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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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 August 2, 2003
| |  | ---------------------------------------------



Commission File Number: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in its charter)



|DELAWARE                                                       |  | 36-3652087                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (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 ̈



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 September 9, 2003 was 1,508,641.



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##### Table of Contents

Factory Card & Party Outlet Corp.



Form 10-Q



For the Quarter Ended August 2, 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 August 2, 2003 (Successor Company) and as of February 1, 2003 (Successor Company)                                                                                                                                        |  | 3    
|        |  |                                                                                                                                                                                                                                                                                   
|        |  | Condensed Consolidated Statements of Operations (Unaudited)  three months ended August 2, 2003, three months ended August 3, 2002, six months ended August 2, 2003, four months ended August 2, 2002 (Successor Company) and
two months ended April 6, 2002 (Predecessor Company) |  | 4    
|        |  |                                                                                                                                                                                                                                                                                   
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  six months ended August 2, 2003, four months ended August 3, 2002 and (Successor Company) and two months ended April 6, 2002 (Predecessor
Company)                                                                   |  | 5    
|        |  |                                                                                                                                                                                                                                                                                   
|        |  | Notes to Condensed Consolidated Financial Statements - (Unaudited)                                                                                                                                                                                                                 |  | 6-16 
|        |  |                                                                                                                                                                                                                                                                                   
|Item 2  |  | Managements Discussion and Analysis of Financial Condition And Results of Operations                                                                                                                                                                                              |  | 17-23
|        |  |                                                                                                                                                                                                                                                                                   
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                         |  | 24   
|        |  |                                                                                                                                                                                                                                                                                   
|Item 4  |  | Disclosure Controls and Procedures                                                                                                                                                                                                                                                 |  | 24   
|        |  |                                                                                                                                                                                                                                                                                   
|Part II |  | Other Information                                                                                                                                                                                                                                                                  |  |      
|        |  | Item 1.
Legal Proceedings                                                                                                                                                                                                                                                          |  | 24   
|        |  | Item 2.
Changes in Securities                                                                                                                                                                                                                                                      |  | 24   
|        |  | Item 3.
Defaults Upon Senior Securities                                                                                                                                                                                                                                            |  | 24   
|        |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                        |  | 24   
|        |  | Item 5.
Other Information                                                                                                                                                                                                                                                          |  | 25   
|        |  | Item 6.
Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                           |  | 25-27
|        |  | Signatures                                                                                                                                                                                                                                                                         |  | 27   



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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)



|                                                                |  | Successor Company |        | Successor Company
|--------------------------------------------------------------- |  | ----------------- | ------ | -----------------
|                                                                |  | August 2, 2003    |        | February 1, 2003 
|ASSETS                                                          |  |                   |        |                  
|                                                                |  |                  
|Current assets:                                                 |  |                   |        |                  
|Cash                                                            |  | $                 | 194    |                  
|Merchandise inventories, net                                    |  |                   | 43,534 |                  
|Prepaid expenses and other                                      |  |                   | 3,922  |                  
|                                                                |  |                   |        |                  
|Total current assets                                            |  |                   | 47,650 |                  
|                                                                |  |                  
|Fixed assets, net                                               |  |                   | 7,038  |                  
|Other assets                                                    |  |                   | 333    |                  
|Deferred tax asset, net                                         |  |                   | 431    |                  
|                                                                |  |                   |        |                  
|Total assets                                                    |  | $                 | 55,452 |                  
|                                                                |  |                   |        |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                            |  |                   |        |                  
|                                                                |  |                  
|Current liabilities:                                            |  |                   |        |                  
|Debt                                                            |  | $                 | 4,640  |                  
|Accounts payable                                                |  |                   | 17,680 |                  
|Accrued expenses                                                |  |                   | 6,644  |                  
|Current portion of long term debt and capital lease obligations |  |                   | 421    |                  
|                                                                |  |                   |        |                  
|Total current liabilities                                       |  |                   | 29,385 |                  
|                                                                |  |                   |        |                  
|Long term debt and capital lease obligations                    |  |                   | 5,740  |                  
|Deferred rent liabilities                                       |  |                   | 1,736  |                  
|                                                                |  |                   |        |                  
|Total liabilities                                               |  |                   | 36,861 |                  
|                                                                |  |                  
|Stockholders equity                                            |  |                   | 18,591 |                  
|                                                                |  |                   |        |                  
|Total liabilities and stockholders equity                      |  | $                 | 55,452 |                  
|                                                                |  |                   |        |                  



