<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
SEPTEMBER 30, 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 /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 November 10, 2000, there were outstanding 12,722,205 shares of
Common Stock, $.01 par value.
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PARTY CITY CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
-------
<S> <C>
Item 1. Consolidated financial statements
Consolidated balance sheets - September 30, 2000 (Unaudited) and July 1, 2000 3
Consolidated statements of operations (Unaudited) - For the quarters ended
September 30, 2000 and October 2, 1999 4
Consolidated statements of cash flows (Unaudited) - For the quarters ended
September 30, 2000 and October 2, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Under Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit Index 15
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JULY 1, 2000
------------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $8,211 $3,950
Merchandise inventory 72,827 42,030
Deferred income taxes 7,460 4,225
Other current assets 17,202 18,554
------ ------
Total current assets 105,700 68,759
Property and equipment, net 41,280 41,447
Goodwill, net 14,553 14,844
Other assets 6,932 7,036
----- -----
Total assets $168,465 $132,086
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $52,432 $30,190
Accrued expenses 17,721 15,457
Advances under Loan Agreement 14,573 -
Senior Notes, current portion 5,103 5,103
Other current liabilities 2,250 2,940
----- -----
Total current liabilities 92,079 53,690
Long-term liabilities:
Deferred rent 7,818 7,503
Senior Notes 29,732 29,547
Other long-term liabilities 326 485
Commitments and contingencies
Stockholders' equity:
Common stock 127 127
Additional paid-in capital 37,968 37,968
Retained earnings 415 2,766
--- -----
Total stockholders' equity 38,510 40,861
------ ------
Total liabilities and stockholders' equity $168,465 $132,086
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Revenues:
Net sales $ 76,853 $ 67,813
Royalty fees 2,809 2,316
Franchise fees 426 322
-------- --------
Total revenues 80,088 70,451
Expenses:
Cost of goods sold and occupancy costs 55,462 50,717
Company-owned stores operating and selling expense 19,749 20,059
Franchise expense 1,254 1,124
General and administrative expense 5,177 8,376
-------- --------
Total expenses 81,642 80,276
-------- --------
Loss before interest and income taxes (1,554) (9,825)
Interest expense 2,282 2,434
-------- --------
Loss before income taxes (3,836) (12,259)
Provision for income tax benefit (1,485) --
-------- --------
Net loss $ (2,351) $(12,259)
======== ========
Basic loss per share $ (0.18) $ (0.98)
Weighted average shares outstanding - basic 12,722 12,456
======== ========
Diluted loss per share $ (0.18) $ (0.98)
Weighted average shares outstanding - diluted 12,722 12,456
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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PARTY CITY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (2,351) $(12,259)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,534 2,694
Non-cash interest 414 195
Deferred rent 315 44
Provision for doubtful accounts 92 --
Loss on sale of stores to franchisees -- 1,042
Changes in assets and liabilities:
Merchandise inventory (30,541) (26,961)
Refundable income taxes -- 4,929
Other current assets (2,013) (2,142)
Other assets (125) (98)
Accounts payable 22,242 3,346
Accrued expenses 2,264 3,399
Other current liabilities (691) (520)
Other long term liabilities (159) (84)
-------- --------
Net cash used in operating activities (8,019) (26,415)
-------- --------
Cash flow from investment activities:
Purchases of property and equipment (1,777) (807)
Proceeds from sale of stores to franchisees -- 9,877
Stores acquired from franchisees (516) --
-------- --------
Net cash provided by (used in) investment
activities (2,293) 9,070
-------- --------
Cash flow provided by financing activities:
Net proceeds from Loan Agreement 14,573 --
Proceeds from Senior Notes -- 30,000
Payment of Senior Note issuance costs -- (673)
Repayment of Credit Agreement advances -- (18,628)
-------- --------
Net cash provided from financing activities 14,573 10,699
-------- --------
Net increase (decrease) in cash and cash equivalents 4,261 (6,646)
Cash and cash equivalents, beginning of period 3,950 11,470
-------- --------
Cash and cash equivalents, end of period $ 8,211 $ 4,824
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid (refunded) $ 1,053 $ (5,030)
Interest paid 1,533 1,038
</TABLE>
See accompanying notes to consolidated financial statements.
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PARTY CITY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements, except for the July 1, 2000
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 September 30, 2000 and the results of
operations and cash flows for the quarters ended September 30, 2000 and October
2, 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 year ended July
1, 2000, 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 1, 2000 consolidated balance sheet
amounts have been derived from the Company's audited consolidated financial
statements.
2. SECURITIES LITIGATION
The Company has been named as a defendant in twelve class action
complaints. The Company's former Chief Executive Officer, 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. In October 1999,
plaintiffs filed an amended class action complaint and in February 2000,
plaintiffs filed a second amended complaint.
