<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 QUARTER ENDED COMMISSION FILE NUMBER
MARCH 31, 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 May 9, 1996, there were outstanding 6,924,000 shares of Common
Stock, $.01 par value.
<PAGE> 2
PARTY CITY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements:
Balance Sheets - March 31, 1996
and December 31, 1995 3
Statements of Operations - For the
Three Months Ended March 31, 1996 and 1995 4
Statements of Stockholders' Equity 5
Statements of Cash Flows - For the
Three Months Ended March 31, 1996 and 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 8
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARTY CITY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------
MARCH 31, DECEMBER 31,
1996 1995 (1)
-----------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ----------
CURRENT ASSETS:
Cash and cash equivalents $15,366,173 $ 1,112,566
Restricted assets for advertising fund 667,832 541,919
Receivables from franchisees:
Royalty fees-net of allowance for doubtful accounts of $40,000 at
December 31, 1995 and $51,335 at March 31, 1996 549,332 652,961
Miscellaneous 69,563 108,343
Merchandise Inventory 4,553,294 3,840,926
Due from affiliates 13,328 5,794
Prepaid income taxes 124,854 --
Deferred income taxes - current 150,631 150,631
Prepaid expenses and other current assets 272,124 315,620
-----------------------------
TOTAL CURRENT ASSETS 21,767,131 6,728,760
Propety and equipment - net 3,289,169 3,195,738
Deferred income taxes 109,176 109,176
Other assets 275,075 273,898
-----------------------------
TOTAL ASSETS $25,440,551 $10,307,572
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 1,729,744 $ 1,960,873
Accrued expenses 2,011,758 1,225,635
Advertising fund 667,832 541,919
Income taxes payable -- 514,458
Current portion - long term debt -- 22,725
Due to affiliates -- 1,779
Deferred revenue 613,417 462,383
-----------------------------
TOTAL CURRENT LIABILITIES 5,022,751 4,729,772
-----------------------------
LONG TERM LIABILITIES:
Long-term debt - net of current portion -- 49,565
Other long term liablilities 891,123 946,528
-----------------------------
TOTAL LONG TERM LIABILITIES 891,123 996,093
-----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: authorized shares - 10,000,000 at December 31,
1995 and 25,000,000 at March 31, 1996; shares issued and outstanding -
5,224,000 at December 31, 1995 and 6,924,000 at
March 31, 1996 69,240 52,240
Additional paid-in capital 17,635,968 2,541,492
Retained Earnings 1,821,469 1,987,975
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 19,526,677 4,581,707
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,440,551 $10,307,572
=============================
</TABLE>
(1) Derived from the audited financial statements for the year ended December
31, 1995.
See accompanying notes to financial statements
3
<PAGE> 4
PARTY CITY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1996 1995
------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Net sales $ 4,562,271 $ 1,782,905
Royalty fees 1,328,741 893,518
Franchise fees 90,000 175,000
------------------------------
TOTAL REVENUES 5,981,012 2,851,423
EXPENSES:
Cost of goods sold 2,385,984 923,091
Company owned stores operating and selling expense 2,250,035 829,520
Franchise expense 852,364 576,815
General and administrative expense 759,514 497,607
------------------------------
TOTAL EXPENSES 6,247,897 2,827,033
------------------------------
(LOSS)/INCOME BEFORE INTEREST AND INCOME TAXES (266,885) 24,390
Interest (Expense)/Income, Net (10,321) 3,735
------------------------------
(LOSS)/INCOME BEFORE INCOME TAXES (277,206) 28,125
(Benefit)/Provision For Income Taxes (110,700) 11,000
------------------------------
NET (LOSS)/INCOME $ (166,506) $ 17,125
==============================
NET (LOSS)/INCOME PER SHARE $ (0.03) $ 0.00
==============================
Weighted average shares outstanding 5,317,406 5,322,333
==============================
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
PARTY CITY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Note Receivable-
--------------------------
Shares Amount Paid-In-Capital Earnings Sale of Stock
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance-December 31,1994 5,224,000 $ 52,240 $ 2,541,492 $ 688,010 $ (49,348)
Net income 17,125
-------------------------------------------------------------------------------
Balance-March 31,1995 5,224,000 52,240 2,541,492 705,135 (49,348)
Proceeds from note receivable 49,348
Net income 1,282,840
-------------------------------------------------------------------------------
Balance-December 31,1995 5,224,000 52,240 2,541,492 1,987,975 -
Sale of common shares 1,700,000 17,000 16,983,000
Expenses incurred on sale (1,888,524)
Net (loss) (166,506)
-------------------------------------------------------------------------------
Balance-March 31,1996 6,924,000 $ 69,240 $ 17,635,968 $ 1,821,469 $ -
===============================================================================
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
PARTY CITY CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1996 1995
--------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flow from Operating Activities:
Net (loss)/income $ (166,506) $ 17,125
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 130,259 56,187
Changes in assets and liabilities:
Sale (purchase) of marketable securities -- (782,346)
Royalty fees receivable 103,629 38,705
