<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 29, 2000
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
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 |_| No |X|
The number of shares of the Registrant's Common Stock outstanding as of June 8,
2000 was 7,503,098.
<PAGE>
Factory Card Outlet Corp.
(Debtor in possession effective March 23, 1999)
Form 10-Q
For the Quarter Ended April 29, 2000
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements (Unaudited):
Consolidated Balance Sheets as of April 29, 2000 and January 29, 2000 3
Consolidated Statements of Operations for the three fiscal months ended April 29,
2000 and May 1, 1999 4
Consolidated Statements of Cash Flows for the three fiscal months
Ended April 29, 2000 and May 1, 1999 5
Notes to Consolidated Financial Statements 6-9
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 12-13
Signatures 14
</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 per share data)
<TABLE>
<CAPTION>
April 29, January 29,
2000 2000
---------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 275 $ 1,713
Merchandise inventories 53,694 56,142
Prepaid expenses and other 2,043 1,748
---------------- ------------
Total current assets 56,012 59,603
Fixed assets, net 29,036 30,559
Other assets 664 641
---------------- ------------
Total assets $ 85,712 $ 90,803
================ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt $ 21,930 $ 22,869
Accounts payable 6,702 9,103
Accrued expenses 9,655 8,662
---------------- ------------
Total current liabilities 38,287 40,634
---------------- ------------
Liabilities subject to compromise 54,866 54,872
---------------- ------------
Stockholders' equity (deficit)
Common stock - $.01 par value.
Voting class - authorized 15,000,000 shares; 7,503,098 shares issued and
outstanding at October 30, 1999 and January 30, 1999, respectively.
Non-voting class - authorized 205,000 shares, no shares issued or outstanding. 75 75
Additional paid-in capital 52,021 52,021
Accumulated deficit (59,537) (56,799)
---------------- ------------
Total stockholders' equity (deficit) (7,441) (4,703)
---------------- ------------
Total liabilities and stockholders' equity (deficit) $ 85,712 $ 90,803
================ ============
</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 per share data)
<TABLE>
<CAPTION>
Three fiscal months ended
------------------------------------------
April 29, May 1,
2000 1999
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 54,442 $ 52,533
Cost of sales 28,962 28,120
------------------- -------------------
Gross profit 25,480 24,413
Selling, general and administrative expenses 25,359 25,768
Interest expense 848 894
------------------- -------------------
Loss before reorganization items, income taxes and
extraordinary item (727) (2,249)
Reorganization items, net 2,011 12,547
------------------- -------------------
Loss before income taxes and extraordinary item (2,738) (14,796)
Income taxes - -
------------------- -------------------
Loss before extraordinary item (2,738) (14,796)
Extraordinary item-loss on early retirement
of debt - 1,292
------------------- -------------------
Net loss $ (2,738) $ (16,088)
=================== ===================
Loss per share - basic and diluted
Before extraordinary item $ (0.36) $ (1.97)
Extraordinary item - (0.17)
------------------- -------------------
Net loss per share - basic and diluted $ (0.36) $ (2.14)
=================== ===================
Weighted average shares outstanding -
Basic and diluted 7,503,098 7,503,098
=================== ===================
</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
--------------------------
April 29, May 1,
2000 1999
------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,738) $ (16,088)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
Activities:
Depreciation and amortization of fixed assets 1,903 1,975
Amortization of deferred financing costs 213 166
Noncash portion of reorganization items 1,182 12,547
Extraordinary loss on early retirement of debt - 1,292
Other - 36
Changes in assets and liabilities:
(Increase) decrease in assets:
Merchandise inventories 2,448 5,650
Prepaid expenses and other assets (530) (1,882)
Increase (decrease) in liabilities:
Accounts payable (2,401) (29,947)
Accrued expenses (189) (4,081)
Liabilities subject to compromise 87 40,213
----------- ---------
Net cash provided by (used in) operating activities (25) 9,881
----------- ---------
Net cash used in investing activities - purchase
of fixed assets, net (381) (324)
----------- ---------
Cash flows from financing activities:
Borrowings 55,710 68,630
Repayment of debt (56,649) (80,395)
Payment of long-term obligations (93) (107)
----------- ---------
Net cash (used in) financing activities (1,032) (11,872)
----------- ---------
Net (decrease) increase in cash (1,438) (2,315)
Cash at beginning of period 1,713 3,597
----------- ---------
Cash at end of period $ 275 $ 1,282
=========== =========
Supplemental cash flow information:
Interest paid $ 610 $ 1,056
</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 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 stores 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 29, 2000 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 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 debtors 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 substantial 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 April 29, 2000. 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 Company has obtained approval from the Bankruptcy Court
of the extension of its exclusive period to file a plan and to solicit
acceptances thereof to and including July 31, 2000 and September 29, 2000,
respectively. 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, 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
plans to develop a plan of reorganization for submission to the Bankruptcy
Court.
