<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 2, 1997
PARTY CITY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-27826 22-3033692
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(State or other (Commission IRS Employer
jurisdiction File Number) Identification No.
of incorporation
400 Commons Way, Rockaway, New Jersey 07866
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 983-0888
N/A
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(Former name or former address, if changed since last report)
<PAGE> 2
AMENDMENT NO. 1
The Registrant hereby amends its Current Report on Form 8-K, dated
September 12, 1997, by inclusion herein of the following items and financial
statements which were unavailable at the time such Current Report on Form 8-K
was filed:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired. The financial statements
required to be filed as part of this Current Report on Form 8-K are listed in
the attached Index to Financial Statements.
(b) Pro Forma Financial Information. The pro forma financial information
required to be filed as part of this Current Report on Form 8-K is listed in the
attached Index to Financial Statements.
(c) Exhibits.
Exhibit No.
-----------
23.1 Consent of Edward Isaac & Company LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Party City Corporation
---------------------------------------------
(Registrant)
By: /s/David E. Lauber
-----------------------------------------
Date: November 10, 1997 David E. Lauber, Executive Vice President
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
Page
Reference
---------
7(a) Financial statements
Hammond Enterprise Limited Partnership and Owned Companies
Independent Auditors' Report 4
Consolidated Balance Sheet as of December 31, 1996 5
Consolidated Statement of Income and Members' Equity
for the year ended December 31, 1996 6
Consolidated Statement of Cash Flows
for the year ended December 31, 1996 7
Notes to Consolidated Financial Statements 8
Consolidated Balance Sheet as of June 30, 1997 13
Consolidated Statement of Income and Members' Equity for the
six months ended June 30, 1997 and 1996 14
Consolidated Statement of Cash Flows for the six
months ended June 30, 1997 and 1996 15
Notes to Consolidated Financial Statements 16
7(b) Pro Forma financial information 20
Condensed Consolidated Pro Forma Balance Sheet as at June 30, 1996 21
Condensed Consolidated Pro Forma Income Statement for the six
months ended June 30, 1997 22
Condensed Consolidated Pro Forma Income Statements for the year
ended December 31, 1996 23
Notes to Condensed consolidated pro forma balance sheet
and income statements 24
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Partners
Hammond Enterprises Limited Partnership
We have audited the accompanying consolidated balance sheet of Hammond
Enterprises Limited Partnership and owned companies as of December 31, 1996, and
the related consolidated statements of income and members' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the companies' management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hammond Enterprises
Limited Partnership and owned companies as of December 31, 1996, and the results
of their operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
Edward Isaac & Company LLC
March 5, 1997, except for Note 6, as to which the date is July 24, 1997
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<PAGE> 5
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
CURRENT ASSETS
Cash $ 454,700
Accounts receivable net of allowance
for doubtful accounts of $ 19,606 23,963
Prepaid expenses 62,614
Inventory 2,223,461
----------
TOTAL CURRENT ASSETS 2,764,738
PROPERTY AND EQUIPMENT, net 757,611
FRANCHISE FEES, net of
accumulated amortization 375,896
SECURITY DEPOSITS 49,681
----------
$3,947,926
==========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
CURRENT LIABILITIES
Accounts payable $1,160,494
State income taxes payable 40,000
Accrued expenses 200,829
Sales taxes payable 103,911
----------
TOTAL CURRENT LIABILITIES 1,505,234
LOAN PAYABLE - member and affiliate 1,670,100
DEFERRED RENT 136,156
MINORITY INTEREST IN OWNED COMPANIES 192,159
COMMITMENTS AND CONTINGENCIES (NOTE 3)
MEMBERS' EQUITY 444,277
----------
$3,947,926
==========
See notes to financial statements.
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<PAGE> 6
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED STATEMENT OF INCOME AND MEMBERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1996
NET SALES $ 13,833,218
COST OF SALES AND OCCUPANCY COSTS 8,598,302
------------
GROSS MARGIN 5,234,916
GROSS MARGIN PERCENTAGE 37.84%
EXPENSES:
Store operating and selling expenses 3,985,501
General and administrative expenses 436,840
Interest expense 144,412
------------
4,566,753
------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN
INCOME OF OWNED COMPANIES 668,163
PROVISION FOR STATE INCOME TAXES 39,069
MINORITY INTEREST IN INCOME OF OWNED COMPANIES 7,782
------------
NET INCOME 621,312
MEMBERS' EQUITY, beginning of period 199,106
CONTRIBUTIONS OF CAPITAL FROM MEMBERS 144,459
DISTRIBUTIONS TO MEMBERS (520,600)
------------
MEMBERS' EQUITY, end of period $ 444,277
============
See notes to financial statements.
