<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 October 28, 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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
December 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 October 28, 2000
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of October 28, 2000 and January 29, 2000 3
Consolidated Statements of Operations for the three fiscal months and nine fiscal
months ended October 28, 2000 and October 30, 1999 4
Consolidated Statements of Cash Flows for the nine fiscal months
ended October 28, 2000 and October 30, 1999 5
Notes to Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Part II Other Information 15-16
Signatures 16
</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>
October 28, January 29,
2000 2000
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 178 $ 1,713
Merchandise inventories 64,122 56,142
Prepaid expenses and other 2,001 1,748
--------- --------
Total current assets 66,301 59,603
Fixed assets, net 26,243 30,559
Other assets 481 641
--------- --------
Total assets $ 93,025 $ 90,803
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt $ 28,766 $ 22,869
Accounts payable 11,743 9,103
Accrued expenses 9,928 8,662
--------- --------
Total current liabilities 50,437 40,634
--------- --------
Liabilities subject to compromise 55,214 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 28, 2000 and January 29, 2000, 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 (64,722) (56,799)
--------- --------
Total stockholders' deficit (12,626) (4,703)
--------- ---------
Total liabilities and stockholders' deficit $ 93,025 $ 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 Nine fiscal months ended
--------------------------- ---------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 50,778 $ 50,485 $ 164,646 $ 155,252
Cost of sales 27,874 29,337 87,447 83,877
------------ ------------ ------------ ------------
Gross profit 22,904 21,148 77,199 71,375
Selling, general and administrative expenses 24,790 25,069 76,540 75,820
Interest expense 739 860 2,345 2,335
------------ ------------ ------------ ------------
Loss before reorganization items and
extraordinary item (2,625) (4,781) (1,686) (6,780)
Reorganization items, net 2,863 2,297 6,237 16,853
------------ ------------ ------------ ------------
Loss before extraordinary item (5,488) (7,078) (7,923) (23,633)
Extraordinary item-loss on early retirement
of debt - - - 1,292
------------ ------------ ------------ ------------
Net loss $ (5,488) $ (7,078) $ (7,923) $ (24,925)
============ ============ ============ ============
Loss per share - basic & diluted
Before extraordinary item $ (0.73) $ (0.94) $ (1.06) $ (3.15)
Extraordinary item - - - (0.17)
------------ ------------ ------------ ------------
Net loss per share - basic & diluted $ (0.73) $ (0.94) $ (1.06) $ (3.32)
============ ============ ============ ============
Weighted average shares outstanding -
basic & diluted 7,503,098 7,503,098 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>
Nine fiscal months ended
--------------------------
October 28, October 30,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,923) $ (24,925)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets 5,436 5,762
Amortization of deferred financing costs and debt discount 404 682
Non-cash portion of reorganization items 3,040 13,636
Extraordinary loss on early retirement of debt -- 1,292
Other 23 58
Changes in assets and liabilities:
Increase in assets:
Merchandise inventories (7,980) (4,572)
Prepaid expenses and other assets (497) (654)
Increase (decrease) in liabilities:
Accounts payable 2,640 (21,759)
Accrued expenses (874) (4,511)
Liabilities subject to compromise 231 40,410
--------- ---------
Net cash provided by (used in) operating activities (5,500) 5,419
--------- ---------
Net cash used in investing activities--purchase of fixed assets, net (1,591) (1,675)
--------- ---------
Cash flows from financing activities:
Borrowings under revolving credit notes and term loan 178,775 188,990
Repayment of borrowings under revolving credit notes and term loan (172,879) (196,066)
Payment of long-term obligations (340) (177)
--------- ---------
Net cash provided by (used in) financing activities 5,556 (7,253)
--------- ---------
Net decrease in cash (1,535) (3,509)
Cash at beginning of period 1,713 3,597
--------- ---------
Cash at end of period $ 178 $ 88
========= =========
Supplemental cash flow information:
Interest paid $ 1,875 $ 2,014
Income taxes refunded -- (792)
</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. ("FCO") and its wholly owned subsidiary,
Factory Card Outlet of America Ltd. (collectively with FCO, 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 in the Consolidated
Statements of Operations. 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 March 30, 2001. 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.
