Attached files
file | filename |
---|---|
EX-4.5 - EX-4.5 - AMSCAN HOLDINGS INC | y90573exv4w5.htm |
EX-4.6 - EX-4.6 - AMSCAN HOLDINGS INC | y90573exv4w6.htm |
EX-31.1 - EX-31.1 - AMSCAN HOLDINGS INC | y90573exv31w1.htm |
EX-11 - EX-11 - AMSCAN HOLDINGS INC | y90573exv11.htm |
EX-32 - EX-32 - AMSCAN HOLDINGS INC | y90573exv32.htm |
EX-23 - EX-23 - AMSCAN HOLDINGS INC | y90573exv23.htm |
EX-31.2 - EX-31.2 - AMSCAN HOLDINGS INC | y90573exv31w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Commission file number 000-21827
Amscan Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-3911462 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
80 Grasslands Road, Elmsford, NY | 10523 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code:
(914) 345-2020
(914) 345-2020
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
þ No o
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 þ No o
Indicate by a check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files.)
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes o No þ
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant (assuming for purposes of this calculation, without conceding, that
all executive officers and directors are affiliates) at June 30, 2010, the last
business day of the registrants most recently completed second fiscal quarter, was
$49,802,000.
The number of outstanding shares of the registrants common stock as
of April 13, 2011 was 1,000.00.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
FORM 10-K
December 31, 2010
TABLE OF CONTENTS
Page | ||||
PART I |
||||
Item 1 Business |
3 | |||
Item 1A Risk Factors |
13 | |||
Item 1B Unresolved Staff Comments |
15 | |||
Item 2 Properties |
16 | |||
Item 3 Legal Proceedings |
19 | |||
Item 4 [Removed and reserved by the SEC] |
19 | |||
PART II |
||||
Item 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
19 | |||
Item 6 Selected Consolidated Financial Data |
21 | |||
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | |||
Item 7A Quantitative and Qualitative Disclosures About Market Risk |
38 | |||
Item 8 Financial Statements and Supplementary Data |
39 | |||
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
39 | |||
Item 9A Controls and Procedures |
39 | |||
Item 9B Other Information |
40 | |||
PART III |
||||
Item 10 Directors and Executive Officers of the Registrant |
41 | |||
Item 11 Executive Compensation |
43 | |||
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
51 | |||
Item 13 Certain Relationships and Related Transactions |
53 | |||
Item 14 Principal Accountant Fees and Services |
53 | |||
PART IV |
||||
Item 15 Exhibits and Financial Statement Schedules |
53 | |||
Signatures |
56 |
References throughout this document to the Company include Amscan
Holdings, Inc. and its wholly owned subsidiaries. In this document the words we,
our, ours and us refer only to the Company and its wholly owned subsidiaries
and not to any other person.
You may read and copy any materials we file with the Securities and
Exchange Commission (SEC) at the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the operations of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that
contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including us, at http://www.sec.gov.
2
PART I
Item 1. | Business |
Amscan Holdings, Inc. (Amscan or the Company) designs, manufactures,
contracts for manufacture and distributes party goods, including paper and plastic
tableware, metallic balloons, accessories, novelties, costumes, other garments, gifts
and stationery. The Company operates retail party goods stores in the United States
principally under the names Party City, and Halloween City and franchises both individual stores and franchise areas throughout the United
States and Puerto Rico principally under the name Party City. The Company is a wholly-owned
subsidiary of AAH Holdings Corporation. (AAH).
Wholesale Operations
We believe we are a leading designer, manufacturer and distributor of
decorative party goods in the United States and the largest manufacturer of metallic
balloons in the world. We offer one of the broadest and deepest product lines in the
party goods industry. We currently offer over 400 party goods ensembles, which range
from approximately five to 100 design-coordinated items spanning tableware,
accessories, novelties, balloons, decorations and gifts. The breadth of these
ensembles enables retailers to encourage additional sales for a single occasion. We
market party goods ensembles for a wide variety of occasions including seasonal and
religious holidays, special events and themed celebrations. Our seasonal and
religious ensembles enhance holiday celebrations throughout the year including New
Years, Valentines Day, St. Patricks Day, Easter, Passover, Fourth of July,
Halloween, Fall, Thanksgiving, Hanukkah and Christmas. Our special event ensembles
include birthdays, christenings, first communions, bar mitzvahs, confirmations,
graduations, bridal and baby showers and anniversaries. Our theme-oriented ensembles
include Bachelorette, Casino, Chinatown, Cocktail Party, Disco, Fiesta, Fifties
Rock-and-Roll, Hawaiian Luau, Hollywood, Mardi Gras, Masquerade, Patriotic,
Retirement, Sports, Summer Barbeque and Western. In 2010, approximately 78% of our
net sales at wholesale consisted of products designed for non-seasonal occasions,
with the remaining 22% comprising items used for holidays and seasonal celebrations
throughout the year. Our extensive gift and stationery product lines, encompassing
home, baby and wedding products for general gift giving or self-purchase, further
leverage our design, marketing and distribution capabilities.
Our products are sold at wholesale to party goods superstores, including
our company-owned retail stores, other party goods retailers, independent card and
gift stores, and other retailers and distributors throughout the world. Sales to the
party goods superstore distribution channel account for approximately 56% of our 2010
sales at wholesale. Party goods superstores provide consumers with a one-stop source
for all of their party needs, generally at discounted prices. In addition, we have
strong, long-standing relationships with balloon distributors and independent party
and card and gift retailers, with these channels accounting for 23% of our 2010 sales
at wholesale. We manufactured approximately 41% of the products sold at wholesale in
2010. The remaining 59% of products sold was supplied by third-party manufacturers,
many of whom are located in Asia.
Recent Wholesale Acquisition
On January 30, 2011, we acquired the common stock of C. Riethmuller GmbH
(Riethmuller) for total consideration of $46.8 million. Riethmuller is a
150-year-old German balloon producer and the pre-eminent brand for party and carnival
items in Germany, Austria and Switzerland. The acquisition expands the Companys
vertical business model into the latex balloon category and gives the Company a
significant presence in Germany, Poland, and Malaysia.
On September 30, 2010, we acquired Christys By Design Limited and three
affiliated companies (the Christys Group) from Christy Holdings Limited for total
consideration of $30.4 million. The Christys Group designs and distributes costumes
and other garments and accessories through its operations in Asia and
the UK. The Christys Group accelerates our entry into the
costume wholesale business while increasing our direct-to-consumer
penetration through our retail stores.
On December 21, 2009, we acquired the Designware party goods division of American
Greetings, including certain assets, equipment and processes used in the manufacture
and distribution of party goods effective on March 1, 2010, for total consideration of
$45.9 million (the Designware Acquisition). In connection with the Designware
Acquisition, American Greetings and the Company also entered into a supply and
distribution and licensing agreement. Under the terms of the agreements, after March
1, 2010, American Greetings will purchase substantially all of its party goods
requirements
3
from the Company and the Company will license from American Greetings the
Designware brand and other character licenses. In addition, the Company has
exclusive rights to manufacture and distribute products into various channels including
the party store channel. American Greetings will continue to distribute party goods to
various channels including to its mass market, drug, grocery, and specialty retail
customers. The results of the Designware Acquisition are included in the consolidated
financial statements since the March 1, 2010 acquisition date.
Retail Operations
The Companys various retail operations began as independent retailers and
franchisors in the mid to late 1980s. The Company acquired its retail operations in
a series of transactions from December 2005 through November 2007. Our retail stores
operate principally under the names Party City, Halloween City, Factory Card & Party
Outlet and The Paper Factory. During 2010, the Company began converting its FCPO
stores from a format that emphasized both party goods and social expressions supplies
to the Party City format that emphasizes principally party goods. Upon conversion,
the stores are rebranded as Party City. In addition, certain FCPO stores have been
converted to an outlet store format. As a result of the conversion and rebranding
program, during 2010 the Company recorded an impairment charge against the Factory
Card & Party Outlet trade name of $27.4 million.
Our retail focus is to provide the consumer with broad assortments, deep
in-stock inventory positions, a compelling price-value proposition and an exceptional
customer experience.
As of December 31, 2010, the Companys retail network consisted of 439 party
goods supply superstores, 90 party goods and social expressions supply stores, 67
party goods outlet stores and 232 franchisee-owned party goods supply superstores.
In addition, during 2010, the Company operated 404 temporary Halloween stores
principally under the name Halloween City. The Companys party goods supply
superstores and party goods and social expressions supply stores typically range in
size from 8,000 to 12,000 square feet and offer a broad range of products for all
occasions, including Amscan and other brand merchandise. The Companys outlet stores
typically range in size from 3,000 to 5,000 square feet, although former FCPO stores
may range up to 13,000 square feet, and offer a larger assortment of products similar
to their larger sister stores. Temporary Halloween stores typically range in size
from 5,000 to 20,000 square feet and operate only during the Halloween selling season
from the day after Labor Day through November 1 of each year.
Non-seasonal merchandise generally accounts for approximately 64% of our
annual retail net sales, with birthdays being the largest non-seasonal event.
Seasonal merchandise for Halloween, Christmas, Summer, Graduation, Easter and other
holidays represents the remaining 36% of our annual retail sales.
Our retail operations generate revenue primarily through the sale of party goods
at company-owned stores. Party City also generates revenue through the assessment of
an initial one-time franchise fee and ongoing franchise royalty payments based on the
retail sales of franchisees.
The Companys retail store operations define a fiscal year (Fiscal Year) as
the 52-week period or 53-week period ended on the Saturday nearest December 31st of
each year, and define their fiscal quarters (Fiscal Quarter) as the four interim
13-week periods following the end of the previous Fiscal Year, except in the case of
a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks.
Recent Retail Acquisitions
Our franchise agreements provide us with a right of first refusal should any
franchisee look to dispose of their operations. During 2010 the Company acquired 20
former franchisee stores principally consisting of store fixtures,
inventory and goodwill. The franchisee stores were acquired from several
franchisees in exchange for total consideration of $24.3 million, including cash and,
in certain instances, the exchange of company-owned stores. The acquired stores were
located in California, Connecticut, Florida, New Jersey, Pennsylvania and Texas.
Summary Financial Information about the Company
Information about the Companys revenues, income from operations and assets for
each of the years in the five-year period ended December 31, 2010, is included in
this report in Item 6, Selected Consolidated Financial Data. The Companys
consolidated financial statements include the accounts of the Company and its
majority-owned and controlled entities.
4
Wholesale Operations
Despite a concentration of holidays in the fourth quarter of the year, as a
result of our expansive product lines and customer base and increased promotional
activities, the impact of seasonality on the quarterly results of our wholesale
operations has been limited. However, as a result of the acquisition of the Christys
Group in September 2010, we expect our wholesale segment to experience a greater
degree of seasonal sales in the third and fourth quarters of future years.
Promotional activities, including special dating terms, particularly with respect to
Halloween and Christmas products sold in the third quarter, and the introduction of
our new everyday products and designs during the fourth quarter result in higher
accounts receivable and inventory balances during these periods.
During 2010, domestic and international sales accounted for 86% and 14% of our
total wholesale sales, respectively. As a result of the September 2010 acquisition
of the Christys Group and the January 2011 acquisition of Riethmuller, international
sales are expected to increase as a percentage of our total wholesale sales reported
in future periods.
Retail Operations
Our retail operations are subject to significant seasonal variations.
Historically, this segment has realized a significant portion of its revenues, cash
flow and net income in the fourth quarter of the year, principally due to our
Halloween sales in October and, to a lesser extent, our year-end holiday sales. In
addition, the results of retail operations and cash flows may fluctuate significantly
as a result of a variety of other factors, including the timing of new store openings
and closings and the timing of the acquisition and disposition of stores.
Our Business Strategy
Our objective is to be the primary source for consumers party goods
requirements and to expand our position as a leading national chain of party goods
superstores, while internally improving our operating efficiencies. Key components of
our business strategy include the following:
Wholesale Operations
| Build upon our Position as a Leading Provider to Party Goods Retailers. We will continue to offer convenient one-stop shopping for both large party goods superstores and smaller, independent party goods retailers. We will seek to grow our sales to existing stores by increasing our share of sales volume and shelf space, continuing to develop innovative new products, including costumes and other garments, and helping retailers promote coordinated ensembles that increase average purchase volume per consumer through add-on or impulse purchases. | ||
| Expand our Presence and our Brand Internationally. We intend to begin to introduce the Party City retail concept internationally. We believe that the potential to do so, especially in English speaking markets is significant. We also believe there is an opportunity to expand our international wholesale business which represented approximately 14% of our net sales at wholesale in the three-year period ended December 31, 2010. With the acquisition on January 1, 2011 of Riethmuller, we currently have a commercial presence in the UK, Germany, Poland Mexico, Canada, Asia and Australia. We have our own sales force in the United Kingdom, Germany, Mexico and Canada, and operate through third-party sales representatives elsewhere. The market for decorative party goods outside the U.S. is less mature due to lower consumer awareness of party products and less developed retail distribution channels. Our strategies include broadening our distribution network through both organic and acquisitive growth, increasing accessorization and customization of our products to local tastes and holidays and continuing to deepen retail penetration. | ||
| Increase the Amscan share of shelf at Company Owned and Franchised Retail Stores. As we integrate the Christys Group acquisition into our business model we will produce costumes and accessories for distribution into our vertical retail distribution. We will also make these products available for our broader distribution as well. We will continue to explore other product categories which will further advance our vertical retail distribution. | ||
| Continued Growth Through Targeted Acquisitions. We believe that there will be, from time to time, opportunities to make acquisitions of complementary businesses. Through such businesses, we can leverage our existing marketing, distribution and production capabilities, expand our presence in the various retail distribution channels, further broaden and deepen our product lines and increase our penetration in international markets. |
5
Retail Operations
| Continue to build the Party City Brand and Consumer Awareness. In 2010 we significantly altered our Party City brand advertising programs reducing our dependence on free standing newspaper inserts (FSIs), and substantially increased our use of television and radio advertising to improve brand awareness and drive consumer traffic. We anticipate continuing and expanding upon what has proven to be a successful strategy | ||
| Offer a Broad Selection of Merchandise. We will continue to provide customers with convenient one-stop shopping for party goods by offering what we believe is one of the most extensive selections of party supplies available. Our typical retail store offers a broad selection of Amscan and other brand merchandise consisting of more than 20,000 active SKUs. | ||
| Maintain Value Price Position. We will continue to use the aggregate buying power of over 800 company-owned and franchise party good stores, which allows us to offer a broad line of high quality merchandise at low prices. We believe we reinforce customers expectations of value through our advertising and marketing campaigns. | ||
| Store Layout and Product Selection. We have a standardized product assortment and continually evaluate our aisle layouts, where appropriate, to allow customers to navigate the store more easily and to provide increased availability of our own and other desired products. During 2010 the Company began converting its FCPO stores from a party goods and social expressions supply format to the party goods supply format of Party City, which included rebranding the stores as Party City. | ||
| Expand Network of Convenient Store Locations. Although we believe that our stores typically are destination shopping locations, we seek to maximize customer traffic and quickly build the visibility of new stores by situating our stores in high traffic areas. Site selection criteria include: population density, demographics, traffic counts, location of complementary retailers, storefront visibility and presence (either in a stand-alone building or in dominant strip shopping centers), competition, lease rates and accessible parking. We believe there are an extensive number of suitable domestic locations available for future stores, and we plan to open approximately 20 to 25 new company-owned retail stores and anticipate that our franchisees will open between three and five franchise stores during 2011. In addition, based on the performance of our temporary Halloween stores, subject to the availability of suitable, short-term lease locations, we plan to open at least 400 temporary stores for the 2011 and subsequent Halloween seasons. | ||
| Expansion of our E-Commerce Store. We believe our addition of a Party City e-commerce website and the integration of our existing Factory Card & Party and Party America websites during 2009 will continue to generate significant revenue growth. Our website is a cost-effective medium designed to offer a convenient, highly visual, user-friendly, and secure online shopping option for new and existing customers. In addition to the ability to order products, our website gives customers information regarding products, party ideas and promotional offers. | ||
| Provide Excellent Customer Service. We view the quality of our customers shopping experience as critical to our continued success, and we are committed to making shopping in our stores an enjoyable experience. For example, at Halloween, our most important selling season, each store significantly increases the number of sales associates available to assist customers. We hire and train qualified store managers and other personnel committed to serving our customers and compensate them based on specific performance measures in order to ensure a customer-service oriented culture in our stores. | ||
| Information Systems. In recent years, our retail segment upgraded a number of its information systems which will allow us to continue to use technology to enhance our business practices. All retail units now use the same merchandising, POS, and financial systems. |
6
Innovative Product Development and Design Capabilities
Our 135 person in-house design staff continuously develops fresh,
innovative and contemporary product designs and concepts. Our continued investment in
art and design results in a steady supply of fresh ideas and the creation of complex,
unique ensembles that appeal to consumers. In 2010, we introduced approximately
4,000 new products and 100 new tableware ensembles. Our proprietary designs and strength in developing new product
programs at value prices help us keep our products differentiated from our
competition.
Product Lines
The following table sets forth the principal products distributed by the Company
at the wholesale level, by product line:
Party Goods | Metallic Balloons | Gift | ||||
Decorative and Solid Color Tableware
|
Baby and Wedding Memory Books | Bouquets | Ceramic Giftware | |||
Candles
|
Decorative Tissues | Standard 18 Inch | Decorative Candles | |||
Cascades and Centerpieces
|
Drink and Serveware | Sing-A-Tune | Decorative Frames | |||
Costumes and Other Wearables
|
Games | SuperShapes | Mugs | |||
Crepe
|
Gift Wrap, Bows and Bags | Weights | ||||
Cutouts
|
Invitations, Notes and Stationery | |||||
Flags and Banners
|
Photograph Albums | |||||
Latex Balloons
|
Stickers and Confetti | |||||
Novelty Gifts |
||||||
Party Favors |
||||||
Piñatas |
||||||
Scene Setters |
The percentage of net sales at wholesale for each product line for 2010, 2009
and 2008 are set forth in the following table:
2010 | 2009 | 2008 | ||||||||||
Party Goods |
81 | % | 78 | % | 77 | % | ||||||
Metallic Balloons |
16 | 18 | 20 | |||||||||
Gift |
3 | 4 | 3 | |||||||||
100 | % | 100 | % | 100 | % | |||||||
Our products span a wide range of lifestyle events from age-specific
birthdays to theme parties and sporting events, as well as holidays such as Halloween
and New Years. In 2010, approximately 78% of our net sales at wholesale consisted of
items designed for non-seasonal occasions, with the remaining 22% comprising of items
used for holidays and seasonal celebrations throughout the year. Our product
offerings cover the following:
Seasonal | Themes | Everyday | ||
New Years
|
Bachelorette | Birthdays | ||
Valentines Day
|
Casino | Anniversaries | ||
St. Patricks Day
|
Card Party | Bar Mitzvahs | ||
Easter
|
Chinatown | Bridal/Baby Showers | ||
Passover
|
Cocktail Party | Christenings | ||
Fourth of July
|
Disco | Confirmations | ||
Halloween
|
Fiesta | First Communions |
7
Seasonal | Themes | Everyday | ||
Fall
|
Fifties Rock and Roll | Graduations | ||
Thanksgiving
|
Hawaiian Luau | Weddings | ||
Hanukkah
|
Hollywood | |||
Christmas
|
Mardi Gras | |||
Masquerade | ||||
Patriotic | ||||
Retirement | ||||
Sports | ||||
Summer Barbeque | ||||
Western |
Manufactured Products
Our vertically integrated manufacturing capability ( i.e., our ability to
perform each of the steps in the process of converting raw materials into our
finished products) enables us to control costs, monitor product quality, manage
inventory investment better and provide more efficient order fulfillment. In 2010,
we manufactured items representing 41% of our net sales at wholesale. Our facilities
in New York, Kentucky, Rhode Island, Minnesota and Mexico are highly automated and
produce paper and plastic plates and cups, paper napkins, metallic balloons and other
party and novelty items. State-of-the-art printing, forming, folding and packaging
equipment support these manufacturing operations. Given our size and sales volume, we
are generally able to operate our manufacturing equipment on the basis of at least
two shifts per day, thus lowering production costs per unit. In addition, we
manufacture products for third parties. This allows us to maintain a satisfactory
level of equipment utilization.
