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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 July 31, 2004 Commission File Number: 21859   FACTORY CARD & PARTY OUTLET CORP.(Exact name of registrant as specified in its charter)   DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    36-3652087
(I.R.S. Employer
Identification Number)
 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 o 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o     No x The number of shares of the Registrants Common Stock outstanding as of
September 9, 2004 was 3,095,246.




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Factory Card & Party Outlet Corp.
Form 10-Q
For the Quarter Ended July 31, 2004
Index  
 PageCautionary Statement Regarding Forward-Looking Statements
    
    
    2Part I
    
    Financial InformationItem 1
    
    Financial Statements:Condensed Consolidated Balance Sheets (Unaudited) as of July 31, 2004
and January 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the three
and six months ended July 31, 2004 and August 2, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the six
months ended July 31, 2004 and August 2, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements  (Unaudited)
    
    
    6-11Item 2
    
    Managements Discussion and Analysis of Financial Condition
And Results of Operations
    
    
    12-20Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4
    
    Controls and Procedures
    
    
    20-21Part II
    
    Other InformationItem 1. Legal Proceedings
    
    
    21Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22-24Signatures
    
    
    25SubsidiariesReport of Independent Registered Public Accounting FirmAwareness LetterCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
 1




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS References throughout this document to the Company include Factory Card & Party
Outlet Corp. and its wholly-owned subsidiary. In accordance with the Securities
and Exchange Commissions Plain English guidelines, this Quarterly Report on
Form 10-Q has been written in the first person. In this document the words
we, our, ours and us refer only to Factory Card & Party Outlet Corp.
and its wholly-owned subsidiary and not to any other person. The Companys website  www.factorycard.com  provides access, free of charge,
to the Companys SEC reports, including Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these
reports. 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. The
forward-looking statements are made a number of times throughout the document
and may be identified by forward-looking terminology as estimate, project,
expect, believe, may, will, intend or similar statements or
variations of such terms. 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;
    
    unseasonable weather;
    
    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;
    
    disruption with our imported product;
    
    vendor performance;
    
    political unrest;
    
    general economic and other developments affecting consumer
confidence and/or consumer spending;
    
    ability to maintain compliance with bank covenants;
    
    availability of retail store space on reasonable lease terms;
    
    adverse developments with respect to litigation;
    
    changes in accounting policies and practices;
    
    governmental regulations; and
    
    other factors both referenced and not referenced in this Form 10-Q. 2




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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) July 31,
    
    January 31,2004
    
    2004ASSETSCurrent assets:Cash
    
    $
    182
    
    
    $
    179Merchandise inventories, net
    
    
    46,458
    
    
    
    45,667Prepaid expenses and other
    
    
    4,112
    
    
    
    4,089Total current assets
    
    
    50,752
    
    
    
    49,935Fixed assets, net
    
    
    7,877
    
    
    
    7,551Other assets
    
    
    190
    
    
    
    259Deferred tax asset, net
    
    
    499
    
    
    
    427Total assets
    
    $
    59,318
    
    
    $
    58,172LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Debt  line of credit
    
    $
    8,003
    
    
    $
    9,763Accounts payable
    
    
    17,589
    
    
    
    15,929Accrued expenses
    
    
    7,373
    
    
    
    6,974Current portion of long term debt and capital lease obligations
    
    
    2,776
    
    
    
    2,135Total current liabilities
    
    
    35,741
    
    
    
    34,801Long term debt and capital lease obligations
    
    
    21
    
    
    
    3,699Deferred rent liabilities
    
    
    1,650
    
    
    
    1,725Total liabilities
    
    
    37,412
    
    
    
    40,225Stockholders equity
    
    
    21,906
    
    
    
    17,947Total liabilities and stockholders equity
    
    $
    59,318
    
    
    $
    58,172
 See accompanying notes to condensed consolidated financial
statements. 3




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FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY Condensed Consolidated Statements of Operations
(Unaudited)
(Dollar amounts in thousands, except share and per share data) Three
    
    Three
    
    Six
    
    SixMonths Ended
    
    Months Ended
    
    Months Ended
    
    Months EndedJuly 31,
    
    August 2,
    
    July 31,
    
    August 2,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    62,162
    
    
    $
    59,835
    
    
    $
    119,090
    
    
    $
    114,376Cost of sales
    
    
    39,028
    
    
    
    37,873
    
    
    
    75,855
    
    
    
    73,887Gross profit
    
    
    23,134
    
    
    
    21,962
    
    
    
    43,235
    
    
    
    40,489Selling, general and administrative expenses
    
    
    18,967
    
    
    
    17,666
    
    
    
    37,802
    
    
    
    35,661Depreciation expense
    
    
    631
    
    
    
    486
    
    
    
    1,214
    
    
    
    934Other (income) expense
    
    
    25
    
    
    
    
    
    
    
    (30
    )
    
    
    Interest expense
    
    
    168
    
    
    
    237
    
    
    
    399
    
    
    
    580Income before income tax expense
    
    
    3,343
    
    
    
    3,573
    
    
    
    3,850
    
    
    
    3,314Income tax expense
    
    
    1,337
    
    
    
    1,429
    
    
    
    1,540
    
    
    
    1,325Net income
    
    $
    2,006
    
    
    $
    2,144
    
    
    $
    2,310
    
    
    $
    1,989Net income per share  basic
    
    $
    0.66
    
    
    $
    0.74
    
    
    $
    0.77
    
    
    $
    0.69Weighted average shares outstanding  basic
    
    
    3,022,279
    
    
    