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<PAGE> 7
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES:
Net income $ 621,312
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 99,260
Deferred rent 37,687
Noncash interest 144,412
Minority interest in earnings 7,782
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (9,582)
Inventory (681,239)
Prepaid expenses 177
Accounts payable 579,770
Accrued expenses 294,473
Franchise fees (245,000)
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 849,052
---------
INVESTING ACTIVITIES:
Capital expenditures (348,636)
Security deposit (28,117)
---------
NET CASH USED IN INVESTING ACTIVITIES (376,753)
FINANCING ACTIVITIES:
Distributions to members (520,600)
Loans from member and affiliate - net 42,012
---------
NET CASH USED IN FINANCING ACTIVITIES (478,588)
---------
NET DECREASE IN CASH (6,289)
CASH, beginning of period 460,989
---------
CASH, end of period $ 454,700
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for state income taxes $ 14,245
=========
Interest imputed on loan payable - member and affiliate $ 144,412
=========
See notes to financial statements.
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<PAGE> 8
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business and Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
the following companies, all of which are under common control and
ownership:
Hammond Enterprises Limited Partnership
Hammond Retailing of Mesquite, LLC
Hammond Retailing of West Plano, LLC
Hammond Retailing of Richardson, LLC
Hammond Retailing of Carrollton, LLC
Hammond Retailing of Arlington, LLC
Hammond Retailing of Irving, LLC
Hammond Retailing of Medallion, LLC
Hammond Retailing of Redbird, LLC
Hammond Retailing of Vista Ridge, LLC
For purposes of these financial statements, these entities are
collectively referred to as the Company. All intercompany balances and
transactions have been eliminated on consolidation.
The Companies , with the exception of Hammond Enterprises Limited
Partnership, are operators of "Party City" franchised party goods stores
in the Dallas-Fort Worth area of Texas. Each store is organized as a
separate Texas limited liability company. All stores were in operation for
all of 1996 with the exception of Redbird and Vista Ridge which were
opened in July and September of 1996, respectively. Hammond Enterprises
Limited Partnership ("Enterprises") is the managing member and majority
owner (99%) of each store. The minority owner of one percent is an owner
of Enterprises.
Under the terms of a development agreement with the Party City
Corporation, the Company is required to open a certain amount of stores
during each development stage as defined. The final stage ends on January
31, 1998 at which time the Company is required to have sixteen (16) stores
in operation. Failure to comply with the requirements of this agreement
could result in the loss of the Company's exclusivity privileges to the
Dallas-Fort Worth area.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
they may ultimately differ from actual results.
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<PAGE> 9
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash:
The Company maintains its cash in accounts which, at times, may exceed
Federal insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
risk with respect to such balances.
Inventory:
Inventory is stated at the lower of average cost or market.
Property and Equipment
Property and equipment is stated at cost net of accumulated depreciation
and amortization. It is depreciated and amortized using the straight-line
method over the estimated useful life or the life of the respective
stores' lease, which ever is less.
Effective January 1, 1996, the Company after reviewing the useful lives of
its property and equipment primarily relating to stores, determined that
the actual useful lives of the assets were longer than previously
determined. Accordingly, the Company extended the useful lives of the
assets to at least the remaining terms of the store leases. The effect of
this change in estimate reduced depreciation expense for the year ended
December 31, 1996 by approximately $126,000. The Company continually
reviews property and equipment and certain identifiable intangibles to
determine that the carrying values have not been impaired.
Franchise Fees:
Franchise fees are being amortized over 10 years.
Income Taxes:
No provision for federal income taxes has been made since the Companies
are not subject to federal income taxes. Federal income taxes are payable
by the individual members based on their proportionate share of net
income. The Companies are liable for state franchise tax.
Advertising:
The Company expenses the costs of advertising based on publication dates.
None of the advertising costs are capitalized since the Company does not
utilize direct response advertising. Advertising expense for the year was
$769,519.
Pre-opening Store Costs:
The costs associated with opening a store are expensed as incurred.
