<PAGE> 1
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 COMMISSION FILE NUMBER
APRIL 1, 2000 0-27826
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PARTY CITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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.
Yes / / No: /X/
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 8, 2000, there were outstanding 12,722,205 shares of
Common Stock, $.01 par value.
<PAGE> 2
PARTY CITY CORPORATION
INDEX
<TABLE>
<S> <C>
Part I. Financial Information Page No.
Item 1. Consolidated Financial Statements -------
Consolidated Balance Sheets - April 1, 2000 (Unaudited) and July 3, 1999 3
Consolidated Statements of Operations (Unaudited) - For the Quarters and Nine
Months Ended April 1, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows (Unaudited) - For the Nine Months
Ended April 1, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Part II. Other Information
Item 2. Changes in Securities 17
Item 3. Defaults Under Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 18
Exhibit Index
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 1, 2000 JULY 3, 1999*
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,495 $ 11,470
Merchandise inventory 51,763 47,016
Refundable income taxes 1,919 6,848
Other current assets 15,325 13,328
Advance merchandise payments -- 9,439
-------- --------
Total current assets 73,502 88,101
Property and equipment, net 43,884 50,557
Goodwill, net 15,153 18,483
Other assets 2,740 906
-------- --------
Total assets $135,279 $158,047
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable - trade $ 28,465 $ 45,114
Accrued expenses 15,137 10,145
Revolving credit facility 6,916 --
Other current liabilities 2,044 986
Credit Agreement -- 58,550
-------- --------
Total current liabilities 52,562 114,795
Deferred rent 7,323 6,527
Senior Notes 34,535 --
Other long-term liabilities 624 791
Commitments and contingencies
Stockholders' equity:
Common stock, 12,722,205 and 12,455,538 shares
outstanding, respectively 127 125
Additional paid-in capital 37,968 34,024
Retained earnings 2,140 1,785
-------- --------
Total stockholders' equity 40,235 35,934
-------- --------
Total liabilities and stockholders' equity $135,279 $158,047
======== ========
</TABLE>
* Derived from audited consolidated financial statements.
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-----------------------------------------------------------------
APRIL 1, 2000 MARCH 31, 1999 APRIL 1, 2000 MARCH 31, 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 66,400 $ 70,420 $ 264,982 $ 260,625
Royalty fees 2,472 2,131 10,065 8,599
Franchise fees -- 164 322 559
--------- --------- --------- ---------
Total revenues 68,872 72,715 275,369 269,783
Expenses:
Cost of goods sold and occupancy costs 49,669 51,191 180,120 181,624
Company-owned stores operating and selling expense 18,381 20,055 64,062 70,364
Franchise expense 987 938 3,239 3,249
General and administrative expense 6,302 6,203 21,169 16,070
--------- --------- --------- ---------
Total expenses 75,339 78,387 268,590 271,307
--------- --------- --------- ---------
Earnings (loss) before interest and income tax benefit (6,467) (5,672) 6,779 (1,524)
Interest expense 2,157 915 6,661 2,677
--------- --------- --------- ---------
Earnings (loss) before income tax benefit (8,624) (6,587) 118 (4,201)
Income tax benefit -- (2,043) (237) (850)
--------- --------- --------- ---------
Net income (loss) ($8,624) ($4,544) $355 ($3,351)
========= ========= ========= =========
Basic earnings (loss) per share ($0.68) ($0.36) $.03 ($0.27)
========= ========= ========= =========
Weighted average shares outstanding - basic 12,722 12,454 12,574 12,468
========= ========= ========= =========
Diluted earnings (loss) per share ($0.68) ($0.36) $.02 ($0.27)
========= ========= ========= =========
Weighted average shares outstanding - diluted 12,722 12,454 15,720 12,468
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
APRIL 1, MARCH 31,
2000 1999
-------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 355 ($3,351)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,669 6,355
Non-cash interest and deferred financing costs 888 --
Deferred rent 796 2,321
Provision for doubtful accounts 853 45
Loss on sale of stores to franchisees 1,375 --
Deferred tax asset (915) 1,367
Changes in assets and liabilities:
Merchandise inventory (9,281) (13,493)
Refundable income taxes 4,929 (8,375)
Advance merchandise payments 9,439 --
Other current assets (2,308) 2,873
Other assets (220) 446
Accounts payable (16,649) 22,979
Accrued expenses 4,659 (1,047)
Other current liabilities (44) 245
Other long-term liabilities (167) (196)
-------- --------
Net cash provided by operating activities 1,379 10,169
Cash flow from investment activities
Purchases of property and equipment (2,530) (24,726)
Proceeds from sales of stores to franchisees 9,877 --
Disposals of property and equipment 87 15
Stores acquired from franchisees -- (5,974)
-------- --------
Net cash provided by (used in) investing activities 7,434 (30,685)
Cash flow provided by financing activities
Proceeds from issuance of stock in exchange for services 800 --
Proceeds from issuance of Senior Notes and warrants 37,281 --
Senior Note and revolving credit facility costs (2,225) --
Tax effect of non-qualified stock options (10) 1,023
Net proceeds from (payments on) Credit Agreement (58,550) 17,220
Net proceeds from revolving credit facility 6,916 --
Proceeds from exercise of stock options -- 207
-------- --------
Net cash provided from (used in) financing activities (15,788) 18,450
-------- --------
Net decrease in cash and cash equivalents (6,975) (2,066)
Cash and cash equivalents, beginning of period 11,470 5,089
-------- --------
Cash and cash equivalents, end of period $ 4,495 $ 3,023
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 97 $ 7,254
Interest paid $ 1,630 $ 833
Supplemental disclosure of financing activities:
Fair value of Warrants issued $ 3,156 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PARTY CITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements, presented in this Form 10-Q, except
for the July 3, 1999 consolidated balance sheet, are unaudited. In the opinion
of management, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of April 1, 2000 and the results
of operations for the interim periods presented and cash flows for nine months
ended April 1, 2000 and March 31, 1999. 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 year.