    2,914,482
    
    
    
    3,001,937
    
    
    
    2,901,354Net income per share  diluted
    
    $
    0.56
    
    
    $
    0.70
    
    
    $
    0.65
    
    
    $
    0.68Weighted average shares outstanding  diluted
    
    
    3,554,071
    
    
    
    3,061,622
    
    
    
    3,545,446
    
    
    
    2,940,670
 See accompanying notes to condensed consolidated financial statements. 4




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FACTORY CARD & PARTY OUTLET CORP.
AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollar amounts in thousands) For the Six
    
    For the SixMonths Ended
    
    Months EndedJuly 31,
    
    August 2,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,310
    
    
    $
    1,989Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization of fixed assets
    
    
    1,214
    
    
    
    934Amortization of deferred financing costs
    
    
    56
    
    
    
    65Amortization of deferred compensation
    
    
    63
    
    
    
    68Loss on disposal of fixed assets
    
    
    6
    
    
    
    Tax benefit of pre-confirmation net operating
losses
    
    
    1,510
    
    
    
    1,380Changes in assets and liabilities:Merchandise inventories
    
    
    (791
    )
    
    
    4,656Prepaid expenses and other assets
    
    
    (82
    )
    
    
    102Accounts payable
    
    
    1,660
    
    
    
    4,715Accrued expenses
    
    
    399
    
    
    
    179Deferred rent obligation
    
    
    (75
    )
    
    
    137Net cash provided by operating activities
    
    
    6,270
    
    
    
    14,225Net cash used in investing activities  purchase of
fixed assets
    
    
    (1,546
    )
    
    
    (1,171
    )Cash flow provided by (used in) financing activities:Borrowings  line of credit
    
    
    123,520
    
    
    
    107,859Repayments  line of credit
    
    
    (125,280
    )
    
    
    (120,747
    )Payment of trade conversion and extended creditor
Note payable
    
    
    (2,932
    )
    
    
    Payment of capital lease obligations
    
    
    (196
    )
    
    
    (216
    )Discount on payment of trade conversion and
extended creditor note payable
    
    
    (20
    )
    
    
    Increase in extended creditor note payable
    
    
    111
    
    
    
    48Cash received from exercise of stock options and
warrants
    
    
    76
    
    
    
    Net cash used in financing activities
    
    
    (4,721
    )
    
    
    (13,056
    )Net increase (decrease) in cash
    
    
    3
    
    
    
    (2
    )Cash at beginning of period
    
    
    179
    
    
    
    196Cash at end of period
    
    $
    182
    
    
    $
    194Supplemental cash flow information:Interest paid
    
    $
    476
    
    
    $
    565Income taxes refunded
    
    
    3
    
    
    
    Cash paid for reorganization items
    
    
    4
    
    
    
    138Supplemental non cash information:Unearned restricted stock awards
    
    
    212
    
    
    
    342
 See accompanying notes to condensed consolidated financial statements. 5




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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)
    
    Business and Basis of PresentationThe Company is a chain of company-owned stores offering an extensive
selection of party supplies, greeting cards, giftwrap, balloons, everyday
and seasonal merchandise and other special occasion merchandise at
everyday value prices. As of September 9, 2004, the Company operated 180
stores in 20 states. The Companys fiscal year ends on the Saturday
closest to January 31st.The condensed consolidated unaudited financial statements include the
accounts of Factory Card & Party Outlet Corp. and its 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 January 31, 2004 included in the Companys
Annual Report on Form 10-K. The operating results for the interim
periods are not necessarily indicative of the results for the year. All
intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, the accompanying condensed
consolidated financial statements reflect all normal recurring and
certain nonrecurring adjustments necessary for a fair presentation of the
interim financial statements.Management EstimatesThe preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Company 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. Actual results could differ from those
estimates.(2)
    
    Debt  Line of CreditThe Company is party to a secured financing facility, dated April 8,
2002, with Wells Fargo Retail Finance, LLC (as amended, the Loan
Agreement). The Loan Agreement, which is a line of credit expiring on
April 8, 2007, currently provides up to $30,000 (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. At July 31, 2004, the interest rate on the
Companys borrowings was 4.25%. Borrowings under the Loan Agreement are
secured by substantially all of the Companys 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.At July 31, 2004 and January 31, 2004, the Company has outstanding
borrowings under the Loan Agreement of $8,003 and $9,763, respectively. 6




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(3)
    
Debt and Capital Lease Obligations  The following table summarizes the components of Debt and Capital Lease
Obligations at July 31, 2004 and January 31, 2004, including its current
portion. July 31,
    
    January 31,2004
    
    2004Trade conversion note
    
    $
    1,127
    
    
    $
    3,130Discounted value of extended creditor payment
    
    
    1,585
    
    
    
    2,425Financing agreements
    
    
    36
    
    
    
    210Capital leases
    
    
    49
    
    
    
    69Sub total
    
    
    2,797
    
    
    
    5,834Less current maturities
    
    
    (2,776
    )
    
    
    (2,135
    )Total long term debt and capital lease obligations
    
    $
    21
    
    
    $
    3,699
  During the six months ended July 31, 2004, the Company made payments of
$1,949 on the Trade Conversion Note and $983 on the Extended Creditor
Payment, net of a $20 discount.(4)
    