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         |  
|--------------------------------------------- |  | ----------------------------- | --------- | ----------------------------- | - | ---------------------------- |  | ---------------------------- | --------- | -------------------------- | -
|                                              |  | ThreeMonthsEndedAugust 2,2003 |           | ThreeMonthsEndedAugust 3,2002 |   | Six MonthsEndedAugust 2,2003 |  | FourMonthsEndedAugust 3,2002 |           | TwoMonthsEndedApril 6,2002 |  
|Net sales                                     |  | $                             | 59,835    |                               | $ | 59,733                       |  | $                            | 114,376   |                            | $
|Cost of sales                                 |  |                               | 37,873    |                               |   | 37,808                       |  |                              | 73,887    |                            |  
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Gross profit                                  |  |                               | 21,962    |                               |   | 21,925                       |  |                              | 40,489    |                            |  
|                                              |  |                               |           |                               |  
|Selling, general and administrative expenses  |  |                               | 17,666    |                               |   | 17,869                       |  |                              | 35,661    |                            |  
|Depreciation                                  |  |                               | 486       |                               |   | 356                          |  |                              | 934       |                            |  
|Reorganization items                          |  |                               |          |                               |   |                             |  |                              |          |                            |  
|Interest expense                              |  |                               | 237       |                               |   | 412                          |  |                              | 580       |                            |  
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Income before income tax expense (benefit)    |  |                               | 3,573     |                               |   | 3,288                        |  |                              | 3,314     |                            |  
|Income tax expense (benefit)                  |  |                               | 1,429     |                               |   | 1,311                        |  |                              | 1,325     |                            |  
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Net income                                    |  | $                             | 2,144     |                               | $ | 1,977                        |  | $                            | 1,989     |                            | $
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Net income per share - basic                  |  | $                             | 1.47      |                               | $ | 1.38                         |  | $                            | 1.37      |                            | $
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Weighted average shares outstanding  basic   |  |                               | 1,457,241 |                               |   | 1,432,486                    |  |                              | 1,450,677 |                            |  
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Net income per share  diluted                |  | $                             | 1.40      |                               | $ | 1.35                         |  | $                            | 1.35      |                            | $
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  
|Weighted average shares outstanding  diluted |  |                               | 1,530,811 |                               |   | 1,463,555                    |  |                              | 1,470,335 |                            |  
|                                              |  |                               |           |                               |   |                              |  |                              |           |                            |  



See accompanying notes
to condensed consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar amounts in thousands)



