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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 November 1, 2003



Commission File Number: 21859



FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in its charter)



|DELAWARE                        |  | 36-3652087                             
|------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of |  | (I.R.S. Employer Identification Number)
|incorporation or organization)  |  |                                        



2727 Diehl Road,

Naperville, IL 60563-2371

(Address of principal executive offices, zip code)



Registrants telephone number, including area code: (630) 579-2000



Factory Card Outlet Corp.

(Former Name)



Indicate by check mark whether this registrant (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ̈



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes ̈No x



The number of shares of the Registrants Common Stock outstanding as of December 5, 2003 was 3,035,210.



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Factory Card & Party Outlet Corp.



Form 10-Q



For the Quarter Ended November 1, 2003



Index



|        |  |                                                                                                                                                                                                                                                                                              |  | Page 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|        |  |                                                                                                                                                                                                                                                                                             
|        |  | Cautionary Statement Regarding Forward-Looking Statements                                                                                                                                                                                                                                    |  | 2    
|        |  |                                                                                                                                                                                                                                                                                             
|Part I  |  | Financial Information                                                                                                                                                                                                                                                                        |  |      
|        |  |                                                                                                                                                                                                                                                                                             
|Item 1  |  | Financial Statements:                                                                                                                                                                                                                                                                        |  |      
|        |  |                                                                                                                                                                                                                                                                                             
|        |  | Condensed Consolidated Balance Sheets (Unaudited)  as of November 1, 2003 (Successor Company) and as of February 1, 2003 (Successor Company)                                                                                                                                                |  | 3    
|        |  |                                                                                                                                                                                                                                                                                             
|        |  | Condensed Consolidated Statements of Operations (Unaudited)  three months ended November 1, 2003, three months ended November 2, 2002, nine months ended November 1, 2003, seven months ended November 2, 2002 (Successor
Company) and two months ended April 6, 2002 (Predecessor Company) |  | 4    
|        |  |                                                                                                                                                                                                                                                                                             
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  nine months ended November 1, 2003, seven months ended November 2, 2002 and (Successor Company) and two months ended April 6, 2002 (Predecessor
Company)                                                                       |  | 5    
|        |  |                                                                                                                                                                                                                                                                                             
|        |  | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                                                                                                                                           |  | 6-18 
|        |  |                                                                                                                                                                                                                                                                                             
|Item 2  |  | Managements Discussion and Analysis of Financial Condition And Results of Operations                                                                                                                                                                                                        |  | 19-26
|        |  |                                                                                                                                                                                                                                                                                             
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                   |  | 26   
|        |  |                                                                                                                                                                                                                                                                                             
|Item 4  |  | Disclosure Controls and Procedures                                                                                                                                                                                                                                                           |  | 26   
|        |  |                                                                                                                                                                                                                                                                                             
|Part II |  | Other Information                                                                                                                                                                                                                                                                            |  |      
|        |  | Item 1.
Legal Proceedings                                                                                                                                                                                                                                                                    |  | 27   
|        |  | Item 2.
Changes in Securities                                                                                                                                                                                                                                                                |  | 27   
|        |  | Item 3.
Defaults Upon Senior Securities                                                                                                                                                                                                                                                      |  | 27   
|        |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                  |  | 27   
|        |  | Item 5.
Other Information                                                                                                                                                                                                                                                                    |  | 27   
|        |  | Item 6.
Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                     |  | 27-29
|        |  | Signatures                                                                                                                                                                                                                                                                                   |  | 29   



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



As used herein, unless the context otherwise requires, the Company, we, our or us refers to Factory Card & Party Outlet Corp. and its subsidiaries.



Statements made in this report, and in our other public filings and releases, which are not
historical facts contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may
include, but are not limited to, certain statements in Managements Discussion and Analysis of Financial Condition and Results of Operations, such as our ability to meet our liquidity needs, scheduled debt and interest payments and
expected future capital expenditure requirements.



The forward-looking
statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the
future may differ materially.



Factors that could cause actual results to
differ materially include, but are not limited to the following:



| |  | ability to meet sales plans;
| | - | ----------------------------



| |  | weather and economic conditions;
| | - | --------------------------------



| |  | dependence on key personnel;
| | - | ----------------------------



| |  | competition;
| | - | ------------



| |  | ability to anticipate merchandise trends and consumer demand;
| | - | -------------------------------------------------------------



| |  | ability to maintain relationships with suppliers;
| | - | -------------------------------------------------



| |  | successful implementation of information systems;
| | - | -------------------------------------------------



| |  | successful handling of merchandise logistics;
| | - | ---------------------------------------------



| |  | inventory shrinkage;
| | - | --------------------



| |  | ability to meet future capital needs;
| | - | -------------------------------------



| |  | seasonality of business;
| | - | ------------------------



| |  | governmental regulations; and
| | - | -----------------------------



| |  | other factors both referenced and not referenced in this Form 10-Q.
| | - | -------------------------------------------------------------------



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PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Balance Sheets

(Unaudited)

(Dollar amounts in thousands)



|                                                                |  | November 1, 2003 |        | February 1, 2003
|--------------------------------------------------------------- |  | ---------------- | ------ | ----------------
|ASSETS                                                          |  |                  |        |                 
|Current assets:                                                 |  |                  |        |                 
|Cash                                                            |  | $                | 196    |                 
|Merchandise inventories, net                                    |  |                  | 49,323 |                 
|Prepaid expenses and other                                      |  |                  | 4,105  |                 
|                                                                |  |                  |        |                 
|Total current assets                                            |  |                  | 53,624 |                 
|Fixed assets, net                                               |  |                  | 7,234  |                 
|Other assets                                                    |  |                  | 307    |                 
|Deferred tax asset, net                                         |  |                  | 424    |                 
|                                                                |  |                  |        |                 
|Total assets                                                    |  | $                | 61,589 |                 
|                                                                |  |                  |        |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                            |  |                  |        |                 
|Current liabilities:                                            |  |                  |        |                 
|Debt                                                            |  | $                | 4,876  |                 
|Accounts payable                                                |  |                  | 20,878 |                 
|Accrued expenses                                                |  |                  | 8,750  |                 
|Current portion of long term debt and capital lease obligations |  |                  | 1,091  |                 
|                                                                |  |                  |        |                 
|Total current liabilities                                       |  |                  | 35,595 |                 
|                                                                |  |                  |        |                 
|Long term debt and capital lease obligations                    |  |                  | 4,822  |                 
|Deferred rent liabilities                                       |  |                  | 1,719  |                 
|                                                                |  |                  |        |                 
|Total liabilities                                               |  |                  | 42,136 |                 
|Stockholders equity                                            |  |                  | 19,453 |                 
|                                                                |  |                  |        |                 
|Total liabilities and stockholders equity                      |  | $                | 61,589 |                 
|                                                                |  |                  |        |                 



See accompanying notes
to condensed consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Operations

(Unaudited)

