SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| For The Quarterly Period Ended March 29, 2003 |
Commission File Number 0-27826 |
PARTY CITY CORPORATION
| Delaware | 22-3033692 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 400 Commons Way | 07866 | |
| Rockaway, New Jersey | (Zip Code) | |
| (Address of Principal Executive Offices) |
973-983-0888
(Registrant’s telephone number, including area code)
Indicate by check mark whether the 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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
As of May 9, 2003, there were
outstanding 16,432,086 shares of
Common Stock, $.01 par value.
1
PARTY CITY CORPORATION AND SUBSIDIARY
INDEX
| Page No. | ||||||
| Part I. | Financial
Information |
|||||
| Item 1. |
Financial Statements |
|||||
Condensed Consolidated Balance Sheets — March 29, 2003 (Unaudited),
March 30, 2002 (Unaudited) and June 29, 2002
|
3 | |||||
Condensed Consolidated Statements of Operations (Unaudited) — For the
quarters and nine months ended March 29, 2003 and March 30, 2002
|
4 | |||||
Condensed Consolidated Statements of Cash Flows (Unaudited) — For the
nine months ended March 29, 2003 and March 30, 2002
|
5 | |||||
Notes to Condensed Consolidated Unaudited Financial Statements
|
6-12 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
13-21 | ||||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk
|
22 | ||||
| Item 4. |
Controls and Procedures
|
22 | ||||
| Part II. | Other
Information |
|||||
| Item 1. |
Legal Proceedings
|
23 | ||||
| Item 2. |
Changes in Securities and Use of Proceeds
|
23 | ||||
| Item 3. |
Defaults upon Senior Securities
|
23 | ||||
| Item 5. |
Other Information
|
23 | ||||
| Item 6. |
Exhibits and Reports on Form 8-K
|
23 | ||||
Exhibit Index
|
24-25 | |||||
| Signatures | 26 | |||||
| Certifications | 27-28 | |||||
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
| March 29, | March 30, | June 29, | |||||||||||||
| 2003 | 2002 | 2002 | |||||||||||||
| (Unaudited) | (Unaudited) | (1) | |||||||||||||
ASSETS |
|||||||||||||||
Current assets: |
|||||||||||||||
Cash and cash equivalents |
$ | 3,036 | $ | 7,455 | $ | 3,467 | |||||||||
Merchandise inventory |
76,156 | 60,952 | 55,867 | ||||||||||||
Deferred income taxes |
6,957 | 5,031 | 5,827 | ||||||||||||
Other current assets, net |
13,862 | 13,349 | 11,789 | ||||||||||||
Total current assets |
100,011 | 86,787 | 76,950 | ||||||||||||
Property and equipment, net |
53,432 | 46,024 | 49,356 | ||||||||||||
Goodwill |
19,172 | 14,206 | 18,016 | ||||||||||||
Other assets |
4,152 | 5,901 | 4,732 | ||||||||||||
Total assets |
$ | 176,767 | $ | 152,918 | $ | 149,054 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||||||
Current liabilities: |
|||||||||||||||
Accounts payable |
$ | 48,913 | $ | 40,846 | $ | 35,499 | |||||||||
Accrued expenses and other current liabilities |
21,139 | 23,191 | 26,744 | ||||||||||||
Advances under Loan Agreement |
18,637 | — | — | ||||||||||||
Senior Notes, current portion |
— | 7,655 | — | ||||||||||||
Total current liabilities |
88,689 | 71,692 | 62,243 | ||||||||||||
Deferred rent and other long-term liabilities |
10,759 | 9,725 | 10,297 | ||||||||||||
Senior Notes |
— | 8,759 | 8,915 | ||||||||||||
Commitments and contingencies |
|||||||||||||||
Stockholders’ equity: |
|||||||||||||||
Common stock $0.01 par value; 25,000,000 shares authorized;
17,177,151, 13,289,767 and 16,239,081 shares issued,
respectively |
172 | 133 | 162 | ||||||||||||
Additional paid-in capital |
41,662 | 38,654 | 39,347 | ||||||||||||
Retained earnings |
41,425 | 25,784 | 29,919 | ||||||||||||
Treasury stock, at cost (747,012 shares at March 29, 2003 and
284,000 shares at March 30, 2002 and June 29, 2002,
respectively) |
(5,940 | ) | (1,829 | ) | (1,829 | ) | |||||||||
Total stockholders’ equity |
77,319 | 62,742 | 67,599 | ||||||||||||
Total liabilities and stockholders’ equity |
$ | 176,767 | $ | 152,918 | $ | 149,054 | |||||||||
| (1) | The June 29, 2002 condensed consolidated balance sheet was derived from the Company’s audited condensed consolidated financial statements. |
See accompanying notes to condensed consolidated financial statements.