6
<PAGE>
In connection therewith, on October 11, 2000 the Company announced
that it and the Statutory Committee of Unsecured Creditors appointed in the
Chapter 11 Cases (the Creditors' Committee) had entered into a non-binding
letter of intent (the "Letter of Intent") with FCO Acquisition Corp.
("FCOAC") 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.
Because the proposal would not result in creditors recovering the full
amount of their claims, the Letter of Intent does not contemplate holders
of the Company's outstanding common stock receiving any distribution.
Consequently, the existing stock would be cancelled.
The Letter of Intent provides for FCOAC 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. The Letter of Intent was
approved by the Bankruptcy Court on October 27, 2000. The Company, FCOAC
and the Creditors' Committee are engaged in ongoing negotiations regarding
the terms of the definitive documentation, including a plan of
reorganization.
Furthermore, on October 11, 2000 the Company announced that Saunders
Karp & Megrue ("SKM"), which had entered into a non-binding letter of
intent ("SKM Letter of Intent") with the Company and the Creditors'
Committee in June 2000, terminated the SKM Letter of Intent. SKM indicated
in its notice to the Company that its termination of SKM Letter of Intent
should not be deemed as an indication that SKM has lost interest in
pursuing a possible transaction.
(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.
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 nine fiscal month periods
ended October 28, 2000 and October 30, 1999 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.
7
<PAGE>
(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 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
In August 2000, the Company closed five under-performing stores.
During the nine fiscal months ended October 28, 2000, the Company recorded
a provision for reorganization costs relating to these store closings of
approximately $1,177. In addition to the provision for the store closings,
reorganization costs for professional fees and other costs related to the
Company's reorganization were $5,060 in the nine fiscal months ended
October 28, 2000.
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 under-performing
or unprofitable. During the nine fiscal months ended October 30, 1999, the
Company recorded a provision for reorganization costs relating to the store
closings of approximately $10,634. 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 $6,219 in the nine fiscal
months ended October 30, 1999.
(6) Income Taxes (Benefit)
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 October 28, 2000 and
January 29, 2000.
8
<PAGE>
(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>
Net Per
Loss Shares share
-------- --------- -------
For the nine fiscal months ended October 28, 2000 -
Loss per share - basic and diluted:
-----------------------------------
<S> <C> <C> <C>
Net loss $ (7,923) 7,503,098 $(1.06)
-------- --------- -------
For the nine fiscal months ended October 30, 1999 -
Loss per share - basic and diluted:
-----------------------------------
Net loss $(24,925) 7,503,098 $(3.32)
-------- --------- -------
</TABLE>
For the nine fiscal months ended October 28, 2000 and October 30,
1999, no options to purchase common stock were included in the computation
of earnings per share - diluted because the effect would be antidilutive.
9
<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 Cases 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 Cases; 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.
On October 11, 2000 the Company announced that it and the Statutory
Committee of Unsecured Creditors appointed in the Chapter 11 Cases (the
Creditors' Committee) have entered into a non-binding letter of intent (the
"Letter of Intent") with FCO Acquisition Corp. ("FCOAC") 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 provides for FCOAC 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. However, the Letter of Intent does
not restrict the Company's and the Creditors' Committee's ability to solicit
alternative proposals. The Company continues to retain The Avalon Group, Ltd.,
New York as its investment banker. The Letter of Intent was approved by the
Bankruptcy Court on October 27, 2000. The Company, FCOAC and the Creditors'
Committee are engaged in ongoing negotiations regarding the terms of the
definitive documentation, including a plan of reorganization.
