQ's staff had determined to delist the Company's common stock from the
NASDAQ National Market. NASDAQ said the determination was based on the
potential impact of the Company's pending Chapter 11 Cases on the Company's
shareholders. The Company has requested a delisting hearing before NASDAQ's
Listing Qualifications Panel. The hearing is scheduled for July 1, 1999. The
Company's common stock will continue to be listed on the NASDAQ's National
Market, although trading continues to be halted until the hearing process is
completed.
The Company is a chain of company-owned superstores offering an extensive
selection of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices. As of June 1, 1999 the
Company operated 209 stores in 23 states but is currently conducting closing
sales at 27 of these stores. The Company currently does not plan to open any
additional stores in 1999.
9
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
<TABLE>
<CAPTION>
Three fiscal months ended
--------------------------------------
May 1, May 2,
1999 1998
----------------- --------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 53.5 48.9
----------------- --------------
Gross profit 46.5 51.1
Selling, general and administrative expenses 49.1 47.6
Interest expense 1.7 1.6
----------------- --------------
(Loss) income before reorganization items, income taxes and extraordinary item (4.3) 1.9
Reorganization items, net 23.9 -
----------------- --------------
(Loss) income before income taxes and extraordinary item (28.2) 1.9
Income taxes - 0.8
----------------- --------------
(Loss) income before extraordinary item (28.2) 1.1
Extraordinary item-loss on early retirement of debt 2.4 -
----------------- --------------
Net (loss) income (30.6%) 1.1%
================= ==============
Number of stores open at end of period 209 193
</TABLE>
Three Fiscal Months Ended May 1, 1999 and May 2, 1998
Net Sales. Net sales increased $2,671, or 5.4%, to $52,533 for the three
fiscal month period ended May 1, 1999 from $49,862 for the three fiscal month
period ended May 2, 1998. The increase resulted from a net sales increase of
$3,898 from stores not included in the comparable store base offset by a
comparable store sales decrease of $1,227, or 2.6%. Sales were impacted by the
reduced flow of merchandise resulting from issues associated with the Company's
liquidity and the Chapter 11 Cases. The Company includes stores opened 13 or 14
months after their opening date in the calculation of comparable sales. If the
opening date of a store falls in the first 14 days of a period, the store is
included in the comparable store calculation in its 13th month of operation;
otherwise, a store is included in the comparable store calculation in its 14th
month of operation.
Gross Profit. Cost of sales includes distribution costs. Gross profit
decreased $1,062, or 4.2%, to $24,413 for the three fiscal month period ended
May 1, 1999 from $25,475 for the three fiscal month period ended May 2,1998. As
a percentage of net sales, gross profit was 46.5% for the three fiscal month
period ended May 1, 1999 compared to 51.1% in the same period in the prior year.
Gross profit as a percentage of net sales decreased primarily as a result of
higher vendor promotional program monies recorded in the three fiscal months
ended May 2, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses. For
reporting, store occupancy expenses are now classified as selling, general and
administrative expenses rather than cost of sales. The comparative information
has been restated to reflect this classification. Selling, general and
administrative expenses increased $2,021, or 8.5%, to $25,768 for the three
fiscal month period ended May 1, 1999 from $23,747 for the three fiscal month
period ended May 2, 1998. Approximately $1,833 of this increase resulted from
the operation of 17 new superstores and additional advertising circulars issued
during the quarter. As a percentage of net sales, selling, general and
administrative expenses increased to 49.1% in the three fiscal month period
ended May 1, 1999 from 47.6% in the three fiscal month period ended May 2, 1998.
10
<PAGE>
Interest Expense. Interest expense was $894 in the three fiscal month
period ended May 1, 1999 compared to $781 in the three fiscal month period ended
May 2, 1998. This increase resulted from a higher effective interest rate on
borrowings.
Reorganization Items, net. The Company has recognized $12,547 of
reorganization items, net consisting of a provision for the writedown of fixed
assets, estimated lease rejection claims and the estimated loss on the
disposition of merchandise inventory related to 27 store closings, professional
fees, and other costs related to the reorganization of the Company.
Income Taxes. The Company's effective income tax rate was 40% during the
three fiscal month period ended May 2, 1998. Management believes that it is
more likely than not that deferred tax assets created by losses and the
extraordinary loss on the early retirement of debt during the three fiscal month
period ended May 1, 1999 will not be realized through future taxable income.
