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 30, 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 December
3, 1999 was 7,503,098.
44336.0003
<PAGE>
Factory Card Outlet Corp.
(Debtor in possession effective March 23, 1999)
Form 10-Q
For the Quarter Ended October 30, 1999
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of October 30, 1999 and January 30, 1999 3
Consolidated Statements of Operations for the three fiscal months and nine fiscal
months ended October 30, 1999 and October 31, 1998 4
Consolidated Statements of Cash Flows for the nine fiscal months
ended October 30, 1999 and October 31, 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Part II Other Information 15
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 30, January 30,
1999 1999
------------------- ------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets
Cash $ 88 $ 3,597
Merchandise inventories 62,183 61,658
Refundable income taxes - 747
Prepaid expenses and other 1,550 980
------------------- -------------------
Total current assets 63,821 66,982
Fixed assets, net 32,156 39,585
Other assets 718 1,004
------------------- -------------------
Total assets $ 96,695 $ 107,571
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt $ 24,103 $ 34,153
Accounts payable 11,330 33,089
Accrued expenses 8,069 8,755
------------------- -------------------
Total current liabilities 43,502 75,997
------------------- -------------------
Deferred rent obligation - 7,396
------------------- -------------------
Liabilities subject to compromise 53,921 -
------------------- -------------------
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 52,040 52,021
Accumulated deficit (52,843) (27,918)
------------------- -------------------
Total stockholders' equity (deficit) (728) 24,178
------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 96,695 $ 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 per share data)
<TABLE>
<CAPTION>
Three fiscal months ended Nine fiscal months ended
---------------------------------------- ----------------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------------- -------------------- ------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 50,485 $ 57,715 $ 155,252 $ 162,326
Cost of sales 29,337 31,175 83,877 83,556
------------------- -------------------- ------------------- --------------------
Gross profit 21,148 26,540 71,375 78,770
Selling, general and administrative expenses 25,069 29,437 75,820 80,352
Interest expense 860 1,442 2,335 3,136
------------------- -------------------- ------------------- --------------------
Loss before reorganization items,
income taxes and extraordinary item (4,781) (4,339) (6,780) (4,718)
Reorganization items, net 2,297 - 16,853 -
------------------- -------------------- ------------------- --------------------
Loss before income taxes and
extraordinary item (7,078) (4,339) (23,633) (4,718)
Income tax benefit - (1,736) - (1,887)
------------------- -------------------- ------------------- --------------------
Loss before extraordinary item (7,078) (2,603) (23,633) (2,831)
Extraordinary item-loss on early retirement
of debt - - 1,292 -
------------------- -------------------- ------------------- --------------------
Net loss $ (7,078) $ (2,603) $ (24,925) $ (2,831)
=================== ==================== =================== ====================
Loss per share -
Basic and diluted $ (0.94) $ (0.35) $ (3.32) $ (0.38)
=================== ==================== =================== ====================
Weighted average shares outstanding -
Basic and diluted 7,503,098 7,445,579 7,503,098 7,395,054
=================== ==================== =================== ====================
</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 30, October 31,
1999 1998
------------------ ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (24,925) $ (2,831)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization of fixed assets 5,762 5,492
Amortization of deferred financing costs and debt discount 682 336
Loss on disposal of fixed assets 36 237
Noncash portion of reorganization items 13,636 -
Extraordinary loss on early retirement of debt 1,292 -
Other 22 496
Changes in assets and liabilities:
(Increase) decrease in assets:
Merchandise inventories (4,572) (23,447)
Prepaid expenses and other assets (654) (2,308)
Increase (decrease) in liabilities:
Accounts payable (21,759) 11,635
Accrued expenses (4,511) 1,439
Deferred rent liabilities - 1,685
Liabilities subject to compromise 40,410 -
------------------ ---------------
Net cash provided by (used in) operating activities 5,419 (7,266)
------------------ ---------------
Net cash used in investing activities - purchase of fixed assets, net (1,675) (7,960)
------------------ ---------------
Cash flows from financing activities:
Borrowings 188,990 118,303
Repayment of debt (196,066) (101,650)
Payment of long-term obligations (177) (1,415)
Proceeds from exercise of employee stock options - 221
------------------ ---------------
Net cash (used in) provided by financing activities (7,253) 15,459
------------------ ---------------
Net (decrease) increase in cash (3,509) 233
Cash at beginning of period 3,597 30
------------------ ---------------
Cash at end of period $ 88 $ 263
================== ===============
Supplemental cash flow information:
Interest paid $ 2,014 $ 3,517
Income taxes paid (refunded) (792) 80
</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 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 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 nine fiscal months
ended October 30, 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 Company has requested
that the Bankruptcy Court grant an extension of its exclusive period
to file a plan and to solicit acceptances to and including June 16,
2000 and August 18, 2000, respectively. The Company currently retains
its exclusivity pending the Court's consideration of that request. 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>
(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 October 30, 1999.
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 30, 1999 and October 31, 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, 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.