These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the eighteen-month
period ended July 3, 1999, included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated. The July 3, 1999 consolidated
balance sheet amounts have been derived from the Company's audited consolidated
balance sheet amounts.
Effective July 3, 1999, the Company changed its fiscal year end for
financial reporting from December 31 to the Saturday nearest to June 30. The
Company continues to use December 31 as its tax year end. The change to a 52-53
week calendar was made to facilitate comparable store sales computations. The
term "Fiscal Year" refers to the 52-53 weeks ending the Saturday nearest June
30, unless otherwise noted.
2. FINANCING ACTIVITIES
On April 24, 1998, the Company refinanced and replaced its then existing
$20 million loan facility with a $60 million secured revolving line of credit
agreement with a group of banks maturing April 24, 2001 (as amended, the "Credit
Agreement"). Advances under the Credit Agreement originally bore interest, at
the Company's option, at the agent bank's base rate (the higher of the bank's
prime rate or the federal funds rate plus 1/2% per annum) or LIBOR plus an
applicable margin. The Company did not meet certain of its financial and
reporting covenants, including those relating to timely filing of consolidated
financial statements, minimum levels of profitability, net worth, liquidity,
fixed charge coverage and others. Consequently, the Company's debt under the
Credit Agreement was subject to acceleration and is classified as a current
liability in the consolidated balance sheet at July 3, 1999. The Credit
Agreement was secured by all the assets of the Company. Additionally, the Credit
Agreement restricted the payment of dividends.
On August 16, 1999, the Company entered into agreements with its existing
bank lenders under the Credit Agreement (the "Banks"), a new group of investors
(the "Investors") and its trade vendors. The Banks and the Company entered into
a Standstill and Forbearance Agreement (the "Bank Forbearance Agreement"). Under
the Bank Forbearance Agreement, the Banks agreed not to exercise rights and
remedies based upon any existing defaults until June 30, 2000 unless a further
event of default occurred. The interest rate on its bank debt was increased to
2% over the bank's prime interest rate, and the Company paid a forbearance fee
of $580,000.
On August 17, 1999, the Company received $30 million in financing from the
Investors. The Investors purchased senior secured notes and warrants pursuant to
separate securities purchase agreements (the "Securities Purchase Agreements")
each dated as of August 16, 1999. Under these Securities Purchase Agreements,
the Company issued (i) $10 million of its 12.5% Secured Notes due 2003 (the "A
Notes"); (ii) $5 million of its 13.0% Secured Notes due 2003 (the "B Notes");
(iii) $5 million of its 13.0% Secured Notes due 2002 (the "C Notes"); (iv) $10
million of its 14.0% Secured Notes due 2004 (the "D Notes", and together with
the A Notes, the B Notes and the C Notes, the "Notes"); and (v) warrants (the
"Warrants") to purchase 6,880,000 shares of the Company's common stock at an
initial exercise price of $3.00 per share. Up to $15 million of the Notes was
secured by a first lien that was pari pasu with the liens under the Credit
Agreement. The Notes are also secured by a second lien on all of the Company's
assets. The Company
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issued the Warrants in connection with the sale of the C Notes and the D Notes.
The Warrants may be exercised before the close of business on August 16, 2006.
The shares of Common Stock reserved for issuance under the Warrants represent
approximately 35% of the shares of Common Stock outstanding assuming the
exercise of the Warrants. The proceeds from the $30 million in new financing
were used for the purchase of seasonal inventory, payment of amounts due under
the Credit Agreement, transaction fees and working capital.
The Company also entered into an Investor Rights Agreement (the "Investor
Rights Agreement") with the Investors and the previous chief executive officer
of the Company. In this agreement, the Company granted registration rights with
respect to shares of common stock. Under the Investor Rights Agreement, the
Investors agree that they will not, without the prior written consent of the
Board of Directors, (i) acquire or agree to acquire, publicly offer or make any
public proposal with respect to the possible acquisition of (a) beneficial
ownership of any securities of the Company, (b) any substantial part of the
Company's assets, or (c) any rights or options to acquire any of the foregoing
from any person; (ii) make or in any way participate in any "solicitation" of
"proxies" (as such terms are defined in the rules of the Securities Exchange Act
of 1934, as amended) to vote, or seek to advise or influence any person with
respect to the voting of any voting securities of the Company; or (iii) make any
public announcement with respect to any transaction between the Company or any
of its securities holders and the Investors, including without limitation, any
tender or exchange offer, merger or other business combination of a material
portion of the assets of the Company. These standstill provisions terminate if
the Company's consolidated earnings before interest, taxes, depreciation and
amortization and exclusive of special charges ("EBITDA"), as defined in the
Investor Rights Agreement, does not meet specified targets. The Company achieved
its target EBITDA for the calendar year 1999. Also, in connection with these
transactions, one outside director of the Company resigned and two
representatives of the Investors joined the Board of Directors.
