-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LyAXe7im40XQ/66e3v1GpzFzWTpV9nMfJLa0jqAMqVlAsCzKu58ZalnSsyZ5AJjk j1iH+SQvpG+yQbr9d1gdmw== 0000950123-97-009669.txt : 19971117 0000950123-97-009669.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950123-97-009669 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARTY CITY CORP CENTRAL INDEX KEY: 0001005972 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 223033692 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27826 FILM NUMBER: 97721889 BUSINESS ADDRESS: STREET 1: 450 COMMONS WAY CITY: ROCKAWAY STATE: NJ ZIP: 07860 BUSINESS PHONE: 2019830888 MAIL ADDRESS: STREET 2: 400 COMMONS WAY CITY: ROCKAWAY STATE: NJ ZIP: 07866 10-Q 1 FORM 10-Q 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, 1997 0-27826 ----------------- 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 12, 1997, there were outstanding 8,191,164 shares of Common Stock, $.01 par value. 2 PARTY CITY CORPORATION INDEX Page No. -------- Part I Financial Information Item 1. Financial Statements: Balance Sheets - September 30, 1997 and December 31, 1996 3 Statements of Operations - For the Three Months Ended September 30, 1997 and 1996 and the Nine Months Ended September 30, 1997 and 1996 4 Statements of Cash Flows - For the Nine Months Ended September 30, 1997 and 1996 5 Notes to Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 Part II Other Information Item 2. Changes in Securities 13 Item 6. Exhibits and Reports on Form 8-K 13 Exhibit Index 15 3 PARTY CITY CORPORATION BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ----------- ASSETS - ---------- CURRENT ASSETS: Cash and cash equivalents $ 4,113,374 $14,949,714 Restricted assets for advertising fund 21,595 101,573 Receivables from franchisees: Royalty fees (net of allowance for doubtful accounts of $34,181 at September 30, 1997 and $32,847 at December 31, 1996) 991,767 1,015,161 Other 458,220 178,571 Merchandise Inventory 42,492,067 9,305,027 Due from affiliates - 35,815 Prepaid income taxes 734,584 - Deferred income taxes - current 193,188 193,188 Prepaid expenses and other current assets 4,250,080 1,015,760 ----------- ----------- TOTAL CURRENT ASSETS 53,254,875 26,794,809 Propety and equipment - net 22,477,471 7,310,740 Deferred income taxes 218,224 218,224 Goodwill, net of amortization 14,361,683 - Other assets 844,390 279,334 ----------- ----------- TOTAL ASSETS $91,156,643 $34,603,107 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $24,884,704 $ 4,977,430 Accrued expenses 8,440,222 1,980,696 Advertising fund 21,595 101,573 Income taxes payable 881,026 1,904,562 Current portion - long term debt 4,568,635 - Deferred revenue 334,631 412,081 ----------- ----------- TOTAL CURRENT LIABILITIES 39,130,813 9,376,342 ----------- ----------- LONG TERM LIABILITIES: Long-term debt - net of current portion 8,471,434 - Deferred rent 5,114,634 1,170,624 Deferred revenue 226,150 495,000 ----------- ----------- TOTAL LONG TERM LIABILITIES 13,812,218 1,665,624 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value: authorized shares - 25,000,000 at September 30, 1997 and December 31, 1996; shares issued and outstanding - 8,180,664 at September 30, 1997 and 6,960,667 at December 31, 1996 81,807 69,607 Additional paid-in capital 32,023,486 17,748,034 Retained earnings 6,108,319 5,743,500 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 38,213,612 23,561,141 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,156,643 $34,603,107 =========== ===========
See accompanying notes to financial statements. -3- 4 PARTY CITY CORPORATION STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- ------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ------------- ------------ ------------- ------------- REVENUES: Net sales $ 25,701,615 $7,507,165 $58,352,325 $18,408,121 Royalty fees 2,141,943 1,785,601 6,340,717 4,887,075 Franchise fees 172,500 615,000 390,000 880,000 ------------ ---------- ----------- ----------- TOTAL REVENUES 28,016,058 9,907,766 65,083,042 24,175,196 EXPENSES: Cost of goods sold and Occupancy Costs 18,152,377 5,339,627 41,290,494 13,036,587 Company-owned stores operating and selling expense 7,875,490 2,427,442 16,310,601 5,310,418 Franchise expense 925,867 969,621 2,720,541 2,741,571 General and administrative expense 1,495,017 767,246 4,421,965 2,288,728 ------------ ---------- ----------- ----------- TOTAL EXPENSES 28,448,751 9,503,936 64,743,601 23,377,304 ------------ ---------- ----------- ----------- INCOME/(LOSS) BEFORE INTEREST AND INCOME TAXES (432,693) 403,830 339,441 797,892 Interest income, Net 26,549 171,830 268,076 331,530 ------------ ---------- ----------- ----------- INCOME/(LOSS) BEFORE INCOME TAXES (406,144) 575,660 607,517 1,129,422 Provision for/(Benefit from) Income Taxes (162,100) 230,000 242,700 451,100 ------------ ---------- ----------- ----------- NET INCOME/(LOSS) $ (244,044) $ 345,660 $ 364,817 $ 678,322 ============ ========== =========== =========== NET INCOME/(LOSS) PER SHARE $ (0.03) $ 0.05 $ 0.05 $ 0.10 ============ ========== =========== =========== Weighted average shares outstanding $ 8,177,521 $7,132,980 $ 7,800,606 $ 6,561,348 ============ ========== =========== ===========
