SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
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Commission file number | |||
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October 2, 2004
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0-27826 | |||
Party City Corporation
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Delaware
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22-3033692 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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400 Commons Way Rockaway, New Jersey (Address of Principal Executive Offices) |
07866 (Zip Code) |
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(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 þ No: o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No: o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
As of October 22, 2004, there were 17,145,573 shares of Common Stock, $0.01 par value, outstanding.
TABLE OF CONTENTS
References throughout this document to the Company include Party City Corporation and its wholly-owned subsidiary. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document the words “we,” “our,” “ours” and “us” refer only to Party City Corporation and its wholly-owned subsidiary and not to any other person.
Our website — www.partycity.com — provides access, free of charge, to our Securities and Exchange Commission (“SEC”) reports, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC, including proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports.
You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov.
1
PART I.
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
PARTY CITY CORPORATION AND SUBSIDIARY
(In thousands, except share information)
| October 2, | July 3, | September 27, | ||||||||||||
| 2004 | 2004 | 2003 | ||||||||||||
| ASSETS | ||||||||||||||
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Current assets:
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||||||||||||||
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Cash and cash equivalents
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$ | 18,614 | $ | 27,845 | $ | 4,603 | ||||||||
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Merchandise inventory
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81,657 | 57,357 | 93,227 | |||||||||||
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Deferred income taxes
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9,298 | 9,298 | 7,428 | |||||||||||
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Other current assets, net
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13,735 | 11,371 | 14,932 | |||||||||||
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Total current assets
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123,304 | 105,871 | 120,190 | |||||||||||
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Property and equipment, net
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46,563 | 48,762 | 50,495 | |||||||||||
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Goodwill
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18,614 | 18,614 | 18,614 | |||||||||||
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Other assets
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4,082 | 4,170 | 5,234 | |||||||||||
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Total assets
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$ | 192,563 | $ | 177,417 | $ | 194,533 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
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Current liabilities:
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||||||||||||||
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Accounts payable
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$ | 61,882 | $ | 38,364 | $ | 64,841 | ||||||||
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Accrued expenses and other current liabilities
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27,306 | 32,689 | 24,823 | |||||||||||
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Cash overdraft
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— | — | 1,548 | |||||||||||
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Advances under Loan Agreement
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— | — | 15,171 | |||||||||||
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Total current liabilities
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89,188 | 71,053 | 106,383 | |||||||||||
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Long-term liabilities:
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||||||||||||||
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Deferred rent and other long-term liabilities
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9,393 | 9,526 | 10,034 | |||||||||||
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Commitments and contingencies (see Notes 7
and 9)
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||||||||||||||
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Stockholders’ equity:
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||||||||||||||
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Common stock, $0.01 par value;
40,000,000 shares authorized at October 2, 2004 and
July 3, 2004 and 25,000,000 shares authorized at
September 27, 2003; 17,871,210 shares issued and
17,124,198 shares outstanding at October 2, 2004;
17,835,778 shares issued and 17,088,766 shares
outstanding at July 3, 2004; and 17,425,070 shares
issued and 16,678,058 shares outstanding at
September 27, 2003
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179 | 178 | 174 | |||||||||||
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Additional paid-in capital
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46,917 | 46,683 | 43,821 | |||||||||||
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Retained earnings
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52,826 | 55,917 | 40,061 | |||||||||||
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Treasury stock, at cost (747,012 shares for
all periods presented)
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(5,940 | ) | (5,940 | ) | (5,940 | ) | ||||||||
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Total stockholders’ equity
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93,982 | 96,838 | 78,116 | |||||||||||
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Total liabilities and stockholders’ equity
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$ | 192,563 | $ | 177,417 | $ | 194,533 | ||||||||
See accompanying notes to condensed consolidated financial statements.