In connection therewith, on June 7, 2000 the Company announced that it
and the Creditors' Committee have entered into a non-binding letter of
intent with Saunders, Karp and Megrue ("SKM") (the "Letter of Intent"), a
Connecticut based investment company, regarding a potential
6
<PAGE>
transaction which would provide the Company with sufficient funding to
enable it to emerge from Chapter 11. The Letter of Intent is subject to,
among other things, the completion of due diligence, the execution of
definitive documentation and confirmation of a plan of reorganization that
would have to be voted upon by creditors. The Letter of Intent outlines the
following general terms of a transaction and plan of reorganization in
which SKM would invest $19.5 million, for which it would receive a note and
approximately 90% of the common stock of the Company upon its emergence
from Chapter 11: General unsecured creditors, whose claims are estimated to
be approximately $43 million, would receive a cash distribution that may
approximate $5 million, a note in the approximate amount of $7 million, and
approximately 10% of the common stock of the Company upon its emergence
from Chapter 11. Because the proposal would not result in creditors
recovering the full amount of their claims, it does not contemplate that
holders of the Company's outstanding common stock would receive any
distribution and, consequently, the existing stock would be cancelled.
The Letter of Intent provides for SKM to receive a break-up fee and
expense reimbursement in the event that the Company decides to pursue an
alternative transaction or course of action and restricts the Company's
ability to solicit alternative proposals. The Letter of Intent is subject
to the approval of the Bankruptcy Court. Accordingly, on June 8, 2000 the
Company filed a motion requesting Bankruptcy Court approval of the Letter
of Intent. The Company expects that the motion will be heard by the
Bankruptcy Court on June 29, 2000.
(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
$10,000 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 1% over prime. 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, all of which have been
met or waived at April 29, 2000.
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 April 29, 2000 and May 1, 1999 include accruals 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, deferred rent
obligations, amounts accrued for rejected leases, other accrued expenses
and obligations under capital leases. These amounts represent management's
best estimate of known or potential
7
<PAGE>
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.
(5) Reorganization Items
During the three fiscal months ended April 29, 2000, reorganization
costs include costs for professional fees and other costs related to the
Company's reorganization. In April 1999, the Company obtained approval from
the Bankruptcy Court to close and conduct closing sales at 27 stores that
were in markets the Company did not intend to continue to operate in or
were underperforming or unprofitable. During the three fiscal months ended
May 1, 1999, the Company recorded a provision for reorganization costs
relating to the store closings of approximately $11,365. This provision
included the write-down of fixed assets, estimated lease rejection claims
and the loss on the disposition of merchandise inventory. In addition to
the provision for the store closings, reorganization costs for professional
fees and other costs related to the Company's reorganization were $1,182 in
the three fiscal months ended May 1, 1999.
(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 recorded a valuation allowance
for the total of the net deferred tax assets at April 29, 2000 and January
29, 2000.
(7) Earnings Per Share
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, earnings per share - basic is computed by dividing net
loss by the weighted average number of common shares outstanding during the
period.