See accompanying notes to financial statements. -4- 5 PARTY CITY CORPORATION STATEMENTS OF CASH FLOWS
Nine Months Ended -------------------------------- September 30, September 30, 1997 1996 ------------ ------------ Cash Flow from Operating Activities: Net income $ 364,817 $ 678,322 Adjustments to reconcile net income to net cash (used in)/provided by operating activities: Depreciation and amortization 1,648,319 468,381 Deferred rent 3,944,010 473,129 Changes in assets and liabilities: Royalty fees receivable 23,394 (131,148) Other receivables (279,649) (580,844) Merchandise inventory (33,187,040) (8,467,156) Prepaid income taxes (734,584) (58,865) Prepaid expenses and other current assets (3,234,320) (504,950) Other assets (580,422) (38,032) Accounts payable 19,907,274 6,381,691 Accrued expenses 6,459,526 1,715,072 Income taxes payable (1,023,536) (514,458) Due to/from affiliates 35,815 (7,701) Deferred revenue - current (77,450) (64,583) Deferred revenue - long term (268,850) 688,015 ------------ ------------ NET CASH (USED IN) / PROVIDED BY OPERATING ACTIVITIES (7,002,696) 36,873 ------------ ------------ Cash Flow From Investment Activities: Purchases of property and equipment (15,614,969) (3,784,718) Acquisition of franchise stores (15,546,398) -- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (31,161,367) (3,784,718) ------------ ------------ Cash Flow from Financing Activities: Net proceeds from sale of stock 14,184,346 15,010,340 Proceeds from exercise of stock options 103,306 50,000 Proceeds from long term debt 13,093,175 Repayments of long term debt (53,106) (72,290) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 27,327,721 14,988,050 ------------ ------------ NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (10,836,342) 11,240,205 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,949,714 1,112,566 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,113,372 $ 12,352,771 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income Taxes Paid $ 2,881,902 $ 1,080,051 Interest Paid $ 115,405 $ 23,349
See accompanying notes to financial statements. -5- 6 PARTY CITY CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows at September 30, 1997 and 1996 have been made. Certain financial information and footnote disclosures included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission. The results of operations for the three and nine month periods ended September 30, 1997 are not necessarily indicative of the operating results for the full year. NOTE 2 - SECONDARY PUBLIC OFFERING The Company completed its secondary public offering on May 8, 1997. The total offering was for 2,240,000 shares of common stock, of which 1,200,000 shares were offered by the Company and 1,040,000 were offered by certain selling stockholders. The offering price was $13.00 per share. Proceeds to the Company, net of offering expenses were $14,184,346. NOTE 3 - ACQUISITION OF FRANCHISE STORES On February 28, 1997, the Company acquired six franchise stores. Four of the stores acquired were owned by Steven Mandell, the Company's Chairman and President. Such stores had aggregate sales of approximately $9,100,000 in 1996 and were acquired for an aggregate purchase price of $4,750,000, subject to post-closing adjustments of inventory and payables. The remaining two stores were owned by Perry Kaplan, a former executive officer and Director of the Company. Such stores had aggregate sales of approximately $3,700,000 and were acquired for an aggregate purchase price of $1,150,000, subject to similar post-closing adjustments. On August 1, 1997, the Company acquired three franchise stores; two stores in the Southern California market and one store in Staten Island, New York. Through these transactions, the Company acquired certain development rights to the Southern California and Staten Island, New York markets. The aggregate purchase price of these transactions was approximately $3.5 million, subject to adjustments for actual inventories and trade payables. Total sales of the three franchise stores in 1996 were $6.2 million. On August 27, 1997 the Company acquired two franchise stores in the Chicago market and on September 12, 1997 the Company acquired two franchise stores in Virginia. The aggregate purchase price of these transactions was approximately $3.4 million, subject to adjustments for actual inventories and trade payables. Three of the four stores were open all of 1996 and averaged $1.8 million in sales, with the remaining store open less than a year. -6- 7 On September 2, 1997, the Company acquired 11 franchise