10
<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 Nine fiscal months ended
--------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
----------- ----------- ------------ -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 54.9 58.1 53.1 54.0
----------- ----------- ------------ -------------
Gross profit 45.1 41.9 46.9 46.0
Selling, general and administrative expenses 48.8 49.7 46.5 48.8
Interest expense 1.5 1.7 1.4 1.5
----------- ------------ ------------ -------------
Loss before reorganization items and
extraordinary item (5.2) (9.5) (1.0) (4.3)
Reorganization items, net 5.6 4.5 3.8 10.9
----------- ------------ ------------ -------------
Loss before extraordinary item (10.8) (14.0) (4.8) (15.2)
Extraordinary item-loss on early retirement of debt - - - 0.8
----------- ------------ ------------ -------------
Net loss (10.8)% (14.0)% (4.8)% (16.0)%
=========== ============ ============ =============
Number of stores open at end of period 177 182 177 182
</TABLE>
Three Fiscal Months Ended October 28, 2000 and October 30, 1999
Net Sales. Net store sales increased $293, or 0.6%, to $50,778 for the
three fiscal month period ended October 28, 2000 from $50,485 for the three
fiscal month period ended October 30, 1999. Comparable store sales increased
$1,137, or 2.8% for the same period. Operating five fewer stores impacted net
sales in the current quarter. As previously reported, the Company closed five
under-performing stores in August 2000. Comparable store sales were impacted by
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. Due to the timing of store openings and closings,
177 stores were included in comparable sales for the three fiscal months ended
October 28, 2000 and the three fiscal month period ended October 30, 1999.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $1,756 or 8.3% to $22,904 for the three fiscal month period ended
October 28, 2000 from $21,148 for the three fiscal month period ended October
30, 1999. As a percentage of net sales, gross profit was 45.1% for the three
fiscal month period ended October 28, 2000 compared to 41.9% in the same period
in the prior year. Gross profit as a percentage of net sales increased as a
result of higher margins related to the sale of seasonal merchandise. Gross
profit in the three fiscal month period ended October 30, 1999 was negatively
impacted by reserve activity recorded to address significant amounts of
Halloween seasonal carryover inventory.
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 $279 or 1.1%, to $24,790
for the three fiscal month period ended October 28, 2000 from $25,069 for the
three fiscal month period ended October 30, 1999. This decrease resulted
primarily from operating five fewer stores for the three fiscal month period
ended October 28, 2000. As a percentage of net sales, selling, general and
administrative expenses decreased to 48.8% in the three fiscal month period
ended October 28, 2000 from 49.7% in the three fiscal month period ended October
30, 1999.
Interest Expense. Interest expense was $739 in the three fiscal month
period ended October 28, 2000 compared to $860 in the three fiscal month period
ended October 30, 1999. This decrease resulted primarily from a reduction in the
amortization of deferred bank costs.
11
<PAGE>
Reorganization Items, net. Reorganization items increased $566 or 24.6%, to
$2,863 for the three fiscal month period ended October 28, 2000 from $2,297 for
the three fiscal month period ended October 30, 1999. During the three fiscal
months ended October 28, 2000, the Company recognized reorganization costs of
$1,177 relating to the closing of five stores in August 2000.
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 October 28, 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 October 28, 2000 and January 29, 2000.
Nine Fiscal Months Ended October 28, 2000 and October 30, 1999
Net Sales. Net sales increased $9,394 or 6.1%, to $164,646 for the nine
fiscal month period ended October 28, 2000 from $155,252 for the nine fiscal
month period ended October 30, 1999. Prior year sales were negatively impacted
by the reduced flow of merchandise resulting from issues associated with the
Company's liquidity and the Chapter 11 Cases. Comparable store sales increased
$14,274 or 9.5% to $164,646 for the nine months ended October 28, 2000 from
$150,372 for the nine months ended October 30, 1999. The Company includes stores
opened 13 or 14 months after their opening date in the calculation of comparable
store sales.
Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $5,824 or 8.2%, to $77,199 for the nine fiscal month period ended
October 28, 2000 from $71,375 for the nine fiscal month period ended October 30,
1999. As a percentage of net sales, gross profit was 46.9% for the nine fiscal
month period ended October 28, 2000 compared to 46.0% in the same period in the
prior year. Gross profit as a percentage of net sales increased primarily as a
result of lower distribution costs coupled with higher gross margin rates in
five of the seven product categories.