Therefore, the Company has increased its valuation allowance, which was
established during the fiscal year ended January 30, 1999, to fully reserve the
potential tax benefits resulting from these losses. As a result, the effective
tax rate for the three fiscal month period ended May 1, 1999 was zero.
Extraordinary Item. During March 1999, the Company refinanced all
borrowings under the Company's previous revolving credit agreement and term
loan. Unamortized financing costs and the remaining debt discount, along with
early termination fees, associated with the retired debt were expensed creating
an extraordinary item of $1,292.
Year 2000 Readiness Disclosure
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a temporary
inability to process transactions or engage in similar normal business
activities. The Company has initiated a Year 2000 program designed to identify
and correct any concerns which may be identified.
The Year 2000 program was developed with the help of independent
consultants and consists of teams identifying and evaluating Year 2000 issues
and remediating systems that are not Year 2000 compliant. The Company's program
to identify and evaluate Year 2000 readiness includes inventorying and testing
systems that are commonly thought of as information technology (IT), such as
computer networks, as well as systems that are not commonly thought of as IT
systems, such as timeclocks and the telephone system. IT systems with non-
compliant code are being modified or replaced with systems that are Year 2000
compliant. Similar actions are being taken with respect to non-IT systems. The
teams are also investigating the Year 2000 readiness of suppliers and other
third parties, which includes surveying their Year 2000 remediation programs,
and developing contingency plans where necessary.
Key IT and non-IT systems have been inventoried and assessed for compliance
and detailed plans have been developed for required system modifications or
replacements, including remediation and testing activities. Independent
consultants are assisting in the assessment and remediation phases of these
systems and are monitoring progress against remediation programs and performing
tests of critical activities. The Company expects to be completed with the
remediation and testing phases by June 30, 1999 for its IT and non-IT systems.
Incremental costs directly related to Year 2000 issues which includes
equipment and software replacements, reprogramming, systems testing, and outside
consulting services, are estimated to be in the range of $900 to $1,100, of
which approximately $800 has been spent through May 1, 1999. This estimate
assumes that the Company will not incur significant Year 2000 related costs on
behalf of its suppliers or other third parties.
11
<PAGE>
Due to some uncertainty inherent in the Year 2000 issue, including
uncertainty regarding the readiness of suppliers, the Company cannot yet
complete a comprehensive analysis of the most likely worst case Year 2000
scenario. However, the Company is currently developing contingency plans for
Year 2000 related interruptions. The process will include, but not be limited
to, developing emergency backup and recovery procedures, manual processes,
alternative systems and work around procedures, identifying alternative
suppliers and developing alternative plans to engage in business activities with
suppliers should they not be Year 2000 compliant. Contingency plans for highly
critical systems will be established by July 31, 1999 and will be reviewed
continually up through the date change to Year 2000.
Liquidity and Capital Resources
On March 23, 1999, the Company filed the Chapter 11 Cases to address
certain operational and liquidity disruptions. The Company's liquidity position
for the remainder of fiscal 1999 will be impacted primarily by the success of
initiatives undertaken to improve store level cash flows and the effects of the
Chapter 11 Cases. The Company's uses of capital for the remainder of fiscal 1999
are expected to include working capital for operating expenses and satisfaction
of current liabilities, expenditures related to maintaining and refurbishing
existing stores, interest payments on outstanding borrowings and costs
associated with the Chapter 11 Cases. The Company's long-term liquidity and the
adequacy of the Company's capital resources cannot be determined until a plan of
reorganization has been developed and confirmed in connection with the Chapter
11 Cases.
As a debtor in possession under the Bankruptcy Code, actions to collect
prepetition indebtedness are stayed and certain contractual obligations may not
be enforced against the Company. With the approval of the Bankruptcy Court,
certain of these obligations may be paid prior to the confirmation of the
reorganization plan. To date, the Company has received approval to pay customary
prepetition obligations associated with the daily operation of its business,
including employee wages and other obligations. As permitted under the
Bankruptcy Code, the Company has received Bankruptcy Court approval to reject 13
real estate leases for stores that were never opened and to close and conduct
closing sales at 27 stores which began in April 1999. The Company has not
completed its review of all of its prepetition contracts and leases for
assumption or rejection. The ultimate amount of, and settlement terms for, such
liabilities are subject to an approved plan of reorganization and, accordingly,
the timing and form of settlement are not presently determinable.