stores in the Dallas/Fort Worth market. The purchase price of the transaction was approximately $8.3 million, subject to an adjustment for actual inventories and trade payables at the time of closing. As part of this acquisition, Party City acquired the rights for any future development in the Dallas/Fort Worth market. Seven of the 11 stores were open for all of 1996 and averaged $1.8 million in sales, with the remaining four stores open less than a year. The acquisitions have been accounted for under the purchase accounting method. The results of operations of the acquired stores are included in the financial statements since the acquisition date. Goodwill recorded in connection with the acquisitions are being amortized on a straight-line basis over fifteen years. The proforma results are not necessarily indicative of the results of operations that would have occurred had the transactions been consumated as indicated nor are they intended to indicate results that may occur in the future. Assuming the stores were acquired on January 1, 1996, the proforma results would have been as follows:
NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Total Revenues $86,128,200 $47,600,700 Net Income 695,300 880,500 Net Income Per Share 0.09 0.13
NOTE 4 - LONG TERM DEBT On June 16, 1997, the Company refinanced and replaced its existing loan facility with a $20,000,000 revolving line of credit facility maturing on June 30, 2000. Advances under the line bear interest, at the Company's option, at 1/2 of 1% below the bank's prime rate (8.5% as of September 30, 1997) or LIBOR plus 1.25% (which margin for the LIBOR rate option is subject to reduction to .75% or increase to 1.75% based on the Company's ratio of total liabilities to tangible net worth). The Company paid a facility fee of $50,000 and a quarterly commitment fee equal to .125% of the average unused portion of the line, which is secured by substantially all of the assets of the Company. The credit facility provides various covenants including, among others, restrictions on capital expenditures, and maintenance of a defined minimum tangible net worth, interest coverage ratio, total liabilities to tangible net worth ratio and current ratio. At September 30, 1997, the Company was in compliance with such loan agreement covenants. In August 1997, the Company incurred a five year capital lease obligation of $1,593,175 for computer hardware and software.
SEPTEMBER 30, 1997 ----------- Revolving credit facility $11,500,000 Capital lease 1,540,069 ----------- Total Debt 13,040,069 Less Current Maturities 4,568,635 ----------- Long term Debt $ 8,471,434 ===========
-7- 8 NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") and SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable segments on the same basis that it uses internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 128 specifies guidelines as to the method of computation as well as presentation and disclosure requirements for earnings per share ("EPS"). The objective of SFAS No. 128 is to simplify the calculation and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. SFAS No. 131 and SFAS No. 130 are effective for fiscal year ending December 31, 1998. SFAS No. 128 is effective for fiscal year ending December 31, 1997. The adoption of these statements will not have a material effect on the Company's consolidated financial statements. -8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS SEPTEMBER 30, 1996 Company-owned Stores Net sales from Company-owned stores were $25,701,615 for the three months ended September 30, 1997 compared to $7,507,165 for the three months ended September 30, 1996. The 1997 results include 16 additional stores which opened during the last two quarters of 1996 plus 15 additional stores which opened during the first two quarters of 1997, 29 additional stores which opened during the third quarter of 1997 and 24 additional stores which were acquired during 1997. The 1996 amount represents sales from 30 stores, including 10 stores which opened during the third quarter of 1996. Stores open in the third quarter 1996 had a 10.1% same store sales increase for the third quarter 1997. 