Party City's trade vendors representing approximately $36.4 million of
trade debt also entered into an agreement with the Company. Pursuant to a Vendor
Standstill and Forbearance Agreement ("Vendor Forbearance Agreement"), these
trade vendors agreed to forbear from taking any action against Party City until
January 15, 2000. The trade vendors received promissory notes from Party City
totaling approximately $12.2 million representing one-third of their unpaid
balances as of May 1, 1999 (the "Trade Notes"). The Trade Notes bore interest at
a rate of 10% per year and were scheduled to mature on November 15, 1999.
Interest on the Trade Notes was due on January 15, 2000.
In order to meet the cash flow requirements of the Halloween seasonal
purchase of inventory and to meet the requirements of the Bank Forbearance
Agreement, the Company identified stores for sale to existing franchisees to
generate working capital. Eighteen stores with a net book value of approximately
$9.8 million were sold to franchisees. In order to facilitate the sale of these
stores, franchise fees were negotiated at lower than normal rates for specific
periods. The total proceeds from the sales of these stores was approximately
$9.9 million. The net proceeds from the sale of stores was required under the
Bank Forbearance Agreement to be used to pay down the outstanding borrowings
under the Credit Agreement.
On January 14, 2000, the Company replaced the Credit Agreement with a new
Loan and Security Agreement (the "Loan Agreement") with Congress Financial
Corporation ("Congress"), as lender. Under the terms of the Loan Agreement, the
Company may from time to time borrow amounts based on a percentage of its
eligible inventory, up to a maximum of $40 million at any time outstanding.
Advances bear interest, at the Company's option, (i) at the adjusted Eurodollar
rate plus the applicable margin, which will initially be 2.75% per annum
(subject to possible reduction to a margin as low as 2.25% from and after June
30, 2001, based on the Company's pre-tax income and excess availability) or (ii)
at the rate of 3/4% per annum above the prime rate. The term of the Loan
Agreement is three years, and is secured by a lien on substantially all of the
assets of the Company. At May 6, 2000, $7.0 million was outstanding under this
revolving credit facility. Under the borrowing base formula of the revolving
credit agreement, the Company has $18.7 million of additional unused borrowing
capacity to meet its liquidity needs.
On January 14, 2000, Party City also received $7 million in cash proceeds
from the sale to certain of its existing investors (the "Investor Group") of a
new series of senior secured notes pursuant to a First Amendment (the "First
Amendment") to the Securities Purchase Agreement dated as of August 16, 1999.
Pursuant to the First Amendment, the Company issued $7,000,000 in aggregate
principal amount of its 14.0% Secured Notes due 2002 (the "E Notes"). The E
Notes are secured by a lien on substantially all of
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the Company's assets. The Investor Group, together with other existing investors
and Congress, have entered into an intercreditor agreement. In consideration for
waivers and forbearances granted by the Investors to various defaults under the
terms of the Company's existing senior secured notes, the Company also agreed to
amend and restate the terms of existing warrants (the "Existing Warrants") held
by such investors to acquire 6,880,000 shares of the Company's Common Stock. The
amended and restated warrants (the "Amended Warrants") will provide for an
exercise price of $1.07 per share and were issued upon surrender of the Existing
Warrants, which had an exercise price of $3.00 per share. The shares issuable
upon the exercise of the Warrants represent approximately 35% of the shares then
outstanding The warrants were valued at $3,156,000 based on management's
estimate using certain fair value methodologies and represent an original issue
discount to the C and D notes. This discount is being amortized using the
effective interest method. The effective yield is 28.6% and 28.9% on the C Notes
and D Notes, respectively.
The Company used the proceeds from the sale of the E Notes and initial
amounts borrowed under the revolving credit facility (i) to pay off all amounts
owing under its current credit facility, (ii) to pay all amounts owing on the
trade notes issued to certain of its vendors in August 1999 and (iii) to pay the
remaining amounts owed to various seasonal trade vendors for credit extended for
inventory purchased by the Company for the 1999 Halloween, Thanksgiving and
Christmas seasons. Substantially all the remaining unpaid vendor balances that
were due May 1, 1999, have been satisfied by individual arrangements with such
vendors.
3. RELATED PARTY TRANSACTION
On November 2, 1999, the Company's Non-Executive Chairman of the Board
purchased $166,667 of the Company's 13.0% Secured Notes due 2002, $333,333 of
the Company's 14.0% Secured Notes due 2004, and Warrants to purchase 229,333
shares of the Company's common stock from an Investor for a total purchase price
of $498,184. For the period from November 2, 1999 to April 1, 2000, the Company
incurred $33,000 of interest expense related to these Notes.
4. LITIGATION
The Company has been named as a defendant in the following twelve class
action complaints: (1) Weber v. Party City Corp., Steven Mandell, and David
Lauber, Civ. Action No. 99-CV-1252; (2) Opus GT Partners LP v. Party City Corp.
and Steven Mandell, Civ. Action No. 99-CV-1327; (3) Klein and Shiffrin v. Party
City Corp., Steven Mandell and David Lauber, Civ. Action No. 99-CV-1325; (4)
Flynn v. Party City Corp., David Lauber and Steven Mandell, Civ. Action No.