The Company is a party to a Revolving Credit and Guaranty Agreement (the
"Loan Agreement") dated as of March 23, 1999 which was entered into subsequent
to the commencement of the Chapter 11 Cases and will terminate upon the earlier
of the confirmation of a plan of reorganization in the Chapter 11 Cases or March
23, 2001. The Loan Agreement provides the Company with a revolving line of
credit for loans and letters of credit in an aggregate amount not to exceed
$50,000 outstanding at any one time, including a sublimit of $5,000 for the
issuance of letters of credit. The Company intends to use amounts borrowed
under the Loan Agreement for its ongoing working capital needs and for other
general corporate purposes.
The 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 indebtness.
12
<PAGE>
As of May 1, 1999, the company had $19,414 of borrowings outstanding under
the Loan Agreement and had utilized approximately $1,558 under the Loan
Agreement to issue letters of credit. The Company believes that its cash flow
from operations and borrowings under the Loan Agreement will provide it with
sufficient liquidity to conduct its operations while the Chapter 11 Cases are
pending. The Company will be exploring opportunities to obtain long-term
financing to support the Company's business plan after it emerges from Chapter
11; however, there can be no assurance that the Company will be able to obtain
such financing with satisfactory terms, if at all.
At May 1, 1999 and May 2, 1998, the Company's working capital was $47,090
and $22,977, respectively. Net cash provided by operations for the three fiscal
month period ended May 1, 1999 was $9,881 compared to $1,436 net cash used for
the three fiscal month period ended May 2, 1998. During the three fiscal month
period ended May 1, 1999, $5,650 of cash from operations was provided by a
reduction in the inventory levels compared to the three fiscal month period
ended May 2, 1998 in which $6,185 of cash from operations was used to increase
inventory levels to support new and existing stores.
Net cash used in investing activities during the three fiscal month period
ended May 1, 1999 and May 2, 1998 was $324 and $3,366, respectively. During the
three fiscal month period ended May 2, 1998, net cash used in investing
activities was primarily for capital expenditures for new superstores and
equipment for the new distribution center.
Net cash used in financing activities during the three fiscal month period
ended May 1, 1999 was $11,872 compared to $4,936 of net cash provided by
financing activities during the three fiscal months ended May 2, 1998. At May
1, 1999, the outstanding balance under the Loan Agreement was $19,414. At May
2, 1998, the outstanding balance under the Company's previous revolving credit
agreement and term loan was $34,968. During March 1999, the Company used
$24,732 of borrowings under the Loan Agreement to pay the outstanding balances
under the Company's previous revolving credit agreement and term loan.
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks from changes in interest rates. The
interest rate on the Company's revolving credit facilities, which represent a
significant portion of the Company's outstanding debt, is variable based on the
prime rate or, at the Company's option, the London Interbank Offered Rate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company commenced the Chapter 11 Cases on March 23, 1999. Additional
information relating to the Chapter 11 Cases is set forth in Part 1, Item 1 of
the Company's Annual Report on Form 10-K under the caption "Proceedings under
Chapter 11 of the Bankruptcy Code": and in Note 1 of the Notes to Consolidated
financial Statements contained herein. Such information is incorporated herein
by reference. If it is determined that the liabilities subject to compromise in
the Chapter 11 Cases exceed the fair value of the net assets, unsecured claims
may be satisfied at less than 100% of their face value and the equity interests
of the Company's stockholders would be substantially (if not completely)
diluted. It is not possible at this time to predict the actual recovery, if any,
to which creditors and stockholders may be entitled.
<PAGE>
Several claims and cases have been filed by creditors of the Company
relating to unpaid amounts due to such creditors. Payment of these amounts are
now stayed in the Chapter 11 Cases. The Company is also from time to time
involved in routine litigation incidental to the conduct of its business. As of
the date of this Quarterly Report on Form 10-Q, the Company is aware of no
material existing or threatened litigation to which it is or may be a party.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports of Form 8-K
(a) Exhibits.
10.15 Executive Severance Pay Plan.
27.1 Financial Data Schedule.
(b) The following reports were filed on Form 8-K since January 30, 1999.
Current Report on Form 8-K on April 30, 1999 to report the Debtor
in Possession Loan and Security Agreement dated March 23, 1999.
14
<PAGE>
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 OUTLET CORP.