|                                                                                         |  | SuccessorCompany                     |          |   | SuccessorCompany                      |   |         | PredecessorCompany                   | 
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | ------------------------------------- | - | ------- | ------------------------------------ | 
|                                                                                         |  | For the SixMonths EndedAugust 2,2003 |          |   | For the FourMonths EndedAugust 3,2002 |   |         | For the TwoMonths EndedApril 6, 2002 | 
|Cash flows from operating activities:                                                    |  |                                      |          |   |                                       |   |         |                                      | 
|Net income                                                                               |  | $                                    | 1,989    |   |                                       | $ | 2,367   |                                      | 
|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                                            |  |                                      | 934      |   |                                       |   | 456     |                                      | 
|Amortization of deferred financing costs                                                 |  |                                      | 65       |   |                                       |   | 30      |                                      | 
|Amortization of deferred compensation                                                    |  |                                      | 68       |   |                                       |   | 47      |                                      | 
|Non cash portion of reorganization items                                                 |  |                                      |         |   |                                       |   |        |                                      | 
|Tax benefit of pre-confirmation net operating losses                                     |  |                                      | 1,380    |   |                                       |   | 1,850   |                                      | 
|Changes in assets and liabilities:                                                       |  |                                      |          |   |                                       |   |         |                                      | 
|Merchandise inventories                                                                  |  |                                      | 4,656    |   |                                       |   | 4,425   |                                      | 
|Prepaid expenses and other assets                                                        |  |                                      | 102      |   |                                       |   | 1,019   |                                      | 
|Accounts payable                                                                         |  |                                      | 4,715    |   |                                       |   | 1,039   |                                      | 
|Accrued expenses                                                                         |  |                                      | 179      |   |                                       |   | (5,351  | )                                    | 
|Deferred rent obligation                                                                 |  |                                      | 137      |   |                                       |   | 726     |                                      | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Net cash provided by operating activities                                                |  |                                      | 14,225   |   |                                       |   | 6,608   |                                      | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Net cash used in investing activities  purchase of fixed assets, net                    |  |                                      | (1,171   | ) |                                       |   | (924    | )                                    | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Cash flow provided by (used in) financing activities:                                    |  |                                      |          |   |                                       |   |         |                                      | 
|Borrowings                                                                               |  |                                      | 107,859  |   |                                       |   | 76,632  |                                      | 
|Repayment of debt                                                                        |  |                                      | (120,747 | ) |                                       |   | (82,285 | )                                    | 
|Payment of capital lease obligations                                                     |  |                                      | (216     | ) |                                       |   | (176    | )                                    | 
|Increase in long term debt                                                               |  |                                      | 48       |   |                                       |   | 46      |                                      | 
|Cash received from exercise of stock warrants and options                                |  |                                      |         |   |                                       |   | 97      |                                      | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Net cash used in financing activities                                                    |  |                                      | (13,056  | ) |                                       |   | (5,686  | )                                    | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Net increase (decrease) in cash                                                          |  |                                      | (2       | ) |                                       |   | (2      | )                                    | 
|Cash at beginning of period                                                              |  |                                      | 196      |   |                                       |   | 189     |                                      | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Cash at end of period                                                                    |  | $                                    | 194      |   |                                       | $ | 187     |                                      | 
|                                                                                         |  |                                      |          |   |                                       |   |         |                                      | 
|Supplemental cash flow information:                                                      |  |                                      |          |   |                                       |   |         |                                      | 
|Interest paid                                                                            |  | $                                    | 565      |   |                                       | $ | 221     |                                      | 
|Cash paid for reorganization items                                                       |  |                                      | 138      |   |                                       |   | 5,233   |                                      | 
|Supplemental non cash information:                                                       |  |                                      |          |   |                                       |   |         |                                      | 
|Stock issued (Successor Company)                                                         |  |                                      |         |   |                                       |   |        |                                      | 
|Fair value adjustments                                                                   |  |                                      |         |   |                                       |   |        |                                      | 
|Stock retired (Predecessor Company) and debt discharge                                   |  |                                      |         |   |                                       |   |        |                                      | 
|Unearned restricted stock awards                                                         |  |                                      | 342      |   |                                       |   | 517     |                                      | 
|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 74,553 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 1,349,995 shares of the new Common Stock to holders of unsecured claims against us, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 75,000 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 31,000 shares of our new Common Stock at a purchase price of $7.52 per share. On June 7, 2002, 12,900 warrants were exercised and the remaining 18,100 warrants expired.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 153,467
additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $11.00 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $16.00 per share.
The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $16.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $34.00 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 166,667 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) |  | 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 August 2, 2003, we operated 171 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.



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.



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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.



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:



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|                                                   |  | 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 six fiscal months ended August 2, 2003 and the three and four fiscal months ended August 3, 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 its 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 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 adopted the provisions of SFAS No. 143
and it did not have a material 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 a material 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 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.



10



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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 the 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 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 for
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 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 contacts (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.



11



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##### Table of Contents

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. 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.



|(3) |  | 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. 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 August 2, 2003.



|                                              |  | August 2, 2003
|--------------------------------------------- |  | --------------
|Trade conversion note                         |  | $             
|Discounted value of extended creditor payment |  |               
|Financing agreements                          |  |               
|Capital leases                                |  |               
|                                              |  |               
|Total                                         |  | $             
|                                              |  |               



|(4) |  | 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 by 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 August 2, 2003. Borrowings under the 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.



|(5) |  | Stockholders Equity
|--- |  | --------------------



We authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. A total of 1,349,995 shares were distributed in the
initial distribution of stock to creditors, 75,000 shares were distributed to certain members of management which vest over a 4 year period and 74,553 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 166,667 stock options to our employees  155,100 options under the 2002 stock



12



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##### Table of Contents

option plan at exercise prices ranging from $5.50 to $9.43 were outstanding at August 2, 2003.