MIscellaneous receivable 38,780 (13,897)
Merchandise inventory (712,368) (186,374)
Due to/from affiliates (9,313) 15,062
Prepaid income taxes (124,854) (63,063)
Prepaid expenses and other current assets 43,496 22,894
Other assets (1,177) (18,765)
Accounts payable (231,129) 414,141
Accrued expenses 786,123 (266,827)
Income taxes payable (514,458) (82,513)
Deferred revenue 151,034 15,017
Long term liabilities (55,405) 58,543
--------------------------------
NET CASH USED IN OPERATING ACTIVITIES (561,889) (776,111)
--------------------------------
Cash Flow from Investment Activities:
Purchases of Property, Plant and Equipment (223,690) (156,449)
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES (223,690) (156,449)
--------------------------------
Cash Flow from Financing Activities:
Net Proceeds from Sale of Stock 15,111,476 --
Proceeds from long term debt -- 55,033
Repayments of long term debt (72,290) (8,105)
--------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,039,186 46,928
--------------------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 14,253,607 (885,632)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,112,566 1,493,611
--------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,366,173 $ 607,979
================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income Taxes Paid $ 507,545 $ 74,063
Interest Paid $ 12,414 $ 661
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
PARTY CITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INITIAL PUBLIC OFFERING
On March 27, 1996, the Company completed an initial public offering of
1,700,000 shares of common stock, $.01 par value, at an initial offering price
of $10 per share, resulting in total outstanding shares of 6,924,000. Proceeds
to the Company, net of offering expenses were $15,111,476.
NOTE 2 - BASIS OF PRESENTATION
The balance sheet as of March 31, 1996, the statements of income and
cash flows for the three months ended March 31, 1996 and March 31, 1995 and the
statements of stockholders' equity as of March 31, 1996 and March 31, 1995 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 March 31, 1996, and
March 31, 1995 have been made. Certain financial information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. Accordingly,
reference is made to the financial statements and notes thereto included in the
Company's Form S-1 for the year ended December 31, 1995.
The results of operations for the period ended March 31, 1996 are not
necessarily indicative of the operating results 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.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
During the first four years of operations, 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.
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. As of March 31, 1995, the
weighted average shares include the additional shares issuable in connection
with the Company's 1994 Amended Stock Option Plan assuming such options were
outstanding, calculated under the treasury stock method using a $9.00 per share
assumed initial public offering price. For the three months ended March 31,
1996, the weighted average shares do not include the above mentioned options,
which are antidilutive, due to the net loss for the quarter.
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
Company-owned Stores
Net sales from Company-owned stores were $4,562,271 for the three
months ended March 31, 1996 compared to $1,782,905 for the three months ended
March 31, 1995. The 1996 results include nine additional stores which opened
during the last three quarters of 1995. The 1995 amount represents sales from
seven stores. $2,387,359 of the sales increase is attributable to new store
openings. Stores open in the first quarter 1995 had a 22.1% same store sales
increase for the first quarter 1996. Gross profit for the three months ended
March 31, 1996 was $2,176,287 compared to $859,814 for the three months ended
March 31, 1995. The increase in 1996 was due to increased sales volume. Gross
margin was 47.7% and 48.2% for the three months ended March 31, 1996 and 1995,
respectively.
8
<PAGE> 9
Store operating and selling expenses were $2,250,035 for the three
months ended March 31, 1996 compared to $829,520 in the comparable 1995 period.
The increase in store operating expenses is attributable to the increased number
of stores operated by the Company during the first quarter 1996. Company-owned
stores showed a loss of $73,748 for the three months ended March 31, 1996,
compared to a profit contribution of $30,294 for the comparable 1995 period.
This is primarily due to losses sustained in the new stores opened during the
third and fourth quarters of 1995. First quarter sales do not typically cover
the expense structure until a store has reached a certain level of maturity in
the second year. This trend is expected to continue until the Company has a
larger base of mature stores.
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 three store openings during the three months ended March 31,
1996 were $90,000 compared to $175,000 during the three months ended March 31,
1995, which represents seven store openings. The reduction in franchise fees
caused by fewer store openings was partially offset by 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 48.7% to $1,328,741 in the three
months ended March 31, 1996 from $893,518 in the three months ended March 31,
1995. Franchise same store sales increases for the three months ended March 31,
1996 were 14.9%.