3
PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| Quarter ended | Nine months ended | ||||||||||||||||||
| March 29, | March 30, | March 29, | March 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Revenues: |
|||||||||||||||||||
Net sales |
$ | 95,846 | $ | 86,252 | $ | 348,618 | $ | 309,026 | |||||||||||
Royalty fees |
3,607 | 3,652 | 13,757 | 13,031 | |||||||||||||||
Franchise fees |
80 | 200 | 355 | 543 | |||||||||||||||
Total revenues |
99,533 | 90,104 | 362,730 | 322,600 | |||||||||||||||
Expenses: |
|||||||||||||||||||
Cost of goods sold and occupancy costs |
70,164 | 60,816 | 230,563 | 202,411 | |||||||||||||||
Company-owned stores operating and
selling expense |
23,196 | 20,031 | 81,182 | 69,724 | |||||||||||||||
Franchise expense |
1,755 | 1,612 | 4,963 | 4,826 | |||||||||||||||
General and administrative expense |
7,223 | 6,707 | 22,928 | 19,409 | |||||||||||||||
Total expenses |
102,338 | 89,166 | 339,636 | 296,370 | |||||||||||||||
Operating (loss) income |
(2,805 | ) | 938 | 23,094 | 26,230 | ||||||||||||||
Interest expense, net |
208 | 1,099 | 3,917 | 4,508 | |||||||||||||||
(Loss) income before income taxes |
(3,013 | ) | (161 | ) | 19,177 | 21,722 | |||||||||||||
(Benefit) provision for income taxes |
(1,205 | ) | (65 | ) | 7,671 | 8,665 | |||||||||||||
Net (loss) income |
$ | (1,808 | ) | $ | (96 | ) | $ | 11,506 | $ | 13,057 | |||||||||
Basic (loss) earnings per share |
$ | (0.11 | ) | $ | (0.01 | ) | $ | 0.69 | $ | 1.01 | |||||||||
Weighted average shares outstanding — basic |
16,653 | 12,982 | 16,617 | 12,909 | |||||||||||||||
Diluted (loss) earnings per share |
$ | (0.11 | ) | $ | (0.01 | ) | $ | 0.58 | $ | 0.69 | |||||||||
Weighted average shares outstanding — diluted |
16,653 | 12,982 | 19,757 | 18,972 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine months ended | |||||||||||
| March 29, | March 30, | ||||||||||
| 2003 | 2002 | ||||||||||
| (Unaudited) | |||||||||||
Cash flow from operating activities: |
|||||||||||
Net income |
$ | 11,506 | $ | 13,057 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||||||
Depreciation and amortization |
11,092 | 8,944 | |||||||||
Deferred taxes |
(349 | ) | 462 | ||||||||
Non-cash interest |
1,584 | 1,128 | |||||||||
Deferred rent and other long-term liabilities |
463 | 1,024 | |||||||||
Equity based compensation |
799 | 257 | |||||||||
Provision for doubtful accounts |
(460 | ) | 59 | ||||||||
Changes in assets and liabilities: |
|||||||||||
Merchandise inventory |
(19,882 | ) | (12,620 | ) | |||||||
Other current assets and other assets |
(1,677 | ) | (1,242 | ) | |||||||
Accounts payable, accrued expenses and other current liabilities |
7,810 | 9,858 | |||||||||
Net cash provided by operating activities |
10,886 | 20,927 | |||||||||
Cash flow from investment activities: |
|||||||||||
Purchases of property and equipment |
(15,023 | ) | (8,493 | ) | |||||||
Stores acquired |
(1,758 | ) | (1,504 | ) | |||||||
Proceeds from disposals of property and equipment |
144 | — | |||||||||
Net cash used in investment activities |
(16,637 | ) | (9,997 | ) | |||||||
Cash flow from financing activities: |
|||||||||||
Payments of Senior Notes |
(10,207 | ) | (11,655 | ) | |||||||
Net proceeds from Loan Agreement |
18,637 | — | |||||||||
Proceeds from exercise of stock options and warrants |
1,525 | 167 | |||||||||
Payment of financing costs |
(524 | ) | — | ||||||||
Purchase of treasury stock |
(4,111 | ) | (1,829 | ) | |||||||
Net cash provided by (used in) financing activities |
5,320 | (13,317 | ) | ||||||||
Net decrease in cash and cash equivalents |
(431 | ) | (2,387 | ) | |||||||
Cash and cash equivalents, beginning of period |
3,467 | 9,842 | |||||||||
Cash and cash equivalents, end of period |
$ | 3,036 | $ | 7,455 | |||||||
Supplemental disclosure of cash flow information: |
|||||||||||
Income taxes paid |
$ | 9,476 | $ | 9,785 | |||||||
Interest paid |
$ | 2,758 | $ | 4,098 | |||||||
Supplemental disclosure of non-cash financing activity: |
|||||||||||
Issuance of shares under management stock plan |
$ | 288 | $ | — | |||||||
Issuance of warrants |
