-----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, VwgpQoHjc7rJ3MI3MNgm3M2sawy74qZ9WXYU/75re4TJgpPF+iaqlgJzYfg6y8Zc RhcX1VQNkRqi+ynGJpUI5Q== 0000950123-96-006619.txt : 19961118 0000950123-96-006619.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950123-96-006619 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 1934 Act SEC FILE NUMBER: 000-27826 FILM NUMBER: 96664615 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 PARTY CITY 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 QUARTER ENDED COMMISSION FILE NUMBER SEPTEMBER 30, 1996 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) 201-983-0888 (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 November 11, 1996, there were outstanding 6,944,000 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, 1996 and December 31, 1995 3 Statements of Income - For the Three Months Ended September 30, 1996 and 1995 and the Nine Months Ended September 30, 1996 and 1995 4 Statements of Cash Flows - For the Nine Months Ended September 30, 1996 and 1995 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 11 3 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. PARTY CITY CORPORATION BALANCE SHEETS
-------------------------------- SEPTEMBER 30, DECEMBER 31, 1996 1995 -------------------------------- ASSETS - -------------- CURRENT ASSETS: Cash and cash equivalents $12,352,771 $ 1,112,566 Restricted assets for advertising fund 109,513 541,919 Receivables from franchisees: Royalty fees-net of allowance for doubtful accounts of $82,346 at September 30, 1996 and $40,000 at December 31, 1995 784,109 652,961 Miscellaneous 689,187 108,343 Merchandise Inventory 12,308,082 3,840,926 Due from affiliates 11,716 5,794 Prepaid income taxes 58,865 -- Deferred income taxes - current 150,631 150,631 Prepaid expenses and other current assets 820,570 315,620 -------------------------------- TOTAL CURRENT ASSETS 27,285,444 6,728,760 Property and equipment - net 6,512,075 3,195,738 Deferred income taxes 109,176 109,176 Other assets 311,930 273,898 -------------------------------- TOTAL ASSETS $34,218,625 $10,307,572 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable - trade $ 8,342,564 $ 1,960,873 Accrued expenses 2,940,707 1,225,635 Advertising fund 109,513 541,919 Income taxes payable -- 514,458 Current portion - long term debt -- 22,725 Due to affiliates -- 1,779 Deferred revenue 397,800 462,383 -------------------------------- TOTAL CURRENT LIABILITIES 11,790,584 4,729,772 -------------------------------- LONG TERM LIABILITIES: Long-term debt - net of current portion -- 49,565 Other long term liabilities 2,107,672 946,528 -------------------------------- TOTAL LONG TERM LIABILITIES 2,107,672 996,093 -------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value: authorized shares - 25,000,000 at September 30, 1996 and 10,000,000 at December 31, 1995; shares issued and outstanding - 6,644,000 at September 30, 1996 and 5,224,000 at December 31, 1995 69,440 52,240 Additional paid-in capital 17,584,632 2,541,492 Retained Earnings 2,666,297 1,987,975 -------------------------------- TOTAL STOCKHOLDERS' EQUITY 20,320,369 4,581,707 -------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,218,625 $10,307,572 ================================
See accompanying notes to financial statements 3 4 PARTY CITY CORPORATION STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 --------------------------------------------------------------------- REVENUES: Net sales $ 7,507,165 $ 3,051,352 $18,408,121 $ 7,493,408 Royalty fees 1,785,601 1,303,851 4,887,075 3,473,560 Franchise fees 615,000 370,000 880,000 775,000 ------------------------------ ------------------------------ TOTAL REVENUES 9,907,766 4,725,203 24,175,196 11,741,968 EXPENSES: Cost of goods sold 3,678,514 1,573,398 9,382,995 3,870,394 Company owned stores operating and selling expense 4,088,554 1,630,179 8,964,010 3,541,761 Franchise expense 969,622 734,862 2,741,571 2,033,164 General and administrative expense 767,246 956,934 2,288,728 2,103,687 ------------------------------ ------------------------------ TOTAL EXPENSES 9,503,936 4,895,373 23,377,304 11,549,006 ------------------------------ ------------------------------ INCOME/(LOSS) BEFORE INTEREST AND INCOME TAXES 403,830 (170,170) 797,892 192,962 Interest Income, Net 171,830 1,310 331,530 13,225 ------------------------------ ------------------------------ INCOME/(LOSS) BEFORE INCOME TAXES 575,660 (168,860) 1,129,422 206,187 Provision For Income Taxes 230,000 (67,000) 451,100 83,000 ------------------------------ ------------------------------ NET INCOME/(LOSS) $ 345,660 $ (101,860) $ 678,322 $ 123,187 ============================== ============================== NET INCOME/LOSS) PER SHARE $ 0.05 $ (0.02) $ 0.10 $ 0.02 ============================== ============================== Weighted average shares outstanding 7,132,980 5,322,333 6,561,348 5,322,333 ============================== ==============================
