<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTER ENDED COMMISSION FILE NUMBER
JUNE 30, 1996 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)
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 August 9, 1996, there were outstanding 6,944,000 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 - June 30, 1996
and December 31, 1995 3
Statements of Income - For the
Three Months Ended June 30, 1996 and 1995 4
and the Six Months Ended June 30, 1996 and 1995
Statements of Cash Flows - For the
Six Months Ended June 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
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PARTY CITY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------------------------------
ASSETS
- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,483,440 $ 1,112,566
Restricted assets for advertising fund 237,404 541,919
Receivables from franchisees:
Royalty fees-net of allowance for doubtful accounts of $40,000 at
December 31, 1995 and $69,543 at June 30, 1996 666,359 652,961
Miscellaneous 243,682 108,343
Merchandise Inventory 5,016,372 3,840,926
Due from affiliates 19,830 5,794
Deferred income taxes - current 150,631 150,631
Prepaid expenses and other current assets 491,631 315,620
--------------------------------
TOTAL CURRENT ASSETS 22,309,349 6,728,760
Propety and equipment - net 3,979,711 3,195,738
Deferred income taxes 109,176 109,176
Other assets 288,242 273,898
--------------------------------
TOTAL ASSETS $ 26,686,478 $10,307,572
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 2,166,001 $ 1,960,873
Accrued expenses 2,354,409 1,225,635
Advertising fund 237,404 541,919
Income taxes payable 12,081 514,458
Current portion - long term debt - 22,725
Due to affiliates - 1,779
Deferred revenue 675,602 462,383
--------------------------------
TOTAL CURRENT LIABILITIES 5,445,497 4,729,772
--------------------------------
LONG TERM LIABILITIES:
Long-term debt - net of current portion - 49,565
Other long term liablilities 1,267,163 946,528
--------------------------------
TOTAL LONG TERM LIABILITIES 1,267,163 996,093
--------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: authorized shares
- 10,000,000 at December 31, 1995 and 25,000,000 at
June 30, 1996; shares issued and outstanding -
5,224,000 at December 31, 1995 and 6,944,000 at
June 30, 1996 69,440 52,240
Additional paid-in capital 17,583,741 2,541,492
Retained Earnings 2,320,637 1,987,975
TOTAL STOCKHOLDERS' EQUITY 19,973,818 4,581,707
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,686,478 $10,307,572
================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
PARTY CITY CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 6,338,685 $ 2,659,151 $10,900,956 $ 4,442,056
Royalty fees 1,772,733 1,276,191 3,101,474 2,169,709
Franchise fees 175,000 230,000 265,000 405,000
----------------------------- ----------------------------
TOTAL REVENUES 8,286,418 4,165,342 14,267,430 7,016,765
EXPENSES:
Cost of goods sold 3,318,497 1,373,905 5,704,481 2,296,996
Company owned stores operating and
selling expense 2,625,421 1,082,062 4,875,456 1,911,582
Franchise expense 919,585 721,487 1,771,949 1,298,302
General and administrative expense 761,968 649,146 1,521,482 1,146,753
----------------------------- ----------------------------
TOTAL EXPENSES 7,625,471 3,826,600 13,873,368 6,653,633
----------------------------- ----------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 660,947 338,742 394,062 383,132
Interest (Expense)/Income, Net 170,021 8,180 159,700 11,915
----------------------------- ----------------------------
INCOME BEFORE INCOME TAXES 830,968 346,922 553,762 375,047
Provision For Income Taxes 331,800 139,000 221,100 150,000
----------------------------- ----------------------------
NET INCOME $ 499,168 $ 207,922 $ 332,662 $ 225,047
============================= ============================
NET INCOME PER SHARE $ 0.07 $ 0.04 $ 0.05 $ 0.04
============================= ============================
Weighted average shares outstanding 7,109,160 5,322,333 6,280,210 5,322,333
============================= ===========================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PARTY CITY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30,
1996 1995
------------------------------------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income $ 332,662 $ 225,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 277,764 105,475
Changes in assets and liabilities:
Sale (purchase) of marketable securities - 20,558
Royalty fees receivable (13,398) (85,039)
MIscellaneous receivable (135,339) 275
Merchandise inventory (1,175,446) (452,162)
Due to/from affiliates (15,815) (39,461)
Prepaid income taxes - (5,743)
Prepaid expenses and other current assets (176,011) 4,154
Other assets (14,344) (27,490)
Accounts payable 205,128 36,710
Accrued expenses 1,128,774 230,613
Income taxes payable (502,377) (117,240)
Deferred revenue 213,219 (40,550)
Long term liabilities 320,635 152,781
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 445,452 7,928
-------------------------------------------
Cash Flow from Investment Activities:
Purchases of Property and Equipment (1,061,737) (382,691)
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,061,737) (382,691)
-------------------------------------------
Cash Flow from Financing Activities:
Net Proceeds from Sale of Stock 15,009,449 -
Proceeds from exercise of Stock Options 50,000 -
Proceeds from long term debt - 88,128
Repayments of long term debt (72,290) (19,433)
-------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,987,159 68,695
-------------------------------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 14,370,874 (306,068)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,112,566 1,493,611
-------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,483,440 $ 1,187,543
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income Taxes Paid $ 767,217 $ 241,188
Interest Paid $ 12,414 $ 2,58
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 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, at an initial
offering price of $10 per share. Proceeds to the Company, net of offering
expenses of $1,990,551, were $15,009,449.
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 June 30, 1996, and June 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 six month periods ended
June 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
<PAGE> 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 eight 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.