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<PAGE> 10
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
2. PROPERTY AND EQUIPMENT
At December 31, 1996, property and equipment consist of the following:
Furniture and fixtures $ 557,208
Equipment 460,542
Leasehold improvements 148,226
----------
1,165,976
Less: Accumulated depreciation and amortization 408,365
----------
$ 757,611
==========
3. COMMITMENTS AND CONTINGENCIES
Leases:
The companies occupy nine stores and one office under non-cancelable
operating leases with varying expiration dates, and are obligated for
approximate minimum annual rental payments (exclusive of operating
expenses) through August, 2006 as follows:
Year
----
1997 $1,039,000
1998 1,050,000
1999 1,052,000
2000 1,053,000
2001 1,081,000
Thereafter 2,988,000
----------
$8,263,000
==========
The companies are also obligated to pay fixed and additional rents for
operating expenses and with the exception of Enterprise and Redbird, are
also obligated to pay an annual "percentage" rental equal to a percentage
of gross sales if the percentage rental is in excess of regular rent. The
percentages range from 2 to 4%. One store, Arlington, pays only on sales
in excess of $2,500,000. For 1996, the percentage rental provisions did
not apply. The companies also have an option to renew certain leases for
one or two five-year terms at minimum annual rentals ranging from $138,000
to $170,000.
The store leases have annual rentals that increase over the period of the
lease. For financial statement purposes, total rent payments for these
stores are being accounted for on a straight-line basis. Accordingly, the
accompanying Balance Sheet reflects a liability for deferred rent for the
excess of the expense charges over the amounts payable pursuant to the
lease terms.
Rent expense for 1996 amounted to $1,097,548.
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<PAGE> 11
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
3. COMMITMENTS AND CONTINGENCIES (Continued)
Incentive and Termination Pay:
If the chief manager of the stores resigns or is terminated by the
Company, for other than good cause, he will receive cash compensation for
incentive and termination pay. The amount to be paid will be determined
based on various factors including years of service, amount invested by
the members, and sale, merger of the company, or going public within
twelve months of termination date. Also see Note 6.
4. FRANCHISE AGREEMENTS AND FEES
The Companies have entered into franchise agreements for each store with
Party City. The agreements have an initial term of 10 years and are
renewable for an additional term of 10 years. Each agreement requires a
franchise fee. The current franchise fee is $30,000 per store. These fees
are capitalized and being amortized over the life of the agreement. In
connection with a development agreement (see Note 1), Enterprise paid a
non refundable deposit of $185,000 to Party City in 1996 for six stores to
be opened during the final development stage. No amortization has been
taken on this amount for 1996.
Under the franchisee agreement, the Companies are obligated to pay the
franchisor a royalty fee and advertising fund fee of 4% and 1%,
respectively, of gross sales. These fees are paid monthly in arrears. For
1996, these fees amounted to $553,329 and $138,331, respectively. At
December 31, 1996, the amount owing to the franchisor with respect to
these fees totaled $69,377.
Under the franchise agreement, the Companies are also obligated to spend,
on an annualized basis, an amount equal to the lesser of 3% of gross sales
or $45,000, on local advertising. This is in addition to the advertising
fund fees paid to the franchisor. For 1996, the companies fulfilled their
obligations with respect to local advertising.
5. RELATED PARTY TRANSACTIONS
Loans payable - member and affiliate represent amounts owing to the
minority owner of Enterprises, and to Hammond Communications, Inc., an
entity owned 100% by the minority owner. The Companies do not anticipate
being required to repay the loans during 1997 and, accordingly, they have
been classified as long-term. There are no stated interest rates or
repayment terms associated with these liabilities. However, interest has
been imputed at the rate of 9.75% in the amount of $144,412. The fair
value of these obligations has not been determined, but would be lower
since there is no stated interest rate or repayment terms. Transactions
involving these balances primarily arose from the financing of the
earliest stores.
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<PAGE> 12
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
6. SUBSEQUENT EVENT
On July 7, 1997 the Company has signed a letter of intent to sell the
retail stores to the franchisor.