See accompanying notes to financial statements 4 5 PARTY CITY CORPORATION STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ---------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1996 1995 ---------------------------------- Cash Flow from Operating Activities: Net income $ 678,322 $ 123,187 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 468,381 166,822 Changes in assets and liabilities: Sale (purchase) of marketable securities -- 20,558 Royalty fees receivable (131,148) (224,550) MIscellaneous receivable (580,844) (57,026) Merchandise inventory (8,467,156) (3,110,544) Due to/from affiliates (7,701) (39,304) Prepaid income taxes (58,865) (347,190) Prepaid expenses and other current assets (504,950) (359,140) Other assets (38,032) (45,291) Accounts payable 6,381,691 3,030,907 Accrued expenses 1,715,072 1,166,848 Income taxes payable (514,458) (117,240) Deferred revenue (64,583) 140,709 Long term liabilities 1,161,144 (10,982) ---------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 36,873 337,764 ---------------------------------- Cash Flow from Investment Activities: Purchases of Property and Equipment (3,784,718) (1,391,420) ---------------------------------- NET CASH USED IN INVESTING ACTIVITIES (3,784,718) (1,391,420) ---------------------------------- Cash Flow from Financing Activities: Net proceeds from Sale of Stock 15,010,340 -- Proceeds from exercise of Stock Options 50,000 -- Proceeds from long term debt -- 288,128 Repayments of long term debt (72,290) (28,954) ---------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,988,050 259,174 ---------------------------------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 11,240,205 (794,482) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,112,566 1,493,611 ---------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,352,771 $ 699,129 ================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income Taxes Paid $ 1,080,051 $ 469,713 Interest Paid $ 23,349 $ 4,842
See accompanying notes to financial statements 5 6 PARTY CITY CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - INITIAL PUBLIC OFFERING On March 27, 1996, the Company completed an initial public offering (IPO) of 1,700,000 shares of common stock, $.01 par value, issued by the Company, at an initial offering price of $10 per share. Proceeds to the Company, net of offering expenses of $1,989,660, were $15,010,340. NOTE 2 - 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 cash flows at September 30, 1996, and September 30, 1995 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 S-1 for the year ended December 31, 1995 filed with the Securities and Exchange Commission. The results of operations for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the operating results to be expected for any other interim period or for the full year. NOTE 3 - STOCK OPTION PLAN In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which was effective for the Company as of January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board ("APB") Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share in its annual financial statements. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the first four years of its operation, the Company concentrated its efforts on building the base of its franchise stores, evaluating the performance of product categories and suppliers, improving store merchandising and refining its store design, procedures and systems. In late 1993, the Company made the strategic decision to begin opening Company-owned stores due to the successful store model developed in the franchise system. In January 1994, the first Company-owned store was opened in Orlando, Florida. Six additional Company-owned stores were opened in the third and fourth quarters of 1994. In 1995, the Company opened nine stores, one in the second quarter, six in the third quarter and two in the fourth quarter. Four additional company-owned stores were opened in the second quarter of 1996 and ten in the third quarter of 1996. Franchise revenues are generated from royalties received on sales and initial franchise fees which are recognized at the time a store opens. All stores opened after January 1, 1993 pay a royalty fee of 4.0% of net sales. Stores opened prior to 1993 have royalty rates ranging from 2.0% to 4.0% of net sales. Franchise fees are currently $30,000 to open a new store. Franchise expenses are those costs directly related to the Company's management of franchise operations and consist primarily of payroll, travel, advertising and legal expenses as well as an allocation of home office occupancy expenses. The Company's business is seasonal, with its highest revenue levels occurring in the fourth quarter. This period, which includes the Halloween, Thanksgiving, Christmas, Hanukkah and New Year's Eve selling seasons, accounts for a significant portion of the Company's total revenues and profitability. In addition, the timing of new store openings, coupled with the related pre-opening expenses, may cause the Company's quarterly results to fluctuate. Earnings per share is computed using the weighted average common stock equivalent shares outstanding during each period. Stock options issued pursuant to the Company's 1994 Amended Stock Option Plan, with exercise prices below the IPO price of $10.00 per share, during the twelve month period preceding the IPO ("Cheap Stock