PARTY CITY CORP - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended December 27, 2003		Commission file number 0-27826

Party City Corporation

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		22-3033692 (I.R.S. Employer Identification No.)

400 Commons Way Rockaway, New Jersey (Address of Principal Executive Offices)		07866 (Zip Code)

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.

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 [x] No: [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

As of February 2, 2004, there were outstanding 17,726,849 shares of Common Stock, $.01 par value.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURES
EMPLOYMENT AGREEMENT OF RICHARD H. GRINER
SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REPORT
SECTION 302 CERTIFICATION OF THE CEO
SECTION 302 CERTIFICATION OF THE CFO
SECTION 906 CERTIFICATION OF THE CEO
SECTION 906 CERTIFICATION OF THE CFO

TABLE OF CONTENTS

PARTY CITY CORPORATION AND SUBSIDIARY

INDEX


		Page No.

Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - December 27, 2003 (Unaudited) December 28, 2002 (Unaudited) and June 28, 2003		3
	Condensed Consolidated Statements of Income (Unaudited) for the quarters and six months ended December 27, 2003 and December 28, 2002		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 27, 2003 and December 28, 2002		5
	Notes to Condensed Consolidated (Unaudited) Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
Part II	Other Information
Item 1.	Legal Proceedings		20
Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		20
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits and Reports on Form 8-K
	Exhibit Index
	Signatures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)


			December 27,			December 28,			June 28,
			2003			2002			2003(1)

			(Unaudited)			(Unaudited)
ASSETS
	Current assets:
	Cash and cash equivalents		$	20,550		$	3,273		$	3,372
	Merchandise inventory			60,281			69,189			65,908
	Other current assets, net			25,263			26,339			21,900

		Total current assets		106,094			98,801			91,180
	Property and equipment, net			48,715			55,878			52,819
	Goodwill			18,614			19,172			18,614
	Other assets			5,201			4,087			5,386

		Total assets	$	178,624		$	177,938		$	167,999

LIABILITIES AND STOCKHOLDERS’ EQUITY
	Current liabilities:
	Accounts payable		$	34,458		$	44,890		$	37,960
	Accrued expenses and other current liabilities			36,062			28,656			24,998
	Book overdraft			—			6,654			4,126
	Advances under Loan Agreement			—			4,114			11,229

		Total current liabilities		70,520			84,314			78,313
	Long-term liabilities:
	Deferred rent and other long-term liabilities			9,905			10,683			10,264
	Commitments and contingencies
	Stockholders’ equity:
	Common stock, $.01 par value, authorized 40,000,000 shares; issued 17,721,850, 17,113,873 and 17,296,807 shares, respectively			177			171			173
	Additional paid-in capital			44,611			41,366			43,178
	Retained earnings			59,351			43,233			42,011
	Treasury stock, at cost (747,012, 284,000 and 747,012 shares, respectively)			(5,940	)		(1,829	)		(5,940	)

		Total stockholders’ equity		98,199			82,941			79,422

		Total liabilities and stockholders’ equity	$	178,624		$	177,938		$	167,999

(1) The June 28, 2003 condensed consolidated balance sheet was derived from the Company’s audited consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)


			Quarter ended						Six months ended

			December 27,			December 28,			December 27,			December 28,
			2003			2002			2003			2002

Revenues:
	Net sales		$	175,304		$	161,648		$	277,924		$	252,772
	Royalty fees			7,216			6,503			11,123			10,150
	Franchise fees			40			40			488			275

		Total revenues		182,560			168,191			289,535			263,197
Expenses:
	Cost of goods sold and occupancy costs			104,705			95,974			179,033			160,399
	Company-owned stores operating and selling expense			36,290			34,288			62,169			57,986
	Franchise expense			1,562			1,646			3,221			3,208
	General and administrative expense			7,498			8,403			15,657			15,705

		Total expenses		150,055			140,311			260,080			237,298

Operating income				32,505			27,880			29,455			25,899

	Interest income			(26	)		(17	)		(30	)		(24	)
	Interest expense			138			2,841			342			3,733

	Interest expense, net			112			2,824			312			3,709

Income before income taxes				32,393			25,056			29,143			22,190
	Provision for income taxes			13,103			10,006			11,803			8,876

Net income			$	19,290		$	15,050		$	17,340		$	13,314

	Basic earnings per share		$	1.14		$	0.90		$	1.03		$	0.80

		Weighted average shares outstanding — basic		16,867			16,803			16,856			16,600

	Diluted earnings per share		$	0.98		$	0.76		$	0.88		$	0.67

		Weighted average shares outstanding — diluted		19,624			19,896			19,620			19,904

See accompanying notes to condensed consolidated financial statements.

PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


			Six Months Ended
			December 27,			December 28,
			2003			2002

			(Unaudited)
Cash flow from operating activities:
Net income			$	17,340		$	13,314
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				7,692			7,133
Non-cash interest and financing costs				80			1,554
Deferred rent				(240	)		387
Equity based compensation				148			752
Provision for doubtful accounts				(140	)		(602	)
Other				10			44
Changes in assets and liabilities:
	Merchandise inventory			5,627			(12,915	)
	Accounts payable, accrued expenses and other current liabilities			3,437			17,956
	Other long-term liabilities			(119	)		—
	Other current assets and other assets			(3,188	)		(7,708	)

		Net cash provided by operating activities		30,647			19,915
Cash flow from investment activities:
	Purchases of property and equipment			(3,529	)		(13,444	)
	Stores acquired			—			(1,758	)

		Net cash used in investment activities		(3,529	)		(15,202	)
Cash flow from financing activities:
	Net (payments on) proceeds from Loan Agreement			(11,229	)		4,114
	Proceeds from exercise of stock options and warrants			1,289			1,276
	Payments of Senior Notes			—			(10,207	)
	Payments of financing costs			—			(90	)

		Net cash used in financing activities		(9,940	)		(4,907	)
Net increase (decrease) in cash and cash equivalents				17,178			(194	)
Cash and cash equivalents, beginning of period				3,372			3,467

Cash and cash equivalents, end of period			$	20,550		$	3,273

Supplemental disclosure of cash flow information:
	Income taxes paid		$	1,047		$	2,414
	Interest paid			262			2,651
Supplemental disclosure of non-cash financing activity:
	Issuance of shares under employment stock plan		$	244		$	265
	Issuance of shares under management stock plan			99			282
	Issuance of warrants			—			245

See accompanying notes to condensed consolidated financial statements.

PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The condensed consolidated financial statements 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 December 27, 2003 and December 28, 2002 and the results of operations for the quarters and six months ended December 27, 2003 and December 28, 2002 and cash flows for the six months ended December 27, 2003 and December 28, 2002. Because of the seasonality of the party goods industry, operating results of the Company on a quarterly or six month 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 year ended June 28, 2003, 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 26, 2003. All significant intercompany accounts and transactions have been eliminated. The June 28, 2003 condensed consolidated balance sheet amounts are derived from the Company’s audited condensed consolidated financial statements.

Our Fiscal Year (“Fiscal Year”) refers to the 52 or 53 weeks, as applicable, ending the Saturday nearest to June 30. The year ended July 3, 2004 (“Fiscal 2004”) is a 53 week year as compared to the years ended June 28, 2003 (“Fiscal 2003”) and June 29, 2002 (“Fiscal 2002”), which were each 52 week years.

Certain reclassifications have been made to the condensed consolidated financial statements in prior periods to conform to the current period presentation.

2. Stock-Based Compensation

The Company periodically grants stock options to employees. Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure, an Amendment of SFAS No. 123”. If compensation cost for the Company’s stock option plans had been determined in accordance with the fair value method prescribed by SFAS No. 123 the Company’s net income would have been (in thousands, except per share data):


		Quarter Ended				Six Months Ended

		December 27,		December 28,		December 27,		December 28,
		2003		2002		2003		2002

Net income as reported		$	19,290	$	15,050	$	17,340	$	13,314
	Deduct: Total equity based employee compensation expense determined under fair value based method, net of taxes		507	626		514		701

	Pro-forma net income	$	18,783	$	14,424	$	16,826	$	12,613
Basic and diluted earnings per share:
	Basic earnings per share as reported	$	1.14	$	0.90	$	1.03	$	0.80
	Basic earnings per share pro forma	$	1.11	$	0.86	$	1.00	$	0.76
	Diluted earnings per share as reported	$	0.98	$	0.76	$	0.88	$	0.67
	Diluted earnings per share pro forma	$	0.96	$	0.72	$	0.86	$	0.63

The weighted average fair value of options granted during the second quarter of Fiscal 2004 and 2003 was $6.48 and $6.25, respectively.

The weighted average fair value of options granted during the six months ended Fiscal 2004 and 2003 was $5.15 and $7.53, respectively.

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				Six Months Ended

	December 27,		December 28,		December 27,		December 28,
	2003		2002		2003		2002

Net income	$	19,290	$	15,050	$	17,340	$	13,314
Earnings per share - basic	$	1.14	$	0.90	$	1.03	$	0.80
Earnings per share - diluted	$	0.98	$	0.76	$	0.88	$	0.67

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