The second amended complaint alleges, 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 seeks 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.
Defendants have moved to dismiss the second amended complaint on the ground
that it fails to state a cause of action. The Court has not yet issued a
decision with respect to the motion to dismiss. Because this case is in its
early stages, no opinion can be expressed as to its likely outcome.
6
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Other
On April 23, 1999, plaintiff Emil Asch, Inc. ("Emil Asch") 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 claims which pertain to price
discrimination under the Robinson-Patman Act, 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 February 3, 2000, Emil Asch amended its complaint by adding Ron's: The
Party Store, Inc., as an additional plaintiff to the suit. The amended complaint
asserts the same causes of action against the same defendants and seeks the same
damages that were sought in the original complaint. The Company has answered the
amended complaint, and discovery is proceeding. At this point, no opinion can be
expressed as to the likely outcome of the litigation.
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.
3. RELATED PARTY TRANSACTIONS
As of July 3, 1999, Erik Mandell, an officer of the Company and the son of
Steven Mandell, the former chief executive officer of the Company, owned one
franchise store. During the year ended July 1, 2000, Steven Mandell acquired
this store from Erik Mandell. On July 27, 2000, the Company purchased this store
from Steven Mandell. Total consideration for this purchase was $516,000. Neither
Steven Mandell nor Erik Mandell owns any other Party City franchise stores.
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4. SEGMENT INFORMATION
The following table contains key financial information of the Company's
business segments (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPTEMBER 30, 2000 OCTOBER 2, 1999
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
RETAIL
Net revenue $ 76,853 $ 67,813
Operating earnings (loss) 1,642 (2,963)
Identifiable assets 155,707 152,961
Depreciation/amortization 1,916 2,156
Capital expenditures 915 339
FRANCHISING
Net revenue $ 3,235 $ 2,638
Operating earnings 1,981 1,514
Identifiable assets 2,595 2,490
Depreciation/amortization 115 137
Capital expenditures -- --
CORPORATE/OTHER
Net revenue $ -- $ --
Operating loss (5,177) (8,376)
Identifiable assets 10,163 9,037
Depreciation/amortization 503 401
Capital expenditures 1,378 468
CONSOLIDATED TOTALS
Net revenue $ 80,088 $ 70,451
Operating loss (1,554) (9,825)
Interest expense 2,282 2,434
--------- ---------
Loss before income taxes (3,836) (12,259)
Provision for income tax benefit (1,485) --
--------- ---------
Net loss $ (2,351) $ (12,259)
========= =========
Identifiable assets $ 168,465 $ 164,488
Depreciation/amortization 2,534 2,694
Capital expenditures 2,293 807
</TABLE>
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5. 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>
QUARTER ENDED
-------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Net loss $ (2,351) $(12,259)
Average common shares outstanding 12,722 12,456
Loss per share - basic (.18) (.98)
Dilutive effect of stock options (a) (a)
Dilutive effect of warrants (a) (a)
Average common and common equivalents 12,722 12,456
outstanding
Loss per share - diluted $ (.18) $ (.98)
</TABLE>
(a) In periods of losses, options are excluded from the computation
of diluted earnings per share because they would be
anti-dilutive.
Options to purchase 1,038,626 and 1,616,501 common shares at prices
ranging from $1.67 to $3.387 per share were outstanding at September
30, 2000 and October 2, 1999, respectively and warrants to purchase
6,880,000 common shares at $1.07 per share were outstanding at
September 30, 2000, but were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.
6. SUBSEQUENT EVENTS
In October 2000, the Company signed an agreement with The Party
Supermarket, Inc. ("Party Supermarket") whereby Party Supermarket would
become a franchisee of the Company. Under that agreement, Party
Supermarket agreed to purchase three stores in Florida from the Company
for approximately $1.2 million. The Company estimates that Party
Supermarket will operate 21 stores as franchise stores.