Expenses directly related to franchise revenue increased $275,549 to
$852,364 for the three months ended March 31, 1996 from $576,815 for the three
months ended March 31, 1995. As a percentage of franchise revenue, franchise
expenses were 60.1% and 54.0% for the quarters ended March 31, 1996 and 1995,
respectively. This increase is primarily attributable to additional franchise
personnel required to operate this portion of the Company's business and the
necessary infrastructure to support such employees, as well as the timing of
other franchise related expenses.
Franchise profit contribution increased 15.2% to $566,377 for the three
months ended March 31, 1996 from $491,703 for the three months ended March 31,
1995. The increase in franchise profit contribution is due to the increase in
royalty fees attributable to the opening of new franchises and increases in
existing franchise store sales offset in part by a decrease in franchise fees
and an increase in franchise expenses, as discussed above.
General and Administrative
General and administrative expenses increased to $759,514 from
$497,607, or 52.6% in the first quarter 1996 from the first quarter 1995. The
increase is primarily attributable to an increase in payroll and related
benefits, recruitment 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 quarter 1996, the Company reported a net loss of $166,506
and a loss per share of $0.03 as compared to net income of $17,125 and earnings
per share of $0.00 for the first quarter 1995.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the three months ended March 31,
1996 was $561,889. The net loss of $166,506, increases in merchandise inventory
of $712,368 and a reduction in income taxes payable of $514,458 were offset by
depreciation and amortization of $130,259, a decrease in royalty fees receivable
of $103,629, an increase in accrued expenses of $786,123 as well as other net
changes in operating assets and liabilities.
Cash used in investing activities of $223,690 for property and
equipment additions necessary to support the growth in Company-owned stores was
substantially funded by the Company's existing available cash. The public sale
of the Company's stock for $15,111,476, net of offering expenses, was used to
pay-off all of the Company's long-term debt in the amount of $72,290.
Cash used in operating activities for the three months ended March 31,
1995 was $776,111 (consisting primarily of $17,125 generated by net income,
$56,187 of depreciation and amortization expense and a $414,141 increase in
accounts payable offset by cash used in the purchase of merchandise inventory of
$186,374, the purchase of marketable securities of $782,346 as well as other net
changes in operating assets and liabilities). Cash used in investing activities
for the purchase of property and equipment to support the opening of
Company-owned stores for the period was $156,449, which was substantially funded
by the Company's existing available cash. As a result of the operating,
investing and financing activities, cash decreased by $885,632 for the three
months ended March 31, 1995.
During February 1995, the Company obtained a revolving credit/term loan
facility in the amount of $2,500,000. In September 1995, this credit facility
was amended to increase borrowings available under the facility. Under the
amended facility, the Company had the right to draw down amounts as follows;
$3,500,000 through October 30, 1995, $4,000,000 from October 31, 1995 to January
30, 1996, $4,500,000 from January 31, 1996 to April 29, 1996 and $5,000,000 from
April 30, 1996 until June 30, 1998. The amended facility expires June 30, 1998,
with the amount of borrowings outstanding at June 30, 1996, 1997 and 1998 to be,
at the option of the Company, repaid or converted 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 compliance
with such loan agreement covenants. At March 31, 1996, the Company was in
compliance with such loan agreement covenants. There was no outstanding balance
of the facility at March 31,1996.
10
<PAGE> 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/ PERRY KAPLAN
-----------------------------------------
(Perry Kaplan)
Executive Vice President
By /s/ DAVID LAUBER
-----------------------------------------
(David Lauber)
Chief Financial &
Principal Accounting Officer
Date: May 9, 1996
11
<PAGE> 12
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,366,173
<SECURITIES> 0
<RECEIVABLES> 618,895
<ALLOWANCES> (51,335)
<INVENTORY> 4,553,294
<CURRENT-ASSETS> 21,767,131
<PP&E> 3,289,169
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,440,551
<CURRENT-LIABILITIES> 5,022,751
<BONDS> 0
0
0
<COMMON> 69,240
<OTHER-SE> 17,635,968
<TOTAL-LIABILITY-AND-EQUITY> 19,526,677
<SALES> 4,562,271
<TOTAL-REVENUES> 5,981,012
<CGS> 2,385,984
<TOTAL-COSTS> 2,250,035
<OTHER-EXPENSES> 1,611,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,321
<INCOME-PRETAX> (277,206)
<INCOME-TAX> (110,700)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (166,506)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> 0
</TABLE>