99-CV-1328; (5) Catanzarite v. Party City Corp., Steven Mandell and David
Lauber, Civ. Action No. 99-CV-1317; (6) Tabbert v. Party City Corp. and Steven
Mandell, Civ. Action No. 99-CV-1353; (7) Maietta v. Steven Mandell and Party
City Corp., Civ. Action No. 99-CV-1386; (8) Barry v. Party City Corp., Steven
Mandell and David Lauber, Civ. Action No. 99-CV-1453; (9) Kurzweil v. Party City
Corp., Steven Mandell and David Lauber, Civ. Action No. 99-CV-1396; (10) Hormel
v. Party City Corp., Steven Mandell and David Lauber, Civ. Action No.
99-CV-1689; (11) Sacher v. Party City Corp., Steven Mandell and David Lauber,
Civ. Action No. 99-CV-2238: and (12) Gross v. Party City Corp., Steven Mandell
and David Lauber, Civ. Action No. 99-CV-2355. The Company's former Chief
Executive Officer and former Chief Financial Officer and Executive Vice
President of Operations have also been named as defendants. The complaints have
all been filed in the United States District Court for the District of New
Jersey. The complaints were filed as class actions on behalf of persons who
purchased or acquired Party City common stock during various time periods
between February 1998 and March 19, 1999.
The complaints allege, among other things, violations of sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, and seek unspecified damages. The plaintiffs allege that defendants
issued a series of false and misleading statements and failed to disclose
material facts concerning, among other things, the Company's financial
condition, adequacy of internal controls and compliance with certain loan
covenants. The plaintiffs further allege that because of the issuance of a
series of false and misleading statements and/or failure to disclose material
facts, the price of Party City common stock was artificially inflated.
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On September 13, 1999, the Court signed an Order appointing lead plaintiffs and
lead counsel to represent the classes alleged in the complaints. Plaintiffs
filed a first amended complaint in October 1999 and a second amended complaint
in February 2000.
The defendants have made a motion to dismiss the complaint.
Other
The Company was named as a defendant in a complaint filed with the Supreme
Court of the State of New York, County of New York, on January 16, 1998 (the
"Complaint"), by each of Party City of Greenbrook, Inc., Party City of Watchung,
Inc., Party City of 22, Inc., Party City of Ralph Avenue and Party City of
Jersey City, Inc., each a franchisee of the Company. Four of the plaintiffs in
the suit have existing Party City franchise stores, with the remaining plaintiff
possessing a right of first refusal to develop a Party City store in Watchung,
New Jersey.
The Complaint stated various causes of action, including unjust
enrichment, unfair competition, fraud and misrepresentation, breach of contract,
misappropriation of information and violations of the New Jersey Franchise
Practices Act and the New York State Franchise Sales Act. The crux of the
Complaint was that the Company undertook a course of conduct intentionally
designed to adversely impact the value of the Plaintiffs' franchise stores in
order to permit the Company to purchase such stores at a substantially reduced
value. The Company settled the lawsuit on June 30, 1999, at no cost to the
Company. In connection with the settlement, the Company agreed to sell the
plaintiff one store at its fair value.
On April 23, 1999, plaintiff Emil Asch, Inc. filed a Complaint in the
United States District Court for the Eastern District of New York against the
Company and co-defendants Amscan, Inc., Hallmark, Inc., and Rubie's Costume. The
Complaint alleges five violations of the Robinson-Patman Act, which pertains to
price discrimination, unfair competition, tortious interference with contractual
relations, and false and deceptive advertising. Plaintiff seeks damages of $2
million, as well as treble and punitive damages for certain counts.
On January 6, 2000, Plaintiff amended its Complaint by adding another
plaintiff, Ron's: The Party Super Store, Inc. The Company has answered the
Complaint, and discovery has commenced.
Although the Company's management is unable to express a view on the
likely outcome of these litigations because they are in their early stages, they
could have a material adverse effect on the Company's business and results of
operations.
In addition to the foregoing, the Company is from time to time involved in
routine litigation incidental to the conduct of its business. The Company is
aware of no other material existing or threatened litigation to which it is or
may be a party.
5. STOCKHOLDERS' EQUITY
The Company entered into an agreement with a crisis management firm in
April 1999 to assist the Company in restructuring its operations as well as with
negotiations with its vendors and banks. Based on the attainment of certain
goals in the first quarter of fiscal 2000, the crisis management firm earned a
success fee, which at the option of the crisis management firm was to be paid
either in cash or a combination of cash and stock. The Company recorded a
liability for the success fee in the first quarter of fiscal 2000. In the second
quarter, the crisis management firm agreed to accept 80% of its success fee in
stock and as such the Company issued 266,667 shares of common stock in the
second quarter of fiscal 2000.