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AND,
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
(in thousands, except per share and store data)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
---- ----
(UNAUDITED)
STATEMENT OF OPERATIONS DATA
<S> <C> <C>
Total revenue $80,088 $70,451
======= =======
Company-owned stores
Net sales 76,853 67,813
Cost of goods sold and occupancy costs 55,462 50,717
------ ------
Gross profit 21,391 17,096
Store operating and selling expense 19,749 20,059
------ ------
Company-owned stores profit contribution (loss) 1,642 (2,963)
Franchise stores:
Royalty fees 2,809 2,316
Franchise fees 426 322
------ ------
Total franchise revenues 3,235 2,638
Total franchise expense 1,254 1,124
------ ------
Franchise profit contribution 1,981 1,514
General and administrative expense:
Special charges (a) -- 4,868
Other general and administrative expenses 5,177 3,508
------ ------
5,177 8,376
------ ------
Loss before interest and income tax benefit (1,554) (9,825)
Interest expense, net 2,282 2,434
------ ------
Loss before income tax benefit (3,836) (12,259)
Provision for income tax benefit (1,485) --
------ ------
Net loss $(2,351) $(12,259)
======== =========
Basic earnings per share $(0.18) $(0.98)
Diluted earnings per share (0.18) (0.98)
Weighted average shares outstanding -- Basic 12,722 12,456
Weighted average shares outstanding -- Diluted 12,722 12,456
EBITDA (b) 980 (2,263)
Depreciation and amortization 2,534 2,694
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30, OCTOBER 2,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
STORE DATA:
COMPANY-OWNED:
Stores open at beginning of period 197 215
Stores opened -- 1
Stores acquired from franchisees 1 --
Stores sold to franchisees -- (17)
--------- ---------
Stores open at end of period 198 199
FRANCHISE:
Stores open at beginning of period 211 178
Stores opened 18 12
Stores acquired from franchisees (1) --
Stores acquired from Company -- 17
--------- ---------
Stores open at end of period 228 207
--------- ---------
Total stores chainwide 426 406
========= =========
Increase (decrease) in Company-owned same store 17.2% (4.5%)
sales
Increase in franchise same store sales 6.8% 6.9%
Average sales per Company-owned store $ 387 $ 332
BALANCE SHEET DATA:
Working capital (deficiency) $ 13,621 $ (30,848)
Total assets 168,465 164,488
Bank borrowings and other debt 49,408 68,000
Capital lease obligation 623 635
Stockholders' equity 38,510 25,640
</TABLE>
(a) Special charges in fiscal 2000 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 transactions. The Company
engaged the services of a crisis management consulting firm
and numerous other professionals to advise management during
the complex negotiations with the bank, vendors and potential
investors.
(b) Earnings before interest, taxes, depreciation and
amortization, and exclusive of special charges, as defined
above.
Quarter Ended September 30, 2000 Compared to Quarter Ended October 2, 1999
Retail. Net sales from Company-owned stores increased 13.3% to $76.9 million for
the first quarter of fiscal 2001 from $67.8 million for the first quarter of the
last fiscal year. Same store sales increased 17.2% in the first quarter of
fiscal 2001. 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 first quarter of
fiscal 2001 increased 25.1% to $21.4 million from $17.1 million for the first
quarter of the last fiscal year. The increase was primarily due to increased
sales volume. Gross margin was 27.8% for the first quarter of fiscal 2001
compared with 25.2% for the first quarter of the last fiscal year. The increase
in gross margin is related primarily to an increase in vendor discounts and
rebates in the first quarter of fiscal 2001.
Store operating and selling expenses decreased 1.5% to $19.7 million for
the first quarter of fiscal 2001 from $20.1 million in the first quarter of the
last fiscal year. The decrease in store operating expenses is attributable to
fewer stores, on average, open during the first quarter of fiscal 2001 compared
to the first quarter of the last fiscal year. Store operating and selling
expenses were 25.7% and 29.6% of sales for the first quarter of fiscal 2001 and
fiscal 2000, respectively. This decrease is due to improvements in
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<PAGE> 12
efficiency in the management of store labor hours. Company-owned stores recorded
a contribution of $1.6 million for the first quarter of fiscal 2001 compared to
a loss of $3.0 million for the first quarter of the last fiscal year. The
improvement over the prior year is primarily the result of improved gross margin
as well as improved operating efficiencies.
Franchising. Franchise revenue is composed of the initial franchise fees that
are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4.0% of the store's net sales. Franchise fees, recognized on 18 store
openings were $426,000 for the first quarter of fiscal 2001 compared to $322,000
for the first quarter of the last fiscal year, relating to 12 store openings.
Royalty fees increased 21.3% to $2.8 million in the first quarter of fiscal 2001
from $2.3 million in the first quarter of the last fiscal year primarily due to
an increase in the number of stores and a same store sales increase of 6.8% for
the franchise stores in the first quarter of fiscal 2001.
Expenses directly related to franchise revenue increased 11.6% to $1.3
million for the first quarter of fiscal 2001 from $1.1 million for the first
quarter of the last fiscal year. As a percentage of franchise revenue, franchise
expenses were 38.8% and 42.6% for the first quarter of fiscal 2001 and fiscal
2000, respectively.
Franchise profit contribution increased 30.8% to $2.0 million for the
first quarter of fiscal 2001 from $1.5 million for the first quarter of the last
fiscal year. The increase in franchise profit contribution is due to higher
revenues from the increased number of franchise stores.