(Dollar amounts in thousands, except per share data)



|                                                  |  | SuccessorCompany                  |           | SuccessorCompany                  |   |           | SuccessorCompany                  |  | SuccessorCompany                  |           | PredecessorCompany            |  
|------------------------------------------------- |  | --------------------------------- | --------- | --------------------------------- | - | --------- | --------------------------------- |  | --------------------------------- | --------- | ----------------------------- | -
|                                                  |  | Three MonthsEnded November 1,2003 |           | Three MonthsEnded November 2,2002 |   |           | Nine Months Ended November 1,2003 |  | Seven MonthsEnded November 2,2002 |           | Two MonthsEnded April 6, 2002 |  
|Net sales                                         |  | $                                 | 51,353    |                                   | $ | 48,942    |                                   |  | $                                 | 165,729   |                               | $
|Cost of sales                                     |  |                                   | 32,622    |                                   |   | 32,540    |                                   |  |                                   | 106,509   |                               |  
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Gross profit                                      |  |                                   | 18,731    |                                   |   | 16,402    |                                   |  |                                   | 59,220    |                               |  
|Selling, general and administrative expenses      |  |                                   | 17,232    |                                   |   | 15,919    |                                   |  |                                   | 52,893    |                               |  
|Depreciation                                      |  |                                   | 466       |                                   |   | 393       |                                   |  |                                   | 1,400     |                               |  
|Reorganization items                              |  |                                   |          |                                   |   |          |                                   |  |                                   |          |                               |  
|Interest expense                                  |  |                                   | 283       |                                   |   | 419       |                                   |  |                                   | 863       |                               |  
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Income (loss) before income tax expense (benefit) |  |                                   | 750       |                                   |   | (329      | )                                 |  |                                   | 4,064     |                               |  
|Income tax expense (benefit)                      |  |                                   | 300       |                                   |   | (132      | )                                 |  |                                   | 1,625     |                               |  
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Net income (loss)                                 |  | $                                 | 450       |                                   | $ | (197      | )                                 |  | $                                 | 2,439     |                               | $
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Net income (loss) per share  basic               |  | $                                 | 0.15      |                                   | $ | (0.07     | )                                 |  | $                                 | 0.84      |                               | $
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Weighted average shares outstanding  basic       |  |                                   | 2,923,163 |                                   |   | 2,874,896 |                                   |  |                                   | 2,908,650 |                               |  
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Net income (loss) per share  diluted             |  | $                                 | 0.13      |                                   | $ | (0.07     | )                                 |  | $                                 | 0.75      |                               | $
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  
|Weighted average shares outstanding  diluted     |  |                                   | 3,597,393 |                                   |   | 2,874,896 |                                   |  |                                   | 3,238,425 |                               |  
|                                                  |  |                                   |           |                                   |   |           |                                   |  |                                   |           |                               |  



See accompanying notes
to condensed consolidated financial statements. All per share amounts are  adjusted for the two-for-one stock split effective October 21, 2003 (note 2).



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar amounts in thousands)



|                                                                                         |  | SuccessorCompany                         |          |   | Successor Company                           |   |          | PredecessorCompany                     | 
|---------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------- | - | ------------------------------------------- | - | -------- | -------------------------------------- | 
|                                                                                         |  | For the NineMonths EndedNovember 1, 2003 |          |   | For the Seven Months Ended November 2, 2002 |   |          | For the Two Months Ended April 6, 2002 | 
|Cash flows from operating activities:                                                    |  |                                          |          |   |                                             |   |          |                                        | 
|Net income                                                                               |  | $                                        | 2,439    |   |                                             | $ | 2,170    |                                        | 
|Adjustments to reconcile net income to net cash provided (used in) operating activities: |  |                                          |          |   |                                             |   |          |                                        | 
|Plan of reorganization and fresh start adjustments                                       |  |                                          |         |   |                                             |   |         |                                        | 
|Depreciation and amortization of fixed assets                                            |  |                                          | 1,400    |   |                                             |   | 849      |                                        | 
|Amortization of deferred financing costs                                                 |  |                                          | 101      |   |                                             |   | 57       |                                        | 
|Amortization of deferred compensation                                                    |  |                                          | 100      |   |                                             |   | 82       |                                        | 
|Non cash portion of reorganization items                                                 |  |                                          |         |   |                                             |   |         |                                        | 
|Tax benefit of pre-confirmation net operating losses                                     |  |                                          | 1,673    |   |                                             |   | 1,952    |                                        | 
|Changes in assets and liabilities:                                                       |  |                                          |          |   |                                             |   |          |                                        | 
|Merchandise inventories                                                                  |  |                                          | (1,133   | ) |                                             |   | (1,241   | )                                      | 
|Prepaid expenses and other assets                                                        |  |                                          | (84      | ) |                                             |   | 1,135    |                                        | 
|Accounts payable                                                                         |  |                                          | 7,913    |   |                                             |   | 4,045    |                                        | 
|Accrued expenses                                                                         |  |                                          | 2,285    |   |                                             |   | (4,793   | )                                      | 
|Deferred rent obligation                                                                 |  |                                          | 120      |   |                                             |   | 1,308    |                                        | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Net cash provided by operating activities                                                |  |                                          | 14,814   |   |                                             |   | 5,564    |                                        | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Net cash used in investing activities  purchase of fixed assets, net                    |  |                                          | (1,833   | ) |                                             |   | (1,557   | )                                      | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Cash flow provided by (used in) financing activities:                                    |  |                                          |          |   |                                             |   |          |                                        | 
|Borrowings                                                                               |  |                                          | 161,364  |   |                                             |   | 129,827  |                                        | 
|Repayment of debt                                                                        |  |                                          | (174,016 | ) |                                             |   | (133,695 | )                                      | 
|Payment of capital lease obligations                                                     |  |                                          | (327     | ) |                                             |   | (311     | )                                      | 
|Change in long term debt and capital lease obligations                                   |  |                                          | (89      | ) |                                             |   | 77       |                                        | 
|Cash received from exercise of stock warrants and options                                |  |                                          | 87       |   |                                             |   | 97       |                                        | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Net cash used in financing activities                                                    |  |                                          | (12,981  | ) |                                             |   | (4,005   | )                                      | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Net increase (decrease) in cash                                                          |  |                                          |         |   |                                             |   | 2        |                                        | 
|Cash at beginning of period                                                              |  |                                          | 196      |   |                                             |   | 189      |                                        | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Cash at end of period                                                                    |  | $                                        | 196      |   |                                             | $ | 191      |                                        | 
|                                                                                         |  |                                          |          |   |                                             |   |          |                                        | 
|Supplemental cash flow information:                                                      |  |                                          |          |   |                                             |   |          |                                        | 
|Interest paid                                                                            |  | $                                        | 705      |   |                                             | $ | 707      |                                        | 
|Alternative minimum taxes paid                                                           |  |                                          |         |   |                                             |   | 37       |                                        | 
|Cash paid for reorganization items                                                       |  |                                          | 143      |   |                                             |   | 5,582    |                                        | 
|Supplemental non cash information:                                                       |  |                                          |          |   |                                             |   |          |                                        | 
|Stock issued (Successor Company)                                                         |  |                                          |         |   |                                             |   |         |                                        | 
|Fair value adjustments                                                                   |  |                                          |         |   |                                             |   |         |                                        | 
|Stock retired (Predecessor Company) and debt discharge                                   |  |                                          |         |   |                                             |   |         |                                        | 
|Unearned restricted stock awards                                                         |  |                                          | 100      |   |                                             |   | 482      |                                        | 
|Capital lease obligations                                                                |  |                                          |         |   |                                             |   |         |                                        | 



See accompanying notes
to condensed consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Dollar amounts in thousands, except share and per share data)



|(1) | Chapter 11 Proceedings and Reorganization
|--- | -----------------------------------------



On March 23, 1999 (the petition date), Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America
Ltd. (collectively the Company), filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code) under case numbers 99-685(JCA) and 99-686(JCA) (the Chapter 11
Cases). From that time until March 20, 2002, we operated our business as a debtor-in-possession subject to the jurisdiction and supervision of the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court).
On March 20, 2002, we announced that the Bankruptcy Court confirmed our Amended Plan of Reorganization (the Plan of Reorganization) that we filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the Effective
Date) the Plan of Reorganization became effective and we successfully emerged from Chapter 11.