Options") have been included in the calculation of common stock equivalents using the treasury stock method, as if they had been outstanding from January 1, 1995. Stock options that are not Cheap Stock Options have been included in the computation using the treasury stock method only when their effect would be dilutive. Same store sales increases or decreases are calculated for stores open at least thirteen full months. Because of the small base of Company-owned stores, comparisons of operations between periods may indicate large percentage variations. RESULTS OF OPERATIONS THREE MONTHS SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS SEPTEMBER 30, 1995 Company-owned Stores Net sales from Company-owned stores were $7,507,165 for the three months ended September 30, 1996 compared to $3,051,352 for the three months ended September 30, 1995. The 1996 results include six stores which opened during the third quarter of 1995, two stores which opened during the last quarter of 1995, four stores which opened during the second quarter of 1996 and ten stores which opened during the current quarter of 1996. The 1995 amount represents sales from 14 stores, including six stores which opened during that quarter. Stores open in the third quarter 1995 had a 17.4% same store sales increase for the third quarter 1996. Gross profit for the three months ended September 30, 1996 was $3,828,651 compared to $1,477,954 for the three months ended September 30, 1995. The increase in 1996 was mainly due to the additional stores as well as increased sales volume. Gross margin was 51.0% and 48.4% for the three months ended September 30, 1996 and 1995, respectively. 7 8 As a result of the increased number of stores operated by the Company during the third quarter 1996, store operating and selling expenses were $4,088,554 compared to $1,630,179 in the comparable 1995 period. The 1996 expenses included pre-opening expenses for the ten stores opened during the quarter plus six stores opened in early October, while the comparable 1995 period included pre-opening expenses for the six stores opened during the quarter plus two stores opened in early October. Company-owned stores showed a loss of $259,903 for the three months ended September 30, 1996, compared to a loss of $152,225 for the comparable 1995 period. Franchise Operations Franchise revenue is composed of the initial franchise fees (currently $30,000 per store) which is recorded as revenue when the store opens, and ongoing royalty fees, generally 4.0% of the store's net sales. Franchise fees, recognized on the 21 store openings during the three months ended September 30, 1996 were $615,000 compared to $370,000 during the three months ended September 30, 1995, which represents 13 store openings. The increase in franchise fees is caused by more store openings in addition to the increase in such fees to $30,000 from $25,000 per store with respect to franchise agreements signed after January 1, 1995. Royalty fees increased 36.9% to $1,785,601 in the three months ended September 30, 1996 from $1,303,851 in the three months ended September 30, 1995. Franchise same store sales increases for the three months ended September 30, 1996 were 10.8%. Expenses directly related to franchise revenue increased $234,760 to $969,622 for the three months ended September 30, 1996 from $734,862 for the three months ended September 30, 1995. This increase is attributable to additional franchise personnel required to operate this portion of the Company's business and the necessary infrastructure to support such employees. As a percentage of franchise revenue, franchise expenses were 40.4% and 43.9% for the quarters ended September 30, 1996 and 1995, respectively. Franchise profit contribution increased 52.4% to $1,430,979 for the three months ended September 30, 1996 from $938,989 for the three months ended September 30, 1995. The increase in franchise profit contribution is due to the increase in royalty fees attributable to both the opening of new franchises and increases in existing franchise store sales, an increase in franchise fees and a decrease in franchise expenses as a percentage of revenues, as discussed above. General and Administrative General and administrative expenses decreased to $767,246 from $956,934 in the third quarter 1996 from the third quarter 1995. The 19.8% decrease is primarily attributable to an accrual for a severance agreement with a former employee of $275,000 in the third quarter of 1995, offset by an increase in payroll and related benefits and increased travel as a result of establishing the necessary organizational infrastructure to allow the Company to build the Company-owned store base. Net Income For the third quarter 1996, the Company reported net income of $345,660 and earnings per share of $0.05 as compared to a net loss of $101,860 and a loss per share of $0.02 for the third quarter 1995. NINE MONTHS SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS SEPTEMBER 30, 1995 Company-owned Stores Net sales from Company-owned stores increased to $18,408,121 in the nine months ended September 30, 1996 from $7,493,408 in the nine months ended September 30, 1995. Same store sales for the nine months 1996 increased 18.6% over the same nine month period last year. Gross profit for the nine months ended September 30, 1996 was $9,025,126 compared to $3,623,014 for the comparable period in 1995. The increase in 1996 was due to increased sales volume. Gross margin was 49.0% and 48.3% for the nine months ended September 30, 1996 and 1995, respectively. 