We also 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 153,467 additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of
$11.00 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $16.00 per share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $16.00 per share. The Series D Warrants
are exercisable any time prior to April 9, 2010 at a price of $34.00 per share.



Warrants were issued to management to purchase an aggregate 31,000 shares of the Common Stock at a purchase price of $7.52 per share. On June 7, 2002, 12,900 warrants were exercised and the remaining 18,100 warrants
expired.



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 150,000 common stock
options to non-employee members of the Board of Directors  90,000 options at exercise prices ranging from $5.30 to $7.52 were outstanding at August 2, 2003.



On January 27, 2003, the Board of Directors adopted the 2003 Equity Incentive Plan whereby 250,000 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  113,600 options were outstanding with an
exercise price of $12.75 at August 2, 2003.



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.



|(6) |  | 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):



13



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##### Table of Contents

|                                           |  | Net income |       | Shares |           | Per share
|------------------------------------------ |  | ---------- | ----- | ------ | --------- | ---------
|For the three months ended August 2, 2003: |  |            |       |        |           |          
|Earnings per share  basic:                |  |            |       |        |           |          
|Net income                                 |  | $          | 2,144 |        | 1,457,241 |          
|                                           |  |            |      
|Effect of dilutive securities:             |  |            |       |        |           |          
|Stock options and warrants                 |  |            |       |        | 73,570    |          
|Earnings per share  diluted:              |  |            |       |        |           |          
|                                           |  |            |       |        |           |          
|Net income                                 |  | $          | 2,144 |        | 1,530,811 |          
|                                           |  |            |       |        |           |          
|For the three months ended August 3, 2002: |  |            |       |        |           |          
|Earnings per share  basic:                |  |            |       |        |           |          
|Net income                                 |  | $          | 1,977 |        | 1,432,486 |          
|                                           |  |            |      
|Effect of dilutive securities:             |  |            |       |        |           |          
|Stock options and warrants                 |  |            |       |        | 31,069    |          
|Earnings per share  diluted:              |  |            |       |        |           |          
|                                           |  |            |       |        |           |          
|Net income                                 |  | $          | 1,977 |        | 1,463,555 |          
|                                           |  |            |       |        |           |          



|                                          |  | Net income |       | Shares |           | Per share
|----------------------------------------- |  | ---------- | ----- | ------ | --------- | ---------
|For the six months ended August 2, 2003:  |  |            |       |        |           |          
|Earnings per share  basic:               |  |            |       |        |           |          
|Net income                                |  | $          | 1,989 |        | 1,450,677 |          
|                                          |  |            |      
|Effect of dilutive securities:            |  |            |       |        |           |          
|Stock options and warrants                |  |            |       |        | 19,658    |          
|Earnings per share  diluted:             |  |            |       |        |           |          
|                                          |  |            |       |        |           |          
|Net income                                |  | $          | 1,989 |        | 1,470,335 |          
|                                          |  |            |       |        |           |          
|For the four months ended August 3, 2002: |  |            |       |        |           |          
|Earnings per share  basic:               |  |            |       |        |           |          
|Net income                                |  | $          | 2,367 |        | 1,430,619 |          
|                                          |  |            |      
|Effect of dilutive securities:            |  |            |       |        |           |          
|Stock options and warrants                |  |            |       |        | 31,069    |          
|Earnings per share  diluted:             |  |            |       |        |           |          
|                                          |  |            |       |        |           |          
|Net income                                |  | $          | 2,367 |        | 1,461,688 |          
|                                          |  |            |       |        |           |          



The dilutive impact
of stock options and warrants was calculated using the treasury method. The 153,467 warrants issued to old equity and 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.



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.



|(7) |  | 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.