Certain of the principal provisions of the Plan of Reorganization are as follows:



| |  |  | We authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. Our amended and restated certificate of incorporation prohibits the transfer of any
shares of the new Common Stock or any rights to acquire shares of the new Common Stock to any person or group that is a 5% shareholder of Factory Card & Party Outlet Corp.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock of Factory Card & Party Outlet Corp. that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of our new Common
Stock were issued to holders of the canceled common stock at a ratio of .00992307034 shares of new Common Stock for each share of canceled common stock.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against us, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 150,000 shares of the new Common Stock to certain members of our management, vesting ratably over a four-year period, as specified in the Plan, and warrants to purchase an
aggregate 62,000 shares of our new Common Stock at a purchase price of 3.76 per share. The exercise of warrants on June 7, 2002 allowed the holders to purchase 25,800 shares of new Common Stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued four series of new Warrants, Series A through D, to tendering holders of the canceled Common Stock, granting such holders the right to purchase an aggregate of 306,934
additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share.
The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share. The exercise of new Warrants during the three
month period ended November 1, 2003 allowed the holders to purchase 5,978 shares of new Common Stock.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | We adopted an employee stock option plan, the 2002 Stock Option Plan, to provide our eligible employees with the opportunity to purchase an aggregate 333,334 shares of our new
Common Stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We paid $1,000 to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an aggregate of
$2,600, less any prepayments, which obligation is secured by a subordinated lien on certain of our property.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We converted an aggregate of $3,130 post petition accounts payable into long-term convertible secured subordinated notes (the Trade Conversion Notes) to seven trade
vendors and suppliers (the Trade Participants). The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part, into an aggregate of 29.35% of the new Common Stock, at any time between April 9,
2005 (the third anniversary of the Plans Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any prepayments made by us.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide us with payment terms,
including extended payment terms and seasonal advances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Two-for-one Stock Split
|--- | -----------------------



On September 9, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data
related to our common stock (number of shares, average shares outstanding and earnings per share) have been adjusted for the prior periods to reflect the impact of this stock split.



|(3) | Business and Basis of Presentation
|--- | ----------------------------------



We are a chain of company-owned stores offering an extensive selection of party supplies, gifts, greeting cards, giftwrap, and other special occasion
merchandise at everyday value prices. As of December 5, 2003, we operated 175 stores in 20 states.



The consolidated unaudited financial statements include the accounts of Factory Card & Party Outlet Corp. and our wholly owned subsidiary, Factory
Card Outlet of America Ltd. These financial statements have been prepared by management without audit and should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended February 1, 2003 included in our
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.



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Fresh-Start Accounting



Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), we adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the plan
received less than 50% of the voting shares of the emerging entity and its reorganization value was less than its post petition liabilities and allowed claims.



As a result of fresh-start reporting, we reflected the distributions under the Plan of Reorganization in its balance sheet as of April 6, 2002 (the
effective date of the consummation of the plan for accounting purposes). Accordingly, all consolidated financial statements for any period prior to April 6, 2002 are referred to as the Predecessor Company as they reflect the periods
prior to the implementation of fresh-start reporting and are not comparable to the consolidated financial statements for periods after the implementation of fresh-start reporting.



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Fresh-start reporting requires that the reorganization value of the reorganized debtors be allocated to
their assets in conformity with Statement of Financial Accounting Standard (SFAS) No. 141 Business Combinations, for transactions reported on the basis of the purchase method. Any reorganization value less than the fair value
of the specific tangible or identified intangible assets is to be allocated to their non-current tangible assets on a pro rata basis after offsetting any intangible assets. Our reorganized enterprise value on the effective date was established at
$42,500 based upon a calculation of discounted cash flows under our financial projections and trading multiples of comparable companies. The effects of the Plan of Reorganization and the application of fresh-start accounting on our pre-confirmation
consolidated balance sheet are as follows:



|                                                   |  | PredecessorApril 6, 2002 |         |   | Plan ofReorganization |   |         | Fresh StartAdjustments |  |   | SuccessorApril 6, 2002
|-------------------------------------------------- |  | ------------------------ | ------- | - | --------------------- | - | ------- | ---------------------- |  | - | ----------------------
|ASSETS                                             |  |                          |         |   |                       |   |         |                        |  |   |                       
|Current assets:                                    |  |                          |         |   |                       |   |         |                        |  |   |                       
|Cash                                               |  | $                        | 189     |   |                       | $ |         |                        |  | $ |                       
|Merchandise inventories                            |  |                          | 56,987  |   |                       |   |         |                        |  |   | (5,396                
|Prepaid expenses and other                         |  |                          | 5,251   |   |                       |   |         |                        |  |   |                       
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Total current assets                               |  |                          | 62,427  |   |                       |   |         |                        |  |   | (5,396                
|Fixed assets, net                                  |  |                          | 17,600  |   |                       |   |         |                        |  |   | (11,760               
|Other assets                                       |  |                          | 240     |   |                       |   | 200     | b                      |  |   |                       
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Total assets                                       |  | $                        | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156               
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)     |  |                          |         |   |                       |   |         |                        |  |   |                       
|Current liabilities:                               |  |                          |         |   |                       |   |         |                        |  |   |                       
|Debt                                               |  | $                        |         |   |                       | $ | 22,743  | c                      |  | $ |                       
|Debtor-in-possession financing                     |  |                          | 22,543  |   |                       |   | (22,543 | )c                     |  |   |                       
|Accounts payable                                   |  |                          | 11,407  |   |                       |   | (3,130  | )d                     |  |   |                       
|Accrued expenses                                   |  |                          | 12,534  |   |                       |   |         |                        |  |   |                       
|Liabilities subject to settlement                  |  |                          |         |   |                       |   | 3,085   | e                      |  |   |                       
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Total current liabilities                          |  |                          | 46,484  |   |                       |   | 155     |                        |  |   |                      
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Long term notes payable and capital leases         |  |                          | 1,128   |   |                       |   | 5,504   | d,h                    |  |   |                       
|Deferred rent liabilities                          |  |                          |        |   |                       |   | 6,750   | f                      |  |   | (6,750                
|Liabilities subject to compromise                  |  |                          | 54,056  |   |                       |   | (54,056 | )f                     |  |   |                       
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Total liabilities                                  |  |                          | 101,668 |   |                       |   | (41,647 | )                      |  |   | (6,750                
|Stockholders equity (deficit)                     |  |                          | (21,401 | ) |                       |   | 41,847  | g                      |  |   | (10,406               
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       
|Total liabilities & stockholders equity (deficit) |  | $                        | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156               
|                                                   |  |                          |         |   |                       |   |         |                        |  |   |                       



|(a) | To reduce the excess of book value over enterprise value.
|--- | ---------------------------------------------------------



|(b) | To record $200 of deferred financing costs related to exit financing with Wells Fargo Retail Finance LLP.
|--- | ---------------------------------------------------------------------------------------------------------



|(c) | Borrowings under new line of credit agreement with Wells Fargo Retail Finance, LLP. Existing debtor in possession financing agreement was paid in full upon the
effective date of the Plan of Reorganization.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | To record the conversion of post-petition accounts payable into the $3,130 Trade Conversion Note.
|--- | -------------------------------------------------------------------------------------------------



|(e) | To record $1,000 payable due to creditors, $1,700 payable in landlord cure amounts, $323 payable in priority claims and $62 payable in convenience claims. Amounts
were paid within 60 days of the Effective Date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) | To record elimination of pre-petition liabilities subject to compromise. Pre-petition liabilities subject to compromise included deferred rent liabilities that were
not extinguished by the Bankruptcy Court.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) | To write-off old equity upon emergence from chapter 11 and record the issuance of new stock
in accordance with the Plan of Reorganization and to adjust the accumulated deficit by the portion of the liabilities subject to compromise that is forgiven.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(h) | To record at fair value the $2,600 creditor agreement.
|--- | ------------------------------------------------------



|(i) | To eliminate the capitalization of certain buying and warehousing costs associated with a change in accounting principle.
|--- | -------------------------------------------------------------------------------------------------------------------------



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Management Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and
related disclosures. Significant estimates made as of and for the three and nine months ended November 1, 2003 and the three and seven months ended November 2, 2002 include accruals for reorganization items, provision for shrinkage, and the carrying
values of inventories. Actual results could differ from those estimates.



Change in Accounting Principle



Prior to the Companys emergence from bankruptcy, we capitalized certain buying and warehousing costs as a component of inventory. As of the emergence date, we discontinued this practice, recording all of the aforementioned costs in
Cost of Sales. Going forward, we do not anticipate that the change will have a significant impact on periodic earnings.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142 Goodwill and Other Intangible Assets, which
establishes financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, Intangible Assets. The provisions of SFAS No. 142 are effective for fiscal years beginning after December
15, 2001. As we do not have goodwill or intangible assets recorded in the financial statements, the adoption of SFAS No. 142 during the first quarter of fiscal 2002 did not have an impact on our financial condition or results of operations.