<TABLE>
<CAPTION>
Income Per
(loss) Shares share
-------- --------- ------
<S> <C> <C> <C>
For the three fiscal months ended April 29, 2000 -
Loss per share - basic and diluted:
-----------------------------------------
Net loss $ (2,738) 7,503,098 $(0.36)
-------- --------- ------
For the three fiscal months ended May 1, 1999 -
Loss per share - basic and diluted:
-----------------------------------------
Net loss $(16,088) 7,503,098 $(2.14)
-------- --------- ------
</TABLE>
For the quarter ended April 29, 2000 and 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.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
8
<PAGE>
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 (the "Chapter 11
Cases"). 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 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 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.
In September 1999 the Company announced that it received notification that
the NASDAQ's staff had delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999. NASDAQ said the determination was
based on the uncertainties concerning the Company's pending Chapter 11 Cases.
The Company is a chain of company-owned stores offering an extensive
selection of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices. As of June 8, 2000, the
Company operated 182 stores in 21 states. The Company does not plan to open any
additional stores in 2000.
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 period:
<TABLE>
<CAPTION>
Three fiscal months ended
--------------------------------
April 29, May 1,
2000 1999
--------- ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 53.2 53.5
----- -----
Gross profit 46.8 46.5
Selling, general and administrative expenses 46.6 49.1
Interest expense 1.6 1.7
----- -----
Loss before reorganization items, income taxes and extraordinary item (1.4) (4.3)
Reorganization items, net 3.7 23.9
----- -----
Loss before income taxes and extraordinary item (5.1) (28.2)
Income taxes - -
----- -----
Loss before extraordinary item (5.1) (28.2)
Extraordinary item-loss on early retirement of debt - 2.4
Net loss (5.1)% (30.6)%
===== =====
Number of stores open at end of period 182 209
</TABLE>
Three Fiscal Months Ended April 29, 2000 and May 1, 1999
Net Sales. Net sales increased $1,909, or 3.6%, to $54,442 for the three
fiscal month period ended April 29, 2000 from $52,533 for the three fiscal month
period ended May 1, 1999. Comparable store sales increased $5,741 or 11.8%. The
increase in net sales was the direct result of improved flow of merchandise to
the stores. The Company includes stores opened 13 or 14 months after their
opening date in the calculation of comparable store 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
increased $1,067 or 4.4%, to $25,480 for the three fiscal month period ended
April 29, 2000 from $24,413 for the three fiscal month period ended May 1, 1999.
As a percentage of net sales, gross profit was 46.8% for the three fiscal month
period ended April 29, 2000 compared to 46.5% in the same period in the prior
year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Selling, general and administrative expenses decreased $409 or 1.6%, to $25,359
for the three fiscal month period ended April 29, 2000 from $25,768 for the
three fiscal month period ended May 1, 1999. This decrease resulted primarily
from operating 27 fewer stores during most of the period. As previously
discussed, the Company closed 27 stores in April 1999. As a percentage of net
sales, selling, general and administrative expenses decreased to 46.6% in the
three fiscal month period ended April 29, 2000 from 49.1% in the three fiscal
month period ended May 1, 1999.
Interest Expense. Interest expense was $848 in the three fiscal month
period ended April 29, 2000 compared to $894 in the three fiscal month period
ended May 1, 1999. This decrease resulted primarily from lower borrowing levels.
Reorganization Items, net. Reorganization items decreased $10,536 or 84%,
to $2,011 for the three fiscal month period ended April 29, 2000 from $12,547
for the three fiscal month period ended May 1, 1999. During the three fiscal
months ended May 1, 1999, the Company recorded a provision for reorganization
costs of $11,635 relating to the closing of 27 stores in April 1999.
10
<PAGE>
Income Taxes. Management believes that it is more likely than not that
deferred tax assets created by net operating loses for the three month period
ended April 29, 2000 will not 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 April 29, 2000 and January 29, 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 2000 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 2000
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. These closing sales were completed in July
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 $10,000 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 indebtedness. All such covenants
have been met or waived at April 29, 2000.