2
PARTY CITY CORPORATION AND SUBSIDIARY
(In thousands, except per share amounts)
| Fiscal Quarter Ended | ||||||||||
| October 2, | September 27, | |||||||||
| 2004 | 2003 | |||||||||
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Revenues:
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Net sales
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$ | 98,602 | $ | 102,620 | ||||||
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Royalty fees
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3,827 | 3,908 | ||||||||
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Franchise fees
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120 | 447 | ||||||||
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Total revenues
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102,549 | 106,975 | ||||||||
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Expenses:
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||||||||||
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Cost of goods sold and occupancy costs
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71,857 | 74,328 | ||||||||
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Company-owned stores operating and selling expense
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24,259 | 25,879 | ||||||||
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Franchise expense
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1,848 | 1,659 | ||||||||
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General and administrative expense
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9,722 | 8,159 | ||||||||
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Total expenses
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107,686 | 110,025 | ||||||||
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Operating loss
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(5,137 | ) | (3,050 | ) | ||||||
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Interest income
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(54 | ) | (4 | ) | ||||||
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Interest expense
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111 | 204 | ||||||||
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Interest expense, net
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57 | 200 | ||||||||
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Loss before income taxes
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(5,194 | ) | (3,250 | ) | ||||||
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Benefit from income taxes
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(2,103 | ) | (1,300 | ) | ||||||
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Net loss
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$ | (3,091 | ) | $ | (1,950 | ) | ||||
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Basic and diluted loss per share
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$ | (0.18 | ) | $ | (0.12 | ) | ||||
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Weighted average shares outstanding —
basic and diluted
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17,105 | 16,599 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
PARTY CITY CORPORATION AND SUBSIDIARY
(In thousands)
| Fiscal Quarter Ended | |||||||||||
| October 2, | September 27, | ||||||||||
| 2004 | 2003 | ||||||||||
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Cash flow from operating activities:
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|||||||||||
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Net loss
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$ | (3,091 | ) | $ | (1,950 | ) | |||||
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Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
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|||||||||||
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Depreciation and amortization
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4,332 | 3,802 | |||||||||
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Amortization of financing costs
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40 | 40 | |||||||||
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Deferred rent
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(127 | ) | (123 | ) | |||||||
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Stock-based compensation
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7 | 37 | |||||||||
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Provision for doubtful accounts
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(70 | ) | (63 | ) | |||||||
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Other
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(125 | ) | 4 | ||||||||
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Changes in assets and liabilities:
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Merchandise inventory
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(24,301 | ) | (27,319 | ) | |||||||
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Accounts payable
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23,518 | 24,303 | |||||||||
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Accrued expenses and other current liabilities
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(5,383 | ) | 2,403 | ||||||||
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Other long-term liabilities
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60 | (20 | ) | ||||||||
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Other current assets and other assets
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(2,264 | ) | (319 | ) | |||||||
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Net cash (used in) provided by operating
activities
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(7,404 | ) | 795 | ||||||||
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Cash flow from investing activities:
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Purchases of property and equipment
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(2,252 | ) | (1,448 | ) | |||||||
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Proceeds from the sale of assets
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250 | — | |||||||||
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Net cash used in investing activities
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(2,002 | ) | (1,448 | ) | |||||||
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Cash flow from financing activities:
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|||||||||||
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Proceeds from exercise of stock options
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175 | 520 | |||||||||
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Net proceeds from Loan Agreement
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— | 3,942 | |||||||||
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Change in cash overdrafts
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— | (2,578 | ) | ||||||||
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Net cash provided by financing activities
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175 | 1,884 | |||||||||
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Net (decrease) increase in cash and cash
equivalents
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(9,231 | ) | 1,231 | ||||||||
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Cash and cash equivalents, beginning of period
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27,845 | 3,372 | |||||||||
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Cash and cash equivalents, end of period
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$ | 18,614 | $ | 4,603 | |||||||
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Supplemental disclosure of cash flow information:
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Income taxes paid
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$ | 1,200 | $ | 788 | |||||||
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Interest paid
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70 | 165 | |||||||||
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Supplemental disclosure of non-cash financing
activity:
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Issuance of shares under management stock
purchase plan
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$ | 53 | $ | 87 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
PARTY CITY CORPORATION AND SUBSIDIARY
| 1. | Basis of Presentation |
Party City Corporation (together with its wholly-owned subsidiary, the “Company”) is incorporated in the State of Delaware and operates retail party supply stores within the United States and sells franchises on an individual store and area basis throughout the United States and Puerto Rico. The condensed consolidated unaudited financial statements have been prepared in accordance with the rules and regulations established by the Securities and Exchange Commission (“SEC”). 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 October 2, 2004 and September 27, 2003 and the results of operations and cash flows for the quarters ended October 2, 2004 and September 27, 2003. All significant intercompany accounts and transactions have been eliminated. 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 year ended July 3, 2004, 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 14, 2004 (the “2004 10-K”). The July 3, 2004 condensed consolidated balance sheet amounts included herein are derived from the Company’s audited consolidated financial statements.
The Company’s fiscal year ends the Saturday nearest to June 30. As used herein, the term “Fiscal Year” or “Fiscal” refers to the 52- or 53-week period, as applicable, ending the Saturday nearest to June 30. Fiscal 2005 is a 52-week period ending July 2, 2005, while Fiscal 2004 is a 53-week period that ended July 3, 2004. However, the financial results for the fiscal quarter ended October 2, 2004 and September 27, 2003 are each based on a 13-week period.
Certain reclassifications have been made to the condensed consolidated financial statements in prior periods to conform to the current period presentation.
| 2. | Accounting Policies |
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2004 10-K.