8 9 Store operating and selling expenses were $8,964,010 for the nine months ended September 30, 1996 compared to $3,541,761 in the comparable 1995 period. The increase in store operating expenses is attributable to the increased number of stores operated by the Company during each quarter of 1996. Company-owned stores' profit contribution was $61,116 for the nine months ended September 30, 1996, compared to a profit contribution of $81,253 for the comparable 1995 period. Franchise Operations Franchise fees, recognized on the 30 store openings during the nine months ended September 30, 1996 were $880,000 compared to $775,000 during the same period in 1995, which represents 29 store openings. Royalty fees increased to $4,887,075 in the nine months ended September 30, 1996 from $3,473,560 in the nine months ended September 30, 1995. Franchise same store sales increases for the nine months ended September 30, 1996 were 12.8%. Expenses directly related to franchise revenue increased to $2,741,571 for the nine months ended September 30, 1996 from $2,033,164 for the nine months ended September 30, 1995. Franchise profit contribution was $3,025,504 for the nine months ended September 30, 1996 compared to $2,215,396 for the nine months ended September 30, 1995. The 36.6% increase in franchise profit contribution is due to the increase in royalty fees and franchise fees offset in part by an increase in franchise expenses, as discussed above. General and Administrative General and administrative expenses increased to $2,288,728 from $2,103,687 or 8.8% in the first nine months 1996 from the same period in 1995. The increase is primarily attributable to an increase in payroll and related benefits, recruitment and moving of new employees and increased travel as a result of establishing the necessary organizational infrastructure to allow the Company to build the Company-owned store base. Net Income For the first nine months of 1996, the Company reported net income of $678,322 and earnings per share of $0.10 as compared to net income of $123,187 and earnings per share of $0.02 for the same period of 1995. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the nine months ended September 30, 1996 was $36,873. Net income of $678,322, depreciation and amortization expense of $468,381, increases in accounts payable of $6,381,691, accrued expenses of $1,715,072 and long term liabilities of $1,161,144 were offset by increases in merchandise inventory of $8,467,156 as well as other net changes in operating assets and liabilities. Cash used in investing activities of $3,784,718 consisted of property and equipment additions necessary to support the growth in Company-owned stores and was substantially funded by the Company's existing available cash. Cash flows from financing activities consisted of the net proceeds of the public sale of the Company's stock of $15,010,340 and the proceeds from the exercise of stock options of $50,000, offset by $72,290 which was used to repay all of the Company's outstanding long-term debt. 9 10 During February 1995, the Company obtained a revolving credit/term loan facility in the amount of $2,500,000, which was amended in September 1995. Under the amended facility, the Company has available borrowings of $5,000,000 as of September 30, 1996 until June 30, 1998. The amended facility expires June 30, 1998. The Company has the option to convert its outstanding borrowings at June 30, 1996, 1997 and 1998 to a four-year term loan with a corresponding reduction in the amount available under the credit facility. Both the revolving credit facility and term loans bear interest at the bank's prime rate plus 1/4 of 1% and are collateralized by all assets of the Company. The Company must pay a quarterly commitment fee of 1/2 of 1% of the unused amount of the available facility. The credit facility contains various covenants including, among others, restriction on capital expenditures, the maintenance of a defined minimum tangible net worth, interest coverage ratio, total liabilities to tangible net worth ratio and current ratio. At September 30, 1996, the Company was in compliance with such loan agreement covenants. There was no outstanding balance of the facility at September 30, 1996. 10 11 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K No exhibits and reports on Form 8-K have been filed during the quarter for which this report has been filed. 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: 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 12,352,771 0 1,473,296 (82,346) 12,308,082 27,285,444 6,512,075 0 34,218,625 11,790,584 0 0 0 69,440 17,584,632 34,218,625 18,408,121 24,175,196 9,382,995 8,964,010 5,030,299 0 (331,530) 1,129,422 451,100 0 0 0 0 678,322 .10 0
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