Dated: June 10, 1999 By: /s/ Stewart M. Kasen
---------------------------------------
Stewart M. Kasen
Chairman of the Board,
President and Chief Executive Officer
Dated: June 10, 1999 By: /s/ Frederick G. Kraegel
---------------------------------------
Frederick G. Kraegel
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Dated: June 10, 1999 By: /s/ Diana B. Kanas
---------------------------------------
Diana B. Kanas
Vice President and Controller
(principal accounting officer)
15
<PAGE>
EXHIBIT 10.15
Factory Card Outlet Corporation
Executive Severance Pay Plan
<PAGE>
Factory Card Outlet Corporation
Executive Severance Pay Plan
1. Purpose. The Factory Card Outlet Corporation Executive Severance Pay Plan
-------
(the "Plan") as set forth herein and adopted effective __________________, 1999
(the "Effective Date"), is intended to further the interests of Factory Card
Outlet Corporation (the "Company") by allowing it to attract, recruit and retain
quality Executives by providing eligible Executives of the Company with certain
severance pay and other benefits in the event that the executive's employment is
terminated by the Company for any reason other than for Cause or Disability (as
defined herein).
The Plan is an unfunded welfare benefit plan for purposes of the Employee
Retirement Income Security Act of 1974, as amended, (hereinafter "ERISA") and a
severance pay plan within the meaning of the United States Department of Labor
regulations section 2510.3-2(b). The Plan, as set forth herein supersedes any
prior severance plans, programs, or policies covering eligible employees, both
formal and informal.
2. Eligibility.
-----------
(a) An Executive (as defined below) shall be eligible for severance
benefits determined in accordance with Paragraph 3 upon termination of
employment by the Company for any reason other than Cause or Disability (as
those terms are defined below).
(b) The term "Executive" shall include all employees designated by the
Company as Senior Officers (includes Senior Vice-Presidents and above),
Vice-Presidents and Directors for purposes of the Plan who have been
continuously employed with the Company for at least twelve (12) months
prior to termination of employment; provided, however, that the Company may
from time to time, at its sole discretion and by resolution of the
Company's Board of Directors, designate certain individuals as eligible
Executives notwithstanding the aforementioned service requirement and upon
such designation such individuals shall be listed in the schedule attached
hereto as Exhibit B.
(c) For purposes of the Plan, the term "Cause" shall mean (i) the
Executive's committing any felony or other crime involving dishonesty; (ii)
any serious, intentional, willful or grossly negligent misconduct in the
course of the Executive's employment; or (iii) the Executive's habitual
neglect of the Executive's duties (other than on account of Disability),
except that (iv) Cause as defined in clauses ii and iii shall not mean:
(A) bad judgment;
(B) negligence other than habitual neglect of duty;
(C) any act or omission believed by the Executive in good faith to
<PAGE>
have been in or not opposed to the interest of the Company
(without intent of the Executive to gain therefrom, directly or
indirectly, a profit to which the Executive was not legally
entitled); or
(D) any act or omission with respect to which notice of termination
of employment of the Executive is given more than twelve (12)
months after the date on which the Company knew or should have
known of such act or omission.
(d) For purposes of the Plan, the term "Disability" means any medically
determinable physical or mental impairment that has lasted for a continuous
period of not less than three (3) months that can be expected to be
permanent or of indefinite duration, and that renders the Executive unable
to perform the duties required of his position.
3. Severance Benefits. Eligible Executives shall be entitled to severance
------------------
benefits as follows:
(a) Salary Continuation. Commencing with the first payroll period
-------------------
following termination and submission of the completed Waiver and Release
Agreement pursuant to paragraph 4 and consistent with the ordinary payroll
practices of the Company, continued salary payments for the Severance
Period (as defined below) at a rate equal to the Executive's salary
payments immediately prior to termination of employment.
(b) Additional Payment. A lump-sum payment equal to the bonus amount, if
------------------
any, pursuant to the bonus policies in effect at the time of termination
that Executive would have been entitled to had the Executive remained
employed until the end of the calendar year multiplied by a fraction the
numerator of which shall be the number of full months of employment during
the calendar year of termination and the denominator of which shall be 12.
Such lump-sum payment shall be made by the Company at such time and in such
manner as bonus payments for the calendar year are made to the Company's
remaining executives.
(c) Medical Benefits. For the Severance Period (as defined below),
----------------
continued eligibility for medical benefits equivalent to those available
immediately prior to termination and Executive shall not be required to
contribute more for such benefits than he was required to contribute
immediately prior to termination.
(d) "Severance Period" shall have the following meaning:
(i) For Senior Officers, twelve (12) months.