In June 2001, the FASB issued SFAS No. 143, Accounting
for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. We adopted the provisions of SFAS No. 143 and it did not have an impact on our consolidated
financial position or results of operations.



In August 2001,
the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, although it retains many of the fundamental provisions of that Statement. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001, thereby applying to fiscal 2002. In conjunction with fresh-start reporting, we recorded a $11,760 adjustment to fixed assets to reflect the excess of book value over enterprise value. We have adopted the provisions
of SFAS No. 144 and it did not have an impact on our consolidated financial position or results of operations.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Specifically, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30 and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, as these two standards required that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. Consequently, such gains and losses will now be classified as
extraordinary only if they meet the criteria for extraordinary treatment set forth in APB Opinion No. 30, Reporting the Results of Operations  Reporting the Effects of



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Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also rescinds SFAS No.
44 Accounting for Intangible Assets of Motor Carriers, an amendment of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions 17 and 30, because the event to which that Statement relates is no longer relevant. SFAS No. 145 amends
SFAS No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as such transactions, and also makes certain technical
corrections to a number of existing pronouncements. We were required to adopt this statement due to the application of fresh-start accounting. The effect of this statement is that the net gain associated with the plan of reorganization and
fresh-start adjustments is reported as a component of operations in the two months ended April 6, 2002.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement changes the
timing of recognition for certain exit costs associated with restructuring activities, so that certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized when we commit to
a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and could result in recognizing the cost of future restructuring activities over a period of time as opposed to as a single event.



In September 2002, the FASB issued Emerging Issues Task Force
(EITF) 02-16 Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor which addresses the accounting for cash retailers receive from vendors. The EITF concluded cash received from a
vendor is presumed to be a reduction of purchase price of goods unless the vendor receives an identifiable benefit or there is reimbursement of a specific incremental identifiable cost. Additionally, rebates are to be recorded when it is probable
and reasonably estimable and allocated to transactions giving rise to the rebate. Our accounting policies relating to cash received from vendors is consistent with the conclusions reached by the EITF.



In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of a liability for certain guarantee obligations issued
or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to be made by a guarantor of certain guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002. We adopted the
disclosure provisions and the accounting requirements of FIN 45 as of February 1, 2003 and it did not have an impact on our consolidated financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement 123. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation and provides alternative methods of accounting for a change by registrants to the fair value
method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of both the annual and interim financial statements
of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, and disclosures are
effective for the first quarter beginning after December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46
addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for
all variable interest



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entities created after January 31, 2003. We are required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003
by the end of the current fiscal year. As we do not have any interests in a variable interest entity, the adoption of this provision did not have an impact on our consolidated financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after June 30, 2003. As
we have not entered into any such agreements after June 30, 2003, the adoption of this provision did not have an impact on our consolidated financial position or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we have not issued any financial instruments which meet this criteria, the adoption of this provision did not have
an impact on our consolidated financial position or results of operations.



|(4) | Long Term Debt and Capital Lease Obligations
|--- | --------------------------------------------



Pursuant to the Plan of Reorganization, we converted $3,130 of post petition trade payables into a trade conversion note, which will be payable within 4
years of the Effective Date (April 6, 2002). In addition, we recorded at fair value a $2,600 extended creditor payment to the general unsecured creditors.



The following table summarizes the components of Long Term Debt and Capital Lease Obligations including its current portion at November 1, 2003:



|                                              |  | November 1,2003
|--------------------------------------------- |  | ---------------
|Trade conversion note                         |  | $              
|Discounted value of extended creditor payment |  |                
|Financing agreements                          |  |                
|Capital leases                                |  |                
|                                              |  |                
|Total                                         |  | $              
|                                              |  |                



Both the Trade
conversion note and the extended creditor payment are subject to prepayment provisions if our average excess availability on the New Loan Agreement exceeds $12,000 during the prior fiscal year. In such event, 40% of the excess availability greater
than $12,000 shall be paid, subject to certain maximum payment amounts, on a pro rata basis to the trade conversion note holders and general unsecured creditors related to the extended creditor payable. Based upon our excess availability through
nine months ended November 1, 2003 and our forecasted availability during the three months ended January 31, 2004, we believe we will be subject to a maximum prepayment amount of $735. This payment is due May 31, 2004.



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|(5) | Debt
|--- | ----



On the Effective Date, obligations relating to our debtor-in-possession financing facility were paid in full and our secured financing facility with Wells Fargo Retail Finance, LLC (the New Loan Agreement)
became effective. The New Loan Agreement, which is a line of credit, currently provides up to $40,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. Borrowings under the facility are
limited to a percent of inventory levels. The Loan Agreement expires on April 8, 2005 and has a variable interest rate based upon the Prime rate or at our option, a variable rate based upon earnings performance and the London Interbank Offered Rate
(LIBOR) with a minimum threshold of 5.0%. The interest rate on our borrowings was 5.0% at November 1, 2003. Borrowings under the New Loan Agreement are secured by substantially all of our assets. Certain restrictive covenants apply,
including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met.



|(6) | Stockholders Equity
|--- | --------------------



We authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. A total of 2,699,990 shares were distributed in the
initial distribution of stock to creditors, 150,000 shares were distributed to certain members of management which vest over a 4 year period and 149,106 shares were distributed to former equity interests.



As provided in the Plan of Reorganization, we adopted a 2002 stock option
plan, which authorizes the grant of up to 333,334 stock options to our employees  322,200 options under the 2002 stock option plan at exercise prices ranging from $2.75 to $18.05 were outstanding at November 1, 2003.



We issued four series of new Warrants, Series A through D, to tendering
holders of the canceled Common Stock, granting such holders the right to purchase an aggregate of 306,934 additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share.
The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any
time prior to April 9, 2010 at a price of $17.00 per share. The exercise of new Warrants during the three month period ended November 1, 2003 allowed the holders to purchase 5,978 shares of new Common Stock.



Warrants were issued to management to purchase an aggregate 62,000 shares of
the new Common Stock at a purchase price of $3.76 per share. The exercise of warrants on June 7, 2002 allowed the holders to purchase 25,800 shares of new Common Stock.



As provided in the Plan of Reorganization, we entered into a Trade Conversion Agreement with certain trade creditors to
convert $3,130 of accounts payable into long term Trade Conversion Notes. Per the agreement, these notes will be payable on the fourth anniversary of the Effective Date and contain a conversion feature into common stock between the third and fourth
anniversary of the Effective Date.



On April 23, 2002, the
Board of Directors approved the non-employee Director Stock Option Plan, which authorized the grant of up to 300,000 common stock options to non-employee members of the Board of Directors  170,000 options at exercise prices ranging from $2.65
to $3.76 were outstanding at November 1, 2003.



On January 27,
2003, the Board of Directors adopted the 2003 Equity Incentive Plan whereby 500,000 shares would become available to our employees and officers. The 2003 Equity Incentive Plan was approved by the stockholders at our annual meeting of stockholders on
July 16, 2003. Under the 2003



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Equity Incentive Plan  225,200 options were outstanding at November 1, 2003 with an exercise price of $6.38.



A separate Statement of Stockholders Equity is not required to be
presented for interim periods. However, comprehensive income equaled net income for the periods presented as the Company does not have any currency translation adjustments, minimum pension liability adjustments or SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities adjustments.



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|(7) | Earnings Per Share
|--- | ------------------



In accordance with SFAS No. 128 Earnings per Share, earnings per share  basic were computed by dividing net income by the weighted
average number of common shares outstanding during the period. Earnings per share  diluted includes, in addition to the above, the effect of potentially dilutive securities, if dilutive.