As a result of the acquisition of Riethmuller, beginning in 2011, the Company
will manufacture certain party goods for the European market in Poland and will
manufacture latex balloons for all markets in Malaysia.
Purchased Products
In 2010, we purchased products created and designed by us, representing 59%
of our net sales at wholesale, from independently-owned manufacturers, many of whom
are located in Asia and with whom we have long-standing relationships. Our business
is not dependent upon any single source of supply for these products. We maintain a
sourcing office in Hong Kong that is dedicated to broadening our supplier base and
facilitating product development and quality control.
With the acquisition of the Christys Group in September 2010, the Company now
designs and imports costumes and related accessories. The costumes and accessories
are manufactured by several companies with which the Christys Group has
long-standing relationships.
Raw Materials
The
principal raw materials used in manufacturing our products are paper,
petroleum-based resin and cotton. While we currently purchase such raw material from a
relatively small number of sources, paper and resin are available from numerous
sources. Therefore, we believe our current suppliers could be replaced without
adversely affecting our manufacturing operations in any material respect.
While not used in the actual manufacture of our products, currently the majority
of our metallic balloons rely upon inflation with helium gas to facilitate their use.
While adequate quantities of helium are currently available for this purpose, we will
rely upon future exploration and refining of natural gas to assure continued adequate
supply.
Wholesale Sales and Marketing
Our principal wholesale sales and marketing efforts are conducted through a
domestic direct employee sales force of approximately 100 professionals servicing
approximately 15,000 independent retail accounts. Included in this sales force are
approximately 20 seasoned sales professionals who primarily service the party goods
specialty retailer channel and who, on average, have been affiliated with us for over
20 years. In addition to the employee sales team, a select group of manufacturers
representatives handle specific account situations. Employees of subsidiaries outside
the United States
8
generally service international customers. Our Anagram subsidiary
utilizes a group of approximately 35 independent distributors in the United States
and approximately 35 international distributors to bring its metallic balloons to the
grocery, gift and floral markets, as well as to our party superstore and specialty
retailer customers.
As part of our sales and marketing efforts, we work with other party goods
retailers to help target important consumer preferences, integrating their input with
our own market research in the creation of our designs and products.
To support our sales and marketing efforts, we produce five key decorative
party product catalogues annually (four catalogues for seasonal products and one
catalogue for everyday products), with additional catalogues to market our metallic
balloons and gift products and for international markets. We have also developed a
website that displays and describes our product assortment and capabilities. We use
this website as a marketing tool, providing us with the ability to announce special
product promotions, new program launches and other information in an expeditious
manner.
Wholesale Distribution and Systems
We ship our products directly to retailers and distributors throughout the
world from company-owned and leased distribution facilities. Our electronic order
entry and information systems allow us to manage our inventory with minimal waste,
maintain strong fill rates and provide quick order turnaround times of generally
between 24 to 48 hours.
Our distribution facilities for party and gift items are principally
located in New York and represent more than 1,000,000 square feet in the aggregate.
We distribute our metallic balloons domestically from company-owned and leased
facilities in Minnesota and New York. The distribution center for our e-commerce
platform, which is managed by our wholesale operation, is located in Naperville,
Illinois.
Products for markets outside the United States are also shipped from leased
distribution facilities in the United Kingdom, Mexico, Australia and, beginning in
2011, Germany and Poland.
Wholesale Customers
Our wholesale customers include our company-owned retail stores, our
franchisees, other party goods retailers, independent card and gift retailers and
other distributors. We also have a presence in the mass, gift, supermarket and other
smaller retail distribution channels. In the aggregate, we supply more than 40,000
retail outlets both domestically and internationally.
Our recent acquisitions of the Christys Group and Riethmuller will deepen our
retail penetration at key international accounts, including European hypermarkets and
supermarkets, as well as increase our international customer base. Our international
focus includes broadening our distribution network and increasing the accessorization
and customization of our products to local tastes and holidays.
We have a diverse third party customer base at wholesale. Although net
sales to franchise-owned and operated stores represented 18% of the Companys net
sales at wholesale in each of the last three years, franchisees are financially
independent and represent a diversified credit exposure. During those three years, no
individual third party customer accounted for more than 5% of our total sales at
wholesale.
Competition at Wholesale
We compete on the basis of diversity and quality of our product designs,
breadth of product line, product availability, price, reputation and customer
service. Although we have many competitors with respect to one or more of our
products, we believe that there are few competitors who manufacture and distribute
products with the complexity of design and breadth of product lines that we do.
Furthermore, our design and manufacturing processes create efficiencies in
manufacturing that few of our competitors can achieve in the production of numerous
coordinated products in multiple design types.
Competitors include smaller independent specialty manufacturers, as well as
divisions or subsidiaries of large companies with greater financial and other
resources than ours. Certain of these competitors control various party goods product
licenses for widely recognized images, such as cartoon or motion picture characters,
which could provide them with a competitive advantage. However, we control one of the
strongest portfolios of character licenses for use in the
9
design and production of
our metallic balloons and, as a result of the Designware Acquisition, beginning in
2010, we have access to a strong portfolio of character and other licenses for party
goods.
Retail Merchandising
Our stores are designed to be fun and engaging and to create a compelling
shopping experience for the consumer. Our stores range in size from approximately
3,000 to 24,000 square feet with a typical store size between 8,000 and 12,000 square
feet. The stores are divided into various sections based upon product categories
displayed to emphasize the breadth of merchandise available at a good value. In-store
signage is used to emphasize our price-value position and make our stores easy to
shop.
To maintain consistency throughout our store network, we maintain a list of
approved items that are permitted to be sold in our stores. Franchise stores are
required to follow these guidelines according to the terms of their franchise
agreements. We maintain a standard store merchandise layout and presentation format
to be followed by company-owned and franchise stores. Any layout or format changes
developed by us are communicated to the managers of stores on a periodic basis.
Although product assortment is continually refreshed and updated, our
product categories remain relatively consistent with our historical selection. The
typical retail store offers a broad selection of our own and other branded
merchandise consisting of more than 20,000 SKUs. Non-seasonal merchandise
historically represents two-thirds of a typical stores selling space and annual net
retail sales, while seasonal merchandise historically represents one-third of the
selling space. We have over 40 product categories, each of which can be characterized
into 11 general themes, including Halloween, Other Seasonal, Birthday, Balloons,
Baby, Wedding, Anniversary, Greeting Card and Gift Wrap, Party Basics, Catering and
Party Themes.
We have many product categories that generally relate to birthdays, making this
theme the largest non-seasonal occasion at approximately 25% of annual net retail
sales. Each birthday product category includes a wide assortment of merchandise to
fulfill customer needs for celebrating birthdays, including invitations, thank you
cards, tableware, hats, horns, banners, cascades, balloons, novelty gifts, piñatas,
favors and candy.
Halloween is our retail segments largest seasonal product category/theme. As a
key component of our sales strategy, our stores provide an extensive selection of
Halloween products. The stores also carry a broad array of related decorations and
accessories for the Halloween season. Our Halloween merchandise is prominently
displayed to provide an exciting and fun shopping experience for customers. The
stores display Halloween-related merchandise throughout the year to position us as
the customers Halloween shopping resource. During 2010, Halloween sales represented
approximately 27% of our retail net sales. To maximize our seasonal opportunity, the
Company also operates a chain of temporary Halloween stores, generally under the name
Halloween City, during the months of September and October of each year.
Beginning in 2009, we also market party goods merchandise through our Party City
website. Our website is a cost-effective medium designed to offer a convenient,
highly visual, user-friendly, and secure online shopping option for new and existing
customers. In addition to the ability to order products, our website gives customers
information regarding products, party ideas and promotional offers.
Retailer Suppliers
As a vertically integrated business, our wholesale segment is the largest
supplier to our retail stores, providing approximately 61%, 54% and 50% of the
merchandise purchased by our company-owned party goods stores for the years ended
December 31, 2010, 2009 and 2008, respectively. No other supplier provided more than
10% of our retail segments purchases during the past three years.
While our retail segment has historically purchased a significant portion
of its other brand merchandise from a relatively small number of sources, we do not
believe our retail business is dependent upon any single source of supply for these
products. However, certain of these suppliers may control various product licenses
for widely recognized images, such as cartoon or motion picture characters, and the
loss of such suppliers could materially adversely affect our future operations. We
consider numerous factors in supplier selection including, but not limited to, price,
credit terms, product offerings and quality.
10
We strive to maintain sufficient inventory to enable us to provide a
high level of service to our customers. Inventory and accounts payable levels,
payment terms and return policies are in accordance with the general practices of the
party goods supply industry and standard business procedures. We negotiate pricing
with suppliers on behalf of all stores in our network (company-owned and franchise).
We believe that our buying power enables us to receive favorable pricing terms and
enhances our ability to obtain high demand merchandise.
Retail Advertising and Marketing
Our advertising focuses on promoting specific seasonal occasions and
general party themes, with a strong emphasis on our price-value position, with the
goal of increasing customer traffic and further building our brand. Prior to 2010,
we advertised primarily via the use of free-standing inserts in newspapers and other
supplemental marketing techniques including outdoor, direct mail, newspaper,
television and radio advertising in selected markets. However, in the fourth quarter
of 2009 and throughout 2010, we utilized a highly successful national television
advertising program to further develop brand awareness and expand our customer base.
In addition to selling party goods merchandise, we use our Party City website to
communicate products, party ideas and promotional offers.
Franchise Operations
As of December 31, 2010, we had 232 franchise stores throughout the
United States and Puerto Rico. Stores run by franchisees utilize our format, design
specifications, methods, standards, operating procedures, systems and trademarks.
We receive revenue from our franchisees, consisting of an initial
one-time fee and ongoing royalty fees generally ranging from 4% to 6%. In addition,
each franchisee has a mandated advertising budget, which consists of a minimum
initial store opening promotion and ongoing local advertising and promotions.
Further, franchisees must pay an additional 1% to 2.25% of net sales to a group advertising
fund to cover common advertising materials. The Company may pay a franchisee a
reverse royalty on e-commerce sales occurring within the franchisees territory. The
franchisee territory and the amount of the reverse royalty are based on several
factors, including the profitability of our e-commerce operation and the territorial
coverage of franchisee advertising. We do not offer financing to our franchisees for
one-time fees or ongoing royalty fees.
Current franchise agreements provide for an assigned area or territory that
typically equals a three-mile radius from the franchisees store location and the
right to use the Party City ® and other logos and trademarks, including
The Discount Party Super Store ®. In most stores, the franchisee or the
majority owner of a corporate franchisee devotes full time to the management,
operation and on-premises supervision of the stores or groups of stores.
Although franchise locations are generally obtained and secured by the
franchisee, pursuant to the franchise agreement, we must approve all site locations.
As franchisor, we also supply valuable and proprietary information pertaining to the
operation of our retail store business, as well as advice regarding location,
improvements and promotion. We also supply consultation in the areas of purchasing,
inventory control, pricing, marketing, merchandising, hiring, training, improvements
and new developments in the franchisees business operations, and we provide
assistance in opening and initially promoting the store.
We continually focus on the management of our franchise operations, looking
for ways to improve the collaborative relationship in such areas as merchandising,
advertising and information systems.
As of December 31, 2010, we had three territory agreements with certain
franchisees. These agreements grant the holder of the territory the right to open one
or more stores within a stated time period.
Competition at Retail
We operate in competitive markets. Our stores compete with a variety of
smaller and larger retailers, including, but not limited to, single owner-operated
party goods supply stores, specialty party goods supply and paper goods retailers
(including superstores), warehouse/merchandise clubs, designated departments in drug
stores, general mass merchandisers, supermarkets and department stores of local,
regional and national chains and catalogue and Internet merchandisers. In addition,
other stores or Internet merchandisers may enter the market and become significant
competitors in the future. Our stores compete, among other things, on the basis of
location and store layout, product mix, customer convenience and price. Some of our
competitors in our markets have greater financial resources than we do.
11
Government Regulation
As a franchisor, we must comply with regulations adopted by the Federal
Trade Commission, such as the Trade Regulation Rule on Franchising, which requires
us, among other things, to furnish prospective franchisees with a franchise offering
circular. We also must comply with a number of state laws that regulate the offer and
sale of our franchises and certain substantive aspects of franchisor-franchisee
relationships. These laws vary in their application and in their regulatory
requirements. State laws that regulate the offer and sale of franchises typically
require us to, among other things, register before the offer and sale of a franchise
can be made in that state and to provide a franchise offering circular to prospective
franchisees.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by restricting a franchisors rights with regard to the
termination, transfer and renewal of a franchise agreement (for example, by requiring
good cause to exist as a basis for the termination and the franchisors decision to
refuse to permit the franchisee to exercise its transfer or renewal rights), by
requiring the franchisor to give advance notice to the franchisee of the termination
and give the franchisee an opportunity to cure most defaults. To date, those laws
have not precluded us from seeking franchisees in any given area and have not had a
material adverse effect on our operations.
Our wholesale and retail segments must also comply with applicable
regulations adopted by federal agencies, including product safety regulations, and
with licensing and other regulations enforced by state and local health, sanitation,
safety, fire and other departments. Difficulties or failures in obtaining the
required licenses or approvals can delay and sometimes prevent the opening of a new
store or the shutting down of an existing store.
Our stores must comply with applicable federal and state environmental
regulations, although the cost of complying with these regulations to date has not
been material. More stringent and varied requirements of local governmental bodies
with respect to zoning, land use, and environmental factors can delay, and sometimes
prevent, development of new stores in particular locations.
Our stores must comply with the Fair Labor Standards Act and various state
laws governing various matters such as minimum wages, overtime and other working
conditions. Our stores must also comply with the provisions of the Americans with
Disabilities Act, which requires that employers provide reasonable accommodation for
employees with disabilities and that stores must be accessible to customers with
disabilities.
Copyrights and Trademarks
We own copyrights on the designs we create and use on our products and
trademarks on the words and designs used on or in connection with our products. It
is our practice to register our copyrights with the United States Copyright Office to
the extent we deem necessary. We do not believe that the loss of copyrights or
trademarks with respect to any particular product or products would have a material
adverse effect on our business. We hold approximately 185 licenses, allowing us to
use various cartoon and other characters and designs principally on our metallic
balloons. None of these licenses is individually material to our aggregate business.
We own and permit our franchisees to use a number of trademarks and service
marks registered with the United States Patent and Trademark Office, including Party
City ®, The Discount Party Super Store ®, Halloween Costume
Warehouse ®, Party America ®, The Paper Factory ®,
The Factory Card & Party Outlet ®, and Halloween City ®.
Information Systems
We continually evaluate and upgrade our information systems to enhance the
quantity, quality and timeliness of information available to management and to
improve the efficiency of our manufacturing and distribution facilities as well as
our service at the store level. We have implemented merchandise replenishment
software to complement our distribution, planning and allocation processes. The
system enhances the store replenishment function by improving in-stock positions,
leveraging our distribution infrastructure and allowing us to become more effective
in our use of store labor. We have implemented a new Point of Sale system and
upgraded merchandising systems to standardize technology
across all of our retail superstores and, in 2010, we implemented similar
systems at our temporary Halloween City stores. In addition, in 2010, our retail
operations implemented a system conversion to upgrade and enhance the current Oracle
financial system in order to maintain support, streamline divisional reporting and
allow for future growth.
12
Employees
As of December 31, 2010, the Company had approximately 5,470 full-time
employees and 7,950 part-time employees, none of whom is covered by a collective
bargaining agreement. The Company considers its relationship with its employees to be
good.
Item 1A. | Risk Factors |
Consumer Demands and Preferences
As a manufacturer, distributor and retailer, our products must appeal to a
broad range of consumers whose preferences cannot be predicted with certainty and are
subject to rapid change. Our success depends on our ability to identify product
trends as well as to anticipate and respond to changing merchandise trends and
consumer demand in a timely manner. We cannot assure you that we will be able to
continue to offer assortments of products that appeal to our customers or that we
will satisfy changing consumer demands in the future. In addition, if consumers
demand for single-use, disposable party goods were to diminish in favor of reusable
products for environmental or other reasons, our sales could decline. We also sell
certain licensed products that are in great demand for short time periods, making it
difficult to project our inventory needs for these products. Accordingly, if:
| we are unable to identify and respond to emerging trends; | ||
| we miscalculate either the market for the merchandise in our stores or our customers purchasing habits; or | ||
| consumer demand dramatically shifts away from disposable party supplies; |
our business, results of operations, financial condition and cash flow could be
materially adversely affected. In addition, we may be faced with significant excess
inventory of some products and missed opportunities for other products, which would
decrease our profitability.
Competition
The party goods industry is competitive. We compete with many other
manufactures and distributors, including smaller, independent specialty manufacturers
and divisions or subsidiaries of larger companies with greater financial and other
resources than we have. Some of our competitors control licenses for widely
recognized images, such as cartoon or motion picture characters, and have broader
access to mass market retailers which could provide them with a competitive
advantage.
Our retail stores compete with a variety of smaller and larger retailers.
Our stores compete, among other things, on the basis of location and store layout,
product mix, customer convenience and price. We cannot guarantee that we will
continue to be able to compete successfully against existing or future competitors.
Expansion into markets served by our competitors and entry of new competitors or
expansion of existing competitors into our markets could materially adversely affect
our business, results of operations, cash flows and financial condition.
Raw Material and Production Costs
The costs of our key raw materials (paper and petroleum-based resin)
fluctuate. In general, we absorb movements in raw material costs we consider
temporary or insignificant. However, cost increases that are considered other than
temporary may require us to increase our prices to maintain our margins. Customers
may resist such price increases.
Products we manufacture, primarily tableware and metallic balloons, represent
approximately 41% of our net sales at wholesale. We believe our ability to
manufacture product representing approximately 41% of our sales enables us to lower
production costs by optimizing production while minimizing inventory investment, to
ensure product quality through rigid quality control procedures, and to be
responsive to our customers product design needs.
13
Interest Rates
Although we may utilize interest rate swap agreements to manage the risk
associated with fluctuations in interest rates, we are exposed to fluctuations in
interest rates on a significant portion of our debt.
Exchange Rates
We are exposed to foreign currency risk principally from fluctuations in
the Euro, British pound sterling, Mexican peso, Canadian dollar and Chinese renminbi
and their impact on our profitability in foreign markets. Although we periodically
enter into foreign currency forward contracts to hedge against the earnings effects
of such fluctuations, we may not be able to hedge such risks completely or
permanently.
Economic Downturn
In general, our retail sales represent discretionary spending by our customers.
Discretionary spending is affected by many factors, including, among others, general
business conditions, interest rates, the availability of consumer credit, taxation,
weather and consumer confidence in future economic conditions. Our customers
purchases of discretionary items, including our products, could decline during
periods when disposable income is lower or during periods of actual or perceived
unfavorable economic conditions. If this occurs, our revenues and profitability will
decline. In addition, our sales could be adversely affected by a downturn in the
economic conditions in the markets in which we operate.
Key Vendors
While our retail divisions have historically purchased a significant
portion of its other brand merchandise from a relatively small number of sources, we
do not believe our retail business is dependent upon any single source of supply for
these products. However, certain of these suppliers may control various product
licenses for widely recognized images, such as cartoon or motion picture characters
and the loss of such suppliers could materially adversely affect our future business,
results of operations, financial condition and cash flow.
Many of our vendors currently provide us with incentives such as volume
purchasing allowances and trade discounts. If our vendors were to reduce or
discontinue these incentives, prices from our vendors could increase. Should we be
unable to pass cost increases to consumers, our profitability would be reduced.
Additional Capital Requirements
Our management currently believes that the cash generated by operations,
together with the borrowing availability under our credit agreements, will be
sufficient to meet our working capital needs for the next twelve months, including
investments made and expenses incurred in connection with technology to improve
merchandising and distribution systems, support cost reduction initiatives, and
improved efficiencies. However, if we are unable to generate sufficient cash from
operations, we may be required to adopt one or more alternatives to raise cash, such
as incurring additional indebtedness, selling our assets, seeking to raise additional
equity capital or restructuring. If adequate financing is unavailable or is
unavailable on acceptable terms, we may be unable to maintain, develop or enhance our
operations, products and services, take advantage of future opportunities,
service our current debt costs, or respond to competitive pressures.
Seasonal and Quarterly Fluctuations
Our retail business is subject to significant seasonal variations.