    Stockholders EquityIn April 2002, the Company authorized an aggregate of 10,000,000 shares
of new Common Stock, par value $0.01 per share. A total of 3,094,646
common shares were outstanding at July 31, 2004.In April 2002, the Company adopted a 2002 stock option plan, which
authorizes the grant of up to 333,334 stock options to the Companys
employees  312,000 options under the 2002 stock option plan at exercise
prices ranging from $2.75 to $22.40 were outstanding at July 31, 2004.In April 2002, the Company issued four series of new Warrants, Series A
through D, 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. At July 31, 2004, the number of
common shares which could be purchased using Series A, B, C and D
Warrants are 62,052, 76,460, 72,330 and 60,152, respectively.In April 2002, the Company 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 and contain a conversion feature into
common stock between the third and fourth anniversary. The Company fully
expects to pay the remaining $1,127 principal and accrued interest
related to the Trade Conversion Notes prior to April 9, 2005, thus
negating the Trade Conversion Note holders options to convert the notes
into 11.8% of the Companys common stock.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  180,000 options at exercise prices ranging from $2.65 to $11.90 were
outstanding at July 31, 2004.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 Equity Incentive Plan  354,400 options were outstanding
at July 31, 2004 with exercise prices ranging from $6.38 to $19.00. 7




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A separate Statement of Stockholders Equity is not required to be
presented for interim periods. 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.(5)
    
    Earnings Per ShareIn accordance with SFAS No. 128 Earnings per Share, earnings per share
  basic was computed by dividing net income by the weighted average
number of common shares outstanding during the period. Earnings per
share  diluted assumes, in addition to the above, the effect of
potentially dilutive securities.The reconciliation of earnings per share basic to earnings per share
diluted is as follows (in thousands, except per share amounts): For the three
    
    For the threemonths ended
    
    months endedJuly 31, 2004
    
    August 2, 2003Net income
    
    $
    2,006
    
    
    $
    2,144Earnings per share  basic
    
    $
    0.66
    
    
    $
    0.74Earnings per share  diluted
    
    $
    0.56
    
    
    $
    0.70Weighted average common shares outstanding
    
    
    3,022,279
    
    
    
    2,914,482Dilutive effect of stock options and warrants
    
    
    531,792
    
    
    
    147,140Weighted average common and common
equivalent shares outstanding
    
    
    3,554,071
    
    
    
    3,061,622
 For the six
    
    For the sixmonths ended
    
    months endedJuly 31, 2004
    
    August 2, 2003Net income
    
    $
    2,310
    
    
    $
    1,989Earnings per share  basic
    
    $
    0.77
    
    
    $
    0.69Earnings per share  diluted
    
    $
    0.65
    
    
    $
    0.68Weighted average common shares outstanding
    
    
    3,001,937
    
    
    
    2,901,354Dilutive effect of stock options and warrants
    
    
    543,509
    
    
    
    39,316Weighted average common and common
equivalent shares outstanding
    
    
    3,545,446
    
    
    
    2,940,670
  The dilutive impact of stock options and warrants was calculated using
the treasury method. 8




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Options to purchase 235,552 common shares at prices ranging from $11.34
to $22.40 per share and warrants to purchase 60,152 common shares at a
price of $17.00 per share were outstanding as of July 31, 2004 but were
not included in the calculation of diluted earnings per share for the
three months ended July 31, 2004 because the strike price was greater than
the average market price per share during the period.Options to purchase 234,752 common shares at prices ranging from $11.90
to $22.40 per share and warrants to purchase 60,152 common shares at a
price of $17.00 per share were outstanding as of July 31, 2004 but were
not included in the calculation of diluted earnings per share for the six
months ended July 31, 2004 because the strike price was greater than the
average market price per share during the quarter.(6)
    
    Stock-Based CompensationThe Company accounts 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. The Company has adopted
the disclosure only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation, as
amended by SFAS No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure, an Amendment of SFAS No. 123. Had the
Company determined compensation cost based upon the fair value at the
grant date for our stock options under SFAS No. 123, net income would
have changed as indicated below: For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJuly 31,
    
    August 2,
    
    July 31,
    
    August 2,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    2,006
    
    
    $
    2,144
    
    
    $
    2,310
    
    
    $
    1,989Deduct: Total
stock-based employee
compensation expense
determined under fair
value basis for all
awards, net of related
tax effects
    
    
    149
    
    
    
    53
    
    
    
    270
    
    
    
    91Pro forma net income
    
    $
    1,857
    
    
    $
    2,091
    
    
    $
    2,040
    
    
    $
    1,898Earnings per share:Basic-as reported
    
    $
    0.66
    
    
    $
    0.74
    
    
    $
    0.77
    
    
    $
    0.69Basic-pro forma
    
    $
    0.61
    
    
    $
    0.72
    
    
    $
    0.68
    
    
    $
    0.65Diluted-as reported
    
    $
    0.56
    
    
    $
    0.70
    
    
    $
    0.65
    
    
    $
    0.68Diluted-pro forma
    
    $
    0.52
    
    
    $
    0.68
    
    
    $
    0.58
    
    
    $
    0.65
  The per share weighted average fair value of stock options granted during
the three months ended July 31, 2004 and August 2, 2003 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 3.875% to 4.36%, volatility of 50% and an expected life of
approximately 10 years. 9




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(7)
    