-2-
<PAGE>
(ii) For Vice-Presidents, the greater of (A) six (6) months or (B)
for (4) weeks for each full year of service, provided that such period
shall not exceed twelve (12) months.
(iii) For Directors, (A) the greater of three (3) months or (B) three
weeks for each full year of service, provided that such period shall
not exceed twenty-six (26) weeks.
(e) Stock Options and Other Benefits. Notwithstanding anything herein to
--------------------------------
the contrary, the terms of this Plan shall not affect in any way the terms
or conditions of any stock options that Executive may have been granted or
benefits under any other Company benefit plan except and to the extent
provided herein. Such options and other benefits shall continue to be
governed by the provisions of applicable plans and agreements.
4. Waiver and Release. In order to receive benefits under the Plan, an
------------------
eligible Executive must submit a signed Waiver and Release Agreement to the Plan
Administrator on or within forty-five (45) days of his/her date of termination
of employment. The required Waiver and Release Agreement is attached hereto as
Exhibit A. An eligible employee may revoke his/her signed Waiver and Release
Agreement within seven (7) days of his/her signing the Waiver and Release
Agreement.
Any such revocation must be made in writing and must be received by the Plan
Administrator within such seven (7) day period. An eligible employee who timely
revokes his/her Waiver and Release Agreement shall not be eligible to receive
any supplemental severance pay under the Plan. An eligible employee who timely-
submits a signed Waiver and Release Agreement form and who does not exercise
his/her right of revocation shall be eligible to receive supplemental severance
pay under the Plan.
Eligible employees shall be encouraged to contact their personal attorney to
review the Waiver and Release Agreement from if they so desire.
5. Plan Administration.
-------------------
(a) The Plan shall be administered by an individual or individuals
designated by the Company (the "Committee") and which initially shall
consist of Matthew Ellis, Glenn Frachi and Frederick Kraegel. The Company
shall have the authority to expand or reduce the number of Committee
members, and to designate, remove or replace the Committee members.
(b) The Committee shall have the sole responsibility for the
administration of the Plan, and may adopt such rules and procedures as it
deems necessary, desirable, or appropriate.
(c) The Committee shall have such powers as may be necessary to discharge
its responsibility to administer the Plan, including but not limited to the
-3-
<PAGE>
following:
(i) To issue rules and regulations necessary for the proper conduct
and administration of the Plan and to change, alter, or amend such
rules and regulations;
(ii) To construe the Plan and complete benefits payable thereunder;
(iii) To determine all questions arising in its administration,
including those relating to the eligibility of persons to become
Executives; the rights of Executives, and their Beneficiaries; and its
decision thereon shall be final and binding upon all persons
hereunder;
(iv) To employ and suitably compensate such accountants and attorneys
(who may but need not be the accountants or attorneys of the Company),
other persons to render advice and clerical employees as it may deem
necessary to the performance of its duties;
(v) To communicate the Plan and its eligibility requirements to the
employees and to notify employees when they become eligible to
participate; and
(vi) To make available to Executives upon request, for examination
during business hours, such records as pertain exclusively to the
examining Executive.
(d) Committee Liability. The Committee and the members thereof shall be
-------------------
free from all liability, joint or several, for their acts as members of
such Committee, except to the extent that they may have been guilty of
willful misconduct, except as otherwise required by federal law.
(e) Construction of Plan and Decisions Final. The Company and the
----------------------------------------
Committee have full discretion to construe and interpret the Plan and to
decide all matters within their respective jurisdictions, including factual
matters, all questions concerning eligibility for participation and all
questions relating to the amount and manner of providing benefits, and
including the full discretion to resolve benefit appeals, and their
decisions shall be final, binding and conclusive upon the Executive and
every other person or party interested or concerned for all purposes.
6. Non-Assignment. No benefits payable under the Plan shall be subject to any
--------------
manner to assignment, anticipation, alienation, sale, transfer, pledge,
encumbrance, or charge, and any such attempted action shall be void and no such
benefit shall be in any manner liable for or subject to debts, contract,
liabilities, engagements, or torts of any Executive. If any Executive shall
become bankrupt or shall attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge any amount or benefit payable under the
plan, then the
-4-
<PAGE>
Committee in its discretion may hold or apply such benefit or any part thereof
to or for the benefit of such Executive or his beneficiary, his spouse,
children, blood relatives, or other dependents, in such manner and in such
proportions as the administrator may consider proper.
7. Amendment and Termination. The Plan shall not be amended or terminated for
-------------------------
a period of twelve (12) months commencing on the effective date hereof.