Historically, our stores realized a significant portion of their revenues, net income
and cash flow in the fourth quarter of the year, principally due to our Halloween
sales in October and, to a lesser extent, due to our year-end holiday sales. We
believe this general pattern will continue in the future. An economic downturn during
this period could adversely affect us to a greater extent than if such downturn
occurred at other times of the year. Our results of operations and cash flows may
also fluctuate significantly as a result of a variety of other factors, including the
timing of new store openings, store closings and timing of the potential disposition
and acquisition of stores.
14
Key Personnel
Our success depends, to a large extent, on the continued service of our
senior management team. The departure of senior officers could have a negative impact
on our business, as we may not be able to find suitable management personnel to
replace departing executives on a timely basis. We do not maintain key life insurance
on any of our senior officers.
As our business expands, we believe that our future success will depend
greatly on our continued ability to attract and retain highly skilled and qualified
personnel. Although we generally have been able to meet our staffing requirements in
the past, our ability to meet our labor needs while controlling costs is subject to
external factors, such as unemployment levels, minimum wage legislation and changing
demographics. Our inability to meet our staffing requirements in the future at costs
that are favorable to us, or at all, could impair our ability to increase revenue,
and our customers could experience lower levels of customer care.
Item 1B. | Unresolved Staff Comments |
Not applicable.
15
Item 2. | Properties |
The Company maintains the following facilities for its corporate and retail
headquarters and to conducts its principal design, manufacturing and distribution
operations:
Owned or Leased | ||||||
(With | ||||||
Principal | Square | Expiration | ||||
Location | Activity | Feet | Date) | |||
Elmsford, New York
|
Executive and other
corporate offices, show
rooms, design and art
production for party
products
|
119,525 square feet
|
Leased (expiration
date: December 31, 2014) |
|||
Rockaway, New Jersey
|
Party City corporate offices
|
106,000 square feet
|
Leased (expiration
date: July 31, 2017) |
|||
Eden Prairie, Minnesota
|
Manufacture of metallic
balloons and accessories
|
115,600 square feet
|
Owned |
|||
Eden Prairie, Minnesota
|
Manufacture of retail, trade
show and showroom fixtures
|
15,324 square feet
|
Leased (expiration
date: July 31, 2012) |
|||
Harriman, New York
|
Manufacture of paper napkins
|
74,400 square feet
|
Leased (expiration
date: March 31, 2016) |
|||
Louisville, Kentucky
|
Manufacture and distribution
of paper plates
|
189,175 square feet
|
Leased (expiration
date: March 31, 2013) |
|||
Newburgh, New York
|
Manufacture of paper napkins
and cups
|
53,000 square feet
|
Leased (expiration
date: May 31, 2012) |
|||
Narragansett, Rhode Island
|
Manufacture and distribution
of plastic plates, cups and
bowls
|
277,689 square feet
|
Leased (expiration
date: April 26, 2011) |
|||
Tijuana, Mexico
|
Manufacture and distribution
of party products
|
100,000 square feet
|
Leased (expiration
date: August 15, 2015) |
|||
Chester, New York (1)
|
Distribution of party and
gift products
|
896,000 square feet
|
Owned |
|||
Dorval, Canada
|
Distribution of party and
gift products
|
19,330 square feet
|
Leased (expiration
date: March 31, 2012) |
|||
Edina, Minnesota
|
Distribution of metallic
balloons and accessories
|
122,312 square feet
|
Leased (expiration
date: December 31,
2015) |
|||
Milton Keynes, Buckinghamshire, England |
Distribution of party
products throughout Europe
|
130,858 square feet
|
Leased (expiration
date: June 30, 2017) |
|||
Naperville, Illinois
|
Distribution of party goods
for e-commerce sales |
440,343 square-foot
|
Leased (expiration
date: December 31,
2018) |
|||
San Bernadino, California
|
Distribution of party goods
for Halloween City
|
244,000 square foot
|
Leased (month to month) |
|||
Atlanta, Georgia
|
Office and storage facilities
|
15,012 square foot
|
Leased (expiration
date: April 30, 2013) |
|||
Livonia, Michigan
|
Office and distribution of
party goods for Halloween
City
|
89,780 square foot
|
Leased (expiration
date: May 31, 2013) |
|||
Pleasanton, California
|
Office for e-commerce sales
|
11,278 square-foot
|
Leased (expiration
date: June 18, 2015) |
(1) | Property is subject to a lien mortgage note in the original principal amount of $10.0 million with the New York State Job Development Authority. The lien mortgage note was amended on December 18, 2009. The amended mortgage note for $5.6 million was extended for a period of 60 months and requires fixed monthly payments of principal and interest. At December 31, 2010, the lien mortgage note bears interest at a rate of 2.22%, subject to semi-annual adjustments. |
16
In addition to the facilities listed above, we maintain smaller distribution
facilities in Australia, Canada and Mexico and our costume design and
sourcing offices in China. We also maintain sales offices in
Australia, Canada, Hong Kong and Japan and showrooms in New York, California,
Georgia, Texas, Canada and Hong Kong.
As of December 31, 2010, there were 439 company-owned Party City superstores, 90
company-owned FCPO stores and 67 outlet stores open in the United States. We lease
the property for all of our company-owned stores. Our Party City and FCPO stores
range in size from 5,000 to 24,000 square feet, with a typical store size between
8,000 and 12,000 square feet. Our outlet stores typically range in size from 3,000
to 5,000 square feet. We do not believe that any individual store property is
material to our financial condition or results of operations. Of the leases for the
company-owned stores 98 expire in 2011, 121 expire in 2012, 119 expire in 2013, 84
expire in 2014, 40 expire in 2015 and the balance expire in 2016 or thereafter. We
have options to extend most of these leases for a minimum of five years.
The following table shows the change in our retail network of stores
for each of the years in the three-year period ended December 31, 2010.
2010 | 2009 | 2008 | ||||||||||
Company-owned: |
||||||||||||
Stores open at beginning of year |
601 | 643 | 673 | |||||||||
Stores opened |
13 | 6 | 19 | |||||||||
Stores acquired |
20 | 3 | 6 | |||||||||
Stores closed / sold |
(38 | ) | (51 | ) | (55 | ) | ||||||
Stores open at end of year |
596 | 601 | 643 | |||||||||
Franchise: |
||||||||||||
Stores open at beginning of year |
248 | 273 | 283 | |||||||||
Stores opened |
4 | 1 | 13 | |||||||||
Stores acquired |
5 | 2 | 7 | |||||||||
Stores closed, sold or converted to independent |
(25 | ) | (28 | ) | (30 | ) | ||||||
Stores open at end of year |
232 | 248 | 273 | |||||||||
Total company-owned and franchise stores |
828 | 849 | 916 | |||||||||
17
As of December 31, 2010, Company and franchise-owned retail stores were located
in the following states and Puerto Rico:
State | Company-owned | Franchise | Chain-wide | |||||||||
Alabama |
2 | 8 | 10 | |||||||||
Arizona |
1 | 20 | 21 | |||||||||
Arkansas |
1 | 3 | 4 | |||||||||
California |
86 | 18 | 104 | |||||||||
Colorado |
14 | 1 | 15 | |||||||||
Connecticut |
4 | 2 | 6 | |||||||||
Delaware |
1 | 1 | 2 | |||||||||
Florida |
54 | 10 | 64 | |||||||||
Georgia |
26 | 1 | 27 | |||||||||
Hawaii |
0 | 2 | 2 | |||||||||
Illinois |
61 | 0 | 61 | |||||||||
Indiana |
27 | 0 | 27 | |||||||||
Iowa |
9 | 1 | 10 | |||||||||
Kansas |
3 | 4 | 7 | |||||||||
Kentucky |
7 | 0 | 7 | |||||||||
Louisiana |
3 | 8 | 11 | |||||||||
Maryland |
14 | 12 | 26 | |||||||||
Michigan |
31 | 0 | 31 | |||||||||
Minnesota |
0 | 21 | 21 | |||||||||
Mississippi |
1 | 3 | 4 | |||||||||
Missouri |
19 | 3 | 22 | |||||||||
Montana |
0 | 1 | 1 | |||||||||
Nebraska |
5 | 0 | 5 | |||||||||
Nevada |
6 | 0 | 6 | |||||||||
New Hampshire |
1 | 0 | 1 | |||||||||
New Jersey |
26 | 2 | 28 | |||||||||
New Mexico |
0 | 3 | 3 | |||||||||
New York |
45 | 14 | 59 | |||||||||
North Carolina |
2 | 19 | 21 | |||||||||
North Dakota |
0 | 3 | 3 | |||||||||
Ohio |
31 | 0 | 31 | |||||||||
Oklahoma |
2 | 0 | 2 | |||||||||
Oregon |
2 | 5 | 7 | |||||||||
Pennsylvania |
17 | 14 | 31 | |||||||||
Puerto Rico |
0 | 5 | 5 | |||||||||
South Carolina |
2 | 6 | 8 | |||||||||
Tennessee |
7 | 10 | 17 | |||||||||
Texas |
41 | 21 | 62 | |||||||||
Virginia |
10 | 9 | 19 | |||||||||
Washington |
15 | 2 | 17 | |||||||||
West Virginia |
2 | 0 | 2 | |||||||||
Wisconsin |
18 | 0 | 18 | |||||||||
Total |
596 | 232 | 828 | |||||||||
In 2010, the Company operated 404 temporary Halloween stores principally under
the Halloween City name. Under this program, we operate temporary stores under
short-term leases with terms of approximately four months, to cover the early
September through early November Halloween season.
We believe that our properties have been adequately maintained, are in
generally good condition and are suitable for our business as presently conducted. We
believe our existing manufacturing facilities provide sufficient production capacity
for our present needs and for our anticipated needs in the foreseeable future. To the
extent such capacity is not needed for the manufacture of our products, we generally
use such capacity for the manufacture of products for others pursuant to terminable
agreements. All manufacturing and distribution facilities generally are used on a
basis of two shifts
18
per day. We also believe that, upon the expiration of our current leases, we
will be able either to secure renewal terms or to enter into leases for alternative
locations at market terms.
Item 3. | Legal Proceedings |
We are a party to certain claims and litigation in the ordinary course of
business. We do not believe these proceedings will have, individually or in the
aggregate, a material adverse effect on our financial condition or future results of
operations.
PART II
Item 5. | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |
There is no public trading market for the Companys common stock.
As of the close of business on April 13, 2011, there were 122 holders of record
of the Companys common stock.
Dividends
In December 2010, in connection with the refinancing of the Companys
term loan agreement (see Liquidity and Capital Resources), the Companys Board of
Directors declared a one-time cash dividend of $9,400 per share of outstanding Common
Stock totaling $289.7 million and similar distributions to the holders of vested common
stock warrants of $12.1 million and holders of vested time options of
$9.4 million. The
distribution to vested time option holders resulted in a charge to pre-tax income in
2010. In addition, holders of unvested time and performance options at the
declaration date may also receive a distribution of $9,400 per share, if and when the
time and performance options vest. At December 31, 2010, the aggregate potential
distribution associated with unvested time and performance options is
$18.5 million.
The Companys current credit facilities and the indenture governing its senior
subordinated notes contain restrictive covenants that effectively limit the Companys
ability to pay future cash dividends or distributions to its stockholders.
Issuer Purchases of Equity Securities
Under the terms of our stockholders agreement, we have an option to
purchase all of the shares of common stock held by former management stockholders, as
defined, and, under certain circumstances, former management stockholders can require
us to purchase all of the shares held by them. The purchase price as prescribed in
the stockholders agreement is to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on cost, as defined
therein.
19
Equity Compensation Plan Information
The following table sets forth certain information as of December 31,
2010, concerning our equity compensation plans (1);
(a) | (b) | (c) | ||||||||||
Number of | Number of Securities | |||||||||||
Securities to be | Remaining Available | |||||||||||
Issued Upon | Weighted-Average | for Future Issuance | ||||||||||
Exercise of | Exercise Price of | Under Equity | ||||||||||
Outstanding | Outstanding | Compensation Plans | ||||||||||
Options, Warrants | Options, Warrants | (Excluding Securities | ||||||||||
and Rights | and Rights | Reflected in Column (a)) | ||||||||||
Equity
compensation plans
approved by
security holders |
3,122.25 | $ | 14,350 | 138.68 | ||||||||
Equity compensation
plans not approved
by security holders |
| | | |||||||||
Total |
3,122.25 | $ | 14,350 | 138.68 |
(1) | See Note 15 to our consolidated financial statements included herein for a description of our equity incentive plan. |
20
Item 6. | Selected Consolidated Financial Data |
The selected consolidated financial data presented below as of and for the years
ended December 31, 2010, 2009, 2008, 2007 and 2006, are derived from the consolidated
financial statements of the Company. The consolidated financial statements as of and
for the years ended December 31, 2010, 2009 and 2008, are included in this report
under Item 8, Financial Statements and Supplementary Data. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements and the related notes thereto and Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31, | ||||||||||||||||||||
2010(1) | 2009 | 2008 | 2007(2) | 2006(3) | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Net sales |
$ | 1,579,677 | $ | 1,467,324 | $ | 1,537,641 | $ | 1,221,516 | $ | 993,342 | ||||||||||
Royalties and franchise fees |
19,417 | 19,494 | 22,020 | 25,888 | 21,746 | |||||||||||||||
Total revenues |
1,599,094 | 1,486,818 | 1,559,661 | 1,247,404 | 1,015,088 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Cost of sales |
943,058 | 899,041 | 966,426 | 777,586 | 676,527 | |||||||||||||||
Selling expenses |
42,725 | 39,786 | 41,894 | 41,899 | 39,449 | |||||||||||||||
Retail operating expenses |
296,891 | 261,691 | 273,627 | 191,423 | 126,224 | |||||||||||||||
Franchise expenses |
12,269 | 11,991 | 13,686 | 12,883 | 13,009 | |||||||||||||||
General and administrative expenses |
134,392 | 119,193 | 120,272 | 105,707 | 84,836 | |||||||||||||||
Art and development costs |
14,923 | 13,243 | 12,462 | 12,149 | 10,338 | |||||||||||||||
Impairment of trade name (4) |
27,400 | | 17,376 | | | |||||||||||||||
Income from operations |
127,436 | 141,873 | 113,918 | 105,757 | 64,705 | |||||||||||||||
Interest expense, net |
40,850 | 41,481 | 50,915 | 54,590 | 54,887 | |||||||||||||||
Other expense (income), net (5) (6) |
4,208 | (32 | ) | (818 | ) | 18,214 | (1,000 | ) | ||||||||||||
Income before income taxes |
82,378 | 100,424 | 63,821 | 32,953 | 10,818 | |||||||||||||||
Income tax expense |
32,945 | 37,673 | 24,188 | 13,246 | 4,295 | |||||||||||||||
Net income |
49,433 | 62,751 | 39,633 | 19,707 | 6,523 | |||||||||||||||
Less: net income (loss) attributable
to noncontrolling interests |
114 | 198 | (877 | ) | 446 | 83 | ||||||||||||||
Net income attributable to Amscan
Holdings, Inc. |
$ | 49,319 | $ | 62,553 | $ | 40,510 | $ | 19,261 | $ | 6,440 | ||||||||||
Other Financial Data: |
||||||||||||||||||||
Capital expenditures, including
assets under capital leases |
53,967 | 26,254 | 53,701 | 36,648 | 40,376 | |||||||||||||||
Depreciation and amortization |
49,418 | 44,382 | 47,278 | 38,093 | 38,619 | |||||||||||||||
Ratio of earnings to fixed charges (7) |
1.9 | x | 2.2 | x | 1.6 | x | 1.4 | x | 1.1 | x |
21
At December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 189,993 | $ | 162,243 | $ | 76,904 | $ | 99,543 | $ | 158,730 | ||||||||||
Total assets (8) (9) (10) |
1,653,151 | 1,480,501 | 1,507,977 | 1,498,845 | 1,217,371 | |||||||||||||||
Short-term obligations
(8) (9) (10) (11) |
159,144 | $ | 112,541 | $ | 170,880 | $ | 161,790 | $ | 8,633 | |||||||||||
Long-term obligations |
841,112 | 538,892 | 550,755 | 584,336 | 558,372 | |||||||||||||||
Total obligations |
$ | 1,000,256 | $ | 651,433 | $ | 721,635 | $ | 746,126 | $ | 567,005 | ||||||||||
Redeemable common
securities (12) (13) |
$ | 18,089 | $ | 18,389 | $ | 18,171 | $ | 33,782 | $ | 9,343 | ||||||||||
AHI stockholders Equity
(8) (10) (13) |
254,110 | 476,985 | 410,228 | 375,586 | 359,839 | |||||||||||||||
Non controlling interest |
2,312 | 2,137 | 1,889 | 2,488 | 2,052 | |||||||||||||||
Total equity |
$ | 256,422 | $ | 479,122 | $ | 412,117 | $ | 378,074 | $ | 361,891 | ||||||||||
(1) | The Designware Acquisition and the Christys Group Acquisition are included in the balance sheet data as of December 31, 2010, and the statement of operations and other financial data from the Designware Acquisition Date (March 1, 2010) and the Christys Group Acquisition Date (September 30, 2010), respectively. | |
(2) | FCPO and PCFG are included in the balance sheet data as of December 31, 2007, and the statement of operations and other financial data from Party City Franchise Group Transaction Date (November 2, 2007) and the Factory Card & Party Outlet Acquisition Date (November 16, 2007), respectively. | |
(3) | Party America is included in the balance sheet data beginning with December 31, 2006, and the statement of operations and other financial data from the Party America Acquisition Date (September 29, 2006). | |
(4) | During 2010 and 2008, the Company implemented plans to convert and rebrand its FCPO stores and its company-owned and franchised Party America stores to Party City stores, respectively. As a result, the Company recorded charges for the impairment of the Factory Card & Party Outlet trade name and the Party America trade name of $27.4 million and $17.4 million in the fourth quarters of 2010 and 2008, respectively. | |
(5) | In connection with the refinancing of debt in August and December 2010, the Company recorded non-recurring expenses of $2.4 million to write off deferred finance costs. | |
(6) | In connection with the refinancing of debt in May 2007, the Company recorded non-recurring expenses of $16.2 million, including $6.2 million of debt retirement costs, $6.3 million write off of deferred finance costs, and a $3.7 million write-off of original issue discount associated with the repayment of debt. | |
(7) | For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes and minority interests plus fixed charges. Fixed charges consist of interest expense on all obligations, amortization of deferred financing costs and an estimate of the rental expense on operating leases representing that portion of rental expense deemed by the Company to be attributable to interest. | |
(8) | In 2010 the Company issued Common Stock warrants valued at $21.0 million and paid cash of $24.9 million to consummate the Designware Acquisition. The cash paid was financed using the Companys revolving credit facility. | |
(9) | In 2010 the Company paid cash of $30.4 million to consummate the Christys Group Acquisition. The cash paid was financed using the Companys revolving credit facility. | |
(10) | In 2006, Common Stock issued to consummate the Party America Acquisition totaled $29.7 million. Cash also paid to consummate the acquisition included $1.1 million for transaction costs, and $12.6 million to repay Party America senior debt. | |
(11) | Short-term obligations consist primarily of borrowings under bank lines of credit and the current portion of long-term debt. At December 31, 2008, the current portion of long-term debt includes $27.5 million of PCFG term debt that had been classified as current due to the PCFGs noncompliance with the loan agreements financial covenants. | |
(12) | In 2007, the Company used redeemable common stock warrants valued at $15.4 million to acquire the remaining minority interest in PCFG. | |
(13) | Under the terms of the AAH stockholders agreement dated April 30, 2004, the Company has an option to purchase all of the shares of common stock held by former management stockholders, as defined, and, under certain circumstances, including death and disability, former management stockholders can require the Company to purchase all of the shares held by the former associates. The purchase price as prescribed in the stockholders agreements is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may be payable by the Company to all management stockholders, based on fully paid and vested shares, is classified as redeemable common securities. |
22
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
Our wholesale revenues are generated from the sales of approximately 37,000
SKUs consisting of party goods for all occasions, including paper and plastic
tableware, accessories and novelties, metallic balloons, stationery and gift items.
Tableware (e.g., plates, cups, cutlery, napkins and tablecovers) is our core product
category, with coordinating accessories (e.g., balloons, banners, gifts and
stationery) and novelties (e.g., party favors) being offered to complement these
tableware products. Our products are sold at wholesale to party goods superstores,
including our company-owned and franchised retail stores, other party goods
retailers, independent card and gift stores, and other retailers and distributors
throughout the world. As a metallic balloon manufacturer, we have a strong presence
in grocery, gift and floral distribution channels.