    Income TaxesThe Company files a consolidated federal income tax return. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and laws
that are expected to be in effect when the differences are expected to
reverse.The Company has recorded a valuation allowance to fully reserve for the
value of net deferred tax assets that existed upon emergence from
bankruptcy in April 2002. The Company has fully reserved for these
amounts because the utilization of its net operating loss carryforwards
is depended upon sufficient future taxable income, which is not
reasonably assured. The Companys reorganization resulted in a modified
capital structure by which Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code,
required the Company to apply fresh start accounting. Under fresh start
accounting, reversals of valuation reserves recorded against deferred tax
assets that existed as of the emergence date will result in an increase
to paid-in capital. Consequently, the Company will recognize cash tax
savings in the year of asset recognition without the corresponding
benefit to income tax expense.The Company has recorded new deferred tax assets since emergence from
bankruptcy in April 2002 because it believes it will realize the benefit
of the new deferred tax asset, net, in future periods and therefore has
not recorded a valuation allowance at this time.(8)
    
    Related Party TransactionsOne entity has an ownership interest of more than 5% of the Company.
Total purchases from that entity were $2,259 during the six months ended
July 31, 2004 and $1,560 during the six months ended August 2, 2003.
Amounts owed to that entity were $212 and $220 at July 31, 2004 and
August 2, 2003, respectively.(9)
    
    ContingenciesOn March 3, 2004, Midwest One Distribution Company filed a lawsuit
against the Company in the Circuit Court of the Eighteen Judicial Circuit
of DuPage County, Illinois, captioned Midwest One Distribution Co. vs.
Factory Card & Party Outlet Corp. and Factory Card Outlet of America,
Ltd. The lawsuit alleges that the Company breached a distribution
agreement between the parties that terminated on January 31, 2004 by
failing to pay certain invoices from Midwest One for certain services
and/or expenses allegedly performed or incurred by Midwest One. Midwest
One seeks damages of approximately $4.8 million and an accounting of all
distribution services for which Midwest One was entitled to compensation
under the distribution agreement. On April 29, 2004, the Company
answered the complaint by denying all allegations and counterclaiming for
breach of contract. The Company seeks damages, costs and attorneys
fees. No trial date has been set. The Company believes that it has
meritorious defenses and counterclaims and is pursuing them vigorously. 10




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##### Table of Contents



(10)
    
    New Accounting PronouncementsOn March 31, 2004, the Financial Accounting Standards Board (FASB) issued
its Exposure Draft No. 1102-100 Share-Based Payment, which is a proposed
amendment to FASB Statement No. 123, Accounting for Stock-Based
Compensation. Generally, the approach in the Exposure Draft is similar to
the approach described in Statement 123. However, the Exposure Draft would
require all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. The FASB expects to issue a final standard late in 2004 that would
be effective for public companies for fiscal years beginning after December
15, 2004. The Company is presently studying the Exposure Draft in
anticipation of its adoption next year, the impact of which is not known or
reasonably estimable at this time. 11




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##### Table of Contents



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 a wide selection of party
supplies, greeting cards, giftwrap, gifts, balloons everyday and seasonal
merchandise and other special occasion merchandise at everyday value prices.
As of September 9, 2004, we operated 180 stores in 20 states. The following
table summarizes store opening and closing activity. For the three months ended:
    
    For the six months ended:July 31, 2004
    
    August 2, 2003
    
    July 31, 2004
    
    August 2, 2003Beginning of period
    
    
    180
    
    
    
    171
    
    
    
    177
    
    
    
    171Openings
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Closings
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    End of period
    
    
    180
    
    
    
    171
    
    
    
    180
    
    
    
    171
 We currently have plans to open up to five additional stores during the
remainder of fiscal year 2004. Critical Accounting Policies and Estimates Critical Accounting Policies are defined as those that are reflective of
significant judgments and estimates 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. Revenue Recognition Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. We estimate returns based
upon historical return rates and such amounts have not been significant. We
use gift cards and store credits, the revenue of which is recognized upon
redemption by the customer. Impairment of Long-Lived Assets We review each store for impairment indicators annually, considering
operating results and cash flows. We are not aware of any impairment
indicators for any of our stores at July 31, 2004. Assumptions and estimates
used to estimate cash flows in the evaluation of impairment and the fair values
used to determine the impairment are subject to a degree of judgment and
complexity. Any changes to the assumptions and estimates resulting from
changes in the actual results or market conditions from those anticipated, may
effect the carrying value of long-lived assets and could result in an
impairment charge. 12




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##### Table of Contents



Merchandise Inventories We state merchandise inventories at the lower of average cost or estimated
net realizable value utilizing the retail method. We perform periodic
evaluations of the net realizable value of merchandise, including merchandise
which is to be discontinued from our ongoing inventory assortment as well as
inventory with excess quantities on hand and certain seasonal inventory
remaining from past holidays. Based upon these evaluations, a provision for
the excess of inventory cost over the net realizable value is recorded as a
reduction to the net inventory balance. At July 31, 2004 and January 31, 2004,
we had reserves of $956 and $1,117, respectively, for certain merchandise which
is to be discontinued from our ongoing inventory assortment, as well as
inventory with excess quantities on hand, and certain seasonal inventory from
past holidays. We receive vendor allowances principally as a result of meeting defined
purchase levels or promoting vendors products. Those received as a result of
purchase levels are accrued as a reduction of merchandise purchase price and
results in a reduction of cost of sales as the merchandise is sold. Those
received for promoting vendors products are offset against specific
advertising expense relating to the promotion and result in a reduction of
selling, general and administrative expenses. Markdown allowances reduce cost
of goods sold in the period the related markdown is taken. Placement
allowances are offset against specific, incremental expenses incurred in
getting the product ready for sale. Liabilities for Insurance Claims Provision for these losses to the extent not insured are recorded based
upon our estimated losses for claims incurred. The provisions are based upon
our historical experience. Income Taxes Historically, we have not recognized an income tax benefit for our losses.
We have recorded a valuation allowance to fully reserve for the value of the
net deferred tax assets that existed upon emergence from bankruptcy. This
allowance on pre-emergence deferred tax assets is necessary, as the utilization
of our net loss carryforwards is dependent upon sufficient future taxable
income. Under fresh start accounting, reversals of valuation reserves recorded
against deferred tax assets that existed as of the emergence date will result
in an increase to paid-in capital. Consequently, we will recognize cash tax
savings in the year of asset recognition without the corresponding benefit to
income tax expense. We have recorded new deferred tax assets since emergence from bankruptcy.
We believe we will realize the benefit of new net deferred tax assets in future
periods and therefore have not recorded a valuation allowance on these new
deferred tax assets. 13