14



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##### Table of Contents

123, our net income would have changed as indicated below:



|                                                                                                                                     |  | For thethreemonthsendedAugust 2,2003 |       | For thethreemonthsendedAugust 3,2002 |   | For thesixmonthsendedAugust 2,2003 |  | For thefourmonthsendedAugust 3,2002
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ----- | ------------------------------------ | - | ---------------------------------- |  | -----------------------------------
|Net income, as reported                                                                                                              |  | $                                    | 2,144 |                                      | $ | 1,977                              |  | $                                  
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |                                      | 53    |                                      |   | 29                                 |  |                                    
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    
|Pro forma net income                                                                                                                 |  | $                                    | 2,091 |                                      | $ | 1,948                              |  | $                                  
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    
|Earnings per share:                                                                                                                  |  |                                      |       |                                      |   |                                    |  |                                    
|Basic-as reported                                                                                                                    |  | $                                    | 1.47  |                                      | $ | 1.38                               |  | $                                  
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    
|Basic-pro forma                                                                                                                      |  | $                                    | 1.44  |                                      | $ | 1.36                               |  | $                                  
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    
|Diluted-as reported                                                                                                                  |  | $                                    | 1.40  |                                      | $ | 1.35                               |  | $                                  
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    
|Diluted-pro forma                                                                                                                    |  | $                                    | 1.37  |                                      | $ | 1.33                               |  | $                                  
|                                                                                                                                     |  |                                      |       |                                      |   |                                    |  |                                    



The per share
weighted average fair value of stock options granted during the three and six months ended August 2, 2003 and three months and four months ended August 3, 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%, volatility of 50% and an expected life of approximately 10 years.



|(8) |  | 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-month period ended April 6, 2002. The
components of Reorganization Items are as follows:



|                                                            |  | Predecessor Company          |        
|----------------------------------------------------------- |  | ---------------------------- | -------
|                                                            |  | Two months endedApril 6,2002 |        
|Reorganization Items:                                       |  |                              |        
|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.



15



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##### Table of Contents

|(9) |  | Income Taxes
|--- |  | ------------



Since we utilized fresh start accounting upon emergence from bankruptcy, the income tax expense of $1,325 for the six months ended August 2, 2003 and
$1,560 for the four months ended August 3, 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.



|(10) |  | 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 $1,560 during the six months ended August 2, 2003 and amounts owed to that
entity as of August 2, 2003 were $220. There were no purchases from this entity during the four months ended August 3, 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.



|(11) |  | 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
August 2, 2003 these charges were approximately $2.2 million. We believe these disputed charges are without merit and are in violation of the terms of our agreement. Consequently, these charges have not been accrued at August 2, 2003.



|(12) |  | Subsequent Event
|---- |  | ----------------



On September 9, 2003, the Board of Directors approved a 2-for-1 stock split of our common stock. Shareholders will receive one additional common share for
every common share held on the record date of October 7, 2003. The additional common shares will be mailed or delivered on or around October 21, 2003.



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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)
|------ |  | -------------------------------------------------------------------------------------------------------------------



The Company is 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 August 2, 2003, the Company operated 171 stores in 20 states.



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 it 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 2  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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##### Table of Contents

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 four month period ended August 3, 2002 (Successor Company) has been combined with the two month period ended April 6, 2002 (Predecessor Company) and then compared to the six
months ended August 2, 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 fiscalmonthsended |   |  | Three fiscalmonthsended |   |  | Six fiscal months ended |  
|-------------------------------------------- |  | ----------------------- | - |  | ----------------------- | - |  | ----------------------- | -
|                                             |  | August 2,2003           |   |  | August 3,2002           |   |  | August 2,2003           |  
|Net sales                                    |  | 100.0                   | % |  | 100.0                   | % |  | 100.0                   | %
|Cost of sales                                |  | 63.3                    |   |  | 63.3                    |   |  | 64.6                    |  
|                                             |  |                         |   |  |                         |   |  |                         |  
|Gross profit                                 |  | 36.7                    |   |  | 36.7                    |   |  | 35.4                    |  
|Selling, general and administrative expenses |  | 29.5                    |   |  | 29.9                    |   |  | 31.2                    |  
|Depreciation                                 |  | 0.8                     |   |  | 0.6                     |   |  | 0.8                     |  
|Reorganization items                         |  |                        |   |  |                        |   |  |                        |  
|Interest expense                             |  | 0.4                     |   |  | 0.7                     |   |  | 0.5                     |  
|                                             |  |                         |   |  |                         |   |  |                         |  
|Income before income tax expense             |  | 6.0                     |   |  | 5.5                     |   |  | 2.9                     |  
|Income tax expense                           |  | 2.4                     |   |  | 2.2                     |   |  | 1.2                     |  
|                                             |  |                         |   |  |                         |   |  |                         |  
|Net income                                   |  | 3.6                     | % |  | 3.3                     | % |  | 1.7                     | %
|                                             |  |                         |   |  |                         |   |  |                         |  
|Number of stores open at end of period       |  | 171                     |   |  | 171                     |   |  | 171                     |  