As of April 29, 2000, the Company had $21,930 of borrowings outstanding
under the Loan Agreement and had utilized approximately $1,685 under the Loan
Agreement to issue letters of credit. The Company believes that its cash flow
from operations, borrowings under the Loan Agreement, adequate trade terms and
the continued support of its vendors 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.
11
<PAGE>
At April 29, 2000 and May 1, 1999, the Company's working capital was
$17,725 and $27,676 respectively. Net cash used in operating activities for the
three fiscal month period ended April 29, 2000 was $25 compared to $9,881 of net
cash provided for the three fiscal month period ended May 1, 1999. The decrease
is primarily due to reorganization items recorded in conjunction with the
Company's bankruptcy proceedings. As previously discussed, the Company filed a
petition on March 23, 1999 for reorganization under chapter 11 of title 11 of
the United States Code and subsequently closed 27 stores in April 1999.
Net cash used in investing activities during the three fiscal month period
ended April 29, 2000 and May 1, 1999 was $381 and $324, respectively. Net cash
used in investing activities was primarily for capital expenditures for store
equipment and equipment for the distribution center.
Net cash used in financing activities during the three fiscal month period
ended April 29, 2000 was $1,032 compared to $11,872 of net cash used in
financing activities during the three fiscal months ended May 1, 1999. 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.
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.
On June 7, 2000 the Company announced that it and the Creditors' Committee
have entered into a non-binding Letter of Intent with Saunders, Karp and Megrue
("SKM") (the "Letter of Intent"), a Connecticut based investment company,
regarding a potential transaction which would provide the Company with
sufficient funding to enable it to emerge from Chapter 11. The Letter of Intent
is subject to, among other things, the completion of due diligence, the
execution of definitive documentation and confirmation of a plan of
reorganization that would have to be voted upon by creditors. The Letter of
Intent outlines the following general terms of a transaction and plan of
reorganization in which SKM would invest $19.5 million, for which it would
receive a note and approximately 90% of the common stock of the Company upon its
emergence from Chapter 11: General unsecured creditors, whose claims are
estimated to be approximately $43 million, would receive a cash distribution
that may approximate $5 million, a note in the approximate amount of $7 million,
and approximately 10% of the common stock of the Company upon its emergence from
Chapter 11. Because the proposal would not result in creditors recovering the
full amount of their claims, it does not contemplate that holders of the
Company's outstanding common stock would receive any distribution and,
consequently, the existing stock would be cancelled.
The Letter of Intent provides for SKM to receive a break-up fee and expense
reimbursement in the event that the Company decides to pursue an alternative
transaction or course of action and restricts the
12
<PAGE>
Company's ability to solicit alternative proposals. The Letter of Intent is
subject to the approval of the Bankruptcy Court. Accordingly, on June 8, 2000
the Company filed a motion requesting Bankruptcy Court approval of the Letter of
Intent. The Company expects that the motion will be heard by the Bankruptcy
Court on June 29, 2000.
A copy of the letter of intent is attached hereto as Exhibit 10.1 and is
incorporated herein by reference. A copy of the Company's press release, dated
June 7, 1999, is attached hereto as Exhibit 99.1.
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, other than bankruptcy cases, 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 on Form 8-K
(a) Exhibits
10.1 Letter of intent dated June 6, 2000 among Saunders Karp & Megrue,
Factory Card Outlet Corp. and Factory Card Outlet of America,
Ltd. and the Statutory Creditors' committee of Factory Card
Outlet
27.1 Financial Data Schedule
99.1 Press release of the Company issued June 7, 2000
(b) Reports on 8-K
None.
13
<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 12, 2000 By: __________________________
William E. Freeman
President and Chief Executive Officer
Dated: June 12, 2000 By: ___________________________
James D. Constantine
Senior Vice President and Chief
Financial Officer
14