$ | 245 | $ | 642 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
PARTY CITY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
| 1. | BASIS OF PRESENTATION |
The condensed consolidated financial statements, except for the June 29, 2002 consolidated balance sheet, are unaudited. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as of March 29, 2003 and March 30, 2002 and the results of operations for the respective three and nine months then ended and cash flows for nine months then ended. Because of the seasonality of the party goods industry, operating results of the Company on a quarterly basis may not be indicative of operating results for the full fiscal year.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 29, 2002, which are included in the Company’s Annual Report on Form 10-K with respect to such period filed with the Securities and Exchange Commission on September 27, 2002. All significant intercompany accounts and transactions have been eliminated. The June 29, 2002 condensed consolidated balance sheet amounts are derived from the Company’s audited consolidated financial statements.
| 2. | RECENT ACCOUNTING STANDARDS |
In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), replacing Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. This statement also established that fair value is the objective for the initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this statement and it did not have a material impact on its financial position or the results of operations.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The disclosure requirement is effective for the Company’s current quarter (see Note 10). The Company has adopted this statement and it did not have a material impact on its financial position or the results of operations.
In November 2002, the EITF reached a consensus on issues raised in EITF 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor” (“EITF 02-16”). This EITF issue addresses the timing of recognition for rebates that are earned by resellers based on specified levels of purchases or over specified periods. This guidance, related to timing of recognition, is to be applied prospectively to new rebate arrangements entered into in fiscal periods beginning after January 1, 2003. This EITF issue also addresses the classification of cash consideration received from vendors in a reseller’s statement of operations. The guidance related to income statement classification is to be applied in annual and interim financial statements for periods beginning after January 1, 2003. The Company has adopted this application and it did not have a material impact on its financial position or the results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation” (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of FASB Statement No. 123, “Accounting For Stock-Based Compensation” (“SFAS 123”) to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Company has adopted the disclosure provisions of SFAS 148 as of December 31, 2002 (see Note 4).
6
PARTY CITY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS—(Continued)
| 3. | EARNINGS PER SHARE |
The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share amounts):
| Quarter ended | Nine months ended | |||||||||||||||||||||||
| March 29, | March 30, | March 29, | March 30, | |||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||
Net (loss) income |
($ | 1,808 | ) | ($ | 96 | ) | $ | 11,506 | $ | 13,057 | ||||||||||||||
Earnings
(loss) per share — basic |
($ | 0.11 | ) | ($ | 0.01 | ) | $ | 0.69 | $ | 1.01 | ||||||||||||||
Earnings
(loss) per share — diluted |
($ | 0.11 | ) | ($ | 0.01 | ) | $ | 0.58 | $ | 0.69 | ||||||||||||||
Weighted average common shares outstanding |
16,653 | 12,982 | 16,617 | 12,909 | ||||||||||||||||||||
Dilutive effect of warrants |
(a | ) | (b | ) | (c | ) | 2,359 | (c | ) | 5,461 | ||||||||||||||
Dilutive effect of stock options |
(a | ) | (b | ) | 692 | 532 | ||||||||||||||||||
Restricted stock units |
(d | ) | (d | ) | 89 | 70 | ||||||||||||||||||
Weighted
average common and common
equivalent shares
outstanding |
16,653 | 12,982 | 19,757 | 18,972 | ||||||||||||||||||||