Three Months Ended August 2, 2003
and August 3, 2002



Net Sales. Net sales increased
$102 or 0.2% to $59,835 for the three month period ended August 2, 2003 (second quarter of fiscal 2003) from $59,733 for the three month period ended August 3, 2002 (second quarter of fiscal 2002). Increases in card, basic
party and seasonal categories were offset by decreases in our other sales categories. Comparable store sales increased 0.7%. No new stores opened in either period and one store closed in the second quarter of fiscal 2002.



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Gross Profit. Cost of sales includes merchandise, distribution and store occupancy costs. Gross
profit increased $37 or 0.2%, to $21,962 for the second quarter of fiscal 2003 from $21,925 for the second quarter of fiscal 2002. As a percentage of net sales, gross profit was 36.7% for both periods presented.



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 decreased $203 or 1.1% to $17,666 for the second quarter of fiscal 2003 from
$17,869 for the second quarter of fiscal 2002. The fluctuation can be attributed to decreases in store and general and administrative expenses of $832 and $176, respectively, offset by an $805 increase in advertising costs. As a percentage of net
sales, selling, general and administrative expenses decreased to 29.5% in the second quarter of fiscal 2003 from 29.9% in the second quarter of fiscal 2002.



Depreciation expense. Depreciation expense was $486 in the second quarter of fiscal 2003 compared to $356 in the second quarter of fiscal 2002. The
increase is a function of depreciation on fixed assets placed in service since we emerged from bankruptcy in April 2002.



Interest Expense. Interest expense was $237 in the second quarter of fiscal 2003 compared to $412 in the second 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 $1,429 in the second quarter of fiscal 2003 compared to $1,311 in the second 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.



Six
Months Ended August 2, 2003 and August 3, 2002



Net
Sales. Net sales decreased $4,381 or 3.7%, to $114,376 for the six fiscal month period ended August 2, 2003 (first half of fiscal 2003) from $118,757 for the six fiscal month period ended August 3, 2002 (first half of fiscal
2002). All sales categories with the exception of cards, basic party and seasonal experienced a sales decrease. Comparable store sales decreased 3.2%. No new stores opened in either period and one store closed in the first half of fiscal 2002.



Gross Profit. Cost of sales includes merchandise,
distribution and occupancy costs. Gross profit decreased $1,872 or 4.4%, to $40,489 for the first half of fiscal 2003 from $42,361 for the first half of fiscal 2002. The fluctuation can be primarily attributed to lower sales volume. As a percentage
of net sales, gross profit was 35.4% for the first half of fiscal 2003 compared to 35.7% 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 decreased $117 or 0.3%, to $35,661 for the first half of fiscal 2003 from $35,778 for the first half of fiscal 2002. The fluctuation can be
attributed to decreases in store expenses and general and administrative expenses of $1,245 and $79, respectively offset by an increase in advertising costs of $1,207. As a percentage of net sales, selling, general and administrative expenses
increased to 31.2% in the first half of fiscal 2003 from 30.1% in the first half of fiscal 2002.



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Depreciation expense. Depreciation expense was $934 in the first half of fiscal 2003 compared to
$1,486 in the first half of fiscal 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 $580 in the first half of
fiscal 2003 compared to $940 in the first half of fiscal 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 first half of 2003. The major components of the $18,840 Reorganization gain recorded in the first half of 2002 are as follows:



|                                                            |  | FiscalYear 2002Combined Results |        
|----------------------------------------------------------- |  | ------------------------------- | -------
|                                                            |  | Six Months endedAugust 3, 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 $1,325 for the first half of 2003 and $1,560 for the four months ended August 3, 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 August 2, 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.