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<PAGE> 13
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
------
CURRENT ASSETS
Cash $ 351,132
Prepaid expenses 177,866
Inventory 2,682,900
----------
TOTAL CURRENT ASSETS 3,211,898
PROPERTY AND EQUIPMENT, net 924,810
FRANCHISE FEES, net 384,318
SECURITY DEPOSITS 49,681
----------
$4,570,707
==========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
CURRENT LIABILITIES
Accounts payable $1,703,984
State income taxes payable 15,000
Sales taxes payable 95,779
----------
TOTAL CURRENT LIABILITIES 1,814,763
LOAN PAYABLE - member and affiliate 1,663,707
DEFERRED RENT 172,452
MINORITY INTEREST IN OWNED COMPANIES 188,093
COMMITMENTS AND CONTINGENCIES (NOTE 3) --
MEMBERS' EQUITY 731,692
----------
$4,570,707
==========
See notes to financial statements.
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<PAGE> 14
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED STATEMENT OF INCOME AND MEMBERS' EQUITY
Six Months Ended June 30,
-------------------------
1997 1996
----------- -----------
NET SALES $ 7,292,035 $ 5,061,258
COST OF SALES AND OCCUPANCY COSTS 4,570,988 3,190,004
---------------------------
GROSS MARGIN 2,721,047 1,871,254
GROSS MARGIN PERCENTAGE 37.32% 36.97%
EXPENSES:
Store operating and selling expenses 2,119,680 1,389,043
General and administrative expenses 269,596 228,119
Interest expense 81,417 71,320
---------------------------
2,470,693 1,688,482
---------------------------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN INCOME OF OWNED COMPANIES 250,354 182,772
PROVISION FOR STATE INCOME TAXES 15,000 11,500
MINORITY INTEREST IN INCOME OF OWNED COMPANIES 3,168 2,426
---------------------------
NET INCOME 232,186 168,846
MEMBERS' EQUITY, beginning of period 444,277 199,106
CONTRIBUTIONS OF CAPITAL FROM MEMBERS 81,417 71,320
DISTRIBUTIONS TO MEMBERS' (26,188) --
---------------------------
MEMBERS' EQUITY EQUITY, end of period $ 731,692 $ 439,272
===========================
See notes to financial statements.
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<PAGE> 15
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income $ 232,186 $ 168,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 67,769 41,838
Deferred rent 36,296 27,275
Bad debt expense 23,963 --
Noncash interest 81,417 71,320
Minority interest in earnings 3,168 2,426
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Accounts Receivable -- (3,267)
Inventory (459,439) (528,520)
Prepaid expenses (115,252) (37,425)
Accounts payable, accrued expenses & other 309,529 631,695
Franchise fees (25,000) (195,000)
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 154,637 179,188
----------------------
INVESTING ACTIVITIES:
Return of security deposits 3,572
Capital expenditures (218,394) (5,015)
----------------------
NET CASH USED IN INVESTING ACTIVITIES (218,394) (1,443)
----------------------
FINANCING ACTIVITIES:
Distributions to minority interest (7,234) --
Distributions to members (26,188) --
Loans from member and affiliate - net (6,393) (180,027)
----------------------
NET CASH USED IN FINANCING ACTIVITIES (39,815) (180,027)
----------------------
NET DECREASE IN CASH (103,572) (2,282)
CASH, beginning of period 454,700 460,989
----------------------
CASH, end of period $ 351,128 $ 458,707
======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for state income taxes $ 39,491 $ 14,245
======================
Interest imputed on loan payable - member
and affiliate $ 81,417 $ 71,320
======================
See notes to financial statements.
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<PAGE> 16
HAMMOND ENTERPRISES LIMITED PARTNERSHIP PRIVATE AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business and Basis of Presentation:
The accompanying combined financial statements include the accounts of the
following companies, all of which are under common control and ownership:
Hammond Enterprises Limited Partnership
Hammond Retailing of Mesquite, LLC
Hammond Retailing of West Plano, LLC
Hammond Retailing of Richardson, LLC
Hammond Retailing of Carrollton, LLC
Hammond Retailing of Arlington, LLC
Hammond Retailing of Irving, LLC
Hammond Retailing of Medallion, LLC
Hammond Retailing of Redbird, LLC
Hammond Retailing of Vista Ridge, LLC
Hammond Retailing of White Rock, LLC
Hammond Retailing of Pleasant Grove, LLC
For purposes of these financial statements, these entities are
collectively referred to as the Company. All intercompany balances and
transactions have been eliminated on combination.
The Companies , with the exception of Hammond Enterprises Limited
Partnership, are operators of Party City" franchised party goods stores in
the Dallas-Fort Worth area of Texas. Each store is organized as a separate
Texas limited liability company. All stores were in operation for the six
months ended June 30, 1997 with the exception of White Rock and Pleasant
Grove which were opened in February and June of 1997, respectively.