Thereafter, the Company shall have the right to amend or terminate this Plan;
provided, however, that no such amendment or termination shall be effective
without twelve (12) months prior written notice to Executives.
8. Continued Employment. Neither the Plan nor any of its provisions shall be
--------------------
construed as giving any Executive of the Company a right to continue in the
employ of the Company, or as a limitation of the Company's right to discharge
any of its employees, with or without cause.
9. Severability. If any provision of the Plan is found, held or deemed by a
------------
by a court of competent jurisdiction to be void, unlawful or unenforceable under
any applicable statute or other controlling law, the remainder of the Plan shall
continue in full force and effect.
10. Plan Year. The ERISA plan year of the Plan shall be the twelve month
---------
period commencing on January 1 of each year; provided, however, that the first
plan year shall be a short plan year commencing on the Effective Date and ending
on December 31, 1999.
11. Successors. The Plan shall be binding upon any successor of the Company
----------
whether by merger, consolidation, or sale of all or substantially all of the
Company's assets.
12. Governing Law. The Plan shall be construed and enforced according to the
-------------
Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the
State of Illinois, other than its laws respecting choice of law, to the extent
not preempted by ERISA.
IN WITNESS WHEREOF, this Plan is executed by a duly authorized officer of the
Company.
Dated: _______________, 1999 FACTORY CARD OUTLET
By:_______________________________
Its: ____________________________
-5-
<PAGE>
EXHIBIT A
---------
Waiver and Release
In consideration of the benefits provided under the Factory Card Outlet
Executive Severance Pay Plan (the "Plan"), Factory Card Outlet (the "Company")
and the undersigned Executive, and any person acting, through, or under the
Executive or the Company, hereby release, waive, and forever discharge each
other, their agents, subsidiaries, affiliates, employees, officers,
shareholders, successors, and assigns (if any) from any and all liability,
actions, charges, causes of action, demands, damages, or claims for relief or
remuneration of any kind whatsoever, whether known or unknown at this time,
arising out of, or connection with, Executive's employment with the Company
(other than indemnification to which the Executive may entitled under the
Company's bylaws, policies or agreements (now or hereafter maintained) with
regard to the indemnification of its executive officers or directors),
Executive's decision to resign, and/or the termination of the Executive's
employment, including, but not limited to, all matters in law, in equity, in
contract, or in tort, or pursuant to statute, including any claim by Executive
for age or other types of discrimination under the Age Discrimination in
Employment Act, Title VII of the Civil Rights Act of 1964, the Americans With
Disabilities Act, or any other federal, state, or local law or ordinance (the
"Waiver"). This Waiver does not apply to any rights or claims that may arise
under the Age Discrimination in Employment Act after the date that Executive
signs this Agreement. Executive acknowledges that he has read the above Waiver
and is voluntarily executing this Waiver and Agreement.
Executive acknowledges that he has been advised in writing to consult with
an attorney prior to signing this Waiver, and was given at least twenty one (21)
days within which to consider this Agreement, including the Waiver, before
signing this Waiver and Agreement. Executive also acknowledges that he
understands that if he signs the Waiver, he may revoke the Waiver and the
Agreement within seven (7) days of signing the Waiver. The Agreement and the
Waiver will therefore not be effective until seven (7) days after the Waiver is
signed.
This Waiver does not apply to any benefits to which the Executive may be
entitled under any Company sponsored tax qualified retirement or savings plan.
Dated:______________________
FACTORY CARD OUTLET
By:___________________________________
Its: ________________________________
EXECUTIVE:
______________________________
<PAGE>
EXHIBIT B
---------
Eligible Executive With Less Then 12 Months of Employment
---------------------------------------------------------
Timothy Gower
Frederick Kraegel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Consolidated Balance Sheet, Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 1,282
<SECURITIES> 0
<RECEIVABLES> 747
<ALLOWANCES> 0
<INVENTORY> 52,066
<CURRENT-ASSETS> 1,439
<PP&E> 33,817
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,502
<CURRENT-LIABILITIES> 8,444
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 8,029
<TOTAL-LIABILITY-AND-EQUITY> 90,502
<SALES> 52,533
<TOTAL-REVENUES> 52,533
<CGS> 28,120
<TOTAL-COSTS> 28,120
<OTHER-EXPENSES> 38,315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 894
<INCOME-PRETAX> (14,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,292
<CHANGES> 0
<NET-INCOME> (16,088)
<EPS-BASIC> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