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##### Table of Contents



New Accounting Pronouncements On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
its Exposure Draft, 1102-100 Share-Based Payment, which is a proposed amendment
to FASB Statement No. 123, Accounting for Stock-Based Compensation.
Generally, the approach in the Exposure Draft is similar to the approach
described in Statement 123. However, the Exposure Draft would require all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. The FASB
expects to issue a final standard late in 2004 that would be effective for
public companies for fiscal years beginning after December 15, 2004. We are
presently studying the Exposure Draft in anticipation of its adoption next
year, the impact of which is not known or reasonably estimable at this time. 14




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##### Table of Contents



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. Fiscal 2004 has 52 weeks and ends on January 29, 2005. Fiscal 2003 had 52
weeks and ended on January 31, 2004. The second quarter of fiscal 2004 had 13 weeks and ended on July 31, 2004.
The second quarter of fiscal 2003 had 13 weeks and ended on August 2, 2003. Three months
    
    Three months
    
    Six months
    
    Six monthsended
    
    ended
    
    ended
    
    endedJuly 31,
    
    August 2,
    
    July 31,
    
    August 2,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    62.8
    
    
    
    63.3
    
    
    
    63.7
    
    
    
    64.6Gross profit
    
    
    37.2
    
    
    
    36.7
    
    
    
    36.3
    
    
    
    35.4Selling, general and administrative expenses
    
    
    30.5
    
    
    
    29.5
    
    
    
    31.7
    
    
    
    31.2Depreciation expense
    
    
    1.0
    
    
    
    0.8
    
    
    
    1.0
    
    
    
    0.8Other (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.5Income before income tax expense
    
    
    5.4
    
    
    
    6.0
    
    
    
    3.3
    
    
    
    2.9Income tax expense
    
    
    2.2
    
    
    
    2.4
    
    
    
    1.3
    
    
    
    1.2Net income
    
    
    3.2
    %
    
    
    3.6
    %
    
    
    2.0
    %
    
    
    1.7
    %Number of stores open at end of period
    
    
    180
    
    
    
    171
    
    
    
    180
    
    
    
    171
 Three Months Ended July 31, 2004 and August 2, 2003 Net Sales.Net sales increased $2,327 or 3.9% to $62,162 for the three
month period ended July 31, 2004 (second quarter of fiscal 2004) from $59,835
for the three month period ended August 2, 2003 (second quarter of fiscal
2003). The increase is attributed to the number of stores. We operated 180
stores during the entire second quarter of fiscal 2004 compared to 171 stores
during the second quarter of fiscal 2003. New store sales in the second
quarter of fiscal 2004 totaled $2,578. Comparable store sales are defined as
sales from those stores open for at least one full year and were essentially
unchanged with an increase of 0.1%. Increases in comparable store sales in our
balloon, candy, basic party and gift categories were offset by decreases in
other categories. Due to the timing of new store openings, new stores were
excluded from the calculation of comparable store sales. Our first new store
will be included in comparable store sales in fiscal October 2004. 15




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##### Table of Contents



Gross Profit. Cost of sales includes merchandise, distribution and store
occupancy costs. Gross profit increased $1,172 or 5.3%, to $23,134 for the
second quarter of fiscal 2004 from $21,962 for the second quarter of fiscal
2003. The increase is primarily due to sales volume of the new stores. As a
percentage of net sales, gross profit was 37.2% for the second quarter of
fiscal 2004 compared to 36.7% in the same period in the prior year. We were
successful in managing merchandise margins while continuing to leverage our
freight and distribution costs. As a percent of sales, gross profit,
excluding store occupancy costs, improved 0.7% from the first quarter
of fiscal 2003. Store occupancy
costs increased $403 or 5.6% primarily as a result of additional stores. 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 $1,301 or 7.4% to $18,967 for the second
quarter of fiscal 2004 from $17,666 for the second quarter of fiscal 2003.
Store related expenses increased $773 or 6.8% as a function of operating nine
additional stores and performing four additional remodels as compared to the
prior year. Furthermore, net advertising expense increased $18 or 0.8% to
$2,308. Other corporate administrative expenses increased $510 or 12.8%
because of additional payroll, insurance and professional fees relating to new
stores and corporate governance initiatives. As a percentage of net sales,
selling, general and administrative expenses was 30.5% in the second quarter of
fiscal 2004 compared to 29.5% in the second quarter of fiscal 2003. Depreciation expense. Depreciation expense was $631 in the second quarter
of fiscal 2004 compared to $486 in the second quarter of fiscal 2003. The
increase is attributed to the level of fixed asset additions primarily related
to new store openings and store remodels. Other expense.Other expense recorded in the second quarter of fiscal
2004 of $25 relates to a fair value adjustment to the Extended Creditor Note
Payable related to a prepayment offset by a debt discount realized on an
optional prepayment of the Trade Conversion Note and recovery of an amount
previously written off in bankruptcy. Interest Expense. Interest expense was $168 in the second quarter of
fiscal 2004 compared to $237 in the second quarter of fiscal 2003. The
decrease resulted from a lower effective interest rate coupled with lower
average borrowing levels as we increase our days payable with our vendors. As
a percentage of net sales, interest expense was 0.3% in the second quarter of
fiscal 2004 compared to 0.4% in the second quarter of fiscal 2003. Income Tax Expense.Income tax expense was $1,337 in the second quarter
of fiscal 2004 compared to $1,429 in the second quarter of fiscal 2003. These
amounts represent approximately 40% of our pre tax income for the period
described. Until the benefits of our net operating loss carry forwards are
fully utilized, we do not expect to pay federal income tax. 16