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 three months ended September 30, 1997 was $7,549,238 compared to $2,167,538 for the three months ended September 30, 1996. The increase in 1997 was due to increased sales volume. Gross margin was 29.4% and 28.9% for the three months ended September 30, 1997 and 1996, respectively. Store operating and selling expenses were $7,875,490 for the three months ended September 30, 1997 compared to $2,427,442 in the comparable 1996 period. The increase in store operating expenses is attributable to the increased number of stores operated by the Company during the third quarter of 1997. Store operating and selling expenses were 30.6% and 32.3% of sales for the three months ended September 30, 1997 and 1996, respectively. Pre-opening expenses in the third quarter were $1,006,000 relating to 29 company-owned stores opened in the third quarter and an additional 10 opened in early October compared to pre-opening expenses of $493,000 incurred in last year's third quarter. Company-owned stores recorded a loss of $326,252 for the three months ended September 30, 1997, compared to a loss of $259,905 for the comparable 1996 period. The increased loss was attributable to the increase in pre-opening expenses, partially offset by the greater profitability of older stores. Franchise Operations Franchise revenue is composed of the initial franchise fees which 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 six store openings were $172,500 for the three months ended September 30, 1997 as compared to $615,000 for the same period in 1996, which represents 21 store openings. Royalty fees increased 20.0% to $2,141,943 in the three months ended September 30, 1997 from $1,785,601 in the three months ended September 30, 1996. The increase in royalty fees is primarily attributable to the increase in franchise same store sales for the three months ended September 30, 1996 of 9.1%. Expenses directly related to franchise revenue decreased $43,754 to $925,867 for the three months ended September 30, 1997 from $969,621 for the three months ended September 30, 1996. As a percentage of franchise revenue, franchise expenses were 40.0% and 40.4% for the quarters ended September 30, 1997 and 1996, respectively. -9- 10 Franchise profit contribution decreased slightly to $1,388,576 for the three months ended September 30, 1997 from $1,430,980 for the three months ended September 30, 1996. The decrease in franchise profit contribution is due to the decreased number of franchise stores due to 24 acquisitions, offset by increases in existing franchise store sales and the leveraging of franchise expenses as discussed above. General and Administrative General and administrative expenses increased to $1,495,017 from $767,246, or 94.9% in the third quarter 1997 from the third quarter 1996. The increase is primarily attributable to an increase in payroll and related benefits, recruitment of new employees and increased travel and occupancy costs as a result of establishing the necessary organizational infrastructure to allow the Company to build the Company-owned store base. As a percentage of revenue, general and administrative expenses were 5.3% and 7.7% for the three months ended September 30, 1997 and 1996, respectively. This decrease as a percentage of revenue resulted from the Company's ability to leverage such expenses across a substantially larger base of revenues. Net Income/(Loss) For the third quarter 1997, the Company reported a net loss of $244,044 or $0.03 per share, compared to net income of $345,660 or $0.05 per share a year ago. The loss was primarily attributable to the increase in pre-opening expenses as discussed above. NINE MONTHS SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS SEPTEMBER 30, 1996 Company-owned Stores Net sales from Company-owned stores increased to $58,352,325 in the nine months ended September 30, 1997 from $18,408,121 in the nine months ended September 30, 1996. Same store sales for the nine months ended September 30, 1997 increased 12.0% over the same nine month period last year. Gross profit for the nine months ended September 30, 1997 was $17,061,831 compared to $5,371,534 for the comparable period in 1996. The increase in 1997 was due to increased sales volume. Gross margin was 29.2% for both the nine months ended September 30, 1997 and 1996. Store operating and selling expenses were $16,310,601 for the nine months ended September 30, 1997 compared to $5,310,418 in the comparable 1996 period. The increase in store operating expenses is attributable to the increased number of stores operated by the Company during the first nine months of 1997. Store operating expenses were 28.0% and 28.8% of sales for the nine months ended September 30, 1997 and 1996, respectively. Pre-opening expenses for company-owned stores for the first three quarters of 1997 were $1,559,000 compared to $640,000 for the same period last year. The increase is due to the increased number of stores opened during the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996. Company-owned stores' profit contribution was $751,230 for the nine months ended September 30, 1997 compared to a profit contribution of $61,116 for the comparable 1996 period. The increase is due to the increased number of stores as well as the greater profitability of older stores. Franchise Operations Franchise fees, recognized on 15 store openings during the nine months ended September 30, 1997 were $390,000 compared to $880,000 during the same period in 1996, which represents 30 store openings. Royalty fees increased to $6,340,717 in the nine months ended September 30, 1997 from $4,887,075 in the nine months ended September 30, 1996. The increase in royalty fees is primarily attributable to franchise same store sales increases for the nine months ended September 30, 1997 of 10.7%. -10- 11 Expenses directly related to franchise revenue decreased to $2,720,541 for the nine months ended September 30, 1997 from $2,741,571 for the nine months ended September 30, 1996. Franchise expenses as a percentage of franchise revenue was 40.4% and 47.5% for the nine months ended September 30, 1997 and 1996, respectively. The percentage decrease is primarily attributable to the Company's ability to leverage such expenses across a substantially larger base of franchise revenues. Franchise profit contribution was $4,010,176 for the nine months ended September 30, 1997 compared to $3,025,504 for the nine months ended September 30, 1996. The 32.5% increase in franchise contribution is due to the increase in royalty fees due to same store sales increases and a decrease in franchise expenses as a percentage of revenue, offset in part by a decrease in franchise fees, as discussed above. General and Administrative General and administrative expenses increased to $4,421,965 from $2,288,728 or 93.2% in the first nine months 1997 from the same period in 1996. As a percentage of revenue, general and administrative expenses were 6.8% and 9.5% for the nine months ended September 30, 1997 and 1996, respectively. The decrease as a percentage of revenues resulted from the Company's ability to leverage such expenses across a substantially larger base of revenues. Net Income For the first nine months of 1997, the Company reported net income of $364,817 and earnings per share of $0.05 as compared to net income of $678,322 and earnings per share of $0.10 for the same period of 1996. The nine month results include an increase in year-to-date pre-opening expenses of $919,000 as compared to 1996, as well as additional operating losses of $813,000 sustained by new stores opened in 1997, compared to operating losses of $537,000 sustained by new stores opened in 1996. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1997, cash used in operating activities was $7,002,696, compared to cash provided by operating activities of $36,873 for the comparable 1996 period. The increase in cash used in operating activities was primarily attributable to increases in merchandise inventory of $33,187,040 and prepaid expenses and other current assets of $3,234,320 and a reduction in income taxes payable of $1,023,536, partially offset by net income of $364,817, depreciation and amortization of $1,648,319, deferred rent of $3,944,010, increases in accounts payable of $19,907,274 and accrued expenses of $6,459,526 as well as other net changes in operating assets and liabilities. Cash used in investing activities for the nine months ended September 30, 1997 was $31,161,365 compared to $3,784,718 in the same period of 1996. The increase in cash used in investing activities was primarily attributable to property and equipment additions necessary to support the growth in Company-owned stores in the amount of $15,614,967 and $15,546,398 for the acquisition of 24 franchise stores. Both were primarily funded by the Company's existing available cash as well as borrowings of $11,500,000 on the credit facility and a new capital lease for computer hardware and software. Cash provided by financing activities was $27,327,721 for the nine months ended September 30, 1997 compared to $14,988,050 in the same period of 1996. Cash provided by financing activities consisted of the net proceeds of the public sale of the Company's stock of $14,184,346, proceeds from the exercise of employee stock options granted under the Company's Amended and Restated 1994 Stock Option Plan in the amount of $103,306, borrowings under the credit facility of $11,500,000 and a new capital lease for computer hardware -11- 12 and software in the amount of $1,593,175. On June 16, 1997, the Company refinanced and replaced its existing loan facility with a $20,000,000 revolving line of credit facility maturing on June 30, 2000. Advances under the line bear interest, at the Company's option, at 1/2 of 1% below the bank's prime rate (8.5% as of September 30, 1997) or LIBOR plus 1.25% (which margin for the LIBOR rate option is subject to reduction to .75% or increase to 1.75% based on the Company's ratio of total liabilities to tangible net worth). The Company paid a facility fee of $50,000 and a quarterly commitment fee equal to .125% of the average unused portion of the line, which is secured by substantially all of the assets of the Company. The credit facility provides various covenants including, among others, restrictions on capital expenditures, and maintenance of a defined minimum tangible net worth, interest coverage ratio, total