General and Administrative Expenses. General and administrative expenses
decreased 38.2% to $5.2 million in the first quarter of fiscal 2001 from $8.4
million in the first quarter of the last fiscal year. This decrease is
attributable in part to $4.9 million in special charges relating to consulting
accounting, banking and other expenses resulting from the Company's refinancing
arrangements in the first quarter of the last fiscal year. Exclusive of the $4.9
million in special charges discussed above, general and administrative expenses
were 6.7% and 5.2% of sales for the first quarter of fiscal 2001 and fiscal
2000, respectively, reflecting strategic investments in management and systems.
Interest Expense. Interest expense decreased 6.2% to $2.3 million for the first
quarter of fiscal 2001 from $2.4 million in the first quarter of the last fiscal
year. The decreased expense is primarily attributable to lower average
borrowings outstanding.
Income Tax Benefit. The effective income tax rate was 38.7% in the first quarter
of 2001 compared to no benefit recorded in the first quarter of the last fiscal
year. The Company recorded a benefit in the current year because it is more
likely than not that it will be realized.
Net Loss. As a result of the above factors, net loss for the first quarter of
fiscal 2001 was $2.4 million, or $(0.18) per basic and diluted share, as
compared to a net loss of $12.3 million, or $(0.98) per basic and diluted share
in first quarter of the last fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter of fiscal 2001, cash used in operating activities
was $8.0 million, compared to $26.4 million for the first quarter of the last
fiscal year. The decrease in cash used in operating activities was primarily
attributable to a $9.9 million decrease in net loss, an $18.9 million increase
in accounts payable and offset by additional inventory purchases of $3.6
million.
Cash used in investing activities for the first quarter of fiscal 2001 was
$2.3 million compared to cash provided by investing activities of $9.1 million
in the first quarter in the last fiscal year. The change in cash used in
investing activities was primarily attributable to the sales of stores to
franchisees in the first quarter of fiscal 2000, one store acquisition in the
first quarter of fiscal 2001 and increased investment in property and equipment
in the first quarter of fiscal 2001 compared to the first quarter of the last
fiscal year.
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<PAGE> 13
Cash provided by financing activities was $14.6 million for the first
quarter of fiscal 2001 compared to $10.7 million in the first quarter of the
last fiscal year. The amount is primarily attributable to the increase in
borrowings in the first quarter of fiscal 2001 to purchase seasonal (Halloween)
inventory.
The Company has a 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 was 2.75% per annum
(subject to possible reduction to an interest rate 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,
totaling 10.25% at September 30, 2000. 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 November 10, 2000, there was no balance outstanding and $31.9
million was available to be borrowed under the Loan Agreement.
Company management currently believes that the cash generated by
operations, together with the borrowing availability under the Loan Agreement,
will be sufficient to meet the Company's working capital needs for the next
twelve months.
Accounting and Reporting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, " Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statements of financial position and to
measure those instruments at fair value. For fiscal year 2001, the Company is
required to adopt SFAS No. 133. The Company has determined that the application
of SFAS No. 133 will not have a material impact on its financial position or
results of operation.
In November 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition." This bulleting sets forth
the SEC Staff's position regarding the point at which it is appropriate for a
Registrant to recognize revenue. The Staff believes that revenue is realizable
and earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or service has been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. The Company uses the above criteria to determine whether
revenue can be recognized, and therefore believes that the issuance of this
bulletin does not have a material impact on its financial statements.
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 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.
13
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in twelve class action
complaints. The Company's former Chief Executive Officer, 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. In October 1999,
plaintiffs filed an amended class action complaint and in February 2000,
plaintiffs filed a second amended complaint.
The second amended complaint alleges, 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 seeks 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.
Defendants have moved to dismiss the second amended complaint on the ground
that it fails to state a cause of action. The Court has not yet issued a
decision with respect to the motion to dismiss. Because this case is in its
early stages, no opinion can be expressed as to its likely outcome.
Other
On April 23, 1999, plaintiff Emil Asch, Inc. ("Emil Asch") 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 claims which pertain to price
discrimination under the Robinson-Patman Act, 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 February 3, 2000, Emil Asch amended its complaint by adding Ron's: The
Party Store, Inc., as an additional plaintiff to the suit. The amended complaint
asserts the same causes of action against the same defendants and seeks the same
damages that were sought in the original complaint. The Company has answered the
amended complaint, and discovery is proceeding. At this point, no opinion can be
expressed as to the likely outcome of the litigation.
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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES AND USE OF PROCEEDS
None
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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) Report on Form 8-K filed September 29, 2000.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
<S> <C> <C>
27 Financial Data Schedule 15
(Filed electronically with SEC only)
</TABLE>
15
<PAGE> 16
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: November 13, 2000
16