With our retail segment, we operate 596 Big Box retail party supply stores
(i.e., stores generally greater than 8,000 square feet, including our retail party
and social expressions supply stores) within the continental United States, and
franchise individual store and franchise areas throughout the United States and
Puerto Rico. At December 31, 2010, our network also included 232 franchise stores.
Our retail operations generate revenue primarily through the sale of more than 20,000
Amscan and other branded SKUs through our company-owned stores, and through the
imposition of an initial one-time franchise fee and ongoing franchise royalty
payments based on retail sales from our franchised stores. In addition to our brick
and mortar stores, our retail segment includes our e-commerce store, PartyCity.com
and, during the Halloween selling season, a chain of temporary Halloween stores
operating under the Halloween City banner.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Percentage of Total Revenues
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Net sales |
98.8 | % | 98.7 | % | ||||
Royalties and franchise fees |
1.2 | 1.3 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Expenses: |
||||||||
Cost of sales |
58.9 | 60.5 | ||||||
Selling expenses |
2.7 | 2.7 | ||||||
Retail operating expenses |
18.6 | 17.6 | ||||||
Franchise expenses |
0.8 | 0.8 | ||||||
General and administrative expenses |
8.4 | 8.0 | ||||||
Art and development costs |
0.9 | 0.9 | ||||||
Impairment of trade name |
1.7 | 0.0 | ||||||
Total expenses |
92.0 | 90.5 | ||||||
Income from operations |
8.0 | 9.5 | ||||||
Interest expense, net |
2.6 | 2.8 | ||||||
Other expense, net |
0.3 | | ||||||
Income before income taxes |
5.1 | 6.7 | ||||||
Income tax expense |
2.0 | 2.5 | ||||||
Net income |
3.1 | 4.2 | ||||||
Less net income attributable to noncontrolling
interests |
| | ||||||
Net income attributable to Amscan Holdings, Inc. |
3.1 | % | 4.2 | % | ||||
23
Total Revenues
The following table sets forth the Companys total revenues for the years
ended December 31, 2010 and 2009, respectively.
Year Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Total Revenue | Thousands | Total Revenue | |||||||||||||
Revenues: |
||||||||||||||||
Sales: |
||||||||||||||||
Wholesale |
$ | 769,247 | 48.1 | % | $ | 633,006 | 42.6 | % | ||||||||
Eliminations |
(298,355 | ) | (18.7 | ) | (221,647 | ) | (14.9 | ) | ||||||||
Net wholesale |
470,892 | 29.4 | 411,359 | 27.7 | ||||||||||||
Retail |
1,108,785 | 69.3 | 1,055,965 | 71.0 | ||||||||||||
Total net sales |
1,579,677 | 98.8 | 1,467,324 | 98.7 | ||||||||||||
Franchise related |
19,417 | 1.2 | 19,494 | 1.3 | ||||||||||||
Total revenues |
$ | 1,599,094 | 100.0 | % | $ | 1,486,818 | 100.0 | % | ||||||||
Wholesale
Net sales for 2010 of $470.9 million were $59.5 million or 14.5% higher than net
sales for 2009. Net sales to franchised and domestic independent party stores totaled
$184.4 million and were $23.1 million or 14.3% higher than 2009 sales. Net sales to
other non-affiliated domestic retail channels totaled $96.8 million and were $12.2
million or 14.4% higher than in 2009. The increase in sales to both the party store
and the other retail channels principally reflect the impact of our acquisition of
American Greetings Designware division in February 2010 and a partial recovery from
the effects of the economic downturn in 2009. Net sales of metallic balloons were
$96.4 million or 14.1% higher than in 2009. The increase in balloon sales reflects
the normalization of purchasing patterns by domestic distributors, following their
liquidation of inventories in 2009. International sales totaled $93.3 million and
were $12.3 million or 15.2% higher than in 2009, primarily the result of the
acquisition of Christys Group in September 2010.
Intercompany sales to our retail affiliates of $298.4 million were $76.7 million
or 34.6% higher than in 2009 and represented 38.7% of total wholesale sales in 2010
compared to 35.0% in 2009. The increase in intercompany sales principally reflects
the growth in our share of shelf at our company-owned retail stores, particularly at
our FCPO stores, driven, in part, by our acquisition of Designware. During 2010, our
wholesale sales to our retail segment represented 61.3% of the retail segments
total purchases, compared to 53.7% in 2009. The intercompany sales of our wholesale
segment are eliminated against the intercompany purchases of our retail segment in
the consolidated financial statements
Retail
Net retail sales at our company-owned stores for 2010 of $1,108.8 million were
$52.8 million or 5.0% higher than net retail sales for 2009. The net retail sales of
our company-owned Party City Big Box stores totaled $770.7 million and were $15.8
million or 2.1% higher than in 2009. Party City Big Box same store sales increased
1.4% during 2010, driven by a 2.0% increase in transaction count. Our e-commerce
store sales totaled $40.2 million and were $26.9 million or 200.7% higher than in
2009. Same store sales for our e-commerce store (from the launch of the Party
City e-commerce store in August 2009 and for the comparable period of 2010)
increased 146.6%, driven by a 127.0% increase in transaction count and a 19.5%
increase in the average sale transaction. Sales at stores converted from FCPO to
Party City totaled $28.6 million and were $3.5 million or 13.8% higher than during
the comparable period of 2009. The increase in same store sales reflects a 15.2%
increase in the average sale transaction partially offset by a 1.4% decrease in
transaction count attributed to the conversion in store format. Sales at all other
full-time store formats totaled $167.8 million and were $26.7 million or 13.7% lower
than in 2009. Net sales at our temporary Halloween City stores totaled $101.4
million and were $33.4 million or 49.1% higher than in 2009, due to a 62% increase in
our temporary store count partially offset by an 8.8% decrease in average sales per
store compared to 2009. The decrease in average Halloween City store sales is
primarily attributable to the formats expansion, in 2010, into several new
territories with pre-existing competition.
24
Royalties and franchise fees
Franchise related revenue for the year ended December 31, 2010, consisting of
royalties and franchise fees, totaled $19.4 million and were $0.1 million lower than
in 2009, principally as a result of a net decrease of 16 franchise stores during 2010
as compared to 2009. The decrease in franchise stores results from the acquisition
by the Company of 20 franchise stores during 2010.
Gross Profit
The following table sets forth the Companys consolidated gross profit on net
sales for the years ended December 31, 2010 and 2009, respectively.
Year Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Associated Sales | Thousands | Associated Sales | |||||||||||||
Wholesale |
$ | 174,507 | 37.1 | % | $ | 148,424 | 36.1 | % | ||||||||
Retail |
462,112 | 41.7 | % | 419,859 | 39.8 | % | ||||||||||
Total |
$ | 636,619 | 40.3 | % | $ | 568,283 | 38.7 | % | ||||||||
The gross profit margin on net sales at wholesale for 2010 was 37.1% or 100
basis points higher than in 2009. The increase in wholesale gross profit margin
principally reflects the impact of product price increases (in anticipation of cost
increases), the continued leveraging of our distribution infrastructure and changes in
product mix.
Retail gross profit margin for 2010 was 41.7% or 190 basis points higher than in
2009, principally due to a greater concentration of sales of product manufactured or
distributed by the wholesale segment, principally the result of the Designware
Acquisition, which resulted in the realization of family-wide margin (i.e.
manufacturing, wholesale and retail margin) on such retail sales. The increase in
margin also reflects favorable variances in inventory shrink and damage reserves as
compared to 2009.
Operating expenses
Selling expenses totaled $42.7 million and were $2.9 million or 7.3% higher
than in 2009. The increase in 2010 selling expense, as compared to 2009, reflects the increase in wholesale segment sales and includes the additional expenses of the Christys Group. Selling expenses were 2.7% of total
revenue in both 2010 and 2009.
Retail operating expenses of $296.9 million for 2010 were $35.2 million or 13.5%
higher than 2009, principally reflecting additional costs associated with the growth in
our temporary Halloween store network and e-commerce business, in addition to the
implementation of a national television-based advertising program in 2010. Retail
operating expenses were 26.8% of retail sales in 2010 and 24.8% of retail sales in 2009.
Franchise expenses for 2010 of $12.3 million were $0.3 million or 2.5% higher than in
2009. Franchise expenses were 63.2% of franchise related revenue in 2010 compared to
61.5% in 2009.
General and administrative expenses for 2010 totaled $134.4 million and were
$15.2 million or 12.8% higher than in 2009. The increase in general and administrative
expenses reflects increased stock and warrant compensation expense and support for our
expanding temporary Halloween operations
as well as the additional expenses of the Christys Group in 2010. These increases were partially offset by a
lower provision for bad debts in 2010 as compared to 2009, and the continued
implementation of cost reductions begun in 2009, including the consolidation of FCPOs
former corporate office operations in Naperville, Illinois into those of Party City. As
a percentage of total revenues, general and administrative expenses were 8.4% for 2010
compared to 8.0% for 2009.
Art and development costs for 2010 totaled $14.9 million and were $1.7 million
higher than in 2009. As a percentage of total revenues, art and development costs were
0.9% in 2010, comparable to 2009.
During 2010, the Company instituted a program to convert substantially all of
its FCPO stores to either Party City stores or to an outlet format and recorded a
$27.4 million charge for the impairment of the Factory Card & Party Outlet trade
name.
25
Interest expense, net
Interest
expense of
$40.9 million for 2010 was comparable to 2009. Despite increases in our ABL
and term loan
margin rates following our August 2010 ABL
and December 2010 term loan
refinancings
and an increase in our term debt following the
December 2010 refinancing, our average debt and effective interest rate for
2010 were comparable to those of 2009.
Other expense, net
Other expense, net, for 2010 totaled
$4.2 million. Other expense, net, includes costs of $2.4 million associated with the refinancing of the Companys revolving and
term debt credit facilities in 2010 and $1.6 million of acquisition related costs. These
costs were partially offset by our share of income from an unconsolidated balloon
distribution joint venture located in Mexico.
Income tax expense
Income tax expense for 2010 and 2009 reflected consolidated effective income tax
rates of 40.0% and 37.5% respectively. The increase in the 2010 effective income tax
rate is primarily attributable to certain adjustments related to deferred tax
accounts recorded in the current year related to activities
associated with previous acquisitions and non - deductible warrant compensation charges, partly offset by an increased domestic manufacturing deduction, a lower
average state income tax rate, the expiration of certain states statutes of limitations
that resulted in the recognition of previous unrecognized tax benefits and the
favorable settlement of the audit of our 2007 federal tax return.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Percentage of Total Revenues
Year Ended December 31, |
||||||||
2009 | 2008 | |||||||
Revenues: |
||||||||
Net sales |
98.7 | % | 98.6 | % | ||||
Royalties and franchise fees |
1.3 | 1.4 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Expenses: |
||||||||
Cost of sales |
60.5 | 62.0 | ||||||
Selling expenses |
2.7 | 2.7 | ||||||
Retail operating expenses |
17.6 | 17.5 | ||||||
Franchise expenses |
0.8 | 0.9 | ||||||
General and administrative expenses |
8.0 | 7.7 | ||||||
Art and development costs |
0.9 | 0.8 | ||||||
Impairment of trade name |
0.0 | 1.1 | ||||||
Total expenses |
90.5 | 92.7 | ||||||
Income from operations |
9.5 | 7.3 | ||||||
Interest expense, net |
2.8 | 3.3 | ||||||
Other (income) expense, net |
0.0 | (0.1 | ) | |||||
Income before income taxes |
6.7 | 4.1 | ||||||
Income tax expense |
2.5 | 1.6 | ||||||
Net income |
4.2 | 2.5 | ||||||
Less net (loss) income attributable to
noncontrolling interests |
0.0 | (0.1 | ) | |||||
Net income attributable to Amscan Holdings, Inc. |
4.2 | % | 2.6 | % | ||||
26
Total Revenues
The following table sets forth the Companys total revenues for the years
ended December 31, 2009 and 2008, respectively.
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Total Revenue | Thousands | Total Revenue | |||||||||||||
Revenues: |
||||||||||||||||
Sales: |
||||||||||||||||
Wholesale |
$ | 633,006 | 42.6 | % | $ | 653,403 | 41.9 | % | ||||||||
Eliminations |
(221,647 | ) | (14.9 | ) | (214,898 | ) | (13.8 | ) | ||||||||
Net wholesale |
411,359 | 27.7 | 438,505 | 28.1 | ||||||||||||
Retail |
1,055,965 | 71.0 | 1,099,136 | 70.5 | ||||||||||||
Total net sales |
1,467,324 | 98.7 | 1,537,641 | 98.6 | ||||||||||||
Franchise related |
19,494 | 1.3 | 22,020 | 1.4 | ||||||||||||
Total revenues |
$ | 1,486,818 | 100.0 | % | $ | 1,559,661 | 100.0 | % | ||||||||
Wholesale
Net sales for 2009 of $411.4 million were $27.1 million or 6.2% lower than net
sales for 2008, principally as a result of the downturn in the U.S. economy. Net
sales to franchise and domestic independent party stores totaled $161.3 million and
were $14.5 million or 8.3% lower than 2008 sales. Net sales to non-affiliated
domestic retail channels totaled $84.6 million and were $1.9 million or 2.2% lower
than in 2008, as the negative impact of the economy was partially offset by a
seasonal direct import and contract manufacturing program for a supplier to the mass
market and other channels. Net sales of metallic balloons were $84.5 million or 8.9%
lower than in 2008, as wholesale distributors and retailers rationalized stock
inventory levels in light of the economic downturn. International sales totaled
$81.0 million and were $2.5 million or 3.0% lower than in 2008. Fluctuations in
foreign currency account for an $11.0 million decrease in international sales, more
than offsetting volume related growth in local currency sales, principally at
European national accounts.
Intercompany sales to our retail affiliates of $221.6 million were $6.7 million
or 3.1% higher than in 2008 and represented 35.0% of the total
wholesale sales in 2009 compared to 32.9% in 2008. The increase in intercompany sales principally reflects
growth in our share of shelf at our company-owned retail stores, particularly the
FCPO stores acquired in November 2007. During 2009, our
wholesale sales to our retail segment represented 53.7% of the retail
segments total purchases compared to 50.4% in 2008. The intercompany sales of our wholesale
segment are eliminated against the intercompany purchases of our retail segment in
the consolidated financial statements
Retail
Net retail sales at our company-owned stores for 2009 of $1,056 million were
$43.2 million or 3.9% lower than net retail sales for 2008, reflecting the downturn
in the U.S. economy, the operation of fewer FCPO and outlet stores during 2009
and the inclusion of a 53rd week in our 2008 retail fiscal year. Net
retail sales of our company-owned Party City Big Box stores (i.e., stores generally
greater than 8,000 square feet) totaled $754.9 million and were
$37.0 million or 4.7%
lower than in 2008. Same store sales during 2009 decreased 3.3% compared to 2008 as
the result of a decrease in transaction count, as the average dollar per transaction
remained consistent between 2009 and 2008. During 2009,
we generated $13.4 million in e-commerce sales compared to $5.9
million in 2008. The increase in e-commerce sales was driven by the
launch of the PartyCity.com website in August 2009. Net retail sales at our FCPO stores of
$197.0 million decreased $29.5 million or 13.0%, reflecting a 3.0% decrease in store
count by year end and a decrease of 5.0% in same store sales. The decrease in same
store sales reflects a 5.3% decrease in transaction count partially offset by a 0.3%
increase in average dollar per transaction. Net retail sales at our outlet stores
totaled $22.6 million and were $14.4 million or 38.9% lower than in 2008, principally
due to the operation of 50% fewer outlet stores by year and a 15.9% decrease in same
store sales. Net sales at our temporary Halloween stores totaled $68.0 million and
were $28.6 million or 72.3% higher than in 2008 due to a 7.5% increase in average
sales per store and a 65.7% increase in store count compared to 2008.
27
Royalties and franchise fees
Franchise related revenue for the year ended December 31, 2009, consisting of
royalties and franchise fees, totaled $19.5 million or 11.5% lower than in 2008, as
our franchise store count decreased by 23 stores or 8.4% and the stores experienced a
same-store net sales decrease of 2.3% compared to 2008.
Gross Profit
The following table sets forth the Companys consolidated gross profit on
net sales for the years ended December 31, 2009 and 2008, respectively.
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Associated Sales | Thousands | Associated Sales | |||||||||||||
Net Wholesale |
$ | 148,424 | 36.1 | % | $ | 142,438 | 32.5 | % | ||||||||
Net Retail |
419,859 | 39.8 | % | 428,777 | 39.0 | % | ||||||||||
Total Gross Profit |
$ | 568,283 | 38.7 | % | $ | 571,215 | 37.1 | % | ||||||||
The gross profit margin on net sales at wholesale for 2009 was 36.1% or 360
basis points higher than in 2008. The increase in wholesale gross profit margin
principally reflects reductions in distribution costs and changes in product mix,
including fewer full case sales in 2009, which generally have lower profit margins.
Retail gross profit margin for 2009 was 39.8% or 80 basis points higher than in
2008, primarily the result of favorable variances in inventory shrink and damage
reserves as compared to 2008.
Operating expenses
Selling expenses totaled $39.8 million and were $2.1 million or 5.0% lower
than in 2008, reflecting a decrease in variable selling expenses, consistent with the
decrease in wholesale sales, and a reduction in the size of our sales force and changes
in foreign currency exchange rates, partially offset by inflationary increases
principally in base compensation and employee benefits. Selling expenses were 2.7% of
total revenue in both 2009 and 2008.
Retail operating expenses of $261.7 million for 2009 were $11.9 million or 4.3%
lower than 2008, principally reflecting a reduction in store count. Retail operating
expenses were 24.8% of retail sales in 2009 and comparable to 2008. Franchise expenses
for 2009 of $12.0 million were $1.7 million or 12.3% lower than in 2008, also reflecting
a reduction in store count. Franchise expenses were 61.5% of franchise related revenue
in 2009 compared to 62.2% in 2008.
General and administrative expenses for 2009 totaled $119.2 million and were
$1.1 million or 0.9% lower than in 2008. The decrease in general and administrative
expenses reflects a management-directed cost reduction program, which included
reductions in work force, travel and other expenses, the reduction of a prior year
purchase accounting reserve, and the impact of changes in foreign currency exchange
rates. These decreases were partially offset by inflationary increases, particularly in
base compensation and employee benefits, increased support for our expanding temporary
Halloween operations, an increase in consulting expense and an additional provision for
bad debts due to the bankruptcy of a national account in Europe. As a percentage of
total revenues, general and administrative expenses were 8.0% for 2009 compared to 7.7%
for 2008.
Art and development costs of $13.2 million for 2009 were comparable to 2008
expenses. As a percentage of total revenues, art and development costs were 0.9% and
0.8% of total revenues for 2009 and 2008, respectively.
Interest expense, net
Interest expense of $41.5 million for 2009 was $9.4 million lower than for 2008,
reflecting the impact of lower average debt and Libor rates.
28
Other income, net
Other income, net, in 2009 primarily includes our share of income from an
unconsolidated balloon distribution joint venture located in Mexico partially offset by
foreign currency transaction losses and other expenses.
Income tax expense
Income tax expense for 2009 and 2008 reflected consolidated
effective income tax rates of 37.5% and 37.9%, respectively. The decrease in the 2009
effective income tax rate is primarily attributable to a lower average state income tax
rate
caused by earnings mix shift among subsidiaries
and the expiration of state statutes of limitations for certain states that
resulted in the recognition of previous unrecognized tax benefits and the favorable
settlement of the audits of our 2006 and 2005 federal tax returns. These tax rate
reductions were partially offset by a lower domestic manufacturing deduction, as a
percentage of pre-tax income.
Liquidity and Capital Resources
Capital Structure
On August 13, 2010, the Company entered into a new senior secured asset-based
revolving credit facility (the New ABL Facility), for an aggregate principal amount of
up to $325 million for working capital, general corporate purposes and the issuance of
letters of credit. The New ABL Facility was used to refinance the Companys existing
asset-based revolver and its Party City Franchise Group (PCFG) revolver and term loan
agreement. At closing, PCFG became a borrower under the New ABL facility and a
guarantor under the terms of the Companys then existing term loan facility and its
8.75%, $175 million senior subordinated notes.