During the first quarter of Fiscal 2005, the Company launched its supply chain initiative, which includes modifying its business operations to vertically integrate certain logistics and distribution activities, and therefore adopted new specific accounting policies for the treatment of the costs associated with the modified distribution network. The Company has outsourced the operations of its modified distribution network to a third party. The Company’s distribution costs include the fees and expenses of operating the distribution centers and the freight expense related to transporting merchandise to the stores. These distribution costs are initially capitalized into merchandise inventory and expensed when the merchandise is sold in the stores.
| 3. | 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. If the options are granted to employees below fair market value, compensation expense is recognized. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an Amendment of SFAS No. 123” (“SFAS No. 148”). If
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
compensation cost for the Company’s stock option plans had been determined in accordance with the fair value method prescribed by SFAS No. 148, the Company’s net loss would have been:
| Fiscal Quarter Ended | |||||||||
| October 2, | September 27, | ||||||||
| 2004 | 2003 | ||||||||
| (In thousands, except | |||||||||
| per share amounts) | |||||||||
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Net loss as reported
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$ | (3,091 | ) | $ | (1,950 | ) | |||
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Add: Stock-based employee compensation expense
determined under APB 25, net of tax
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4 | 22 | |||||||
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Deduct: Total stock-based employee compensation
expense determined under fair value based method of
SFAS No. 148, net of tax(1)
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(436 | ) | (136 | ) | |||||
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Pro-forma net loss
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$ | (3,523 | ) | $ | (2,064 | ) | |||
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Basic and diluted loss per share:
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Basic and diluted loss per share as reported
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$ | (0.18 | ) | $ | (0.12 | ) | |||
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Basic and diluted loss per share pro forma
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$ | (0.21 | ) | $ | (0.12 | ) | |||
| (1) | In accordance with SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions for grants in the respective periods: |
| Fiscal Quarter Ended | ||||||||
| October 2, | September 27, | |||||||
| 2004 | 2003 | |||||||
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Expected volatility
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55% | 55% | ||||||
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Expected lives
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4.0 years | 4.0 years | ||||||
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Risk-free interest rate
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3.3% | 2.5% | ||||||
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Expected dividend yield
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0.0% | 0.0% | ||||||
The weighted average fair value of options granted during the first quarter of Fiscal 2005 and 2004 were $5.53 and $4.50, respectively.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 4. | Loss Per Share |
The following table sets forth the computations of basic and diluted loss per share:
| Fiscal Quarter Ended | ||||||||
| October 2, | September 27, | |||||||
| 2004 | 2003 | |||||||
| (In thousands, except | ||||||||
| per share amounts) | ||||||||
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Net loss
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$ | (3,091 | ) | $ | (1,950 | ) | ||
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Loss per share — basic and diluted(a)
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$ | (0.18 | ) | $ | (0.12 | ) | ||
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Weighted average common shares outstanding
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17,105 | 16,599 | ||||||
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Dilutive effect of stock options(a)(b)
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— | — | ||||||
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Dilutive effect of warrants(a)(c)
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— | — | ||||||
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Dilutive effect of restricted stock units(a)(d)
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— | — | ||||||
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Weighted average common and potentially dilutive
common shares outstanding
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17,105 | 16,599 | ||||||
| (a) | Stock options and warrants with exercise prices below the applicable market price of the Company’s common stock and all restricted stock units are included in potentially dilutive common shares outstanding if the Company reports net income for a reporting period. Therefore, if the Company reports net income, its earnings per share would be lower on a diluted basis. Options to purchase 2,125,999 common shares with exercise prices ranging from $1.71 to $13.14 per share at October 2, 2004, and options to purchase 1,345,243 common shares with exercise prices ranging from $1.71 to $11.06 per share at September 27, 2003, would have been included in the weighted-average common and potentially dilutive common shares outstanding, respectively, if the Company was in a net income position. |
| However, when the Company incurs a net loss for a reporting period, the inclusion of any such shares would result in a decrease in loss per share, and therefore all stock options, warrants and restricted stock units are ignored when calculating diluted earnings per share. Therefore, the Company’s loss per share for the quarter ended October 2, 2004 and September 27, 2003 are the same amounts on a basic and diluted basis, respectively. | |
| (b) | Options to purchase 3,171,199 common shares with exercise prices ranging from $1.71 to $30.88 per share were outstanding at October 2, 2004, and options to purchase 2,080,618 common shares with exercise prices ranging from $1.71 to $30.88 per share were outstanding at September 27, 2003 were not included in the computation of diluted loss per share for the fiscal quarter ended October 2, 2004 and September 27, 2003, respectively, because to do so would have been anti-dilutive. |
| (c) | Warrants to purchase 2,496,000 common shares with an exercise price of $1.07 per share were outstanding at October 2, 2004 and September 27, 2003 but were not included in the computation of diluted loss per share for the fiscal quarter ended October 2, 2004 and September 27, 2003, respectively, because to do so would have been anti-dilutive. |
| (d) | Restricted stock units of 13,567 and 17,396 shares of common stock were outstanding at October 2, 2004 and September 27, 2003, respectively, related to the Management Stock Purchase Plan and were not included in the computation of diluted loss per share for the fiscal quarter ended October 2, 2004 and September 27, 2003, respectively, because to do so would have been anti-dilutive. |
7