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6. SEGMENT INFORMATION
The following table contains key financial information of the Company's
business segments (in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
APRIL 1, MARCH 31, APRIL 1, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
RETAIL:
Net revenue $ 66,400 $ 70,420 $ 264,982 $ 260,625
Operating earnings (loss) (1,650) (826) 20,800 8,637
Identifiable assets 124,303 151,128 124,303 151,128
Depreciation/amortization 2,057 2,054 6,290 5,429
Capital expenditures 241 3,299 1,030 19,164
FRANCHISING:
Net revenue $ 2,472 $ 2,295 $ 10,387 $ 9,158
Operating earnings 1,485 1,357 7,148 5,909
Identifiable assets 1,748 1,930 1,748 1,930
Depreciation/amortization -- -- -- --
Capital expenditures -- -- -- --
CORPORATE/OTHER:
Net revenue $ -- $ -- $ -- $ --
Operating expenses 6,302 6,203 21,169 16,070
Identifiable assets 9,228 9,588 9,228 9,588
Depreciation/amortization 283 433 1,379 948
Capital expenditures 497 1,420 1,500 5,762
CONSOLIDATED TOTALS:
Net revenue $ 68,872 $ 72,715 $ 275,369 $ 269,783
Operating earnings (loss) (6,467) (5,672) 6,779 (1,524)
Interest expense 2,157 915 6,661 2,677
--------- --------- --------- ---------
Earnings (loss) before income taxes (8,624) (6,587) 118 (4,201)
Provision for income tax benefit -- (2,043) (237) (850)
--------- --------- --------- ---------
Net income (loss) ($ 8,624) ($ 4,544) $ 355 ($ 3,351)
========= ========= ========= =========
Identifiable assets $ 135,279 $ 162,646 $ 135,279 $ 162,646
Depreciation/amortization 2,340 2,487 7,669 6,377
Capital expenditures 738 4,719 2,530 24,926
</TABLE>
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7. Earnings Per Share
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarters ended Nine Months Ended
-------------- -----------------
April 1, March 31, April 1, March 31,
-------- --------- -------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($8,624) ($4,544) $355 ($3,351)
Average shares outstanding 12,722 12,454 12,574 12,468
Earnings (loss) per share - basic ($0.68) ($0.36) $0.03 ($0.27)
Dilutive effect of stock options (a) (a) 9 (a)
Dilutive effect of warrants (a) NA 3,137 NA
Average common and common equivalent shares
outstanding 12,722 12,454 15,720 12,468
Earnings (loss) per share - diluted ($0.68) ($0.36) $0.02 ($0.27)
</TABLE>
(a) In periods of losses, options were excluded from the computation of diluted
earnings per share because they would be antidilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(in thousands, except per share and store data)
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
APRIL 1, MARCH 31, APRIL 1, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue $ 68,872 $ 72,715 $ 275,369 $ 269,783
========= ========= ========= =========
Company-owned stores
Net sales $ 66,400 $ 70,420 $ 264,982 $ 260,625
Cost of goods sold and occupancy costs 49,669 51,191 180,120 181,624
--------- --------- --------- ---------
Gross profit 16,731 19,229 84,862 79,001
Store operating and selling expense 18,381 20,055 64,062 70,364
--------- --------- --------- ---------
Company-owned stores profit contribution (loss) (1,650) (826) 20,800 8,637
Franchise stores:
Royalty fees 2,472 2,131 10,065 8,599
Franchise fees -- 164 322 559
--------- --------- --------- ---------
Total franchise revenues 2,472 2,295 10,387 9,158
Total franchise expense 987 938 3,239 3,249
--------- --------- --------- ---------
Franchise profit contribution 1,485 1,357 7,148 5,909
General and administrative expense:
Special charges (a) 811 1,151 7,073 1,151
Other general and administrative expenses 5,491 5,052 14,096 14,919
--------- --------- --------- ---------
6,302 6,203 21,169 16,070
--------- --------- --------- ---------
Earnings (loss) before interest and income tax benefit (6,467) (5,672) 6,779 (1,524)
Interest expense, net 2,157 915 6,661 2,677
--------- --------- --------- ---------
Earnings (loss) before income tax benefit (8,624) (6,587) 118 (4,201)
Income tax benefit -- (2,043) (237) (850)
--------- --------- --------- ---------
Net income (loss) ($ 8,624) ($ 4,544) $ 355 ($ 3,351)
========= ========= ========= =========
Basic earnings (loss) per share ($ 0.68) ($ 0.36) $ .03 ($ 0.27)
========= ========= ========= =========
Diluted earnings (loss) per share ($ 0.68) ($ 0.36) $ .02 ($ 0.27)
========= ========= ========= =========
Weighted average shares outstanding - Basic 12,722 12,454 12,574 12,468
========= ========= ========= =========
Weighted average shares outstanding - Diluted 12,722 12,454 15,720 12,468
========= ========= ========= =========
EBITDA (b) $ (3,316) $ (2,034) $ 21,521 $ 6,004
========= ========= ========= =========
</TABLE>
(a) Special charges relate to consulting services, accounting fees, bank
fees, legal fees and other expenses related to the Company's default on its
Credit Agreement and related financial and refinancing transactions. The Company
engaged the services of a crisis management consulting firm and various other
professionals and consultants to advise management during the complex
negotiations with the banks, vendors and potential investors.
(b) Earnings before interest, taxes, depreciation and amortization, and
exclusive of special charges, as defined above.