On December 2, 2010, the Company entered into a $675 million senior secured term
loan facility (the New Term Loan Credit Agreement). The Company used the proceeds from
this facility to terminate the then existing $342 million term loan facility, to pay a
one-time cash dividend of $9,400 per share to common stockholders and a cash payment in
lieu of a dividend to certain option holders and warrant holders aggregating
approximately $311.2 million (the Dividend) and to pay related fees and expenses in
connection with such refinancing and Dividend and related transactions (collectively,
the Transactions). The term loans under the New Term Loan Credit Agreement were issued
at a 1%, or $6.8 million discount that is being amortized by the effective interest
method over the life of the loan.
On December 2, 2010, the Company entered into an amendment to the New ABL Facility
to permit the Transactions and amend the maturity date under the New ABL Facility to
provide for a maturity date of August 13, 2015 or, if still outstanding, the date that
is 120 days prior to the scheduled maturity of our senior subordinated notes or any
indebtedness that refinances our senior subordinated notes.
New ABL Facility
The New ABL Facility provides for (a) revolving loans in an aggregate principal
amount at any time outstanding not to exceed $325 million, subject to a borrowing base
described below, (b) swing-line loans in an aggregate principal amount at any time
outstanding not to exceed 10% of the aggregate commitments under the facility and (c)
letters of credit, in an aggregate face amount at any time outstanding not to exceed $50
million, to support payment obligations incurred in the ordinary course of business by
the Company and its subsidiaries.
Under the New ABL Facility, the borrowing base at any time equals (a) 85% of
eligible trade receivables plus (b) 85% of eligible inventory at its net orderly
liquidation value and (c) 90% of eligible credit card receivables, less (d) certain
reserves.
Amounts borrowed under the New ABL Facility bear interest at a rate per annum equal
to an applicable margin plus, at our option, either (a) an alternate base rate
determined by reference to the highest of (1) the prime rate of Wells Fargo, N.A., (2)
the federal funds rate in effect on such date plus 1/2 of 1.00% and (3) the LIBOR rate
for a three-month interest period plus 1% or (b) the LIBOR rate determined by reference
to the LIBOR cost of funds for U.S. dollar deposits for the relevant interest period
adjusted for certain additional costs. The applicable margin percentage ranges from
1.25% to 1.75% for alternate base rate loans and from 2.25% to 2.75% for loans based on
the LIBOR rate, in each case based on average historical excess availability (as defined
in the New ABL Facility). The applicable margin at December 31, 2010 was 1.50% for
alternate base rate loans and 2.50% for loans based on the LIBOR rate.
29
In addition to paying interest on outstanding principal under the New ABL Facility,
the Company is required to pay a commitment fee of between 0.375% and 0.50% per annum in
respect of the unutilized commitments thereunder. The Company must also pay customary
letter of credit fees and agency fees.
The New ABL Facility also provides that the Company has the right from time to time
to request an amount of additional commitments up to $125 million, of which the entire
amount remains available. The lenders under the New ABL Facility are not under any
obligation to provide any such additional commitments, and any increase in commitments
is subject to several conditions precedent and limitations. If we were to request any
additional commitments, and the existing lenders or new lenders were to agree to provide
such commitments, the facility size could be increased to up to $450 million, but our
ability to borrow under this facility would still be limited by the amount of the
borrowing base.
In connection with the New ABL Facility, the Company incurred $3.8 million in
finance costs that have been capitalized and will be amortized over the life of the
loan.
All obligations under the New ABL Facility are jointly and severally guaranteed by
our parent and each existing and future domestic subsidiary of the Company. Each
guarantor has secured its obligations under the guaranty by a first priority lien on its
accounts receivable, inventory, cash and related proceeds and assets and a second
priority lien on substantially all of its other assets.
The New ABL Facility contains negative covenants that, among other things and
subject to certain exceptions, restrict the ability of the parent, the Company and its
restricted subsidiaries to:
| incur additional indebtedness; | ||
| pay dividends or distributions on capital stock (except the Dividend) or redeem, repurchase or retire capital stock of the Company, the parent or any restricted subsidiary or make payments on, or redeem, repurchase or retire any subordinated indebtedness; | ||
| make certain investments, loans, advances and acquisitions; | ||
| enter into sale and leaseback transactions; | ||
| engage in transactions with affiliates; | ||
| create liens; | ||
| transfer or sell assets; | ||
| guarantee debt; | ||
| create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; | ||
| consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and | ||
| engage in unrelated businesses. |
In addition, we must comply with a fixed charge coverage ratio if our excess
availability on any day is less than (a) 15% of the lesser of the aggregate commitments
under the New ABL Facility or the then borrowing base or (b) $25 million. Excess
availability under the New ABL Facility means the lesser of (a) the aggregate
commitments under the New ABL Facility and (b) the then borrowing base, minus the
outstanding credit extensions.
The New ABL Facility also contains certain customary affirmative covenants and
events of default.
Borrowings under the New ABL Facility at December 31, 2010 totaled $150.1 million at
interest rates ranging from 2.77% to 4.75%. Outstanding standby letters of credit totaled
$12.9 million and the Company had $162.0 million of excess availability under the terms of
the New ABL Facility at December 31, 2010.
New Term Loan Credit Agreement
Amounts borrowed under the New Term Loan Credit Agreement bear interest at a rate
per annum equal to an applicable margin plus, at the Companys option, either (a) an
alternate base rate determined by reference to the highest of (1) the prime rate of
Credit Suisse AG, (2) the federal funds rate in effect on such date plus 1/2 of 1.00%
and (3) the LIBOR rate for a one-month interest period plus 1% or (b) a LIBOR rate
determined by reference to the cost of funds for U.S. dollar deposits for the relevant
interest period, adjusted for certain additional costs, but not less than 1.50%. The
applicable margin percentage is 4.25% for alternate base rate loans and 5.75% for loans
based on the LIBOR rate.
In addition to paying interest on outstanding principal under the New Term
Loan
Credit Agreement, the Company must also pay customary agency fees.
30
The New Term Loan Credit Agreement also provides that the Company has the right
from time to time to request an amount of additional term loans up to $175 million and
to refinance, replace or extend the maturity date of all or a portion of the then
existing term loans thereunder. The lenders under the New Term Loan Credit Agreement are
not under any obligation to provide any such additional term loans, provide such
refinancing or replacement term loans, or agree to extend the maturity date of existing
term loans held by them, and transactions to effect any additional, refinancing,
replacement or extended term loans are subject to several conditions precedent and
limitations.
The New Term Loan Credit Agreement provides that the term
loans
are
subject to a 1.00% prepayment premium if voluntarily repaid under certain circumstances
before December 2, 2011. Otherwise, we may voluntarily prepay the term loans at any time
without premium or penalty, other than customary breakage costs with respect to loans
based on the LIBOR rate. The term loans are subject to mandatory prepayment, subject to
certain exceptions, with (i) 100% of net proceeds arising from all non-ordinary course
asset sales or other dispositions of property(including casualty events) by the Company
or by its subsidiaries, subject to reinvestment rights and certain other exceptions,
(ii) 100% of the net cash proceeds of any incurrence of debt other than debt permitted
under the New Term Loan Credit Agreement, (iii) commencing with the fiscal year ended
December 31, 2011, 50% (which percentage will be reduced to 25% and 0% if the Companys
total leverage ratio is less than specified ratios) of the Companys annual excess cash
flow (as defined in the New Term Loan Credit Agreement).
The term loans under the New Term Loan Credit Agreement mature on December 2, 2017
(or January 30, 2014, if the Companys senior subordinated notes are not refinanced with
indebtedness permitted to be incurred under the New Term Loan Credit Agreement that
matures at least 91 days after the maturity date of the term loans). The Company is
required to repay installments on the term loans in quarterly principal amounts of
0.25%, with the remaining amount payable on the maturity date.
All obligations under the New Term Loan Credit Agreement are jointly and severally
guaranteed by our parent and each existing and future domestic subsidiary of the
Company. Each guarantor has secured its obligations under the guaranty by a first
priority lien on substantially all of its assets (other than accounts receivable,
inventory, cash and related proceeds and assets) and a second priority lien on its
accounts receivable, inventory, cash and related proceeds and assets.
The New Term Loan Credit Agreement contains negative covenants that are
substantially similar to our New ABL Facility, except that the New Term Loan Credit
Agreement does not require compliance with a fixed charge coverage ratio. The New Term
Loan Credit Agreement also contains certain customary affirmative covenants and events
of default.
In connection with the New Term Loan Credit Agreement, the Company incurred $12.2
million in finance costs that have been capitalized and will be amortized over the life
of the loan.
At December 31, 2010, the outstanding principal amount of term loans under the Term
Loan Credit Agreement was $666.6 million, which reflects an original issue discount of
$6.7 million net of $0.1 million of accumulated amortization, and the interest rate on
borrowings ranged from 6.75% to 7.50%
Other Credit Agreements
At December 31, 2010, we have a $0.4 million Canadian dollar denominated revolving
credit facility that bears interest at the Canadian prime rate plus 1.1% and expires in
June 2011, and a 1.4 million British Pound Sterling denominated revolving credit
facility that bears interest at the UK base rate plus 1.75% on the first 1.0 million
British Pound Sterling and 4.75% over the UK base rate on the remaining $0.4 million
British Pound Sterling. The British Pound Sterling revolving credit facility expires on
June 30, 2011. There were no borrowings under the British Pound Sterling revolving
credit facility at December 31, 2010. At December 31, 2009, borrowings outstanding under
the British Pound Sterling revolving credit facility were 0.4 million British Pound
Sterling. At December 31, 2010 and 2009, there were no borrowings under the Canadian
dollar denominated revolving credit facility. We expect to renew these revolving credit
facilities upon expiration.
Long-term borrowings at December 31, 2010 include a mortgage note with the New
York State Job Development Authority of $4.5 million. The mortgage note was amended on
December 18, 2009, extending the fixed monthly payments of principal and interest for a
period of 60 months up to and including December 31, 2014. The note bears interest at
the rate of 2.22%, and is subject to review and adjustment semi-annually based on the
New York State Job Development Authoritys confidential internal protocols. The mortgage
note is collateralized by a distribution facility located in Chester, New York.
In connection with its acquisition by AAH on April 30, 2004, the Company
issued $175.0 million in principal amount of 8.75% senior subordinated notes due 2014 to
their initial purchasers, which were subsequently resold to qualified institutional
buyers and non-U.S. persons in reliance upon Rule 144A and Regulation S under the
Securities Act of 1933 (the Note Offering). In August 2004, the Company filed with the
Securities and Exchange Commission a Registration Statement on
Form S-4, offering to exchange registered notes for the notes issued in connection
with the Note Offering. The terms of
31
the notes and the exchange notes were substantially
identical. The exchange was completed in October 2004. Interest is payable semi-annually
in arrears on May 1 and November 1 of each year. The outstanding senior subordinated
notes are guaranteed, jointly and severally, on an unsecured subordinated basis by each
of the Companys existing and future domestic subsidiaries.
The indenture governing the outstanding notes contains certain covenants limiting,
among other things and subject to certain exceptions, the Companys ability and the
ability of the Companys restricted subsidiaries to:
| incur additional indebtedness or issue preferred stock; | ||
| pay dividends or distributions on capital stock (except the Dividend, as defined below), or redeem, repurchase or retire capital stock of the Company or any restricted subsidiary or make payments on, or redeem, repurchase or retire any subordinated indebtedness; | ||
| make certain investments, loans, advances and acquisitions; | ||
| enter into sale and leaseback transactions; | ||
| engage in transactions with affiliates; | ||
| create liens; | ||
| transfer or sell assets; | ||
| guarantee debt; | ||
| create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; | ||
| consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; and | ||
| engage in unrelated businesses. |
We may redeem our outstanding senior subordinated notes,
in whole or in part, at the redemption prices (expressed as percentages of principal
amount of senior subordinated notes to be redeemed) set forth below, plus accrued and
unpaid interest thereon, if redeemed during the twelve-month period beginning on May 1
of each of the years indicated below:
Year | Percentage | |||
2011 |
101.458 | % | ||
2012 and thereafter |
100.000 | % |
If we experience certain kinds of change in control, we must offer to
purchase our outstanding senior subordinated notes at 101% of their principal amount,
plus accrued and unpaid interest.
If we or our restricted subsidiaries engage in certain asset sales, we generally
must either invest the net cash proceeds from such sales in our business within a period
of time, prepay senior debt or make an offer to purchase a principal amount of our
outstanding senior subordinated notes equal to the excess net cash proceeds, subject to
certain exceptions. The purchase price of the outstanding senior subordinated notes
will be 100% of their principal amount, plus accrued and unpaid interest.
We have entered into various capital leases for machinery and equipment and
automobiles with implicit interest rates ranging from 5.69% to 17.40% which extend to
2015. The Company has numerous non-cancelable operating leases for its retail store
sites as well as several leases for offices, distribution and manufacturing facilities,
showrooms and equipment. These leases expire on various dates through 2023 and generally
contain renewal options and require the Company to pay real estate taxes, utilities and
related insurance costs.
Restructuring costs
Restructuring costs associated with the Factory Card & Party Outlet Acquisition of
$9.1 million were accrued as part of net assets acquired. Through December 31, 2009, the
Company incurred $6.7 million in restructuring costs, including $3.8 million in 2009.
Through December 31, 2010, the Company incurred $7.6 million in restructuring costs
including $0.9
million incurred in the year ended December 31, 2010. The Company expects to incur
$0.5 million in restructuring costs in 2011.
32
During October 2009, the Company communicated its plan to close the FCPO corporate
office in Naperville, Illinois and to consolidate its retail corporate office operations
into those of Party City, in Rockaway, New Jersey. In connection with the closing, the
Company recorded severance costs of $1.8 million during 2009, all of which were paid by
December 2010. The Company continues to utilize the Naperville facility as a
distribution center for greeting cards and other products.
Other
Rent expense for the years ended December 31, 2010 and 2009 totaled $144.0 million
and $136.8 million, respectively. Minimum lease payments currently required under
non-cancelable operating leases for the year ending December 31, 2011, approximate
$112.2 million.
The Company has a management agreement with Berkshire Partners LLC and Weston
Presidio. Pursuant to the management agreement, the Company pays annual management fees
of $1.2 million. Although the indenture governing the 8.75% senior subordinated notes
will permit the payments under the management agreement, such payments will be
restricted during an event of default under the notes and will be subordinated in right
of payment to all obligations due with respect to the notes in the event of a bankruptcy
or similar proceeding of Amscan.
We expect that cash generated from operating activities and availability under our
credit agreements will be our principal sources of liquidity. Based on our current level
of operations, we believe these sources will be adequate to meet our liquidity needs for
at least the next twelve months. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available to us under our senior secured credit facilities in an amount sufficient to
enable us to repay our indebtedness, including the notes, or to fund our other liquidity
needs.
Cash Flow Data Year Ended December 31, 2010 Compared to Year Ended December 31,
2009
Net cash provided by operating activities
totaled $61.2 million during 2010, as
compared to $123.9 million during 2009. Net cash flow provided by operating activities
before changes in operating assets and liabilities was $133.4 million during 2010 and
$124.2 million during 2009. Changes in operating assets and liabilities during 2010
resulted in the use of cash of $72.2 million and principally reflect an increase in
inventories necessary to support the growth in our share of shelf at our company-owned
retail stores as well as the growth in our temporary Halloween stores. Changes in
operating assets and liabilities resulted in the use of cash of $0.2 million during
2009.
Net cash used in investing
activities totaled $102.8 million during 2010 and $54.4
million during 2009. Investing activities for 2010 included $30.4 million paid in
connection with the purchase of the Christys Group and $21.5 million paid in connection
with the purchase of retail franchise stores. Capital expenditures totaled $49.6 million
in 2010 compared to $26.2 million in 2009. Retail capital expenditures totaled $37.2
million in 2010 and were principally for store renovations and updated information
systems, while wholesale capital expenditures totaled $12.4 million.
Net
cash provided from financing activities was $46.5 million in 2010,
compared to $70.2 million used in financing activities in
2009. During 2010, net cash provided by financing activities included $160.6 million
from the refinancing of our asset based revolving credit facility and $675.0 million
from the refinancing of our term loan credit facility. Cash provided by the refinancing
of the revolving credit facility was principally used to pay off the $137.6 million
balance on the prior revolving credit facility and the $19.2 million balance of the
prior PCFG term loan. The remaining cash from financing under the revolving credit
facility was principally used to pay down trade payables. Cash provided by the
refinancing of the term loan credit facility was used to pay off the $341.6 million
balance on the prior term loan credit facility and to pay a $301.8 million dividend to
stockholders. Additionally, cash used in financing activities included scheduled
payments on our long-term obligations that totaled $2.6 million compared to $11.0
million 2009.
Cash Flow Data Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net cash provided by operating activities totaled $123.9 million in 2009, as
compared to $79.9 million in 2008. Net cash provided by operating activities before
changes in operating assets and liabilities was $124.2 million for 2009 and $102.6
million for 2008. Changes in operating assets and liabilities resulted in the use of
cash of $0.2 million in 2009 and $22.7 million in 2008. The increase in cash provided by
operating activities during 2009 principally reflects an increase in income from
operations and decreases in interest expense and inventory levels, partially offset by
an increase in other assets.
Net cash used in investing activities totaled $54.4 million in 2009 and $51.2
million in 2008. Investing activities for 2009 included $24.9 million paid in escrow in
connection with the asset purchase agreement with American Greetings. Retail
capital expenditures, principally for store renovations and updated information
systems, totaled $16.3 million in 2009, while wholesale capital expenditures totaled
$9.9 million.
33
Net cash used in financing activities was $70.2 million in 2009 and $23.0 million
in 2008. During 2009, the majority of cash used in financing activities was used to
reduce borrowings under our revolving credit facility . Additionally, cash used in
financing activities included scheduled payments on our long-term obligations that
totaled $11.0 million in 2009 compared to $8.9 million during 2008. Scheduled payments
during 2009 included an additional $2.5 million for payments on the PCFG term loan in
connection with the amended credit agreement.
Tabular Disclosure of Contractual Obligations
Our contractual obligations at December 31, 2010 are summarized by the year in
which the payments are due in the following table (dollars in thousands):
Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | ||||||||||||||||||||||
Long-term debt obligations
(a) |
$ | 846,183 | $ | 6,810 | $ | 6,835 | $ | 6,860 | $ | 181,982 | $ | 5,737 | $ | 637,959 | ||||||||||||||
Capital lease obligations (a) |
3,976 | 2,236 | 1,446 | 147 | 131 | 16 | | |||||||||||||||||||||
Operating lease obligations
(b) |
425,164 | 112,172 | 95,026 | 67,314 | 45,510 | 33,369 | 71,773 | |||||||||||||||||||||
Merchandise purchase
commitments (c) |
81,600 | 26,700 | 27,200 | 27,700 | | | | |||||||||||||||||||||
Minimum product royalty
obligations |
19,765 | 8,271 | 7,320 | 1,724 | 800 | 550 | 1,100 | |||||||||||||||||||||
Total contractual obligations |
$ | 1,376,688 | $ | 156,189 | $ | 137,827 | $ | 103,745 | $ | 228,423 | $ | 39,672 | $ | 710,832 | ||||||||||||||
(a) | See Note 8 to our Consolidated Financial Statements which are included in this report beginning on page F-2. | |
(b) | We are also an assignor with continuing lease liability for sixteen stores sold to franchisees that expire through 2016. The assigned lease obligations continue until the applicable leases expire. The maximum amount of the assigned lease obligations may vary, but is limited to the sum of the total amount due under the lease. At December 31, 2010, the maximum amount of the assigned lease obligations was approximately $7.4 million and is not included in the table above. |
The operating lease obligations included above do not include contingent
rent based upon sales volume (which represented less than 1% of minimum
lease obligations in 2010), or other variable costs such as maintenance,
insurance and taxes. See Note 17 to our Consolidated Financial Statements
which are included in this report beginning on page F-2.
(c) The Company has certain purchase commitments with vendors requiring minimum
purchase commitments through 2013.
At December 31, 2010 there were no non-cancelable purchase orders related
to capital expenditures.
At December 31, 2010, there were $150.1 million of borrowings under our ABL
Credit Agreement, and standby letters of credit totaling $12.9 million.