Hammond Enterprises Limited Partnership ("Enterprises") is the managing
member and majority owner (99%) of each store. The other one percent is
owned by an owner of Enterprises.
Under the terms of a development agreement with the Party City
Corporation, the Company is required to open a certain amount of stores
during each development stage as defined. The final stage ends on January
31, 1998 at which time the Company is required to have sixteen (16) stores
in operation. Failure to comply with the requirements of this agreement
could result in the loss of the Company's exclusivity privileges to the
Dallas-Fort Worth area.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
they may ultimately differ from actual results.
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<PAGE> 17
HAMMOND ENTERPRISES LIMITED PARTNERSHIP PRIVATE AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash:
The Company maintains its cash in accounts which, at times, may exceed
Federal insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
risk with respect to such balances.
Inventory:
Inventory is stated at the lower of average cost or market.
Depreciation and Amortization:
Despreciation of property and equipment is provided by the striaght-line
method over the life of the respective stores' lease. Franchise fees are
being amortized over 10 years.
Franchise Fees:
Franchise fees are being amortized over 10 years.
Income Taxes:
No provision for federal income taxes has been made since the Companies
are not subject to federal income taxes. Federal income taxes payable by
the individual members based on their proportionate share of net income.
The Companies are liable for state franchise tax.
Advertising:
The Company expenses the costs of advertising based on publication dates.
None of the advertising costs are capitalized since the Company doesn ot
utilize direct response advertising. Advertising expense for the xis
months ended June 30, 1997 was $224,889.
2. PROPERTY AND EQUIPMENT
At June 30,1997, property and equipment consist of the following:
Furniture and fixtures $ 664,812
Equipment 489,154
Leasehold improvements 230,404
----------
1,384,370
Less: Accumulated depreciation and amortization 459,560
----------
$ 924,810
==========
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<PAGE> 18
HAMMOND ENTERPRISES LIMITED PARTNERSHIP PRIVATE AND OWNED COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
3. COMMITMENTS AND CONTINGENCIES
Leases:
The companies occupy eleven stores and one office under non-cancelable
operating leases with varying expiration dates, and are obligated for
approximate minimum annual rental payments (exclusive of operating
expenses) through June, 2007 as follows:
Period ended June 30
--------------------
1998 $1,110,580
1999 1,137,014
2000 1,183,203
2001 1,241,624
2002 1,247,771
Thereafter 2,295,580
----------
$8,215,772
==========
The companies with the exception of Enterprise, Redbird, White Rock, and
Pleasant Grove are also obligated to pay an annual "percentage" rental
equal to a percentage of gross sales if the percentage rental is in excess
of regular rent. The percentages range from 2 to 4%. One store, Arlington,
pays only on sales in excess of $2,500,000. For the six months ended June
30, 1997, the percentage rental provisions did not apply. The companies
also have an option to renew certain leases for one or two five-year terms
at minimum annual rentals ranging from $138,000 to $170,000.
The store leases have annual rentals that increase over the period of the
lease. For financial statement purposes, total rent payments for these
stores are being accounted for on a straight-line basis. Accordingly, the
accompanying Balance Sheet reflects a liability for deferred rent for the
excess of the expense charges over the amounts payable pursuant to the
lease terms.
Rent expense for the six months ended June 30, 1997 amounted to $705,784.
Incentive and Termination Pay:
If the chief manager of the stores resigns or is terminated by the
Company, for other than good cause, he will receive cash compensation for
incentive and termination pay. The amount to be paid will be determined
based on various factors including years of service, amount invested by
the members, and sale, merger of the company, or going public within
twelve months of termination date. Also, see Note 6.
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<PAGE> 19
HAMMOND ENTERPRISES LIMITED PARTNERSHIP AND OWNED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
4. FRANCHISE AGREEMENTS AND FEES
The Companies have entered into franchise agreements for each store with
Party City. The agreements have an initial term of 10 years and are
renewable for an additional term of 10 years. Each agreement requires a
franchise fee. The current franchise fee is $30,000 per store. These fees
are capitalized and being amortized over the life of the agreement. In
connection with a development agreement (see Note 1), Enterprise paid a
non refundable deposit of $180,000 to Party City in 1996 for six stores to
be opened during the final development stage. No amortization has been
taken on this amount for the six months ended June 30, 1997.