The reconciliation of earnings per share basic to earnings per share diluted
is as follows (in thousands, except per share amounts):



|                                             |  | Net income |       |   | Shares |           | Per share |  
|-------------------------------------------- |  | ---------- | ----- | - | ------ | --------- | --------- | -
|For the three months ended November 1, 2003: |  |            |       |   |        |           |           |  
|Earnings per share  basic:                  |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 450   |   |        | 2,923,163 |           | $
|Effect of dilutive securities:               |  |            |       |   |        |           |           |  
|Stock options and warrants                   |  |            |       |   |        | 674,230   |           |  
|Earnings per share  diluted:                |  |            |       |   |        |           |           |  
|                                             |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 450   |   |        | 3,597,393 |           | $
|                                             |  |            |       |   |        |           |           |  
|                                             |  |            |      
|For the three months ended November 2, 2002: |  |            |       |   |        |           |           |  
|Loss per share  basic:                      |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | (197  | ) |        | 2,874,896 |           | $
|Effect of dilutive securities:               |  |            |       |   |        |           |           |  
|Stock options and warrants                   |  |            |       |   |        |          |           |  
|Loss per share  diluted:                    |  |            |       |   |        |           |           |  
|                                             |  |            |       |   |        |           |           |  
|Net loss                                     |  | $          | (197  | ) |        | 2,874,896 |           | $
|                                             |  |            |       |   |        |           |           |  
|                                             |  |            |      
|                                             |  | Net income |       |   | Shares |           | Per share |  
|For the nine months ended November 1, 2003:  |  |            |       |   |        |           |           |  
|Earnings per share  basic:                  |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 2,439 |   |        | 2,908,650 |           | $
|Effect of dilutive securities:               |  |            |       |   |        |           |           |  
|Stock options and warrants                   |  |            |       |   |        | 329,775   |           |  
|Earnings per share  diluted:                |  |            |       |   |        |           |           |  
|                                             |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 2,439 |   |        | 3,238,425 |           | $
|                                             |  |            |       |   |        |           |           |  
|                                             |  |            |      
|For the seven months ended November 2, 2002: |  |            |       |   |        |           |           |  
|Earnings per share  basic:                  |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 2,170 |   |        | 2,867,156 |           | $
|Effect of dilutive securities:               |  |            |       |   |        |           |           |  
|Stock options and warrants                   |  |            |       |   |        | 136,504   |           |  
|Earnings per share  diluted:                |  |            |       |   |        |           |           |  
|                                             |  |            |       |   |        |           |           |  
|Net income                                   |  | $          | 2,170 |   |        | 3,003,660 |           | $
|                                             |  |            |       |   |        |           |           |  



The dilutive impact of
stock options and warrants was calculated using the treasury method. The shares related to the trade conversion notes did not meet the criteria for inclusion in the diluted earning per share calculation and thus were excluded. Had we reported a
profit in the three months ended November 2, 2002, the number of average shares diluted would have increased by 135,622 shares.



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##### Table of Contents

Per share and share information for the Predecessor Company for all periods presented in the Condensed
Consolidated Statements of Operations have been omitted as such information is not deemed to be meaningful.



|(8) | Stock-Based Compensation
|--- | ------------------------



We account for stock option plans under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 Accounting for Stock Based Compensation and has been determined as if we had accounted for our stock
option plans under the fair value method of SFAS No. 123. Had we determined compensation cost based upon the fair value at the grant date for our stock options under SFAS No. 123, our net income would have changed as indicated below:



|                                                                                                                                     |  | For the threemonths endedNovember 1,2003 |      |   | For the threemonths endedNovember 2,2002 |   |       | For the ninemonths endedNovember 1,2003 |  |   | For the sevenmonths endedNovember 2,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ---- | - | ---------------------------------------- | - | ----- | --------------------------------------- |  | - | ---------------------------------------- | -
|Net income (loss), as reported                                                                                                       |  | $                                        | 450  |   |                                          | $ | (197  | )                                       |  | $ | 2,439                                    |  
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |                                          | (117 | ) |                                          |   | (29   | )                                       |  |   | (208                                     | )
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|Pro forma net income (loss)                                                                                                          |  | $                                        | 333  |   |                                          | $ | (226  | )                                       |  | $ | 2,231                                    |  
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|                                                                                                                                     |  |                                          |      |  
|Earnings per share:                                                                                                                  |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|Basic-as reported                                                                                                                    |  | $                                        | 0.15 |   |                                          | $ | (0.07 | )                                       |  | $ | 0.84                                     |  
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|Basic-pro forma                                                                                                                      |  | $                                        | 0.11 |   |                                          | $ | (0.08 | )                                       |  | $ | 0.77                                     |  
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|Diluted-as reported                                                                                                                  |  | $                                        | 0.13 |   |                                          | $ | (0.07 | )                                       |  | $ | 0.75                                     |  
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  
|Diluted-pro forma                                                                                                                    |  | $                                        | 0.09 |   |                                          | $ | (0.08 | )                                       |  | $ | 0.69                                     |  
|                                                                                                                                     |  |                                          |      |   |                                          |   |       |                                         |  |   |                                          |  



The per share weighted
average fair value of stock options granted during the three and nine months ended November 1, 2003 and three months and seven months ended November 2, 2002 was estimated using the Black-Scholes Option Pricing Model with the following weighted
average assumptions: expected dividend rate 0.0%, risk free interest rate of 4.25% to 4.36%, volatility of 50% and an expected life of approximately 10 years.



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##### Table of Contents

|(9) | Reorganization Items
|--- | --------------------



Reorganization Items consisted of professional fees related to legal, accounting and consulting services directly attributable to the Plan of
Reorganization and employee retention bonuses. In addition, Reorganization Items include the write-off of old equity upon emergence from chapter 11 and the elimination of pre-petition obligations during the two-months ended April 6, 2002. The
components of Reorganization Items are as follows:



|                                                            |  | PredecessorCompany             |        
|----------------------------------------------------------- |  | ------------------------------ | -------
|Reorganization Items:                                       |  | Two months ended April 6, 2002 |        
|Professional fees                                           |  | $                              | 1,379  
|Severance/retention bonus                                   |  |                                | 1,026  
|Closed store expense                                        |  |                                | 311    
|Fresh start adjustments                                     |  |                                | 10,406 
|Forgiveness of debt                                         |  |                                | (41,847
|Unsecured creditors ownership share of reorganized company |  |                                | 9,543  
|Other                                                       |  |                                | 342    
|                                                            |  |                                |        
|Total Reorganization Items                                  |  | $                              | (18,840
|                                                            |  |                                |        



The Successor Company
has not recorded any Reorganization Items.



|(10) | Income Taxes
|---- | ------------



Since we utilized fresh start accounting upon emergence from bankruptcy, the income tax expense of $1,625 for the nine months ended November 1, 2003 and
$1,428 for the seven months ended November 2, 2002 is offset, net of the impact of deferred taxes, by a direct increase in stockholders equity resulting from the ability to utilize prior period net operating loss benefits. Due to the fact we
have the ability to use prior period net operating loss benefits, we did not pay federal income tax in either period. The income tax benefit of $360 for the two months ended April 6, 2002 results from the realization of net operating loss carry
backs due to the enactment of the Job Creation and Workers Assistance Act of 2002.



We have recorded a valuation allowance to fully reserve for the value of net deferred tax assets that existed upon emergence from bankruptcy. These assets include remaining net operating loss carryforwards. This
allowance on pre-emergence deferred tax assets is necessary, as the utilization of the Companys net loss carry forwards is dependent upon sufficient future taxable income.



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|(11) | Related Party Transactions
|---- | --------------------------



As described in the Plan of Reorganization, 90% of the new Common Stock was distributed to unsecured creditors, five percent was distributed to our
management and five percent was distributed to old equity shareholders. Only one entity has an ownership interest of more than 10%. Total purchases from that entity were $1,924 during the nine months ended November 1, 2003 and amounts owed to that
entity as of November 1, 2003 were $146. There were no purchases from this entity during the seven months ended November 2, 2002 or the two months ended April 6, 2002. Management believes transactions with former unsecured creditors, as well as
other vendors, are deemed consummated on terms equivalent to those prevailing in an arms length transaction.



|(12) | Contingencies
|---- | -------------



In 2003 we implemented an in-house program to sort merchandise by store in our warehouse facility. Prior to this program, a third party logistical vendor
performed the sorting of this merchandise. We have a contract with this vendor to perform certain logistical services requested by us that expires on January 31, 2004. This vendor has continued to over bill us for sort and various other charges. At
November 1, 2003 these charges were approximately $3,200. We believe these disputed charges are without merit and are in violation of the terms of our agreement. Consequently, these charges are not accrued in the financial statements at November 1,
2003.