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##### Table of Contents



Six Months Ended July 31, 2004 and August 2, 2003 Net Sales. Net sales increased $4,714 or 4.1%, to $119,090 for the six
fiscal month period ended July 31, 2004 (first half of fiscal 2004) from
$114,376 for the six fiscal month period ended August 2, 2003 (first half of
fiscal 2003). The increase is attributed to the number of stores. We opened
four new stores and closed one store during the first half of fiscal 2004 and
opened six stores during the second half of fiscal 2003. New store sales in
the first half of fiscal year 2004 totaled $4,281. Comparable store sales are
defined as sales from those stores open for at least one full year. Comparable
store sales increased 0.9%. We experienced strong comparable store sales in
our balloon, candy and basic party categories while experiencing negative
trends in other categories. Due to the timing of the new store openings, new
stores were excluded from the calculation of comparable store sales. Our first
new store will be included in comparable store sales in fiscal October 2004. Gross Profit. Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $2,746 or 6.8%, to $43,235 for the
first half of fiscal 2004 from $40,489 for the first half of fiscal 2003. The
increase is primarily due to sales volume of the new stores. As a percentage of
net sales, gross profit was 36.3% for the first half of fiscal 2004 compared to
35.4% in the first half of fiscal 2003. We were successful in managing
merchandise margins while continuing to leverage our freight and distribution
costs. As a percent of sales, gross profit,
excluding store occupancy costs, improved 1.1% from the first half of fiscal 2003. Store occupancy costs increased $800 or 5.6% primarily as
a result of additional stores. 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 $2,141 or 6.0%, to $37,802 for the first half
of fiscal 2004 from $35,661 for the first half of fiscal 2003. Store related
expenses increased $1,349 or 6.0% as a function of operating nine additional
stores while advertising expense increased only $22 or 0.4% to $4,976 as we
leverage our advertising distribution while opening stores in existing markets.
Other corporate administrative expenses increased $771 or 9.5% because of
additional insurance costs and professional fees. As a percentage of net sales,
selling, general and administrative expenses was 31.7% in the first half of
fiscal 2004 compared to 31.2% in the first half of fiscal 2003. Depreciation expense. Depreciation expense was $1,214 in the first half
of fiscal 2004 compared to $934 in the first half of fiscal 2003. The increase
is attributed to the level of fixed asset additions primarily related to new
store openings and store remodels. Other income.Other income recorded in the first half of fiscal 2004 of
$30 relates to a debt discount realized on an optional prepayment of the Trade
Conversion Note coupled with a recovery of an amount previously written off in
bankruptcy offset by a fair value adjustment to the Extended Creditor Note
Payable related to a prepayment on the debt. Interest Expense. Interest expense was $399 in the first half of fiscal
2004 compared to $580 in the first half of fiscal 2003. The decrease resulted
from a lower effective interest rate coupled with lower average borrowing
levels as we increase our days payable with our vendors. Income Tax Expense. Income tax expense was $1,540 in the first half of
2004 compared to $1,325 in the first half of fiscal 2003. These amounts
represent approximately 40% of our pre tax income for the period described.
Until the benefits of our net operating loss carry forwards are fully utilized,
we do not expect to pay federal income tax. 17




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##### Table of Contents



Liquidity and Capital Resources Our uses of capital for the remainder of fiscal 2004 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.
Historically, these cash requirements have been met through cash flow from
operations and borrowing from our credit facility. The following table sets forth certain consolidated statements of cash flows
data: FY2004
    