12
<PAGE> 13
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------- -----------------
APRIL 1, MARCH 31, APRIL 1, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
STORE DATA:
COMPANY-OWNED:
Stores open at beginning of period 198 207 215 148
Stores opened 1 7 2 61
Stores closed (1) -- (2) --
Stores acquired from franchisees -- -- -- 5
Stores sold to franchisees -- -- (17) --
---- ---- ---- ----
Stores open at end of period 198 214 198 214
FRANCHISE:
Stores open at beginning of period 206 167 178 161
Stores opened 3 7 15 18
Stores closed (1) -- (2) --
Stores acquired from corporate -- -- 17 --
Stores sold to corporate -- -- -- (5)
---- ---- ---- ----
Stores open at end of period 208 174 208 174
---- ---- ---- ----
406 388 406 388
==== ==== ==== ====
Increase (decrease) in company-owned
same store sales (4.4%) 15.0% (0.3%) 12.4%
Increase (decrease) in franchise same
store sales (1.2%) 10.4% 7.1% 6.8%
Average sales per Company-owned
store (in thousands) $339.5 $357.3 $1,381.4 $1,345.6
</TABLE>
<TABLE>
<CAPTION>
APRIL 1, MARCH 31,
BALANCE SHEET DATA: 2000 1999
---- ----
<S> <C> <C>
Working capital (deficiency) $20,940 ($20,993)
Total assets 135,279 162,646
Revolving credit agreement borrowings and other
Senior Notes 41,451 56,500
Capital lease obligation 795 1,036
Stockholders' equity 40,235 43,982
</TABLE>
QUARTER ENDED APRIL 1, 2000 ("THIRD QUARTER") COMPARED TO QUARTER ENDED MARCH
31, 1999 ("1999 QUARTER")
Retail. Net sales from Company-owned stores decreased 5.7% to $66.4
million for the Third Quarter, from $70.4 million for the comparable 1999
Quarter. The decrease in sales is the result of the decreased number of stores
and same store sales declines. Same store sales decreased 4.4% in the Third
Quarter primarily as a result of the shift of a significant portion of Easter
sales to the fourth quarter. Gross profit reflects the cost of goods sold and
store occupancy costs including rent, common area maintenance, real estate
taxes, repair and maintenance, depreciation and utilities. Gross profit for the
Third Quarter decreased 13.0% to $16.7 million from $19.2 million for the
comparable 1999 Quarter. The decrease in gross profit in the Third Quarter was
primarily due to fewer stores. Gross margin was 25.2% for the Third Quarter
compared to 27.3% in the 1999 Quarter.
Store operating and selling expenses decreased 8.3% to $18.4 million for
the Third Quarter from $20.1 million in the comparable 1999 Quarter. The
decrease in store operating expenses is primarily attributable to store payroll
and bonuses of $945,000 and reduced other operating expenses of $477,000 during
the Third Quarter. Store operating and selling expenses were 27.7% and 28.5% of
sales for the Third Quarter and the comparable 1999 quarter, respectively.
Pre-opening expenses of $6,000 were incurred in the quarter related to one third
quarter opening compared to pre-opening expenses of $182,000 incurred in the
1999
13
<PAGE> 14
Quarter in connection with the opening of seven stores. Company-owned stores
recorded a negative contribution of $1.7 million for the Third Quarter, compared
to a negative contribution of $826,000 for the 1999 Quarter.
Franchising. Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4% of the store's net sales. Royalty fees increased 16.0% to $2.5
million in the Third Quarter from $2.1 million in the comparable 1999 Quarter
due primarily to an increase in the number of stores. No franchise fee income
was recognized in the Third Quarter, compared to $164,000 recognized in the
comparable period in 1999.
Expenses directly related to franchise revenue increased 5.2% to $987,000
for the Third Quarter from $938,000 for the comparable 1999 period. As a
percentage of franchise revenue, franchise expenses were 39.9% and 40.9% for the
Third Quarter and the comparable 1999 Quarter, respectively.
Franchise profit contribution increased 9.4% to $1.5 million for the Third
Quarter from $1.4 million for the comparable 1999 Quarter. The increase in
franchise profit contribution is due to higher revenues from the increased
number of franchise stores.
General and Administrative. General and administrative expenses increased
1.6% to $6.3 million in the Third Quarter from $6.2 million in the comparable
1999 Quarter. This increase includes $811,000 in special charges relating to
consulting accounting, banking and other expense resulting from the Company's
refinancing arrangements in the second Quarter. Exclusive of the $811,000 in
special charges, general and administrative expenses were 8.0% and 6.9% of total
revenue for the Third Quarter and 1999 Quarter, respectively. This increase
primarily results from a charge for store closing costs of $955,000 relating to
two stores.
Interest Expense. Interest expense increased 136% to $2.2 million for the
Third Quarter from $915,000 in the comparable 1999 Quarter. The increased
expense is primarily attributable to increased interest rates, new borrowings
and increased average borrowings outstanding.
Income Tax Benefit. There was no tax benefit for the Third Quarter as
compared to the $2.0 million benefit reported in the 1999 Quarter.
Net Loss. As a result of the above factors, net loss for the Third Quarter
was $8.6 million, or $0.68 per basic and diluted share, in the Third Quarter, as
compared to a net loss of $4.5 million, or $.36 per basic and diluted share in
the 1999 Quarter.