Under the franchisee agreement, the Companies are obligated to pay the
franchisor a royalty fee and advertising fund fee of 4% and 1%,
respectively, of gross sales. These fees are paid monthly in arrears. For
the six months ended June 30,1997, these fees amounted to $290,624 and
$72,656, respectively. At June 30, 1997, the amount owing to the
franchisor with respect to these fees totaled $ 61,387.
Under the franchise agreement, the Companies are also obligated to spend,
on an annualized basis, an amount equal to the lesser of 3% of gross sales
or $45,000, on local advertising. This is in addition to the advertising
fund fees paid to the franchisor. For six months ended June 30, 1997, the
companies fulfilled their obligations with respect to local advertising.
5. RELATED PARTY TRANSACTIONS
Loans payable - member and affiliate represent amounts owing to the
aforementioned Partner of Enterprises, and to Hammond Communications,
Inc., an entity owned 100% by the Partner. The Companies do not anticipate
being required to repay the loans during 1997 and, accordingly, they have
been classified as long-term. There are no stated interest rates or
repayment terms associated with these liabilities. However, interest has
been imputed at the rate of 9.75% in the amount of $81,417. The fair value
of these lease obligations has not been determined, but would be lower
since there is no stated interest rate or repayment terms. Transactions
involving these balances primarily arose from the financing of the
earliest stores.
6. SUBSEQUENT EVENT
On July 7, 1997 the Company has signed a letter of intent to sell the
retail stores to the franchisor.
-19-
<PAGE> 20
Pro forma Financial Information:
The unaudited condensed consolidated pro forma financial information
attached presents (i) the condensed consolidated pro forma statements of income
for Part City Corporation for the year ended December 31, 1996 and the six
months ended June 30, 1997, as if the acquisition of Hammond Enterprise had
occurred on January 1, 1996 and (ii) the condensed consolidated pro forma
balance sheet of Party City Corporation as of June 30, 1997, as if the above
acquisition had occurred on June 30, 1997.
The unaudited condensed consolidated pro forma financial information is
not necessarily indicative of what Party City Corporation's actual results of
operations or financial position would have been had these transactions been
consummated on the dates indicated, nor does it purport to represent Party City
Corporation's results of operations or financial position for any future period.
The results of operations for the six-months ended June 30, 1997 are not
necessarily indicative of the operating results for the full year.
The unaudited condensed consolidated pro forma financial information
should be read in conjunction with the Financial Statements and notes thereto
included in Party City Corporation's Annual Report on Form 10-K for the year
ended December 31, 1996, and the Quarterly Report on Form 10-Q for the period
ended June 30, 1997 and the consolidated financial statements of Hammond
Enterprise included herein. In management's opinion, all adjustments necessary
to reflect these transactions have been made.
20
<PAGE> 21
CONDENSED CONSOLIDATED PROFORMA BALANCE SHEET
June 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
PARTY CITY HAMMOND PRO FORMA PRO FORMA
CORPORATION ENTERPRISES ADJUSTMENTS PARTY CITY
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS: $13,667,403 $ 351,132 $ (351,132) (a) 13,667,403
Cash and cash equivalents 148,327 148,327
Restricted assets for advertising fund
Receivable from franchisees:
Royalty fees (net of allowance for doubtful accounts
of $85,729 823,707 (61,387) (a) 762,320
Other 409,008 409,008
Merchandising inventory 16,666,358 2,682,900 19,349,258
Prepaid income taxes 247,838 247,838
Deferred income taxes 193,188 193,188
Prepaid expenses and other current assets 2,658,854 177,866 (177,866) (a) 2,658,854
------------------------------------------- -----------
TOTAL CURRENT ASSETS 34,814,683 3,211,898 (590,385) 37,436,196
Property and equipment - net 12,164,842 924,810 (419,810) (a) 12,669,842
Deferred income taxes 218,224 218,224
Goodwill, net of amortization 4,238,177 5,361,222 (a) 9,599,399
Frenchise fees, net 384,318 (384,318) (a) --
Other assets 1,498,329 49,681 (49,681) (a) 1,498,329