    FY2003Six months ended
    
    Six months endedJuly 31, 2004
    
    August 2, 2003Cash provided by operating activities
    
    $
    6,270
    
    
    $
    14,225Cash used in investing activities
    
    $
    1,546
    
    
    $
    1,171Cash used in financing activities
    
    $
    4,721
    
    
    $
    13,056
 At July 31, 2004 our working capital was $15,011. Net cash provided by
operating activities for the six months ended July 31, 2004 was $6,270 compared
to $14,225 of net cash provided by operating activities during the six months
ended August 2, 2003. The decrease is related to the leveling off of inventory
and accounts payable balances in the six months ended July 31, 2004. In the
six months ended August 2, 2003 we made significant strides in driving down
inventory balances and increasing accounts payable as we worked with our
vendors in obtaining favorable trade terms. Net cash used in investing activities during the six months ended July 31,
2004 and the six months ended August 2, 2003 was $1,546 and $1,171,
respectively. Net cash used in investing activities was primarily for capital
expenditures related to new store openings, computer equipment, store
remodeling and warehouse equipment for the distribution center. Net cash used in financing activities during the six months ended July 31,
2004 was $4,721 compared to $13,056 during the six months ended August 2, 2003.
Amounts are attributable to the level of borrowings and repayments. We are party to a secured financing facility, dated April 8, 2002, with
Wells Fargo Retail Finance, LLC (as amended, the Loan Agreement). The Loan
Agreement, which is a line of credit expiring on April 8, 2007, currently
provides up to $30 million, (including $10 million 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. At September
9, 2004, the interest rate on our borrowings was 4.50%. Borrowings under the
Loan Agreement are secured by substantially all of our assets. The Loan Agreement contains certain restrictive covenants, which, among
other things, require us to 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. 18




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##### Table of Contents



Pursuant to the Plan of Reorganization in April 2002, we converted $3,130
of post petition trade payables into a Trade Conversion Note, which is payable
within four years of issue date. In addition, we recorded at fair value the
$2,600 extended creditor payment payable to the general unsecured creditors.
During the six months ended July 31, 2004, we made payments of $1,949 on the
Trade Conversion Note and $983 on the Extended Creditor Payment, net of a $20
discount. We expect to pay down the remaining balance of both debt instruments
by April 9, 2005, thus negating the conversion factor of the Trade Conversion
Note. As of July 31, 2004, we had $8.0 million in borrowings outstanding under
the Loan Agreement and had utilized approximately $1.1 million for issuance of
letters of credit. We do not intend to pay cash dividends in the foreseeable future and under
our current Loan Agreement we are restricted from paying dividends on our
capital stock. 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 our current level of operations and anticipated
growth, we believe that future cash flows from operations, together with
available borrowings under the Loan Agreement, will be adequate for the next
twelve months 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. Contractual Obligations We conduct substantially all of our activities using leased premises.
Store and office leases generally provide that real estate taxes, insurance,
common area maintenance, and operating expenses are our obligations. Certain
store leases also provide for contingent rentals based on sales in excess of
specified minimums. To facilitate an understanding of our contractual obligations, the
following data is provided which summarizes future payments: Payments Due By Period(amounts in millions)Within
    
    Within
    
    Within
    
    After 51 Year
    
    2-3 Years
    
    4-5 years
    
    Years
    
    TotalLine of credit
    
    $
    8.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8.0Trade conversion note
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1Extended creditor note
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.6Operating leases
    
    
    26.5
    
    
    
    44.8
    
    
    
    20.9
    
    
    
    15.8
    
    
    
    108.0Capital leases
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Inventory purchase
commitments
    
    
    20.5
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    20.7Total payments
    
    $
    57.8
    
    
    $
    45.0
    
    
    $
    20.9
    
    
    
    15.8
    
    
    $
    139.5
 19




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##### Table of Contents



Off-Balance Sheet Arrangements We have not created, and are not party to, any special-purpose or
off-balance sheet entities for the
purposes of raising capital, incurring debt or operating our business. We
do not have any off-balance sheet arrangements or relationships with entities
that are not consolidated into our financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources. 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 2004 quarters are defined as follows: first fiscal quarter
is February 1, 2004 to May 1, 2004, second fiscal quarter is May 2, 2004 to
July 31, 2004, third fiscal quarter is August 1, 2004 to October 30, 2004 and
fourth fiscal quarter is October 31, 2004 to January 29, 2005. Our fiscal year
ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to
January 31st. 
 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are subject to market risks from changes in interest rates. As of July
31, 2004, 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 the prime rate. We believe our interest rate risk is minimal as a
hypothetical 1.0% increase to the average interest rate under the credit
facilities applied to the average outstanding balance during the three and six
months ended July 31, 2004 and the three and six months ended August 2, 2003
would not have had a material impact on our financial position or results of
operations. 
 ITEM 4 CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions (the SEC) rules and forms and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. As of September 9, 2004 and as required by SEC Rule 13a-15(b), we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level. During the quarter ended July 31, 2004, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 
 20




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##### Table of Contents



PART II  OTHER INFORMATION Item 1. Legal Proceedings On March 3, 2004, Midwest One Distribution Company filed a lawsuit against
us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County,
Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party
Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that
we breached a distribution agreement between the parties that terminated on
January 31, 2004 by failing to pay certain invoices from Midwest One for
certain services and/or expenses allegedly performed or incurred by Midwest
One. Midwest One seeks damages of approximately $4.8 million and an accounting
of all distribution services for which Midwest One was entitled to compensation
under the distribution agreement. On April 29, 2004, we answered the complaint
by denying all allegations and counterclaiming for breach of contract. We are
seeking damages, costs and attorneys fees. No trial date has been set. We
believe we have meritorious defenses and counterclaims and are pursuing them
vigorously. Additionally, we are from time to time involved in routine litigation
incidental to the conduct of our business. As of the date of this Quarterly
Report on Form 10-Q, we are not aware of any other material existing or
threatening litigation to which we are or may be a party. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities None. 
 Item 3. Defaults Upon Senior Securities None 21