NINE MONTHS ENDED APRIL 1, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
Retail. Net sales from Company-owned stores increased 1.7% to $265 million
for the nine months ended April 1, 2000, from $261 million for the comparable
nine month period ended March 31, 1999. This increase is the result of the
maturing of stores opened in the 1999 period offset by negative same-store sales
increases, further offset by the effects of the 17 stores sold in the first
quarter. Same store sales decreased 0.3% in the nine months ended April 1, 2000.
Gross profit reflects the cost of goods sold and store occupancy costs including
rent, common area maintenance, real estate taxes, repair and maintenance,
depreciation and utilities. Gross profit for the 2000 period increased 7.4% to
$84.9 million from $79.0 million for the comparable 1999 period. The increase in
gross profit in the 2000 period was primarily due to a charge of $7.9 million
recorded in the 1999 period. This charge was the result of the reconciliation of
the physical inventory counts taken in January through March of 1999. In
addition, the Company increased its provision for obsolete inventory by $2.7
million during the 1999 period. Gross margin was 32.0% for the 2000 period
compared with 30.3% for the comparable 1999 period.
Store operating and selling expenses decreased 9.0% to $64.1 million for
the 2000 period from $70.4 million in the comparable 1999 period. The decrease
in store operating expenses is attributable primarily to reduced store payroll
of $1.4 million, reduced advertising expense of $1.8 million, reduced supplies
expense of $948,000 and reduced other operating expenses of $2.6 million. Store
operating and selling
14
<PAGE> 15
expenses were 24.2% and 27.0% of sales for the 2000 period and 1999 period,
respectively. Pre-opening expenses in the 2000 period were $93,000 for the two
Company-owned store opened in the 2000 period compared to pre-opening expenses
of $783,000 for 61 stores opened in the 1999 period. Company-owned stores
recorded a profit contribution of $20.8 million for the 2000 period, compared to
a contribution of $8.6 million for the 1999 period. The increased contribution
was primarily the result of reduced cost of sales and lower operating expenses,
including the decrease in pre-opening expenses, and the increased profitability
of mature stores.
Franchising. Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4% of the store's net sales. Franchise fees, recognized on 15 store
openings were $322,000 for the 2000 period compared to $559,000 for the
comparable 1999 period, which represents 18 store openings. Royalty fees
increased 17.0% to $10.1 million in the 2000 period from $8.6 million in the
comparable 1999 period due primarily to an increase in the number of franchise
stores and same-store sales increases of 7.1%.
Expenses directly related to franchise revenue remained nearly constant at
$3.2 million for the 2000 period and 1999 period. As a percentage of franchise
revenue, franchise expenses were 31.2% and 35.5% for the 2000 period and 1999
period, respectively.
Franchise profit contribution increased 21.0% to $7.1 million for the 2000
period from $5.9 million for the comparable 1999 period. The increase in
franchise profit contribution is due to higher revenues from the increased
number of franchise stores and same-store sales increases.
General and Administrative. General and administrative expenses increased
31.7% to $21.2 million in the 2000 period from $16.1 million in the comparable
1999 period. This increase is primarily attributable to $7.1 million in special
charges relating to consulting accounting, banking and other expense resulting
from the Company's refinancing arrangements. During the 1999 period, $1.2
million of such special charges were incurred. During the 1999 period there was
a decrease in corporate expenses primarily attributable to decreased travel,
professional fees and other costs. Exclusive of the $7.1 million in special
charges discussed above, general and administrative expenses were 5.1% and 5.5%
of revenue for the 2000 period and 1999 period, respectively.
Interest Expense. Interest expense increased 149% to $6.7 million for the
2000 period from $2.7 million in the comparable 1999 period. The increased
expense is primarily attributable to increased interest rates, new borrowings
and average borrowings outstanding.
Income Tax Benefit. There was a tax benefit of $237,000 for the 2000
period as compared to the $850,000 benefit reported in the 1999 period. The tax
benefit in 2000 was primarily due to reduced valuation allowances against
deferred tax assets and the use of previous federal and state net operating
losses.
Net Income. As a result of the above factors, net income for the 2000
period was $355,000, or $.03 per basic share and $.02 per diluted share, in the
2000 period, as compared to a net loss of $3.4 million, or $(.27) per basic and
diluted share in the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ended April 1, 2000, cash provided by operating
activities was $1.4 million compared to $10.2 million for the comparable 1999
Period. The decrease in cash provided by operating activities was primarily
attributable to increases in other current assets and other assets of $2.5
million, decreases in 2000 in accounts payable of $16.6 million, compared to an
increase in accounts payable of $23.0 million in the 1999 period, offset in part
by a reduction of refundable income taxes of $4.9 million and increased net
income of $3.7 million.
Cash provided by investing activities for the 2000 period was $7.4 million
compared to cash used in investing activities of $30.7 million used in investing
in the comparable 1999 period. The change in cash used in investing activities
was primarily attributable to declines in new store additions and acquisitions.
15
<PAGE> 16
During the 2000 period, two new stores were opened compared to 61 stores opened
in the 1999 period. No stores were acquired in the 2000 period, compared to five
stores acquired in the 1999 period.
Cash used in financing activities was $15.8 million for the 2000 period
compared to cash provided by financing activities of $18.5 million in the
comparable 1999 period. This change is primarily attributable to the repayment
of borrowings of $58.6 million under the Credit Agreement, net proceeds of $35.0
million from the issuance of Senior Notes, and $6.9 million from advances under
the revolving credit facility.