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 nine fiscal months
ended October 30, 1999, the Company recorded a provision for
reorganization costs relating to these 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
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 for the total
of the net deferred tax assets at October 30, 1999 and January 30,
1999.
(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. Earnings per share - diluted includes
the effect of stock options and warrants, as applicable.
For the three and nine fiscal months ended October 30,
1999, 540,684 options to purchase common stock were not included in
the computation of earnings per share - diluted because the options
price was greater than the average market price of the common shares.
For the three and nine fiscal months ended October 31, 1998, 111,364
and 167,850 options to purchase common stock outstanding during the
periods, respectively, were 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.
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
(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; ability to complete
corrective action necessary to address Year 2000 issues; 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 has 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 December 3, 1999,
the Company operated 182 stores in 21 states. The Company 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:
<TABLE>
<CAPTION>
Three fiscal months ended Nine fiscal months ended
---------------------------------- --------------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 58.1 54.0 54.0 51.5
---------------- ----------------- ----------------- ---------------
Gross profit 41.9 46.0 46.0 48.5
Selling, general and administrative expenses 49.7 51.0 48.8 49.5
Interest expense 1.7 2.5 1.5 1.9
---------------- ----------------- ----------------- ---------------
Loss before reorganization items,
income taxes and extraordinary item (9.5) (7.5) (4.3) (2.9)
Reorganization items, net 4.5 - 10.9 -
---------------- ----------------- ----------------- ---------------
Loss before income taxes and
Extraordinary item (14.0) (7.5) (15.2) (2.9)
Income tax benefit - (3.0) - (1.2)
---------------- ----------------- ----------------- ---------------
Loss before extraordinary item (14.0) (4.5) (15.2) (1.7)
Extraordinary item-loss on early retirement of debt - - .8 -
---------------- ----------------- ----------------- ---------------
Net loss (14.0) % (4.5) % (16.0) % (1.7) %
================ ================= ================= ===============
Number of stores open at end of period 182 211 182 211
</TABLE>
THREE FISCAL MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
Net Sales. Net sales decreased $7,230, or 12.5%, to $50,485 for the
three fiscal month period ended October 30, 1999 from $57,715 for the three
fiscal month period ended October 31, 1998. Net sales decreased primarily as a
result of operating 29 fewer stores for the three fiscal months ended October
30, 1999. Additionally, comparable store sales decreased $2,080 or 4.1%.
Comparable store 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 store sales.
Gross Profit. Cost of sales includes distribution costs. Gross profit
decreased $5,392 or 20.3%, to $21,148 for the three fiscal month period ended
October 30, 1999 from $26,540 for the three fiscal month period ended October
31, 1998. As a percentage of net sales, gross profit was 41.9% for the three
fiscal month period ended October 30, 1999 compared to 46.0% in the same period
in the prior year. Gross profit as a percentage of net sales decreased primarily
as a result of lower margins from Halloween related merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses. Store
occupancy expenses are included in selling, general and administrative expenses
for all information presented. Selling, general and administrative expenses
decreased $4,368, or 14.8%, to $25,069 for the three fiscal month period ended
October 30, 1999 from $29,437 for the three fiscal month period ended October
31, 1998. This decrease resulted primarily from operating 29 fewer stores during
the quarter ended October 30, 1999 than the quarter ended October 31, 1998. As a
percentage of net sales, selling, general and administrative expenses decreased
to 49.7% in the three fiscal month period ended October 30, 1999 from 51.0% in
the three fiscal month period ended October 31, 1998.
10
<PAGE>
Interest Expense. Interest expense was $860 in the three fiscal month
period ended October 30, 1999 compared to $1,442 in the three fiscal month
period ended October 31, 1998. This decrease resulted primarily from lower
borrowing levels.
Reorganization Items, net. The Company recognized $2,297 of
reorganization items, net consisting of professional fees and other costs
related to the reorganization of the Company in the three fiscal month period
ended October 30, 1999.
Income Taxes. The Company's effective income tax rate was 40% during
the three fiscal month period ended October 31, 1998. Management believes that
it is more likely than not that deferred tax assets created by net operating
losses during the three fiscal month period ended October 30, 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 net
operating losses. As a result, the effective tax rate for the three fiscal month
period ended October 30, 1999 was zero.
NINE FISCAL MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
Net Sales. Net sales decreased $7,074, or 4.4%, to $155,252 for the
nine fiscal month period ended October 30, 1999 from $162,326 for the nine
fiscal month period ended October 31, 1998. The decrease resulted from
conducting closing sales at 27 stores during the second quarter of this fiscal
year. Additionally, comparable store sales decreased $4,056, or 2.8%. Comparable
store 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 store sales.