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|ITEM 2 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands)
|------ |  | -------------------------------------------------------------------------------------------------------------------



We are a chain of company-owned stores offering an extensive selection of
party supplies, gifts, greeting cards, giftwrap and other special occasion merchandise at everyday value prices. During the fiscal quarter ending November 1, 2003, we opened three new stores. This marks the first store opening in over five years.
Additionally, another store opened in November 2003. As of December 5, 2003, we operate 175 stores in 20 states.



On November 18, 2003 we announced our re-listing on the NASDAQ National Market. Our common stock now trades under the ticker symbol FCPO.



On March 23, 1999 we filed voluntary petitions for relief under chapter 11 of
title 11 of the United States Code under case numbers 99-685(JCA) and 99-686(JCA). From that time until March 20, 2002, we operated our business as a debtor-in-possession subject to the jurisdiction and supervision of the United States Bankruptcy
Court for the District of Delaware (the Bankruptcy Court). On March 20, 2002, we announced that the Bankruptcy Court confirmed our Amended Plan of Reorganization (the Plan of Reorganization) that we filed with the Bankruptcy
Court on February 5, 2002. On April 9, 2002 (the Effective Date) the Plan of Reorganization became effective and we successfully emerged from Chapter 11. See Note (1) to the Notes to the Condensed Consolidated Financial Statements for a
summary of the principal provisions of the Plan of Reorganization.



Critical Accounting Policies



Critical Accounting Policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We have prepared the
accompanying financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We have identified the following critical accounting policies utilized in the preparation of these financial statements.



Fresh Start Accounting



As is more fully discussed in Note 3  Business and Basis of
Presentation in our Notes to Condensed Consolidated Financial Statements, we adopted fresh start accounting pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), during the first quarter of fiscal 2002 resulting in a change in the basis of accounting of our underlying assets and liabilities at the Effective Date. Accordingly,
our financial statements before and after the Effective Date are not comparable. The operating results for the two months ended April 6, 2002 were significantly impacted by items associated with emerging from bankruptcy including debt forgiveness,
restructuring activities and certain changes to record the excess of book value over enterprise value. Upon implementation of fresh start accounting, our total assets and total liabilities and stockholders equity were adjusted downward by
approximately $17,000.



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Fresh-start Reporting; Factors Affecting Comparability of Financial Information



Effective April 9, 2002, we emerged from Chapter 11
bankruptcy proceedings and implemented fresh-start accounting. Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity
and are not comparable to pre-confirmation periods. However, for purposes of this discussion, the seven months ended November 2, 2002 (Successor Company) has been combined with the two months ended April 6, 2002 (Predecessor Company) and then
compared to the nine months ended November 1, 2003. Differences between periods due to fresh-start accounting adjustments are explained when necessary.



The lack of comparability in the accompanying unaudited consolidated financial statements is most apparent in our capital costs (lease, interest,
depreciation and amortization), as well as income taxes, debt restructuring and reorganization costs.



Results of Operations



The following table sets forth, for the periods indicated, selected statements of operations data expressed as a percentage of net sales and the number of stores open at the end of each period. The following table is included solely for use
in comparative analysis of results of operations and to complement managements discussion and analysis.



|                                             |  | Three monthsended |   |  | Three monthsended |    |  | Nine months ended |  
|-------------------------------------------- |  | ----------------- | - |  | ----------------- | -- |  | ----------------- | -
|                                             |  | November 1,2003   |   |  | November 2,2002   |    |  | November 1,2003   |  
|Net sales                                    |  | 100.0             | % |  | 100.0             | %  |  | 100.0             | %
|Cost of sales                                |  | 63.5              |   |  | 66.5              |    |  | 64.3              |  
|                                             |  |                   |   |  |                   |    |  |                   |  
|Gross profit                                 |  | 36.5              |   |  | 33.5              |    |  | 35.7              |  
|Selling, general and administrative expenses |  | 33.6              |   |  | 32.5              |    |  | 31.9              |  
|Depreciation                                 |  | 0.9               |   |  | 0.8               |    |  | 0.8               |  
|Reorganization items                         |  |                  |   |  |                  |    |  |                  |  
|Interest expense                             |  | 0.6               |   |  | 0.9               |    |  | 0.5               |  
|                                             |  |                   |   |  |                   |    |  |                   |  
|Income (loss) before income tax expense      |  | 1.4               |   |  | (0.7              | )  |  | 2.5               |  
|Income tax expense (benefit)                 |  | 0.6               |   |  | (0.3              | )  |  | 1.0               |  
|                                             |  |                   |   |  |                   |    |  |                   |  
|Net income (loss)                            |  | 0.8               | % |  | (0.4              | )% |  | 1.5               | %
|                                             |  |                   |   |  |                   |    |  |                   |  
|Number of stores open at end of period       |  | 174               |   |  | 171               |    |  | 174               |  



Three Months Ended November 1, 2003
and November 2, 2002



Net Sales. Net sales
increased $2,411 or 4.9% to $51,353 for the three months ended November 1, 2003 (third quarter of fiscal 2003) from $48,942 for the three months ended November 2, 2002 (third quarter of fiscal 2002). Strong performance in our
seasonal and basic party categories coupled with our three new store openings helped drive the sales increase. Comparable store sales increased 4.4%. We include stores opened 13 or 14 months after their opening date in the calculation of comparable
sales.



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Gross Profit. Cost of sales includes merchandise, distribution and store occupancy costs. Gross
profit increased $2,329 or 14.2%, to $18,731 for the third quarter of fiscal 2003 from $16,402 for the third quarter of fiscal 2002. As a percentage of net sales, gross profit was 36.5% for the third quarter of fiscal 2003 compared to 33.5% in the
third quarter of fiscal 2002. This fluctuation is attributed to a decrease in freight and distribution costs and improved merchandise gross margin.



Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, advertising and other store
operating and corporate administrative expenses. Selling, general and administrative expenses increased $1,313 or 8.2% to $17,232 for the third quarter of fiscal 2003 from $15,919 for the third quarter of fiscal 2002. The fluctuation is attributed
to increases in store payroll and general and administrative expenses of $263 and $1,151 respectively, offset by a $275 decrease in store general expenses. Additionally, advertising expense increased $174 to $1,581 for the third quarter of fiscal
2003 from $1,407 for the third quarter of fiscal 2002 as we expanded our advertising campaign during the Halloween season. As a percentage of net sales, selling, general and administrative expenses increased to 33.6% in the third quarter of fiscal
2003 from 32.5% in the third quarter of fiscal 2002.



Depreciation expense. Depreciation expense was $466 in the third quarter of fiscal 2003 compared to $393 in the third quarter of fiscal 2002. The increase is attributed to the level of fixed asset additions placed in service since we
emerged from bankruptcy in April 2002.



Interest
Expense. Interest expense was $283 in the third quarter of fiscal 2003 compared to $419 in the third quarter of fiscal 2002. Decreases in inventory levels coupled with an increase in our days payable outstanding have translated to lower
borrowing levels.



Income Taxes. Income tax expense of
$300 in the third quarter of fiscal 2003 compared to an income tax benefit of $132 in the third quarter of fiscal 2002. Amounts represent approximately 40% of our pre tax income for the period described. Due to the fact we are able to use pre
emergence net operating losses, we did not pay federal income tax and the expense recorded in each period resulted, net of the impact of deferred taxes, in a direct increase to stockholders equity.



Nine Months Ended November 1, 2003 and November 2, 2002



Net Sales. Net sales decreased $1,970 or 1.2%, to $165,729 for the
nine months ended November 1, 2003 from $167,699 for the nine months ended November 2, 2002. All sales categories, with the exception of cards, basic party and seasonal, experienced a sales decrease. Comparable store sales decreased 1.0% as we
continue to navigate through a challenging retail environment. Three new stores opened in the nine months ended November 1, 2003 and one store closed in the nine months ended November 2, 2002.