On January 14, 2000, the Company replaced the Credit Agreement with a new
revolving credit facility with Congress Financial Corporation ("Congress"), as
lender. Under the terms of the Loan and Security Agreement (the "Loan
Agreement") which the Company entered into with Congress, the Company may from
time to time borrow amounts based on a percentage of its eligible inventory, up
to a maximum of $40 million at any time outstanding. Advances bear interest, at
the Company's option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which will initially be 2.75% per annum (subject to possible reduction
to a margin as low as 2.25% from and after June 30, 2001, based on the Company's
pre-tax income and excess availability) or (ii) at the rate of 3/4% per annum
above the prime rate. The term of the Loan Agreement is three years, and the
credit facility is secured by a lien on substantially all of the assets of the
Company. At May 6, 2000, $7.0 million was outstanding under the revolving credit
agreement. Under the borrowing base formula of the revolving credit agreement,
the Company has $18.7 million of additional unused borrowing capacity to meet
its liquidity needs.
Party City also received $7 million of cash proceeds from the sale to
certain of its existing investors (the "Investor Group") of a new series of
senior secured notes pursuant to a First Amendment (the "First Amendment") to
the Securities Purchase Agreement dated as of August 16, 1999. Pursuant to the
First Amendment, the Company issued $7,000,000 in aggregate principal amount of
its 14.0% Secured Notes due 2002 (the "E Notes"). The E Notes are secured by a
lien on substantially all of the Company's assets.
The Company used the proceeds from the sale of the E Notes and initial
amounts borrowed under the Loan Agreement (i) to pay off all amounts owing under
its current credit facility, (ii) to pay all amounts owing on the trade notes
issued to certain of its vendors in August 1999 and (iii) to pay the remaining
amounts owed to various seasonal trade vendors for credit extended for inventory
purchased by the Company for the 1999 Halloween, Thanksgiving and Christmas
seasons. Substantially all the remaining unpaid balances that were due as of
May 1, 1999, have been satisfied through individual arrangements with the
Company's vendors.
IMPACT OF YEAR 2000 ON THE COMPANY'S COMPUTER OPERATIONS
The Company prepared for the impact of the arrival of the Year 2000 on its
business. The "Year 2000 Problem" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. The Year 2000 Problem created potential risks for the Company,
including the inability to recognize and properly treat dates occurring on or
after January 1, 2000, which may have resulted in computer system failures or
miscalculations of critical financial or operations information.
As of the date of this filing, May 16, 2000, the Company has not incurred
any significant business disruptions as a result of year 2000 issues. However,
while no such occurrence has developed as of the date of this filing, year 2000
issues that may arise related to material Third Parties may not become apparent
immediately and therefore, there is no assurance that the Company will not be
affected by Third Party noncompliance in the future. The Company will continue
to monitor the issue vigilantly and work to remediate any issues that may arise.
16
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This Form 10-Q (including the information incorporated herein by
reference) contains forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995. The statements are made a number of
times throughout the document and may be identified by forward-looking
terminology as "estimate," "project," "expect," "believe," "may," "will,"
"intend" or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties, and include among others,
the following: levels of sales, store traffic, acceptance of product offerings,
competitive pressures from other party supplies retailers, availability of
qualified personnel, availability of suitable future store locations, schedules
of store expansion plans and year 2000 readiness issues relating to the
Company's internal systems and those of third parties, the ability of the
Company to refinance its existing debt on terms acceptable to it and other
factors. As a result of the foregoing risks and uncertainties, actual results
and performance may differ materially from that projected or suggested herein.
Additional information concerning certain risks and uncertainties that could
cause actual results to differ materially from that projected or suggested may
be identified from time to time in the Company's Securities and Exchange
Commission filings and the Company's public announcements.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
See Note 2 to the Notes to the Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits required to be filed as part of this report on Form 10-Q
are listed in the attached Exhibit Index.
(b) The Company filed the following Current Report on Form 8-K during the
quarter for which this report has been filed.
Form 8-K, dated January 14, 2000 (Item 5).
17
<PAGE> 18
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.
PARTY CITY CORPORATION
By /s/ James Shea
---------------------
(James Shea)
Chief Executive Officer
By /s/ Thomas E. Larson
-----------------------
(Thomas E. Larson)
Chief Financial Officer
By /s/ Linda M. Siluk
---------------------
(Linda M. Siluk)
Chief Accounting Officer
Date: May 16, 2000
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> APR-01-2000
<CASH> 4,495
<SECURITIES> 0
<RECEIVABLES> 4,532
<ALLOWANCES> 795
<INVENTORY> 51,763
<CURRENT-ASSETS> 73,502
<PP&E> 43,884
<DEPRECIATION> 0
<TOTAL-ASSETS> 135,279
<CURRENT-LIABILITIES> 52,562
<BONDS> 0
0
0
<COMMON> 127
<OTHER-SE> 40,235
<TOTAL-LIABILITY-AND-EQUITY> 135,279
<SALES> 264,982
<TOTAL-REVENUES> 275,369
<CGS> 180,120
<TOTAL-COSTS> 247,421
<OTHER-EXPENSES> 21,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,661
<INCOME-PRETAX> 118
<INCOME-TAX> (237)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355
<EPS-BASIC> .03
<EPS-DILUTED> .02
</TABLE>