---------------------------------------------------------------
$52,934,255 $4,570,707 3,917,028 $61,421,990
===============================================================
LIABILITIES AND STOCKHOLDERS'/MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 7,424,854 $1,703,984 $ -- $ 9,128,838
Accrued Expenses 4,347,214 95,779 (95,779) (a) 4,347,214
Advertising Expenses 148,327 148,327
Deferred revenue 285,607 (90,000) (b) 195,607
Income Taxes Payable 15,000 (15,000) (a) --
------------------------------------------- -----------
TOTAL CURRENT LIABILITIES 12,206,002 1,814,763 (200,779) 13,819,986
------------------------------------------- -----------
LONG TERM LIABILITIES:
Advances under Revolving Credit Agreement 6,963,751 (a) 6,963,751
Deferred rent 1,676,322 172,452 (172,452) (a) 1,676,322
Deferred revenue 646,103 (90,000) (b) 556,103
Loans payable - member and affiliate 1,663,707 (1,663,707) (a) 0
Minority interest 188,093 (188,093) (a) 0
------------------------------------------- -----------
TOTAL LONG-TERM LIABILITIES 2,322,425 2,024,252 4,849,499 (a) 9,196,176
------------------------------------------- -----------
Stockholders'/Members' equity 38,405,828 731,692 (731,692) (a) 38,405,828
------------------------------------------- -----------
$52,934,255 $4,570,707 $ 3,917,028 $61,421,990
=========================================== ===========
</TABLE>
See accompanying notes to
pro forma financial statements
21
<PAGE> 22
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
PARTY CITY HAMMOND PRO FORMA PRO FORMA
CORPORATION ENTERPRISES ADJUSTMENTS PARTY CITY
<S> <C> <C> <C> <C>
REVENUES:
Net sales $32,650,710 $ 7,292,035 $ -- $ 39,942,745
Royalty fees 4,198,774 (290,624) (c) 3,908,150
Franchise Fees 217,500 (30,000) (d) 187,500
-------------------------------------------- ------------
TOTAL REVENUES 37,066,984 7,292,035 (320,624) 44,038,395
EXPENSES:
Cost of goods sold and Occupancy Costs 23,138,117 4,570,988 147,007 (e) 27,856,112
Company-owned stores operating and selling expenses 8,435,111 2,119,680 (290,624) (c) 10,264,167
Franchise expense 1,794,674 1,794,674
General and administrative expenses 2,926,948 272,764 3,199,712
-------------------------------------------- ------------
TOTAL EXPENSES 36,294,850 6,963,432 (143,617) 43,114,665
-------------------------------------------- ------------
INCOME BEFORE INTEREST AND INCOME TAXES 772,134 328,603 (177,007) 923,730
Interest income (expense), net 241,527 (81,417) (278,550) (f) (118,440)
-------------------------------------------- ------------
INCOME BEFORE INCOME TAXES 1,013,661 247,186 (455,557) 805,290
Provision for income taxes 404,800 15,000 (98,203) (g) 321,597
-------------------------------------------- ------------
NET INCOME $ 608,861 $ 232,186 $ (357,355) $ 483,692
============================================ ============
Net income per share $ 0.08 $ 0.06
============ ============
Weighted average shares outstanding 7,507,896 7,507,896
============ ============
</TABLE>
See accompanying notes to
pro forma financial statements
22
<PAGE> 23
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
PARTY CITY HAMMOND PRO FORMA PRO FORMA
CORPORATION ENTERPRISES ADJUSTMENTS PARTY CITY
<S> <C> <C> <C> <C>
REVENUES:
Net sales $39,143,625 $ 13,833,218 $ -- $ 52,976,843
Royalty fees 8,449,760 (553,329) (c) 7,896,431
Franchise Fees 935,000 (60,000) (d) 875,000
---------------------------------------------- ------------
TOTAL REVENUES 48,528,385 13,833,218 (613,329) 61,748,274
EXPENSES:
Cost of goods sold and Occupancy Costs 25,937,444 8,598,302 330,292 (e) 34,535,746
Company-owned stores operating and selling expenses 10,116,160 3,985,501 (553,329) (c) 14,101,661
Franchise expense 3,729,050 3,729,050
General and administrative expenses 3,096,811 444,622 3,541,433
---------------------------------------------- ------------
TOTAL EXPENSES 42,879,465 13,028,425 (223,037) 55,907,890
---------------------------------------------- ------------
INCOME BEFORE INTEREST AND INCOME TAXES 5,648,920 804,793 (390,292) 5,840,384
Interest income (expense), net 475,805 (144,412) (557,100) (f) (225,707)
---------------------------------------------- ------------
INCOME BEFORE INCOME TAXES 6,124,725 660,381 (947,392) 5,837,714
Provision for income taxes 2,369,200 39,069 (150,085) (g) 2,258,184