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 JUNE 30, 1996 COMPARED TO THREE MONTHS JUNE 30, 1995
Company-owned Stores
Net sales from Company-owned stores were $6,338,685 for the three
months ended June 30, 1996 compared to $2,659,151 for the three months ended
June 30, 1995. The 1996 results include one store which opened during the second
quarter of 1995, eight stores which opened during the last two quarters of 1995
and four stores which opened during the current quarter of 1996. The 1995 amount
represents sales from eight stores, including one store which opened during that
quarter. Stores open in the second quarter 1995 had a 17.5% same store sales
increase for the second quarter 1996. Gross profit for the three months ended
June 30, 1996 was $3,020,188 compared to $1,285,246 for the three months ended
June 30, 1995. The increase in 1996 was mainly due to the additional stores as
well as increased sales volume. Gross margin was 47.6% and 48.3% for the three
months ended June 30, 1996 and 1995, respectively.
7
<PAGE> 8
As a result of the increased number of stores operated by the Company
during the second quarter 1996, store operating and selling expenses were
$2,625,421 compared to $1,082,062 in the comparable 1995 period. Company-owned
stores showed a profit contribution of $394,767 for the three months ended June
30, 1996, compared to a profit contribution of $203,184 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 six store openings during the three months ended June 30, 1996
were $175,000 compared to $230,000 during the three months ended June 30, 1995,
which represents nine 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 38.9% to $1,772,733 in the three months
ended June 30, 1996 from $1,276,191 in the three months ended June 30, 1995.
Franchise same store sales increases for the three months ended June 30, 1996
were 14.0%.
Expenses directly related to franchise revenue increased $198,098 to
$919,585 for the three months ended June 30, 1996 from $721,487 for the three
months ended June 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 47.2% and 47.9% for the quarters
ended June 30, 1996 and 1995, respectively.
Franchise profit contribution increased 31.0% to $1,028,148 for the
three months ended June 30, 1996 from $784,704 for the three months ended June
30, 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 $761,968 from $649,146
in the second quarter 1996 from the second quarter 1995. The 17.4% increase is
primarily attributable to 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 second quarter 1996, the Company reported net income of
$499,168 and earnings per share of $0.07 as compared to net income of $207,922
and earnings per share of $0.04 for the second quarter 1995.
SIX MONTHS JUNE 30, 1996 COMPARED TO SIX MONTHS JUNE 30, 1995
Company-owned Stores
Net sales from Company-owned stores increased to $10,900,956 in the six
months ended June 30, 1996 from $4,442,056 in the six months ended June 30,
1995. Same store sales for the six months 1996 increased 19.4% over the same six
month period last year. Gross profit for the six months ended June 30, 1996 was
$5,196,475 compared to $2,145,060 for the comparable period in 1995. The
increase in 1996 was due to increased sales volume. Gross margin was 47.7% and
48.3% for the six months ended June 30, 1996 and 1995, respectively.
8
<PAGE> 9
Store operating and selling expenses were $4,875,456 for the six months
ended June 30, 1996 compared to $1,911,582 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 and second quarters 1996.
Company-owned stores' profit contribution was $321,019 for the six months ended
June 30, 1996, compared to a profit contribution of $233,478 for the comparable
1995 period.
Franchise Operations
Franchise fees, recognized on the nine store openings during the six
months ended June 30, 1996 were $265,000 compared to $405,000 during the same
period in 1995, which represents 16 store openings. Royalty fees increased to
$3,101,474 in the six months ended June 30, 1996 from $2,169,709 in the six
months ended June 30, 1995. Franchise same store sales increases for the six
months ended June 30, 1996 were 14.4%.
Expenses directly related to franchise revenue increased to $1,771,949
for the six months ended June 30, 1996 from $1,298,302 for the six months ended
June 30, 1995.
Franchise profit contribution was $1,594,524 for the six months ended
June 30, 1996 compared to $1,276,407 for the six months ended June 30, 1995. The
24.9% increase in franchise profit contribution is due to the increase in
royalty fees 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 $1,521,482 from
$1,146,753 or 32.7% in the first six 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 six months of 1996, the Company reported net income of
$332,662 and earnings per share of $0.05 as compared to net income of $225,047
and earnings per share of $0.04 for the same period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the six months ended June 30,
1996 was $445,452. Net income of $332,662, depreciation and amortization expense
of $277,764, increases in accounts payable of $205,128 and accrued expenses of
$1,128,774 were offset by increases in merchandise inventory of $1,175,446 and a
reduction in income taxes payable of $502,377 as well as other net changes in
operating assets and liabilities.
Cash used in investing activities of $1,061,737 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 $15,009,449, offset by $77,290 which was used to repay
all of the Company's outstanding long-term debt.
9
<PAGE> 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 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.
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 compliance with such
loan agreement covenants. At June 30, 1996, the Company was in compliance with
such loan agreement covenants. There was no outstanding balance of the facility
at June 30,1996.
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: August 13, 1996
11
<PAGE> 12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,483,440
<SECURITIES> 0
<RECEIVABLES> 910,041
<ALLOWANCES> (69,543)
<INVENTORY> 5,016,372
<CURRENT-ASSETS> 22,309,349
<PP&E> 3,979,711
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,686,478
<CURRENT-LIABILITIES> 5,445,497
<BONDS> 0
0
0
<COMMON> 69,440
<OTHER-SE> 17,583,741
<TOTAL-LIABILITY-AND-EQUITY> 26,686,478
<SALES> 6,338,685
<TOTAL-REVENUES> 8,286,418
<CGS> 3,318,497
<TOTAL-COSTS> 2,625,421
<OTHER-EXPENSES> 1,681,553
<LOSS-PROVISION> 18,208
<INTEREST-EXPENSE> (170,021)
<INCOME-PRETAX> 830,968
<INCOME-TAX> 331,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 499,168
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>