Not included in the above table are $0.7 million of net potential cash
obligations associated with unrecognized tax benefits due to the high degree of
uncertainty regarding the timing of future cash outflows associated with such
obligations. Please refer to Note 16, Income Taxes, in the Notes to Consolidated
Financial Statements for further information related to unrecognized tax benefits.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item
303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
34
Effects of Inflation
Although we expect that our operating results will be influenced by general
economic conditions, we do not believe that inflation has had a material effect on our
results of operations during the periods presented. However, there can be no assurance
that our business will not be affected by inflation in the future.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the financial
statements and related notes. Since future events and their impact cannot be determined
with certainty, the actual results will inevitably differ from our estimates. Such
differences could be material to the consolidated financial statements included herein.
We believe our application of accounting policies, and the estimates
inherently required by these policies, are reasonable. These accounting policies and
estimates are constantly re-evaluated and adjustments are made when facts and
circumstances dictate a change. Historically, we have found the application of
accounting policies to be reasonable, and actual results generally do not differ
materially from those determined using necessary estimates.
Revenue Recognition
Our terms of sale to retailers and other distributors are principally F.O.B.
shipping point and, accordingly, title and the risks and rewards of ownership are
transferred to the customer, and revenue is recognized, when goods are shipped. We
estimate reductions to revenues for volume-based rebate programs at the time sales are
recognized. Should customers earn rebates higher than estimated by us, additional
reductions to revenues may be required.
Revenue from retail operations is recognized at the point of sale. We estimate
future retail sales returns and, when material, record a provision in the period that
the related sales are recorded based on historical information. Should actual
returns differ from our estimates, we would be required to revise estimated sales
returns. Retail sales are reported net of taxes collected.
Store Closure Costs
We record estimated store closure costs, estimated lease commitment costs net
of estimated sublease income and other miscellaneous store closing costs when the
liability is incurred. Such estimates, including sublease income, may be subject to
change.
Product Royalty Agreements
The Company enters into product royalty agreements that allow the Company to
use licensed designs on certain of its products. These contracts require the Company to
pay royalties, generally based on the sales of such product and may require guaranteed
minimum royalties, a portion of which may be paid in advance. The Company matches
royalty expense with revenue by recording royalties at the time of sale, at the greater
of the contractual rate or an effective rate calculated based on the guaranteed minimum
royalty and the Companys estimate of sales during the contract period. If a portion of
the guaranteed minimum royalty is determined to be unrecoverable, the unrecoverable
portion is charged to expense at that time.
Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers and franchisees to make required payments. A
considerable amount of judgment is required in assessing the ultimate realization of
these receivables, including consideration of our history of receivable write-offs, the
level of past due accounts and the economic status of our customers. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances would be required.
Inventories
Our policy requires that we state our inventories at the lower of cost or
market. In assessing the ultimate realization of inventories, we are required to make
judgments regarding, among other things, future demand and market conditions, current
35
inventory levels and the impact of the possible discontinuation of product designs. If
actual conditions are less favorable than those projected by us, additional inventory
write-downs to market value may be required.
We estimate retail inventory shortage, for the period from the last inventory
date to the end of the reporting period, on a store-by-store basis. Our inventory
shortage estimate can be affected by changes in merchandise mix and changes in actual
shortage trends. The shrinkage rate from the most recent physical inventory, in
combination with historical experience, is the basis for estimating shrinkage.
Long-Lived and Intangible Assets
We review the recoverability of our long-lived assets, including
definite-lived intangible assets other than goodwill, whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable. For purposes of
recognizing and measuring impairment, we evaluate long-lived assets other than goodwill
based upon the lowest level of independent cash flows ascertainable to evaluate
impairment. If the sum of the undiscounted future cash flows expected over the remaining
asset life is less than the carrying value of the assets, we may recognize an impairment
loss. The impairment related to long-lived assets is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. When fair values are
not readily available, we estimate fair values using expected discounted future cash
flows.
During 2010 and 2008, the Company instituted programs to convert its FCPO stores
and its company-owned and franchised Party America stores to Party City stores and
recorded fourth quarter charges of $27.4 million and $17.4 million respectively, for the
impairment of the Factory Card & Party Outlet and Party America trade names.
In the evaluation of the fair value and future benefits of finite long-lived
assets attached to retail stores, we perform our cash flow analysis on a store-by-store
basis. Various factors including future sales growth and profit margins are included in
this analysis. To the extent these future projections or strategies change, the
conclusion regarding impairment may differ from the current estimates.
Goodwill is reviewed for potential impairment, on an annual basis or more
frequently if circumstances indicate a possible impairment, by comparing the fair value
of a reporting unit with its carrying amount, including goodwill. We estimate the fair
value of each reporting unit using expected discounted cash flows. If the carrying
amount of a reporting unit exceeds its fair value, the excess, if any, of the fair value
of the reporting unit over amounts allocable to the units other assets and
liabilities is the implied fair value of goodwill. If the carrying amount of a reporting
units goodwill exceeds the implied fair value of that goodwill, an impairment loss will
be recognized in an amount equal to that excess. The fair value of a reporting unit
refers to the amount at which the unit as a whole could be sold in a current transaction
between willing parties.
Insurance Accruals
Our consolidated balance sheet includes significant liabilities with respect
to self-insured workers compensation, medical and general liability claims. We estimate
the required liability for such claims based upon various assumptions, which include,
but are not limited to, our historical loss experience, projected loss development
factors, actual payroll and other data. The required liability is also subject to
adjustment in the future based upon changes in claims experience, including changes in
the number of incidents (frequency) and changes in the ultimate cost per incident
(severity). Adjustments to earnings resulting from changes in historical loss trends
have been insignificant. Further, we do not anticipate any significant change in loss
trends, settlements or other costs that would cause a significant change in our
earnings.
Income Taxes
Temporary differences arising from differing treatment of income and expense
items for tax and financial reporting purposes result in deferred tax assets and
liabilities that are recorded on the balance sheet. These balances, as well as income
tax expense, are determined through managements estimations, interpretation of tax law
for multiple jurisdictions and tax planning. If our actual results differ from estimated
results due to changes in tax laws or tax planning, our effective tax rate and tax
balances could be affected. As such, these estimates may require adjustment in the
future as additional facts become known or as circumstances change.
The Companys income tax returns are periodically audited by the Internal
Revenue Service and by various state and local jurisdictions. The Company reserves for
uncertain tax positions according to the guidance of ASC 740-10
Income Taxes. See
further discussion in Note 16 of the Notes to the Consolidated Financial Statements.
36
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards, Accounting Standards Codification or ASC Subtopic 718 (SFAS No. 123(R))
Share-Based Payment, which is a revision of SFAS No. 123 Accounting for Stock-Based
Compensation as amended. ASC Subtopic 718 (SFAS No. 123(R)) establishes standards for
the accounting for transactions where an entity exchanges its equity for goods or
services and transactions that are based on the fair value of the entitys equity
instruments or that may be settled by the issuance of those equity instruments. ASC
Subtopic 718 focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Generally, the fair value
approach in ASC Subtopic 718 is similar to the fair value approach described in SFAS No.
123.
The Company adopted ASC Subtopic 718 using the prospective method. Since the
Companys common stock is not publicly traded, the options granted in 2005 under SFAS
No. 123 continue to be expensed under the provisions of SFAS No.123 using a minimum
value method. Options issued subsequent to January 1, 2006 are expensed under the
provisions of ASC Subtopic 718 (see Note 15).
Legal Proceedings
We are a party to certain claims and litigation in the ordinary course of
business. We do not believe any of these proceedings will result, individually or in the
aggregate, in a material adverse effect upon our financial condition or future results
of operations.
Recently Issued Accounting Pronouncements
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires
increased disclosures about the credit quality of financing receivables and allowances
for credit losses, including disclosure about credit quality indicators, past due
information and modifications of finance receivables. The guidance is generally effective
for reporting periods ending after December 15, 2010. There was no material impact from
this update.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805).
This update requires a public entity to disclose pro forma information for business
combinations that occurred in the current reporting period and specifically requires the
same information for the comparative prior period. This guidance is generally effective
for annual reporting periods beginning on or after December 15, 2010. We do not
anticipate any material impact from this update.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 defers
the portion of ASU 2010-20 related to troubled debt disclosures. This guidance is
anticipated to be effective for interim and annual periods ending after June 15, 2011. We
do not anticipate any material impact from this update.
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
This report includes forward-looking statements within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report that
address activities, events or developments that we expect or anticipate will or may
occur in the future, future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement strategy, including any changes to
operations, goals, expansion and growth of our business and operations, plans,
references to future success and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by us in light of
our experience and our perception of historical trends, current conditions and expected
future developments as well as other factors we believe are appropriate in the
circumstances. Actual results may differ materially from those discussed. Whether actual
results and developments will conform with our expectations and predictions is subject
to a number of risks and uncertainties, including, but not limited to (1) the
concentration of sales by us to party goods superstores where the reduction of purchases
by a small number of customers could materially reduce our sales and profitability, (2)
the failure by us to anticipate changes in tastes and preferences of party goods
retailers and consumers, (3) the introduction by us of new product lines, (4) the
introduction of new products by our competitors, (5) the inability to increase prices to
recover fully future increases in raw material prices, especially increases in prices of
paper and petroleum-based resin, (6) the loss of key employees, (7) changes in general
business conditions, (8) other factors which might be described from time to time in our
filings with the Commission, and (9) other factors which are beyond our control.
Consequently, all of the forward-looking statements made in this report are qualified by
these cautionary statements, and the actual results or developments anticipated
37
by us
may not be realized or, even if substantially realized, may not have the expected
consequences to or effects on our business or operations. Although we believe that we
have the product offerings and resources needed for growth in revenues and margins,
future revenue and margin trends cannot be reliably predicted. Changes in such trends
may cause us to adjust our operations in the future. Because of the foregoing and other
factors, recent trends should not be considered reliable indicators of future financial
results. In addition, our highly leveraged nature may impair our ability to finance our
future operations and capital needs and our flexibility to respond to changing business
and economic conditions and business opportunities.
Quarterly Results (Unaudited)
Despite a concentration of holidays in the fourth quarter of the year, as a
result of our expansive product lines and wholesale customer base and increased
promotional activities, the impact of seasonality on the quarterly results of our
wholesale operations in recent years has been limited. Promotional activities, including
special dating terms, particularly with respect to Halloween and Christmas products sold
to retailers and other distributors in the third quarter, and the introduction of our
new everyday products and designs during the fourth quarter generally result in higher
accounts receivables and inventory balances. Our retail operations are subject to
substantial seasonal variations. Historically, our retail stores have realized a
significant portion of their net sales, net income and cash flow in the fourth quarter
of the year, principally due to the sales in October for the Halloween season and, to a
lesser extent, due to sales for end of year holidays.
The following table sets forth our historical revenues, gross profit, income from
operations and net income (loss), by quarter, for 2010 and 2009.
For the Three Months Ended, | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
2010 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 304,379 | $ | 352,705 | $ | 358,772 | $ | 563,821 | ||||||||
Royalties and franchise fees |
3,844 | 4,453 | 4,035 | 7,085 | ||||||||||||
Gross profit |
104,479 | 141,840 | 132,437 | 257,863 | ||||||||||||
Income from operations |
8,288 | 35,367 | 17,963 | 65,818 | (a) | |||||||||||
Net (loss) income
attributable to Amscan
Holdings, Inc. |
(412 | ) | 16,460 | 4,603 | 28,668 | (a) | ||||||||||
2009 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 309,046 | $ | 337,536 | $ | 336,944 | $ | 483,798 | ||||||||
Royalties and franchise fees |
3,694 | 4,536 | 4,164 | 7,100 | ||||||||||||
Gross profit |
103,629 | 128,425 | 121,453 | 214,776 | ||||||||||||
Income from operations |
12,201 | 27,818 | 14,937 | 86,917 | ||||||||||||
Net income attributable to
Amscan Holdings, Inc. |
2,403 | 10,952 | 3,079 | 46,119 |
(a) | During the 4th Quarter 2010, the Company recorded a charge of $27,400 to write off the Factory Card & Party Outlet trade name. |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our earnings are affected by changes in interest rates as a result of our variable
rate indebtedness. However, we utilize interest rate swap agreements to manage the
market risk associated with fluctuations in interest rates. If market interest rates for
our variable rate indebtedness averaged 2% more than the interest rate actually paid for
the years ended December 31, 2010, 2009 and 2008, our interest expense, after
considering the effects of our interest rate swap agreements, would have increased, and
income before income taxes would have decreased, by $7.1 million, $6.7 million, and $7.3
million, respectively. These amounts are determined by considering the impact of the
hypothetical interest rates on our
38
borrowings and interest rate swap agreements. This
analysis does not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further mitigate our
exposure to the change. However, due to the uncertainty of the specific actions that we
would take and their possible effects, the sensitivity analysis assumes no changes in
our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S. dollar
as compared to foreign currencies, predominately in European countries, as a result of
the sales of our products in foreign markets. Although we periodically enter into
foreign currency forward contracts to hedge against the earnings effects of such
fluctuations, we (1) may not be able to achieve hedge effectiveness to qualify for
hedge-accounting treatment and, therefore, would record any gain or loss on the fair
value of the derivative in other expense (income) and (2) may not be able to hedge such
risks completely or permanently. A uniform 10% strengthening in the value of the dollar
relative to the currencies in which our foreign sales are denominated would have
resulted in a decrease in gross profit of $6.7 million, $5.5 million, and $5.6 million
for the years ended December 31, 2010, 2009 and 2008, respectively. These calculations
assume that each exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange rates, which could
change the U.S. dollar value of the resulting sales, changes in exchange rates may also
affect the volume of sales or the foreign currency sales price as competitors products
become more or less attractive. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales levels or
local currency prices.
Item 8. Financial Statements and Supplementary Data
See the consolidated financial statements and supplementary data listed in the
accompanying Index to Consolidated Financial Statements and Financial Statement Schedule on
page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure control procedures, as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (the Exchange Act), designed to provide reasonable
assurance that information required to be disclosed in reports filed
under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms; and (ii) accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosures.
As of the end of the period covered by this report, our Chief Executive Officer and
Chief Financial Officer evaluated, with the participation of our management, the
effectiveness of our disclosure controls and procedures. Based on the evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level as of December
31, 2010.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth
quarter of 2010 identified in connection with our Chief Executive Officers and Chief
Financial Officers evaluation that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
(c) Managements Annual Report on Internal Control Over Financial Reporting
The management of Amscan is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d 15(f) promulgated under the Exchange
Act, as amended, as a process designed by, or under the supervision of, Amscans Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions,
and effected by Amscans board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of
39
financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of Amscan; |
||
| Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
Amscan are being made only in accordance with authorizations of management and
directors of Amscan; and |
||
| Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Amscans assets that could have a
material effect on the consolidated financial statements. |
Our internal control system was designed to provide reasonable assurance to our
management and Board of Directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision of the Companys Chief Executive Officer and Chief
Financial Officer, management conducted an evaluation of the Companys internal control
over financial reporting based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on the evaluation performed, management concluded that its internal
control over financial reporting, based on the COSO criteria, was effective, at the
reasonable assurance level, as of December 31, 2010.
This annual report does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys public accounting
firm.
Item 9B. Other Information
Not applicable.
40
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages and positions with the Company of the
persons who are serving as directors and executive officers of the
Company at April 13, 2011.
Name | Age | Position | ||||
Gerald C. Rittenberg
|
59 | Chief Executive Officer and Director | ||||
James M. Harrison
|
59 | President, Chief Operating Officer and Director | ||||
Michael A. Correale
|
53 | Chief Financial Officer | ||||
Gregg A Melnick
|
41 | President, Party City Retail Group | ||||
Robert J. Small
|
44 | Chairman of the Board of Directors | ||||
Steven J. Collins
|
42 | Director | ||||
Michael F. Cronin
|
57 | Director | ||||
Kevin M. Hayes
|
42 | Director | ||||
Jordan A. Kahn
|
69 | Director | ||||
William A. Kussell
|
51 | Director | ||||
Richard K. Lubin
|
64 | Director | ||||
Carol M. Meyrowitz
|
57 | Director | ||||
David M. Mussafer
|
47 | Director |
Gerald C. Rittenberg became our Chief Executive Officer in December 1997.
From May 1997 until December 1997, Mr. Rittenberg served as acting Chairman of the
Board. Prior to that time, Mr. Rittenberg served as our President from October
1996.
James M. Harrison became our President in December 1997 and our Chief
Operating Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also
served as our Chief Financial Officer and Treasurer. From February 1997 to December
1997, Mr. Harrison served as our Secretary.
Michael A. Correale became our Chief Financial Officer in March 2002. Prior to
that time, Mr. Correale served as our Vice President Finance, from May 1997 to
March 2002.
Gregg A. Melnick became President of Party City Retail Group in March 2011. From
May 2010 to February 2011, Mr. Melnick was President of Party City Corporation.
Previously, he was Chief Operating Officer from October 2007 to April 2010, and Chief
Financial Officer from September 2004 to September 2007.
Robert J. Small became one of our directors upon the consummation of the
acquisition of the Company by AAH Holdings Corporation (the 2004 Transactions). Mr.
Small, a Managing Director of Berkshire Partners LLC, which he joined in 1992,
currently serves on the board of directors of TransDigm Group Incorporated. Mr.
Small has also served on the board of directors of Hexcel Corporation and several
privately held companies.
Steven J. Collins has been a member of our Board since August 2008. Mr.
Collins, a Managing Director of Advent International, which he joined in 1995, is
currently a member of the board of directors of Kirklands, Inc. and previously
served on the board of directors of lululemon athletica inc. and several privately
held businesses. Mr. Collins received a B.S. from the Wharton School of the
University of Pennsylvania and an M.B.A. from the Harvard Business School.
Michael F. Cronin became one of our directors upon the consummation of the
2004 Transactions. From 1991 to the present, Mr. Cronin has served as Managing
Partner of Weston Presidio. Mr. Cronin also serves as a director of several
privately held companies.
Kevin M. Hayes became one of our directors upon the consummation of the
2004 Transactions. Mr. Hayes is a Partner of Weston Presidio and has served in that
position since 2000. Mr. Hayes is also serves as a director of several privately
held companies.
41
Jordan A. Kahn became a director in January 2005. Mr. Kahn was the founder
and Chairman of the Board of Directors of The Holmes Group and served as President
and Chief Executive Officer of the Holmes organization from 1982 through 2005. Since
1968, Mr. Kahn has also been Managing Director of Jordan Kahn Co., Inc., a
manufacturers representative representing small electric personal appliance
manufacturers to retailers across the Northeast.
William A. Kussell became a director in October, 2010. Mr. Kussell is an
Operating Partner at Advent International, working in the North American Consumer
Retail Segment. Prior to joining Advent International, he was President and Chief
Brand Officer for Dunkin Donuts World Wide. Mr. Kussel also serves on the board
of directors of Modells Sporting Goods and Extended Stay Hotels.
Richard K. Lubin became one of our directors upon the consummation of the 2004
Transactions. Mr. Lubin, a Managing Director of Berkshire Partners LLC, which he
co-founded in 1986, currently serves on the board of directors of SkillSoft. Mr.
Lubin has also served on the board of directors of Electro-Motive Diesel, Holmes
Products Corporation and a number of privately held companies.
Carol M. Meyrowitz became a director in August 2006. Ms. Meyrowitz is
currently a Director and CEO of The TJX Companies, Inc., where she has had extensive
management experience since 1983. Ms. Meyrowitz also serves as a director of Staples,
Inc. and is a member of the Board of Overseers for the Joslin Diabetes Center. Ms.
Meyrowitz also served on the board of directors of the Yankee Candle Company from
2004 through 2007.
David M. Mussafer has been a member of our Board since August 2008. Mr.
Mussafer, a Managing Partner of Advent International, which he joined in 1990,
previously served on the board of directors of Dufry AG, Kirklands, lululemon
athletica inc. and numerous privately held businesses. Mr. Mussafer received a
B.S.M. from Tulane University and an M.B.A. from the Wharton School of the University
of Pennsylvania.
Board of Directors
The Board of Directors is led by Robert J. Small, a Non-Executive Chairman
of the Board, and is comprised of eight additional non-employee directors and two
employee directors. The Board of Directors has determined that Jordan A. Kahn,
William A. Kussell, and Carol M. Meyrowitz are independent directors, as used in Item
7(d)(iv) of Schedule 14A under the Exchange Act.