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders On June 2, 2004, we held our Annual Meeting of Stockholders. There were a
total of 3,072,838 votes entitled to be cast at the meeting. Of this total,
1,853,628, or approximately 60% of the total number of votes eligible to be
cast, were represented either in person or by proxy. At the meeting, the
stockholders elected three (3) Class One directors. Set forth below are (i)
the names of the persons elected to serve on our Board of Directors until the
2007 Annual Meeting of Stockholders or until their successors are duly elected
and qualified and (ii) the results of the voting for the nominees. Votes For
    
    WithheldDirector
    
    Number
    
    % of Total
    
    Number
    
    % of TotalBen Evans
    
    
    1,696,453
    
    
    
    55.2
    %
    
    
    157,175
    
    
    
    5.1
    %Martin G. Mand
    
    
    1,696,453
    
    
    
    55.2
    %
    
    
    157,175
    
    
    
    5.1
    %Robert S. Sandler
    
    
    1,696,469
    
    
    
    55.2
    %
    
    
    157,159
    
    
    
    5.1
    %
 The stockholders also ratified the appointment of Deloitte & Touche LLP as
our independent public auditors for the current fiscal year ending January 29,
2005. Set forth below is the results of that vote. Votes For
    
    Votes Against
    
    Votes AbstainedNumber
    
    % of Total
    
    Number
    
    % of Total
    
    Number
    
    % of TotalRatification of
appointment of
Deloitte & Touche
LLP as our
independent auditor
    
    
    1,840,138
    
    
    
    59.9
    %
    
    
    7,486
    
    
    
    0.2
    %
    
    
    6,004
    
    
    
    0.2
    %
 
 Item 5. Other Information None 
 Item 6. Exhibits and reports on Form 8-K (a) Exhibits 2.1
    (1)
    
    Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code, dated February 5, 2002.3.1
    (2)
    
    Amended and Restated Certificate of Incorporation of Factory Card &
Party Outlet Corp.3.2
    (4)
    
    Amended Bylaws of Factory Card & Party Outlet Corp.3.11
    (5)
    
    Amendment to the Amended and Restated Certificate of
Incorporation of Factory Card & Party Outlet Corp. dated July 17, 2003.3.12
    (5)
    
    Amendment to the Amended and Restated Certificate of
Incorporation of Factory Card & Party Outlet Corp. dated April 6, 2004.4.1
    (2)
    
    Warrant Agreement, dated April 9, 2002, between Factory Card & Party
Outlet and Wells Fargo Bank Minnesota, N.A.4.2
    (2)
    
    Form of New Management Warrant, dated April 9, 2002.
 22




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##### Table of Contents



4.3
    (2)
    
    Schedule of New Management Warrants (pursuant to Instruction 2 of
Item 601).4.4
    (2)
    
    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.4.5
    (2)
    
    Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item
601).4.6
    (2)
    
    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.10.1
    (2)
    
    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.10.2
    (5)
    
    First Amendment dated April 9, 2004, to the Loan and Security
Agreement, among Factory Card Outlet of America, Ltd., as borrower, the
lenders thereto as Well Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.10.3
    (2)
    
    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.10.4
    (2)
    
    Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.10.5
    (2)
    
    Trade Vendor Supply Agreement, dated April 9, 2002, between Factory
Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and
Maryland Plastics.10.6
    (2)
    
    Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2
of Item 601).10.7
    (2)
    
    Employment Agreement, dated as of April 9, 2002, between Factory Card
Outlet of America, Ltd. and James D. Constantine.10.8
    (2)
    
    Employment Agreement, dated as of April 9, 2002, between Factory Card
Outlet of America, Ltd. and Timothy F. Gower.10.9
    (2)
    
    Employment Agreement, dated as of April 9, 2002, between Factory Card
Outlet of America, Ltd. and Gary W. Rada.10.10
    (3)
    
    Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.10.11
    (3)
    
    First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.10.12
    (3)
    
    Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.10.13
    (4)
    
    Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.21
    
    
    Subsidiaries of the Company.23.1
    
    
    Report of Independent Registered Public Accounting Firm.23.2
    
    
    Awareness Letter from Deloitte & Touche, LLP.
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##### Table of Contents



31.1
    
    
    Chief Executive Officer Certification under Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Chief Financial Officer Certification under Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    
    Chief Executive Officer Certification of Periodic Report
under Section 906 of Sarbanes-Oxley Act of 2002.32.2
    
    
    Chief Financial Officer Certification of Periodic Report
under Section 906 of Sarbanes-Oxley Act of 2002.
 Notes  (1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K as
filed on March 25, 2002.(2)
    
    Incorporated by reference to the Companys Current Report on Form 8-K as
filed on April 23, 2002.(3)
    
    Incorporated by reference to the Companys Current Report on Form 10-Q as
filed on June 18, 2002.(4)
    
    Incorporated by reference to the Companys Current Report on Form
10-K as filed on May 2, 2003.(5)
    
    Incorporated by reference to the Companys Current Report on Form
10-K filed on April 21, 2004.  (b)
    
    Reports on 8-K.  Current Report on Form 8-K filed on May 6, 2004 announcing net sales
results for fiscal April 2004.Current Report on Form 8-K filed on June 8, 2004 announcing net sales
results for fiscal May 2004.Current Report on Form 8-K filed on July 9, 2004 announcing net sales
results for fiscal June 2004. 24




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##### Table of Contents



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: September 9, 2004
    By:
    /s/ Gary W. RadaGary W. RadaPresident and Chief Executive OfficerDated: September 9, 2004
    By:
    /s/  James D. ConstantineJames D. ConstantineExecutive Vice President and Chief Financial and
Administrative Officer
[Principal Accounting Officer] 25