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 increased $720 or 0.9%, to $76,540
for the nine fiscal month period ended October 28, 2000 from $75,820 for the
nine fiscal month period ended October 30, 1999. This increase resulted
primarily from higher advertising costs offset by a decrease in store operating
expenses relating to the closure of five stores in August 2000. As a percentage
of net sales, selling, general and administrative expenses decreased to 46.5% in
the nine fiscal month period ended October 28, 2000 from 48.8% in the nine
fiscal month period ended October 30, 1999.
Interest Expense. Interest expense was $2,345 in the nine fiscal month
period ended October 28, 2000 compared to $2,335 in the nine fiscal month period
ended October 30, 1999. This increase resulted primarily from higher borrowing
levels coupled with a higher effective interest rate.
Reorganization Items, net. Reorganization items decreased $10,616 or 63.0%,
to $6,237 for the nine fiscal month period ended October 28, 2000 from $16,853
for the nine fiscal month period ended October 30, 1999. During the nine fiscal
months ended October 30, 1999, the Company recorded a provision for
reorganization costs of $10,634 relating to the closing of 27 stores in April
1999. During the nine fiscal months ended October 28, 2000, the Company recorded
a provision for reorganization costs of $1,177 for store closings in August
2000.
12
<PAGE>
Income Taxes. Management believes that it is more likely than not that
deferred tax assets created by net operating losses for the nine fiscal month
period ended October 28, 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 October 28, 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 closed five additional stores in August 2000. 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.
As of October 28, 2000, the Company had $28,766 of borrowings outstanding
under the Loan Agreement and had utilized approximately $2,300 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.
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At October 28, 2000, the Company's working capital was $15,864. Net cash
used in operations for the nine fiscal month period ended October 28, 2000 was
$5,500 compared to $5,419 of net cash provided by operations for the nine fiscal
month period ended October 30, 1999. The decrease was a result of the non-cash
portion of reorganization costs associated with the 27 store closings recorded
in the nine months ended October 30, 1999.
Net cash used in investing activities during the nine fiscal month periods
ended October 28, 2000 and October 30, 1999 was $1,591 and $1,675, respectively.
Net cash used in investing activities was primarily for capital expenditures for
store and distribution center equipment.
Net cash provided by financing activities during the nine fiscal month
period ended October 28, 2000 was $5,556 compared to $7,253 of net cash used in
financing activities during the nine fiscal months ended October 30, 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 the Loan Agreement is restricted from paying dividends on its capital
stock.
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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 October 11, 2000 the Company announced that it and the Statutory
Committee of Unsecured Creditors (the Creditors' Committee) have entered into a
non-binding Letter of Intent (the "Letter of Intent") with FCO Acquisition Corp.
("FCOAC") 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 provides for FCOAC 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. However, the Letter of Intent does
not restrict the Company's and the Creditors' Committee's ability to solicit
alternative proposals. The Company continues to retain The Avalon Group, Ltd.,
New York as its investment banker. The Letter of Intent was approved by the
Bankruptcy Court on October 27, 2000. The Company, FCOAC and the Creditors'
Committee are engaged in ongoing negotiations regarding the terms of the
definitive documentation, including a plan of reorganization.
Several claims and cases have been filed by creditors of the Company
relating to unpaid amounts due to such creditors. Payment of these amounts is
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
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(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on 8-K
Form 8-K dated October 13, 2000, to report the entering into of the
Letter of Intent dated October 11, 2000, among FCO Acquisition Corp.,
Factory Card Outlet Corp., Factory Card Outlet of America, Ltd., and
the Statutory Committed of Unsecured Creditors of Factory Card Outlet
Corp. and Factory Card Outlet of America, Ltd.
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: December 8, 2000 By: /s/ William E. Freeman
-------------------------------------------
William E. Freeman
President and Chief Executive Officer
Dated: December 8, 2000 By: /s/ James D. Constantine
-------------------------------------------
James D. Constantine
Senior Vice President and Chief Financial Officer
(principal financial officer)
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