As of August 2, 2003, we had $4,640 in borrowings outstanding under the New
Loan Agreement and had utilized approximately $2,619 under the New Loan Agreement to issue letters of credit.



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



|                                      |  | FY2003                        |        | FY2002                                         
|------------------------------------- |  | ----------------------------- | ------ | -----------------------------------------------
|                                      |  | Six monthsended August 2,2003 |        | Combined results -Six monthsended August 3,2002
|Cash provided by operating activities |  | $                             | 14,225 |                                                
|                                      |  |                               |        |                                                
|Cash used in investing activities     |  | $                             | 1,171  |                                                
|                                      |  |                               |        |                                                
|Cash used in financing activities     |  | $                             | 13,056 |                                                
|                                      |  |                               |        |                                                



At August 2, 2003 our
working capital was $18,265. Net cash provided by operating activities for the six month period ended August 2, 2003 was $14,225 compared to $11,445 of net cash provided by operating activities during the six month period ended August 3, 2002. Cash
provided for the current period is related to decreases in inventory balances coupled with increases in accounts payable as we continue to leverage days payable with our vendor community.



Net cash used in investing activities during the six month period ended August 2, 2003 and the six month period ended August
3, 2002 was $1,171 and $1,181, respectively. Net cash used in investing activities was primarily for capital expenditures relating to leasehold improvements at the stores, store fixtures, computer equipment and warehouse equipment for the
distribution center.



Net cash used in financing activities
during the six month period ended August 2, 2003 was $13,056 compared to $10,259 during the six month period ended August 3, 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.



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 August 2, 2003 these charges were approximately $2,190. We
believe these disputed charges are without merit and are in violation of the terms of our agreement. Consequently, these charges are not accrued at August 2, 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



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portion of its 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 a material 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 a material 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 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



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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 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 for
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 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 contacts (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.
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.



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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



We are subject to market risks from changes in interest rates. As of August 2, 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 six months ended August 2, 2003, the four months ended August 3, 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 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



At our annual meeting of stockholders held on July 16, 2003, the stockholders approved proposals regarding the following:



(1) the election of three directors (James D. Constantine, Patrick OBrien and Gary W. Rada); the vote was 1,120,146 shares for James D. Constantine,
1,126,543 shares for Patrick OBrien and 1,120,146 shares for Gary W. Rada.



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(2) an amendment to our Amended and Restated Certificate of Incorporation to (a) provide that the number
of directors shall be fixed from time to time exclusively by resolution of the board of directors, (b) increase the number of classes in our classified board of directors from two to three and (c) designate persons to serve as directors in all three
classes; the vote was 891,455 shares for the proposal, 166,267 shares against and 131 abstaining.



(3) an amendment to our Amended and Restated Certificate of Incorporation to (a) effect the continuation of provisions in the current Certificate which
prohibit transfers of our common stock that would either result in a person or group becoming a 5% or greater stockholder or increase the ownership of a 5% or greater stockholder and (b) clarify the exception for certain employee stock option
exercises; the vote was 921,151 shares for the proposal, 136,673 shares against and 29 abstaining.



(4) the Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan; the vote was 928,763 shares for the proposal, 128,003 shares against and 1,087
abstaining.



(5) the appointment of Deloitte & Touche LLP
as the independent auditors for Factory Card for the fiscal year ending January 31, 2004; the vote was 1,102,582 shares for the proposal, 8,799 shares against and 41,473 abstaining.



The total number of shares entitled to vote on each proposal was 1,506,134.



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.



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



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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 Form of Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.



Exhibit 15 Acknowledgement of Awareness Letter from Deloitte & Touche, LLP dated September 3, 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.



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.



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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.



(b) Reports on Form 8-K filed
in the quarter ended August 2, 2003



Current Report on Form
8-K filed on May 23, 2003 announcing the date of our annual meeting of stockholders.



Current Report on Form 8-K filed on June 17, 2003 announcing our first quarter results.



Current Report on Form 8-K filed on July 17, 2003 announcing the proposals which were approved at our annual meeting of stockholders held on July 16,
2003.



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 10, 2003 |  |  |  | By:                              
|                          |  |  |  |                                  
|                          |  |  | 
|Dated: September 10, 2003 |  |  |  | By:                              
|                          |  |  |  |                                  



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