Gross Profit. Cost of sales includes merchandise, distribution and
store occupancy costs. Gross profit increased $457 or 0.8%, to $59,220 for the nine months ended November 1, 2003 from $58,763 for the nine months ended November 2, 2002. The increase is attributed to decreases in freight and distribution costs as
well as improved merchandise gross margin. As a percentage of net sales, gross profit was 35.7% for the nine months ended November 1, 2003 compared to 35.0% in the same period in the prior year.



Selling, General and Administrative Expenses. Selling, general and
administrative expenses include store payroll, advertising, depreciation, other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $1,196 or 2.3%, to $52,893 for the nine months ended
November 1, 2003 from $51,697 for the nine months ended November 2, 2002. The fluctuation is attributed to increases in general and administrative expenses of $1,072 offset by a decrease in store expenses of $1,257. Additionally, advertising expense
increased $1,381 to $6,536 for the nine months ended November 1, 2003 from $5,154 for the nine months ended November 2, 2002 as we attempted to drive sales in a difficult retail environment. As a percentage of net sales, selling, general and
administrative expenses increased to 31.9% for the nine months ended November 1, 2003 from 30.8% in nine months ended November 2, 2002.



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Depreciation expense. Depreciation expense was $1,400 in the nine months ended November 1, 2003
compared to $1,879 in the nine months ended November 2, 2002. The decrease relates to the fresh-start adjustment of $11,760 on fixed assets whereby the Company adjusted for the excess of book value over enterprise value.



Interest Expense. Interest expense was $863 in the nine months ended
November 1, 2003 compared to $1,359 in the nine months ended November 2, 2002. Decreases in inventory levels coupled with an increase in our days payable outstanding have translated to lower borrowing levels.



Reorganization Items, net. We did not record any Reorganization Items
in the nine months ended November 1, 2003. The major components of the $18,840 Reorganization gain recorded in the nine months ended November 2, 2002 are as follows:



|                                                            |  | FiscalYear 2002Combined Results   |        
|----------------------------------------------------------- |  | --------------------------------- | -------
|                                                            |  | Nine months endedNovember 2, 2002 |        
|Professional fees                                           |  | $                                 | 1,379  
|Severance/retention bonus                                   |  |                                   | 1,026  
|Closed store expense                                        |  |                                   | 311    
|Fresh start adjustments                                     |  |                                   | 10,406 
|Forgiveness of debt                                         |  |                                   | (41,847
|Unsecured creditors ownership share of reorganized Company |  |                                   | 9,543  
|Other                                                       |  |                                   | 342    
|                                                            |  |                                   |        
|Total                                                       |  | $                                 | (18,840
|                                                            |  |                                   |        



Income Taxes.
Income tax expense of $1,625 for the nine months ended November 1, 2003 and $1,428 for the seven months ended November 2, 2002 represents approximately 40% of our pre tax income. The income tax benefit of $360 for the two months ended April 6, 2002
results from the realization of net operating loss carry backs due to the enactment of the Job Creation and Workers Assistance Act of 2002.



Liquidity and Capital Resources



Our uses of capital for the remainder of fiscal 2003 are expected to include working capital for operating expenses and satisfaction of current
liabilities, expenditures related to maintaining and refurbishing existing stores, opening new stores and interest payments on outstanding borrowings.



On April 9, 2002, obligations relating to our debtor-in-possession financing facility were paid in full and our secured financing facility with Wells
Fargo Retail Finance, LLC (the New Loan Agreement) became effective. The New Loan Agreement, which is a line of credit, currently provides up to $40,000 (including $10,000 for letters of credit) to fund working capital needs and for
general corporate purposes. Borrowings under the facility are limited by a percent of inventory levels. The New Loan Agreement expires on April 8, 2005 and has a variable interest rate based upon the Prime rate or at our option, a variable rate
based upon earnings performance and the London Interbank Offered Rate (LIBOR) with a minimum threshold of 5.0%. The interest rate on our borrowings was 5.0% at November 1, 2003. Borrowings under the New Loan Agreement are secured by
substantially all of our assets.



The New Loan Agreement
contains certain restrictive covenants, which, among other things, require us to maintain certain inventory levels and achieve specified operating results. The restrictive covenants also limit our capital expenditures, asset sales and dividends and
our ability to grant liens and incur additional indebtedness.



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Pursuant to the Plan of Reorganization, we converted $3,130 of post petition trade payables into a trade
conversion note, which will be payable within 4 years of the Effective Date. In addition, we recorded at fair value the $2,600 extended creditor payment payable to the general unsecured creditors. Both of these agreements are subject to prepayment
provisions if our average excess availability on the New Loan Agreement exceeds $12,000 during the prior fiscal year. In such event, 40% of the excess availability greater than $12,000 shall be paid, subject to certain maximum payment amounts, on a
pro rata basis to the trade conversion note holders and general unsecured creditors related to the extended creditor payable. Based upon our excess availability through nine months ended November 1, 2003 and our forecasted availability during the
three months ended January 31, 2004, we believe we will be subject to a maximum prepayment amount of $735. This prepayment is due on May 31, 2004.



As of November 1, 2003, we had $4,876 in borrowings outstanding under the New Loan Agreement and utilized approximately $1,012 under the New Loan
Agreement to issue letters of credit.



The following table sets forth certain
consolidated statements of cash flows:



|                                      |  | FY2003                          |         |   | FY2002                                             |  
|------------------------------------- |  | ------------------------------- | ------- | - | -------------------------------------------------- | -
|                                      |  | Nine monthsendedNovember 1,2003 |         |   | Combined results -Nine monthsended November 2,2002 |  
|Cash provided by operating activities |  | $                               | 14,814  |   |                                                    | $
|                                      |  |                                 |         |   |                                                    |  
|Cash (used in) investing activities   |  | $                               | (1,833  | ) |                                                    | $
|                                      |  |                                 |         |   |                                                    |  
|Cash (used in) financing activities   |  | $                               | (12,981 | ) |                                                    | $
|                                      |  |                                 |         |   |                                                    |  



At November 1, 2003
our working capital was $18,029. Net cash provided by operating activities for the nine months ended November 1, 2003 was $14,814 compared to $10,401 of net cash provided by operating activities during the nine months ended November 2, 2002. Cash
provided for the current period is related to our net income coupled with increases in accounts payable and accrued expenses. We continue to leverage days payable with our vendor community.



Net cash used in investing activities during the nine months ended November
1, 2003 and the nine months ended November 2, 2002 was $1,833 and $1,814, respectively. Net cash used in investing activities was primarily for capital expenditures relating to leasehold improvements at the stores, store fixtures for existing and
new stores, computer equipment and warehouse equipment for the distribution center.



Net cash used in financing activities during the nine months ended November 1, 2003 was $12,981 compared to $8,578 during the nine months ended November 2, 2002. Amounts are attributable to the level of borrowings and
repayments.



We do not intend to pay cash dividends in the
foreseeable future and our current Loan Agreement restricts us from paying dividends on our capital stock.



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In 2003 we implemented an in-house program to sort merchandise by store in our warehouse facility. Prior
to this program, a third party logistical vendor performed the sorting of this merchandise. We have a contract with this vendor to perform certain logistical services requested by us that expires on January 31, 2004. This vendor has continued to
over bill us for sort and various other charges. At November 1, 2003 these charges were approximately $3,200. We believe these disputed charges are without merit and are in violation of the terms of our agreement. Consequently, these charges are not
accrued in the financial statements at November 1, 2003.



Our
ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, indebtedness or to fund planned capital expenditures, will depend upon future performance, which, in turn, is subject to general economic, financial,
competitive and other factors that are beyond our control. Based upon current levels of operation and anticipated growth, we believe that future cash flow from operations, together with available borrowings under the New Loan Agreement, will be
adequate to meet anticipated requirements for capital expenditures, working capital, interest payments and scheduled principal payments. There can be no assurance that our business will continue to generate sufficient cash flow from operations in
the future to service our debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our existing debt, sell
assets or obtain additional financing. There can be no assurance that any refinancing would be available or that any sales of assets or additional financing could be obtained.