Gross Profit. Cost of sales includes distribution costs. Gross profit
decreased $7,395, or 9.4%, to $71,375 for the nine fiscal month period ended
October 30, 1999 from $78,770 for the nine fiscal month period ended October 31,
1998. As a percentage of net sales, gross profit was 46.0% for the nine fiscal
month period ended October 30, 1999 compared to 48.5% 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 nine fiscal
months ended October 31, 1998 and the lower margins from Halloween related
merchandise in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses. Store
occupancy expenses are included in selling, general and administrative expenses
for all information presented. Selling, general and administrative expenses
decreased $4,532, or 5.6%, to $75,820 for the nine fiscal month period ended
October 30, 1999 from $80,352 for the nine fiscal month period ended October 31,
1998. During the nine fiscal months ended October 31, 1998, the Company recorded
a pre-tax special charge of $655 relating to certain severance and new store
design costs which amounts have been included in selling, general and
administrative expenses. As a percentage of net sales, selling, general and
administrative expenses decreased to 48.8% in the nine fiscal month period ended
October 30, 1999 from 49.5% in the nine fiscal month period ended October 31,
1998.
Interest Expense. Interest expense was $2,335 in the nine fiscal
month period ended October 30, 1999 compared to $3,136 in the nine fiscal month
period ended October 31, 1998. This decrease resulted primarily from lower
borrowing levels.
11
<PAGE>
Reorganization Items, net. The Company has recognized $16,853 of
reorganization items, net consisting of a provision for the write down of fixed
assets, estimated lease rejection claims and the loss on the disposition of
merchandise inventory related to 27 store closings, professional fees, and other
costs related to the reorganization of the Company for the nine fiscal month
period ended October 30, 1999.
Income Taxes. The Company's effective income tax rate was 40% during
the nine fiscal month period ended October 31, 1998. Management believes that it
is more likely than not that deferred tax assets created by losses during the
nine fiscal month period ended October 30, 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 nine fiscal month period ended October
30, 1999 was zero.
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 codes 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.
Prior to July 1999 remediation was completed and all IT and non-IT systems were
tested and certified as Year 2000 ready and were moved into production status.
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 $1,000 to $1,100, of
which approximately $1,000 had been spent as of October 30, 1999. This estimate
assumes the Company will not incur significant Year 2000 related costs on behalf
of its suppliers or other third parties.
The Company did not experience and does not believe it will
experience any significant adverse effects from Year 2000 related incidents.
The costs of the Company's Year 2000 transition program were
essentially funded with cash flows from operations. Some of these costs related
solely to the modification of existing systems while others were for new
systems, which improve business functionality. In total, these costs were not
substantially different from the normal, recurring costs incurred for systems
development and implementation. As a result, these costs did not have a material
adverse effect on the Company's overall results of operations or cash flows.
12
<PAGE>
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. 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 October 30, 1999.
As of October 30, 1999, the Company had $24,103 of borrowings
outstanding under the Loan Agreement and had utilized approximately $7,900 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.
13
<PAGE>
At October 30, 1999 the Company's working capital was $20,319. Net
cash provided by operations for the nine fiscal month period ended October 30,
1999 was $5,419 compared to $7,266 of net cash used for the nine fiscal month
period ended October 31, 1998. The items most significantly influencing this
change was the $13,636 noncash portion of reorganization items and $40,414
increase in liabilities subject to compromise which was partially offset by the
related $21,759 decrease in accounts payable.
Net cash used in investing activities during the nine fiscal month
periods ended October 30, 1999 and October 31, 1998 was $1,675 and $7,960,
respectively. During the nine fiscal month period ended October 31, 1998, net
cash used in investing activities was primarily for capital expenditures for new
stores and equipment for the new distribution center.
Net cash used in financing activities during the nine fiscal month
period ended October 30, 1999 was $7,253 compared to $15,459 of net cash
provided by financing activities during the nine fiscal months ended October 31,
1998. 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.
14
<PAGE>
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.
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 of Form 8-K
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
The following report was filed on Form 8-K since July 31, 1999.
Current Report on Form 8-K filed on October 12, 1999 to report the
resignation of Stewart M. Kasen, Chairman, President and Chief
Executive Officer, the appointment of Robert C. Blattberg to
Chairman; the appointment of William E. Freeman as President and
Chief Executive Officer; and the promotion of Gary Rada to position
of Executive Vice President and General Merchandise Manager effective
October 11, 1999.
15
<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: April 26, 2000 By: /s/ William E. Freeman
--------------------------------------
William E. Freeman
President and Chief Executive Officer
Dated: April 26, 2000 By: /s/ Glen J. Franchi
--------------------------------------
Glen J. Franchi
Executive Vice President,
Chief Operating Officer and Treasurer
(principal financial and
accounting officer)
16
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 62,183
<CURRENT-ASSETS> 1,550
<PP&E> 32,156
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,695
<CURRENT-LIABILITIES> 43,502
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> (803)
<TOTAL-LIABILITY-AND-EQUITY> 96,695
<SALES> 50,485
<TOTAL-REVENUES> 50,485
<CGS> 29,337
<TOTAL-COSTS> 29,337
<OTHER-EXPENSES> 27,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 860
<INCOME-PRETAX> (7,078)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,078)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,078)
<EPS-BASIC> (.94)
<EPS-DILUTED> (.94)
</TABLE>