The Board of Directors holds regularly scheduled meetings each quarter. In
addition to the quarterly meetings, there are typically other scheduled and special
meetings annually. At each quarterly meeting, time is set aside for the
non-management directors to meet without management present.
Board Leadership Structure
The Company separates the roles of Chief Executive Officer and Chairman of the
Board of Directors in recognition of the differences between the two roles. The Chief
Executive Officer is responsible for setting the strategic direction for the Company and
the day to day leadership and performance of the Company, while the Chairman of the
Board of Directors provides guidance to the Chief Executive Officer and sets the agenda
for board meetings and presides over meetings of the full Board of Directors. We also
believe that separation of the positions creates an environment that is more conducive
to objective evaluation and oversight of managements performance, increasing management
accountability and improving the ability of the Board of Directors to monitor whether
managements actions are in the best interests of the Company and its stockholders. Mr.
Small, our Chairman of the Board of Directors, presides at all executive sessions of the
Board of Directors.
Risk Oversight
The Board of Directors role in the Companys risk oversight process includes
receiving reports from members of senior management on areas of material risk to the
Company, including operational, financial, legal and regulatory, and strategic risks.
The full Board of Directors receives these reports to enable it to understand our risk
identification, risk management
and risk mitigation strategies. While the Audit and Compensation Committees are
responsible for evaluating certain risks and overseeing the management of such risks,
the entire Board of Directors is informed of such risks at the Board of Directors
meeting following a given committee meeting. This enables the Board of Directors and
its committees to coordinate the risk oversight role, particularly with respect to risk
interrelationships.
42
Audit Committee
The Audit Committee of the Board of Directors consists of Michael F. Cronin,
Chairman, Robert J. Small, Steven J. Collins and James M. Harrison. The Audit Committee
is responsible for evaluating and recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement and establishing and
monitoring the Companys financial policies and control procedures. The Audit Committee
is governed by a written charter approved by the Board of Directors. There are two
regularly scheduled meetings of the Audit Committee and typically other special meetings
each year.
As required by SEC rules, the Audit Committee has established procedures for
the receipt, retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters, as well as the
confidential and anonymous submission of information, written or oral, by Company
employees regarding questionable accounting or auditing matters. Both our independent
auditors and internal financial personnel meet privately with our Audit Committee and
have unrestricted access to the Committee.
The Board of Directors has determined that Mr. Harrison has the requisite
financial knowledge and experience and qualifies as an audit committee financial
expert within the meaning of SEC regulations. Because of his role as an executive
officer of the Company, Mr. Harrison is not independent within the meaning of SEC
regulations.
Compensation Committee
The Compensation Committee of the Board of Directors consists of Richard K.
Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and David M. Mussafer. The Compensation
Committee is responsible for setting and administering the Companys policies that
govern executive compensation and for establishing the compensation of the Companys
executive officers. The Compensation Committee is also responsible for the
administration of, and grants under, the Companys equity incentive plan.
Code of Ethics
The Company has adopted a Code of Business Conduct, a copy of which is filed
with the Securities and Exchange Commission as an exhibit to this report. The Companys
Code of Business Conduct is a code of ethics, as defined in Item 406(b) of Regulation
S-K of the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Because the Companys common stock is not registered under the Exchange Act,
none of the Companys directors, officers or stockholders is obligated to file reports
of beneficial ownership of Company common stock pursuant to Section 16 of the Exchange
Act.
Item 11. Executive Compensation
Compensation Discussion and Analysis
This compensation discussion and analysis section is intended to provide
information about our compensation objectives and policies for our Chief Executive
Officer, our Chief Operating Officer, our Chief Financial Officer, and our
President-Party City Retail Group (we refer to these officers as our named executive
officers) that will place in context the information contained in the tables that
follow this discussion.
43
Compensation Committee
The Compensation Committee of the Board of Directors consists of Richard K.
Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and David M. Mussafer. The Compensation
Committee is responsible for setting and administering our executive compensation
policies and programs and determining the compensation of our executive officers. The
Compensation Committee also administers our Equity Incentive Plan (as defined
hereafter). The Compensation Committee met periodically in 2010, and all members of the
Compensation Committee attended each meeting.
The Compensation Committee has the authority to retain outside independent
executive compensation consultants to assist in the evaluation of executive officer
compensation and in order to ensure the objectivity and appropriateness of the actions
of the Compensation Committee. The Compensation Committee has the sole authority to
retain, at our expense, and terminate any such consultant, including sole authority to
approve such consultants fees and other retention terms. However, all decisions
regarding compensation of executive officers are made solely by the Compensation
Committee. No independent executive compensation consultants were retained by the
Compensation Committee during 2010.
Compensation Philosophy
Our executive compensation program has been designed to motivate, reward,
attract, and retain the management deemed essential to ensure our success. The program
seeks to align executive compensation with our short- and long-term objectives,
business strategy, and financial performance. We seek to create a sustainable
competitive advantage by achieving higher productivity and lower costs than our
competitors. Our compensation objectives at all compensation levels are designed to
support this goal by:
| linking pay to performance to create incentives to perform; | ||
| ensuring compensation levels and components are actively managed; and | ||
| using equity compensation to align employees long-term interests with those of the stockholders. |
Compensation
The Chief Executive Officer evaluates the performance of all executive and
senior officers against their established goals and objectives. Annually, the Chief
Executive Officer uses the results of these evaluations to determine compensation
packages for executive and senior officers to be recommended for approval by the
Compensation Committee. The Compensation Committee meets annually, usually in February,
to evaluate the performance of the executive and senior officers, and to establish
their base salaries, annual cash incentive award for the prior years performance and
share-based incentive compensation to be effective in the first quarter of the current
year. The Chief Executive Officer may request a meeting of the Compensation Committee
44
at an interim date to review the compensation package of a named executive or
other officer, as the result of unforeseen organizational or responsibility changes,
including new hires that occur during the year.
In determining compensation components and levels, the Chief Executive
Officer and the Compensation Committee consider the scope and responsibility of the
officers position, our overall financial and operating performance, the officers
overall performance and future potential, and the officers income potential resulting
from common stock acquired and stock options received in prior years. Three of the
four members of the Compensation Committee are representatives of the private equity
firms that collectively own approximately 93% of our outstanding equity. Thus, unlike
the situation at many public companies, compensation decisions at our Company are made
by individuals who have a real and direct economic stake in the outcome of the
decisions. The Committee members apply their considerable experiences in serving as
directors of private equity portfolio companies to devise compensation packages that
they believe will attract, retain and provide incentives to the executive talent
necessary to manage an entity in which their firms have a substantial economic
interest. Although the Committee looks to other companies to get a sense of the market
for executive compensation in comparable circumstances, it does not engage in formal
benchmarking or formulaic compensation. The members take the compensation actions that
a prudent owner of a business would take to make sure that they have the right
executive management to protect their investment.
Our Chief Executive Officer and Chief Operating Officer set salaries and bonus
opportunities for employees below the levels of executive and senior officers and make recommendations with respect to equity incentive awards to employees at these levels.
Components of Compensation
The Companys named executive and other officer compensation includes both
short-term and long-term components. Short-term compensation consists of an officers
annual base salary and annual incentive cash bonus. Long-term compensation may include
grants of stock options, restricted stock or other share-based incentives established
by the Company, as determined by the Compensation Committee.
Compensation is comprised of the following components:
Base Salary
The base salaries for our officers were determined based on the scope of
their responsibilities, basing the determination in large part on the collective
experience that the Sponsor representatives have with other companies in their
respective portfolios. Generally, we believe that executive base salaries should be
near the middle of the range of salaries that our Committee members have observed for
executives in similar positions and with similar responsibilities. Base salaries will
be reviewed annually, and adjusted from time to time to reflect individual
responsibilities, performance and experience, as well as market compensation levels.
Annual Cash Bonus Plan
We have an annual cash incentive plan that is designed to serve as an
incentive to drive annual financial performance. As a company with a substantial
amount of indebtedness, we believe that Adjusted EBITDA is an important measure of our
financial performance and ability to service our indebtedness and we use it as the
target metric for our annual cash incentive plan. Adjusted EBITDA is a non-GAAP
measure used internally and is measured by taking net income (loss) from operations and
adding back interest charges, income taxes, depreciation and amortization and
adjustments for other non-cash or non-recurring transactions. Individual performance
factors can also play a role in determining incentive compensation. Each named executive
is assigned a percentage of base salary ranging from 50% to 100%- that can be earned if the target
Adjusted EBITDA is achieved. The base range
percentage is adjusted based on actual performance, with a maximum range of 75% to 150% and a minimum of zero.
For 2010, the target Adjusted EBITDA was $206 million and the Company needed to achieve Adjusted EBITDA of $230 million in
order for the maximum incentive to be earned. We achieved Adjusted EBITDA of $225 million. As a result, the Committee concluded
to pay incentive awards that were 88% of the maximum.
45
Stock-based Incentive Program
We have an Equity Incentive Plan (the Equity Incentive Plan) under which
the Committee may grant incentive awards in the form of options to purchase shares of
common stock and shares of restricted or unrestricted common stock to directors,
officers, employees and consultants (Participants) of Party City and its affiliates.
The Compensation Committee uses the Equity Incentive Plan as an important component of
our overall compensation program because it helps retain key employees, aligns their
financial interests with the interests of our equity owners, and rewards the
achievement of the our long-term strategic goals. Common stock options provide our
employees with the opportunity to purchase and maintain an equity interest in the
Company and to share in the appreciation of the value of our stock.
We granted a substantial amount of equity at the time of the 2004 Acquisition and
have refreshed those awards on several occasions since 2004. The Committee uses both
time-based awards and performance-based awards to provide what it believes are the
appropriate incentives. Time-based stock options help to retain executives, who must
be employed by us at the time the award vests. In addition, because we set the
exercise price of stock options at the fair value of the common stock at the time of
grant, our equity value must increase thereby benefiting all stockholders before
the awards have any value. Performance-based awards are vested only if there is a
liquidity event and our private equity owners have achieved a specified internal rate of return on their
investment. We believe that these awards put our executives in the shoes of the equity
owners and align their interest with those of our stockholders.
Unless otherwise provided in the related award agreement or, if applicable, the
Stockholders Agreement, immediately prior to certain change of control transactions
described in the Equity Incentive Plan, all outstanding Company stock options will,
subject to certain limitations, become fully exercisable and vested and any
restrictions and deferral limitations applicable to any restricted stock awards will
lapse. We believe that providing for acceleration upon a liquidity event such as a
change of control helps to align the interests of the executive with those of the
stockholders.
In March 2010, the Committee made a stock option award to Gregg A. Melnick, upon
his promotion to President of our Party City Retail Group. The award consisted of
time-based options for 30 shares that vest in five equal annual installments commencing
on the first anniversary of the grant date and performance-based options for 16 shares
that have the same terms as described above for all performance-based awards.
Special stock option distribution
In December 2010, in connection with the refinancing of our term loan agreement
(see Liquidity and Capital Resources), our Board of Directors declared a one-time cash
dividend of $9,400 per share of outstanding Common Stock and similar distributions to
the holders of vested time options, in order to recognize that the dividend would
reduce the Companys stock valuation. The named executives, to the extent they held
either common shares or vested time options, received the same payment per share or
vested option as every other shareholder and time option holder. The distributions
related to the vested time options are shown in the summary of compensation table in a
separate column. In addition, for the portion of the outstanding
46
performance-based
options that were vested at the time of the dividend, but as to which the additional
performance criteria had not been met, the holders will receive a dividend equivalent
payment if the performance conditions cause the award to be earned. The Board of
Directors believed that this treatment of option holders was fair and consistent with
their status as equity participant in our company.
Other Compensation
Each named executive is eligible to participate in the Companys benefit
plans, such as medical, dental, group life, disability and accidental death and
dismemberment insurance. Under our profit sharing plans, our named executive officers
and generally all full-time domestic exempt and non-exempt employees who meet certain
length-of-service and age requirements, as defined, may contribute a portion of their
compensation to the plan on a pre-tax basis and receive a matching contribution ranging
from 25% to 100% of the employee contributions, not to exceed a range of 4% to 6% of
the employees annual salary. In addition our profit-sharing plans provide for annual
discretionary contributions to be credited to participants accounts. Named executive
officers participate in the benefit plans on the same basis as most other Company
employees.
The Chief Executive Officer and the Chief Operating Officer drive automobiles
owned by the Company. The Chief Financial Officer and the President-Party City Retail
Group each receive an allowance to cover the cost of his automobile. The annual value
of the automobile usage
and the allowance are reported as taxable income to the executive. All employees,
including the named executives are reimbursed for the cost of business related travel.
The named executive officers did not receive any other perquisites or
personal benefits or property in 2010, 2009, or 2008.
Accounting and Tax Treatment
Accounting Treatment
The Company accounts for share-based payment awards in accordance with
Statement of Financial Accounting Standard (SFAS) No. 123(R) or Accounting Standards
Codification Subtopic 718, Share-based Payment Awards, which requires that all forms
of share-based payments to employees, including but not limited to stock options, be
treated as compensation expense and recognized in the Companys consolidated statements
of income over the vesting period.
Cash compensation or non-share based compensation, including base salary and
incentive compensation, is recorded as an expense in the Companys consolidated
financial statements as it is earned.
Tax Treatment
As the Companys common stock is not publicly traded, executive compensation
is not subject to the provisions of Section 162(m) of the Internal Revenue Code which
limit the deductibility of compensation paid to certain individuals to $1.0 million,
excluding qualifying incentive-based compensation. However, as part of its role, the
Compensation Committee reviews and considers the current and future deductibility of
executive compensation. Accordingly, the Company believes that compensation paid to its
named executive officers is and will remain fully deductible for federal income tax
purposes. However, in certain situations, the Compensation Committee may approve
compensation that will not meet these requirements in order to ensure competitive
levels of total compensation for its named executive and senior officers. In addition,
should executive compensation become non-deductible for income tax purposes, the
Compensation Committee may consider revisions to its policies and programs in response
to this provision of law.
47
The following is a general description of the federal income tax consequences
to the Participant and the Company with regard to the types of share-based payment
awards granted under the Equity Incentive Plan:
Incentive stock options. There typically will be no federal income tax
consequences to the optionee or to the Company upon the grant of an incentive stock
option. As discussed subsequently in this paragraph, the exercise of an incentive stock
option may result in alternative minimum tax consequences to the optionee. If the
optionee holds the option shares for the required holding period of at least two years
after the date the option was granted and one year after exercise, the difference
between the exercise price and the amount realized upon sale or
disposition of the option shares will be long-term capital gain or loss, and the
Company will not be entitled to a federal income tax deduction. If the optionee
disposes of the option shares in a sale, exchange, or other disqualifying disposition
before the required holding period ends, he or she will recognize taxable ordinary
income in an amount equal to the excess of the fair market value of the option shares
at the time of exercise over the exercise price, and the Company will be allowed a
federal income tax deduction equal to such amount. While the exercise of an incentive
stock option does not result in current taxable income, the excess of the fair market
value of the option shares at the time of exercise over the exercise price will be an
item of adjustment for purposes of determining the optionees alternative minimum
taxable income. Thus, exercise of an incentive stock option may trigger alternative
minimum tax.
Non-qualified stock options. There typically will be no federal income tax
consequences to the optionee or to the Company upon the grant of a nonqualified stock
option under the Plan. When the optionee exercises a nonqualified option, however, he
or she will recognize ordinary income in an amount equal to the excess of the fair
market value of the common stock received at the time of exercise over the exercise
price, and the Company will be allowed a corresponding deduction, subject to any
applicable limitations under the Internal Revenue Code Section 162(m). Any gain that
the optionee recognizes when he or she later sells or disposes of the option shares
will be short-term or long-term capital gain, depending on how long the shares were
held.
Restricted Stock. Unless a participant makes an election to accelerate
recognition of the income to the date of grant (as described below), the participant
will not recognize income, and the Company will not be allowed a tax deduction, at the
time a restricted stock award is granted. When the restrictions lapse, the participant
will recognize ordinary income equal to the fair market value of the common stock as of
that date (less any amount paid for the stock), and the Company will be allowed a
corresponding federal income tax deduction at that time, subject to any applicable
limitations under Section 162(m) of the Internal Revenue Code. If the participant files
an election under Section 83(b) of the Internal Revenue Code within 30 days of the date
of grant of the restricted stock, he or she will recognize ordinary income as of the
date of grant equal to the fair market value of the stock as of that date (less any
amount paid for the stock), and the Company will be allowed a corresponding federal
income tax deduction at that time, subject to any applicable limitations under Section
162(m). Any future appreciation in the stock will be taxable to the participant at
capital gains rates. However, if the stock is later forfeited, the participant will not
be able to recover the tax previously paid pursuant to a Section 83(b) election.
Report of Compensation Committee on Executive Compensation
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with management.
Based on such review and discussions, the Compensation Committee recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in this
Form 10-K.
Respectfully submitted,
48
Richard K. Lubin, Chairman
Kevin M. Hayes
Jordan A. Kahn
David M. Mussafer
Kevin M. Hayes
Jordan A. Kahn
David M. Mussafer
This Report shall not be deemed to be incorporated by reference by any
general statement incorporating this report on Form 10-K into any filing under the
Securities Act of 1933, as amended, and shall not otherwise be deemed filed under such
statute.
49
Summary of Compensation Table
Other | ||||||||||||||||||||||||
Option | Compensation | |||||||||||||||||||||||
Name and Principal Position | Year | Salary (a) | Bonus (b) | Awards (c) | (d) (e) | Total | ||||||||||||||||||
Gerald C, Rittenberg |
2010 | $ | 1,102,500 | $ | 1,798,900 | $ | | $ | 2,261,042 | $ | 5,162,442 | |||||||||||||
Chief Executive Officer |
2009 | 1,050,000 | 1,367,000 | | 21,400 | 2,438,400 | ||||||||||||||||||
2008 | 1,000,000 | 1,066,000 | 595,300 | 21,400 | 2,682,700 | |||||||||||||||||||
James M. Harrison |
2010 | $ | 937,125 | $ | 1,481,600 | $ | | $ | 1,537,814 | $ | 3,956,539 | |||||||||||||
President and |
2009 | 892,500 | 1,114,500 | | 20,600 | 2,027,600 | ||||||||||||||||||
Chief Operating Officer |
2008 | 850,000 | 858,600 | 446,500 | 19,800 | 2,174,900 | ||||||||||||||||||
Michael D. Heller |
2009 | $ | 507,800 | $ | 270,100 | $ | | $ | 700 | $ | 778,600 | |||||||||||||
Executive Vice President
Retail Operations |
2008 | 507,800 | 331,000 | 700 | 839,500 | |||||||||||||||||||
Michael A. Correale |
2010 | $ | 345,000 | $ | 226,700 | $ | | $ | 258,804 | $ | 830,504 | |||||||||||||
Chief Financial Officer |
2009 | 333,125 | 129,100 | | 40,400 | 502,625 | ||||||||||||||||||
2008 | 325,000 | 93,100 | | 37,400 | 455,500 | |||||||||||||||||||
Gregg A Melnick |
2010 | $ | 525,000 | $ | 344,991 | $ | 232,530 | $ | 262,600 | $ | 1,365,121 | |||||||||||||
President, Party City Retail
Group |
(a) | Amounts include executives contribution to profit sharing plans | |
(b) | Represents annual bonuses earned with respect to the years indicated, whether paid or accrued, and, in 2010, 2009 and 2008, annual deferred compensation for Messrs. Rittenberg and Harrison of $350,000 and $250,000, respectively. | |
(c) | The dollar values shown reflect the aggregate grant date fair value of equity awards granted within the year in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718 for stock-based compensation. These amounts reflect the total grant date expense for these awards and do not correspond to the actual cash value that will be recognized by each individual when received. | |
(d) | Includes a special stock option distribution of $9,400 per vested option described earlier to the following named executive officers in the amounts after their names: Mr. Rittenberg ($2,232,442), Mr. Harrison ($1,517,714), Mr. Correale ($217,704) and Mr. Melnick ($253,800). | |
(e) | Represents contributions by the Company under a profit sharing and savings plan, insurance premiums paid by the Company with respect to term life insurance for the benefit of the named executive officer and automobile-related compensation. |
50
Grants of Plan Based Awards
Mr. Melnick received a grant of 30 time-based options and 16
performance-based options on March 10, 2010, at a strike price of $28,350.