Seasonality



Our business is highly seasonal, with operating results varying from quarter to quarter. We historically have experienced higher sales during the second
and fourth fiscal quarters due to increased demand by customers for our products attributable to special occasions and holiday seasons during these periods. Our fiscal 2003 quarters are defined as follows: first fiscal quarter is February 2, 2003 to
May 3, 2003, second fiscal quarter is May 4, 2003 to August 2, 2003, third fiscal quarter is August 3, 2003 to November 1, 2003 and fourth fiscal quarter is November 2, 2003 to January 31, 2004. Our fiscal year ends on the 52 or 53 weeks, as
applicable, ending the Saturday nearest to January 31st.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB
Opinion No. 17, Intangible Assets. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. As we do not have goodwill or intangible assets recorded in the financial statements, the adoption of
SFAS No. 142 during the first quarter of fiscal 2002 did not have an impact on our financial condition or results of operations.



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset. We have adopted the provisions of SFAS No. 143 and it did not have an impact on our consolidated financial position or results of operations.



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In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, although it retains many of the fundamental provisions of that Statement. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001, thereby applying to fiscal 2002. In conjunction with fresh-start
reporting, we recorded a $11,760 adjustment to fixed assets to reflect the excess of book value over enterprise value. We have adopted the provisions of SFAS No. 144 and it did not have an impact on our consolidated financial position or results of
operations.



In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Specifically, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an amendment of
APB Opinion No. 30 and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, as these two standards required that all gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item. Consequently, such gains and losses will now be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in APB Opinion No. 30, Reporting the Results of Operations
 Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also rescinds SFAS No. 44 Accounting for Intangible Assets of Motor
Carriers, an amendment of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions 17 and 30, because the event to which that Statement relates is no longer relevant. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to
require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as such transactions, and also makes certain technical corrections to a number of existing pronouncements.
We were required to adopt this statement due to the application of fresh-start accounting. The effect of this statement is that our net gain associated with the plan of reorganization and fresh-start adjustments is reported as a component of
operations.



In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This statement changes the timing of recognition for certain exit costs associated with restructuring activities, so that certain exit costs would be recognized over the
period in which the restructuring activities occur. Currently, exit costs are recognized when we commit to a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and could result in
recognizing the cost of future restructuring activities over a period of time as opposed to as a single event.



In September 2002, the FASB issued Emerging Issues Task Force (EITF) 02-16 Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor which addresses the accounting for cash retailers receive from vendors. The EITF concluded cash received from a vendor is presumed to be a reduction of purchase price of goods unless the vendor receives an
identifiable benefit or there is reimbursement of a specific incremental identifiable cost. Additionally, rebates are to be recorded when it is probable and reasonably estimable and allocated to transactions giving rise to the rebate. Our accounting
policies relating to cash received from vendors is consistent with the conclusions reached by the EITF.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to
be made by a guarantor of certain guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002. We adopted the disclosure provisions and the accounting requirements of FIN 45 as of February 1, 2003
and it did not have a material impact on our consolidated financial position or results of operations.



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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of FASB Statement 123. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation and provides alternative methods of accounting for a change by registrants to
the fair value method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of both the annual and interim
financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, and
disclosures are effective for the first quarter beginning after December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46
addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for
all variable interest entities created after January 31, 2003. We are required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003 by the end of the current fiscal year. As we do not have any
interests in a variable interest entity, the adoption of this provision did not have an impact on our consolidated financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement
amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or modified after June 30, 2003. As we have not entered into any such agreements after June 30, 2003, the adoption
of this provision did not have an impact on our consolidated financial position or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we have not issued any financial instruments which meet this criteria, the adoption of this provision did not have an impact on our
consolidated financial position or results of operations.



|ITEM 3 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|------ |  | -----------------------------------------------------------



We are subject to market risks from changes in interest rates. As of November 1, 2003, the interest rate on the Companys revolving credit
facilities, which represents a significant portion of the Companys outstanding debt, is variable based upon earnings performance, the London Interbank Offered Rate (LIBOR) and the prime rate. A hypothetical 10 percent increase to
the average interest rate under the credit facilities applied to the average outstanding balance during the nine months ended November 1, 2003, the seven months ended November 2, 2002 and two months ended April 6, 2002 would not have had a material
impact on our financial position or results of operations.



|ITEM 4 |  | DISCLOSURE CONTROLS AND PROCEDURES
|------ |  | ----------------------------------



As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness



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of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our periodic reports filed with the SEC.



In addition, we evaluated our internal control over financial reporting and
there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



|Item 1. |  | Legal Proceedings.
|------- |  | ------------------



We are from time to time involved in litigation, either asserted or unasserted, incidental to the conduct of our business. While the outcome of these
matters cannot be predicted with certainty, we do not believe that the outcome of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flow.



|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



Exhibit 3.1 (1) Certificate on Incorporation of Factory Card & Party Outlet Corp.



Exhibit 3.2 (1) Bylaws of Factory Card & Party Outlet Corp.



Exhibit 4.1 (1) Warrant Agreement, dated April 9, 2002, between Factory Card
& Party Outlet and Wells Fargo Bank Minnesota, N.A.



Exhibit 4.2 (1) Form of New Management Warrant, dated April 9, 2002.



Exhibit 4.3 (1) Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).



Exhibit 4.4 (1) Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the
benefit of CSS Industries, Inc.



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Exhibit 4.5 (1) Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).



Exhibit 4.6 (1) Trade Conversion Agreement, dated as of April 9, 2002,
among Factory Card & Party Outlet Corp., Factory Card Outlet of America. Ltd., Amscan, Inc., Creative Expressions Group, Inc., Images and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland
Plastics, Inc.



Exhibit 10.1 (1) Loan and Security Agreement,
dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral agent and administrative agent.



Exhibit 10.2 (1) Security Agreement, dated April 9, 2002, among Factory Card
& Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral Trustee.



Exhibit 10.3 (1) Form of Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.



Exhibit 10.4 (1) Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory
Card Outlet of America, Ltd and Maryland Plastics.



Exhibit
10.5 (1) Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).



Exhibit 10.6 (1) Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd and James D. Constantine.



Exhibit 10.7 (1) Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd and Timothy F.
Gower.



Exhibit 10.8 (1) Employment Agreement, dated as of
April 9, 2002, between Factory Card Outlet of America, Ltd and Gary W. Rada.



Exhibit 10.9 (2) Form of Factory Card & Party Outlet Corp. 2002 Non- Employee Directors Stock Option Plan.



Exhibit 10.10 (2) First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.



Exhibit 10.11 (2) Second Amendment to the Factory Card & Party Outlet
Corp. 2002 Stock Option Plan.



Exhibit 10.12 (3) Form of
Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.



Exhibit 15 Acknowledgement of Awareness Letter from Deloitte & Touche, LLP dated December 4, 2003 Concerning Unaudited Interim Financial Information.



Exhibit 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit 31.2 Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit 32.1 Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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Exhibit 32.2 Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



Exhibit 99.1 Independent Accountants Report from Deloitte & Touche, LLP.



Notes



(1) Incorporated
by reference to the Companys Current Report on Form 8-K as filed on April 23,2002.



(2) Incorporated by reference to the Companys Current Report on Form 10-Q as filed on June 18, 2002.



(3) Incorporated by reference to the Companys Current Report on Form 10-Q as filed on September 10, 2003.



(b) Reports on Form 8-K filed in the quarter ended November 1, 2003



Current Report on Form 8-K filed on September 10, 2003
announcing approval of a 2-for-1 stock split of its common shares.



SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |  |  | FACTORY CARD & PARTY OUTLET CORP.
|----------------------- |  |  |  | ---------------------------------
|                        |  |  | 
|Dated: December 5, 2003 |  |  |  | By:                              
|                        |  |  |  |                                  
|                        |  |  |  |                                  



|                        |  |  | 
|----------------------- |  |  | 
|Dated: December 5, 2003 |  |  | 
|                        |  |  | 
|                        |  |  | 



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