liabilities to tangible net worth ratio and current ratio. At September 30, 1997, the Company was in compliance with such loan agreement covenants. The outstanding balance on the facility at September 30, 1997 was $11,500,000. The Company completed its secondary public offering on May 8, 1997. The total offering was for 2,240,000 shares of common stock, of which 1,200,000 shares were offered by the Company and 1,040,000 were offered by certain selling stockholders. Proceeds to the Company, net of offering expenses were $14,184,346. -12- 13 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Within the past three years, the Company has sold the following securities which were not registered under the Securities Act of 1933, as amended (the "Securities Act"): In 1994, the Company issued options to purchase 102,240 shares of the Company's common stock, $.01 par value per share ("Common Stock") to various employees, officers and directors of the Company pursuant to the Company's Amended and Restated 1994 Stock Option Plan ("the Plan"), in consideration for the recipients' services to the Company. Such options were issued based upon the exemption from registration under Section 4(2) of the Securities Act. In 1995, the Company issued options to purchase 79,760 shares of Common Stock to various employees, officers and directors of the Company pursuant to the Plan, in consideration for the recipients' services to the Company. Such options were issued based upon an exemption from registration under Section 4(2) of the Securities Act. In 1996, the Company issued options to purchase 281,500 shares of Common Stock to various employees, officers and directors of the Company pursuant to the Plan, in consideration for the recipients' services to the Company. Such options were issued based upon an exemption from registration under Section 4(2) of the Securities Act. In 1996, the Company sold 36,667 shares of Common Stock pursuant to the exercise of stock options for an aggregate purchase price of $174,995, based upon an exemption from registration under Section 4(2) of the Securities Act. In 1997, the Company issued options to purchase 294,250 shares of Common Stock to various employees, officers and directors of the Company pursuant to the Plan, in consideration for the recipients' services to the Company. Such options were issued based upon an exemption from registration under Section 4(2) of the Securities Act. In 1997, the Company sold 19,997 shares of Common Stock pursuant to the exercise of stock options for an aggregate purchase price of $103,305.50, based upon an exemption from registration under Section 4(2) of the Securities Act. 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) On September 12, 1997 the Company filed a Current Report on Form 8-K dated September 2, 1997 reporting under "Item 2. Acquisition or Disposition of Assets," the Company's September 2, 1997 acquisition of 11 franchise stores in the Dallas/Forth Worth market. On November 10, 1997 the Company filed an amendment to the above-referenced Current Report on Form 8-K/A, including therein the following financial statements. (i) Consolidated Financial Statements for Hammond Enterprises Limited Partnership and owned companies, including: Consolidated Balance Sheet as at December 31, 1996 Consolidated Statement of Income and Members' Equity for the year ended December 31, 1996 Consolidated Statement of Cash Flows for the year ended December 31 1996 Notes to Consolidated Financial Statements Consolidated Balance Sheet as at June 30, 1997 Consolidated Statement of Income and Members' Equity for the six months ended June 30, 1997 Consolidated Statement of Cash Flows for the six months ended June 30, 1997 Notes to Consolidated Financial Statements (ii) Pro Forma financial information, as follows: Condensed Consolidated Pro Forma Balance Sheet as at June 30, 1997 Condensed Consolidated Pro Foma Income Statement for the six months ended June 30, 1997 Condensed Consolidated Pro Forma Income Statement for the year ended December 31, 1996 Notes to Condensed Consolidated Pro Forma Balance Sheet and Income Statements -13- 14 SIGNATURE 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/ STEVEN MANDELL ------------------------------ (Steven Mandell) President & Chief Executive Officer By /s/ DAVID LAUBER ------------------------------ (David Lauber) Chief Financial & Principal Accounting Officer Date: November 14, 1997 -14- 15 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - ------ ----------- ---- 27 Financial Data Schedule -15- EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 4,113,374 0 991,767 34,181 42,492,067 53,254,875 22,477,471 0 91,156,643 39,130,813 0 0 0 81,807 38,131,805 91,156,643 58,352,325 65,083,042 41,290,494 60,321,636 4,421,965 0 (268,016) 607,517 242,700 0 0 0 0 364,817 0.05 0
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