NET INCOME $ 3,755,525 $ 621,312 $ (797,307) $ 3,579,530
============================================== ============
Net income per share $ 0.56 $ 0.54
============ ============
Weighted average shares outstanding 6,664,202 6,664,202
============ ============
</TABLE>
See accompanying notes to
pro forma financial statements
23
<PAGE> 24
NOTES TO CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET AND STATEMENTS OF
INCOME
(a) Acquisition of Hammond Enterprise
Party City announced its acquisition of Hammond Enterprise, to acquire
certain assets including inventory, property and equipment, lease
agreements and to assume trade accounts payable. The purchase price has
been allocated to the assets acquired and liabilities assumed by Party
City based on their estimated fair values. The funds needed for the net
purchase price is to be obtained from a draw on a line of credit provided
by PNC Bank. Amounts borrowed under this line bear interest at Party
City's option at 1/2 of 1% below the bank's prime rate (8.5% as of
September 1, 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 Party
City's ratio of total liabilities to tangible net worth), and are secured
by Party City's tangible and intangible assets.
Party City acquired Hammond Enterprise for the cash consideration as
follows (1):
<TABLE>
<S> <C>
Adjusted Purchase Price $ 6,963,751
-----------
Fair value of assets acquired:
Historical book value of acquired company 731,692
Elimination of net assets (liabilities) not acquired or assumed:
Cash (351,132)
Prepaid expense and other current assets (177,866)
Franchise fees, net (384,318)
Other assets (49,681)
Accrued expense 95,779
Income taxes payable 15,000
Deferred rent 172,452
Loans payable - member and affiliate 1,663,707
Minority Interest 188,093
Fair value adjustments to assets acquired and liabilities assumed:
Property and equipment (419,810)
-----------
Fair value of identifiable net assets acquired 1,483,916
-----------
Excess of cost over fair value of assets acquired $ 5,479,835
===========
</TABLE>
(1) While Party City has yet to complete the final allocation of the
purchase price to the specific assets acquired based on its preliminary
estimate. Party City believes that the excess will be allocated
principally to goodwill, which will be amortized over 15 years. Management
of Party City believes that the final allocation of purchase price to
goodwill will not be materially different.
<TABLE>
<S> <C>
Pro forma borrowings under line of credit are as follows:
Cash portion of purchase price - borrowed under line of credit $ 6,845,138
Amount receivable for franchise fee (61,387)
Refund of franchise fee to Hammond Enterprise for acquired stores in development stage 180,000
-----------
Adjusted Purchase Price $ 6,963,751
===========
</TABLE>
(b) To recognize deferred revenue upon the purchase of stores in development
stage.
(c) To adjust relates to royalty fee paid by Hammond Enterprise to Party City
(d) To adjust relates to frenchise fee recognized as income by Party City
(e) To adjust amortization of goodwill and adjust depreciation expense based
on the fair value of property and equipment as follows:
<TABLE>
<CAPTION>
Six Months ended Year ended
June 30, 1997 December 31, 1996
<S> <C> <C>
Pro forma amortization of goodwill $ 178,704 $ 357,408
Pro forma deprecation of property and equipment 36,072 72,144
Elimination of Hammond Enterprises' historical
amortization and depreciation expense (67,769) (99,260)
------------------------------
$ 147,007 $ 330,292
==============================
</TABLE>
(f) To record interest expense on the drawing under line of credit for the
payment of purchase price, at an assumed rate of 8%. See note (a) for the
terms of borrowings.
(g) To adjust income tax expense at Party City's effective rate.
24
<PAGE> 1
Exhibit 23.1
The Members
Hammond Enterprise Limited Partnership
We consent to the inclusion of our report dated March 5, 1997, (except for
Note 6, as to which the date is July 24, 1997), with respect to the consolidated
balance sheet of Hammond Enterprise Limited Partnership as of December 31, 1996
and the related consolidated statements of income, members' equity and cash
flows for the year then ended, which report appears in the Form 8-K/A of Party
City Corporation dated November 10, 1997.
Edward Isaac & Company
White Plains, New York
November 10, 1997
25