Potential Payments upon Change in Control
The employment contracts of Mr. Rittenberg and Mr. Harrison and a
severance agreement with Mr. Correale provide for severance benefits upon the
involuntary termination of their employment in the event of change of control to help
keep them focused on their work responsibilities during the uncertainty that
accompanies a change in control, to provide benefits for a period of time after a
change in control transaction and to help us attract and retain key talent. Under these
agreements, Mr. Rittenberg and Mr. Harrison would receive a minimum of 12 months of
compensation and up to 36 months compensation should Mr. Rittenberg or Mr. Harrison be
terminated following a change in control or should the Company extend the term of their
Restriction Period (as defined hereafter, see Employment Arrangements) and Mr.
Correale would receive 12 months of compensation.
Options Exercised
There were no time or performance based options exercised by our named
executives during the year ended December 31, 2010.
Outstanding Equity Awards
The following table sets forth certain information with respect to
outstanding equity awards at December 31, 2010 with respect to the named executive
officers.
Number of Securities | Option | Option | ||||||||||||||
Underlying Unexercised Options | Exercise | Expiration | ||||||||||||||
Name | No. Exercisable | No. Unexercisable | Price ($/Share) | Date | ||||||||||||
Gerald C. Rittenberg |
| 100.00 | 22,340 | 3/6/2018 | ||||||||||||
40.40 | 127.20 | 12,000 | 4/1/2016 | |||||||||||||
154.51 | 162.86 | 10,000 | 4/1/2015 | |||||||||||||
40.58 | | 2,500 | 4/30/2014 | |||||||||||||
James M. Harrison |
| 75.00 | 22,340 | 3/6/2018 | ||||||||||||
38.16 | 114.48 | 12,000 | 4/1/2016 | |||||||||||||
103.01 | 108.58 | 10,000 | 4/1/2015 | |||||||||||||
20.29 | | 2,500 | 4/30/2014 | |||||||||||||
Michael D. Heller |
13.58 | 44.37 | 28,350 | 12/30/2018 | ||||||||||||
Michael A. Correale |
12.72 | 25.44 | 12,000 | 4/1/2016 | ||||||||||||
10.44 | 17.40 | 10,000 | 4/1/2015 | |||||||||||||
Gregg A. Melnick |
| 46.00 | 28,350 | 3/10/2020 | ||||||||||||
2.00 | 13.00 | 22,340 | 2/25/2018 | |||||||||||||
25.00 | 50.00 | 12,000 | 4/1/2016 |
Director Compensation
Annual Compensation
51
We have agreed to pay our independent directors an annual retainer fee of
$20,000 and fees of $1,500 and $2,500 for regular and special meetings of the Board. We
also reimburse our independent directors for customary expenses for attending board and
committee meetings. In addition, independent directors were granted 2.5 basic stock
options and 2.5 performance stock options during the year they joined the board of
directors.
The following table further summarizes the compensation paid to the
independent directors for the year ended December 31, 2010.
Fees Earned or | Option | |||||||||||
Name | Paid in Cash | Awards | Total | |||||||||
Jordan A. Kahn |
$ | 26,000 | $ | $ | 26,000 | |||||||
William A. Kussell |
19,500 | 14,000 | 33,500 | |||||||||
Carol M. Meyrowitz |
26,000 | | $ | 26,000 |
During 2010, Mr. Kussell was granted 2 time based stock option awards.
Directors who are also our employees receive no additional compensation for
serving as a director.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors or
Compensation Committee and the Board of Directors or Compensation Committee of any
other company, nor has any interlocking relationship existed in the past.
Employment Arrangements
Employment Agreement with Gerald C. Rittenberg. Gerald C. Rittenberg
entered into an employment agreement with us, dated January 1, 2008, which is referred
to as the Rittenberg Employment Agreement, pursuant to which Mr. Rittenberg will serve
as our Chief Executive Officer through December 31, 2012. During 2010, Mr. Rittenberg
received an annual base salary of $1.1 million, which will increase per the terms of
the Rittenberg Employment Agreement. Mr. Rittenberg will be eligible for an annual
bonus for each calendar year if certain operational and financial targets are attained
as determined by both our compensation committee and board of directors in consultation
with Mr. Rittenberg. In addition to the annual bonus, Mr. Rittenberg is entitled to
receive a deferred bonus accruing at a rate of $0.4 million per year, payable on the
earlier of the expiration of the Employment Agreement or termination of employment by
the Company other than for cause or by Mr. Rittenberg for good reason, as defined in
the Rittenberg Employment Agreement. The Rittenberg Employment Agreement also provides
for other customary benefits including incentive, savings and retirement plans, paid
vacation, health care and life insurance plans and expense reimbursement.
Under the Rittenberg Employment Agreement, if we terminate Mr. Rittenbergs
employment other than for cause, death or disability or Mr. Rittenberg terminates his
employment for good reason, we would be obligated to pay Mr. Rittenberg a lump sum cash
payment in an amount equal to the sum of (1) accrued unpaid salary, earned but unpaid
annual bonus for any prior year and accrued but unpaid vacation pay, collectively
referred to as Accrued Obligations, (2) severance pay equal to his annual base salary,
provided, however, that in connection with a termination following a change in control,
the severance payment shall equal three years salary and, in connection with a
termination by us other than for cause or due to his death or disability,
52
such
severance pay will be equal to Mr. Rittenbergs annual base salary multiplied by the
number of years we elect as the Restriction Period (as defined hereafter) and (3) an
amount equal to the annual bonus which Mr. Rittenberg would otherwise have been
entitled to receive for the year in which Mr. Rittenberg is terminated. Upon
termination of Mr. Rittenbergs
employment by us for cause, death or disability or if he terminates his employment
for other than good reason, Mr. Rittenberg will be entitled to his unpaid Accrued
Obligations.
The Rittenberg Employment Agreement also provides that during the term of the
agreement and during the three-year period following any termination of his employment,
referred to as the Restriction Period, Mr. Rittenberg will not participate in or permit
his name to be used or become associated with any person or entity that is or intends
to be engaged in any business that is in competition with our business, or any of our
subsidiaries or controlled affiliates, in any country in which we or any of our
subsidiaries or controlled affiliates operate, compete or are engaged in such business
or at such time intend to so operate, compete or become engaged in such business.
However, if we terminate Mr. Rittenbergs employment other than for cause or due to his
death or disability, the Restriction Period will be instead a one, two or three-year
period at our election. If all, or substantially all, of our stock or assets is sold or
otherwise disposed of to a third party not affiliated with us and Mr. Rittenberg is not
offered employment on substantially similar terms by us or by one of our continuing
affiliates immediately thereafter, then for all purposes of the Rittenberg Employment
Agreement, Mr. Rittenbergs employment shall be deemed to have been terminated by us
other than for cause effective as of the date of such sale or disposition, provided,
however, that we shall have no obligations to Mr. Rittenberg if he is hired or offered
employment on substantially similar terms by the purchaser of our stock or assets. The
Rittenberg Employment Agreement also provides for certain other restrictions during the
Restriction Period in connection with (a) the solicitation of persons or entities with
whom we have business relationships and (b) inducing any of our employees to terminate
their employment or offering employment to such persons, in each case subject to
certain conditions.
Employment Agreement with James M. Harrison. James M. Harrison entered into
an employment agreement with us, dated January 1, 2008, which is referred to as the
Harrison Employment Agreement, pursuant to which Mr. Harrison would serve as our
President through December 31, 2012. During 2010, Mr. Harrison received an annual base
salary of $0.9 million, which will increase per the terms of the Harrison Employment
Agreement. The Harrison Employment Agreement contains provisions for deferred bonus
payments (accruing at an annual rate of $0.3 million), annual bonus payments,
severance, other benefits and provisions for non-competition and non-solicitation
similar to those in the Rittenberg Employment Agreement.
53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of December 31, 2010, the issued and outstanding capital stock of AAH
consisted of 30,824.02 shares of common stock, par value $.01 per share. The number of
shares of AAH common stock outstanding used in calculating the percentage for each
listed person includes the shares of AAH common stock underlying the options
beneficially owned by that person that are exercisable within 60 days following
December 31, 2010. The stockholders agreement of AAH governs the stockholders exercise
of their voting rights with respect to the election of directors and other material
events. See Certain Relationships and Related Transactions.
The following table sets forth information with respect to the beneficial
ownership of AAH common stock as of April 13, 2011 (i) by each person known by us to
own beneficially more than 5% of such class of securities, (ii) by each director and
named executive officer and (iii) by all directors and executive officers as a group.
Unless otherwise noted, to our knowledge, each of such stockholders has sole voting and
investment power as to the shares shown.
Shares of Company | Percentage | |||||||
Common Stock | Of Class | |||||||
Name of Beneficial Owner | Beneficially Owned | Outstanding | ||||||
Advent International(1) |
11,918.71 | 38.67 | % | |||||
Berkshire Partners LLC(2) |
11,210.31 | 36.37 | % | |||||
Weston Presidio (3) |
5,605.16 | 18.19 | % | |||||
GB Holdings I LLC |
1,118.01 | 3.63 | % | |||||
Steven J. Collins(4) |
11,918.71 | 38.67 | % | |||||
Michael A. Correale(5) |
36.66 | * | ||||||
Michael F. Cronin(6) |
5,605.16 | 18.19 | % | |||||
James M. Harrison(7), |
237.31 | * | ||||||
Kevin M. Hayes(6) |
5,605.16 | 18.19 | % | |||||
Jordan A. Kahn(8) |
59.33 | * | ||||||
William A. Kussell |
| * | ||||||
Richard K. Lubin(9) |
11,210.31 | 36.37 | % | |||||
Gregg A. Melnick(10) |
67.00 | * | ||||||
Carol M. Meyrowitz(11) |
27.45 | * | ||||||
David M. Mussafer (4) |
11,918.71 | 38.67 | % | |||||
Gerald C. Rittenberg(12), |
398.69 | 1.25 | % | |||||
Robert J. Small(10) |
11,210.31 | 36.37 | % | |||||
All directors and executive officers as a group (12 persons) |
29,560.63 | 94.39 | % |
* | Less than 1% | |
| Director | |
| Named Executive Officer |
54
(1) | Consists of 11,918.71 shares held by Advent-Amscan Acquisition LLC | |
(2) | Consists of (i) 2,553.36 shares of common stock owned by Berkshire Fund V, Limited Partnership, (ii) 8,290.22 shares of common stock owned by Berkshire Fund VI, Limited Partnership, (iii) 19.51 shares of common stock owned by Berkshire Investors III LLC and (iv) 347.22 shares of common stock owned by Berkshire Investors LLC. The address of Berkshire Partners LLC is the John Hancock Tower, 200 Clarendon Street, Boston, Massachusetts 02116-5021. | |
(3) | Consists of (i) 5,517.82 shares of common stock owned by Weston Presidio Capital IV, L.P. and (ii) 87.34 shares owned by WPC Entrepreneur Fund II, L.P. | |
(4) | Mr. Collins is a Managing Director of Advent International and Mr. Mussafer is a Managing Partner of Advent International. Mr. Collins and Mr. Mussafer each disclaims beneficial ownership of the shares held by Advent International, except to the extent of his pecuniary interest therein. Their addresses are 75 State Street, Boston, Massachusetts 02109. | |
(5) | Includes 23.16 shares which could be acquired by Mr. Correale within 60 days upon exercise of options. | |
(6) | Mr. Cronin is a Managing Partner of Weston Presidio and Mr. Hayes is a General Partner of Weston Presidio. Mr. Cronin and Mr. Hayes each disclaims beneficial ownership of the shares held by Weston Presidio, except to the extent of his pecuniary interest therein. Their addresses are 200 Clarendon Street, 50th Floor, Boston, Massachusetts 02116. | |
(7) | Includes 161.46 shares which could be acquired by Mr. Harrison within 60 days upon exercise of options. | |
(8) | Includes 2.5 shares which could be acquired by Mr. Kahn within 60 days upon exercise of options. | |
(9) | Mr. Lubin and Mr. Small are Managing Directors of Berkshire Partners LLC. Mr. Lubin and Mr. Small each disclaims beneficial ownership of the shares held by Berkshire Partners LLC, except to the extent of his pecuniary interest therein. Their address is the John Hancock Tower, 200 Clarendon Street, Boston, Massachusetts 02116-5021. | |
(10) | Includes 27.00 shares which could be acquired by Mr. Melnick within 60 days upon exercise of options. | |
(11) | Includes 1.62 shares which could be acquired by Ms. Meyrowitz within 60 days upon exercise of options. | |
(12) | Includes 237.49 shares which could be acquired by Mr. Rittenberg within 60 days upon exercise of options. |
Stockholders Agreement
The Company maintains a stockholders agreement with the Advent
International, Berkshire Partners, and Weston Presidio (the Principal Investors),
other investors and certain employees of the Company listed as parties thereto (the
Stockholders Agreement). The following discussion summarizes the terms of the
Stockholders Agreement, as amended, which the Company believes are material to an
investor in the debt or equity securities of the Company. The Stockholders Agreement
provides, among other things, for (i) the right of the non-principal investors to
participate in, and the right of the Principal Investors to require the non-principal
investors to participate in, certain sales of the Companys common stock by the
Principal Investors, (ii) prior to an initial public offering of the stock of the
Company (as defined in the Stockholders Agreement), certain rights of the Company to
purchase, and certain rights of the non-principal investors to require the Company to
purchase (except in the case of termination of employment by such non-principal
investors) all, but not less than all, of the shares of the Companys common stock
owned by a non-principal investor upon the termination of employment or death of such
non-principal investor, at prices determined in accordance with the Stockholders
Agreement and (iii) certain additional restrictions on the rights of the non-principal
investors to transfer shares of the Companys common stock. The Stockholders Agreement
also contains certain provisions granting the Principal Investors and the non-principal
investors certain rights in connection with the private sale or public registrations of
the Companys common stock and provides for indemnification and certain other rights,
restrictions and obligations in connection with such registrations.
55
For information concerning our equity compensation plan, see Item 5. Market
for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Item 13. Certain Relationships and Related Transactions
The Company executed a management agreement with Berkshire Partners LLC and
Weston Presidio, pursuant to which Berkshire Partners LLC and Weston Presidio will be
paid annual management fees of $0.8 million and $0.4 million, respectively. At December
31, 2010, accrued management fees payable to Berkshire Partners LLC and Weston Presidio
totaled $0.1 million and $0.1 million, respectively. Although the indenture governing
the 8.75% senior subordinated notes will permit the payments under the management
agreement, such payments will be restricted during an event of default under the notes
and will be subordinated in right of payment to all obligations due with respect to the
notes in the event of a bankruptcy or similar proceeding of the Company.
Item 14. Principal Accountant Fees and Services
Audit Fees
Fees for audit services totaled $1.5 million and $1.7 million for the
years ended December 31, 2010 and 2009, respectively. These fees included the audit of
the consolidated financial statements; reviews of financial statements included in the
Companys Quarterly Reports on Form 10-Q; assistance with SEC filings, including
comfort letters, consents and comment letters; and accounting consultations on matters
addressed during the audit or interim reviews.
Audit-Related Fees
Fees for audit-related services totaled $0.1 million
for the years ended December 31, 2010 and 2009. Such fees related to the
audits of the Companys employee benefit plans; due diligence services; and statutory
audits incremental to the audit of the consolidated financial statements.
Tax Fees
Fees for tax services, including tax compliance, tax advice and tax
planning, totaled $0.5 million for the years ended December 31, 2010 and
2009.
All Other Fees
The Company paid minimal subscription fees for access to the Ernst &
Young Global Accounting and Auditing Information Tool.
The Companys Audit Committee appoints the independent registered public
accounting firm and pre-approves the fee arrangements with respect to the above
accounting fees and services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Schedule.
See Index to Consolidated Financial Statements and Financial Statement
Schedule which appears on page F-1 herein.
3. Exhibits
Exhibit | ||||
Number | Description | |||
2 | Party City Acquisition Merger Agreement, dated as of September 26, 2005
(incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form
8-K dated September 27, 2005) |
|||
3(1) | Certificate of Incorporation of Amscan Holdings, Inc., dated October 3, 1996, as
amended to March 30, 2001 (incorporated by reference to Exhibit 3(a) to the
Registrants Annual Report on Form 10-K for the year ended December 31, 2000
(Commission File No. 000-21827)) |
|||
3(2) | Amended By-Laws of Amscan Holdings, Inc. (incorporated by reference to Exhibit 3.2
to the Registrants Registration Statement on Form S-4 (Registration No.
333-45457)) |
56
Exhibit | ||||
Number | Description | |||
3(3) | Amended Articles of Incorporation of Anagram International, Inc. (incorporated by
reference to Exhibit 3(1) to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004 (Commission File No. 000-21827)) |
|||
3(4) | By-Laws of Anagram
International, Inc.
(incorporated by reference to
Exhibit 3(2) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(5) | Articles of Incorporation of
Anagram International Holdings,
Inc. (incorporated by reference
to Exhibit 3(3) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(6) | By-Laws of Anagram
International Holdings, Inc.
(incorporated by reference to
Exhibit 3(4) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(7) | Articles of Organization of
Anagram International, LLC
(incorporated by reference to
Exhibit 3(5) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(8) | Operating Agreement of Anagram
International, LLC
(incorporated by reference to
Exhibit 3(6) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(9) | Certificate of Formation of
Anagram Eden Prairie Property
Holdings LLC (incorporated by
reference to Exhibit 3(7) to
the Registrants Quarterly
Report on Form 10-Q for the
quarter ended June 30, 2004
(Commission File No.
000-21827)) |
|||
3(10) | Plan of Merger of Am-Source,
Inc. into Am-Source, LLC dated
February 28, 2000 and Articles
of Organization of Am-Source,
LLC (incorporated by reference
to Exhibit 3(8) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(11) | Operating Agreement of
Am-Source, LLC (incorporated by
reference to Exhibit 3(9) to
the Registrants Quarterly
Report on Form 10-Q for the
quarter ended June 30, 2004
(Commission File No.
000-21827)) |
|||
3(12) | Certificate of Incorporation of
M&D Industries, Inc.
(incorporated by reference to
Exhibit 3(10) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
3(13) | By-Laws of M&D Industries, Inc.
(incorporated by reference to
Exhibit 3(11) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
4(1) | Indenture, dated as of April
30, 2004, by and among the
Company, the Guarantors named
therein and The Bank of New
York with respect to the 8.75%
Senior Subordinated Notes due
2014. (incorporated by
reference to Exhibit 4(1) to
the Registrants Quarterly
Report on Form 10-Q for the
quarter ended June 30, 2004
(Commission File No.
000-21827)) |
|||
4(2) | First Supplemental Indenture,
dated as of June 21, 2004 by
and among the Company, the
Guarantors named therein and
The Bank of New York with
respect to the 8.75% Senior
Subordinated Notes due 2014
(incorporated by reference to
Exhibit 4(2) to the
Registrants Quarterly Report
on Form 10-Q for the quarter
ended June 30, 2004 (Commission
File No. 000-21827)) |
|||
4(3) | ABL Credit Agreement dated as of August 13, 2010, by and among Amscan Holdings, Inc., AAH Holdings Corporation,
the subsidiaries of Amscan Holdings, Inc., from time to time party hereto, the Lenders, Wells Fargo Retail Finance, LLC, as
administrative agent and collateral agent for the Lenders, Bank of America, N.A., as syndication agent for the Lenders and RBS
Business Capital, TD Bank, N.A. and SunTrust Bank, as co-documentation agents. (incorporated by reference to Exhibit 4.3 to
the Registrants Current Report on Form 8-K dated December 2, 2010 (Commission File No. 000-21827)) |
|||
4(4) | Pledge and Security Agreement dated as of August 13, 2010 by and among Amscan Inc., Anagram International, Inc.,
Am-Source, LLC, Factory Card Outlet of America Ltd., Gags and Games, Inc., PA Acquisition Corp., Party City Corporation, and Party
City Franchise Group, LLC, each a Borrower and collectively, Borrowers, Amscan Holdings, Inc., AAH Holdings Corporation, the
Subsidiary Parties from time to time party hereto, and Wells Fargo Retail Finance, LLC, as administrative and collateral agent for the
lenders party to the Credit Agreement. (incorporated by reference to Exhibit 4.4 to the Registrants Current Report on Form 8-K dated
December 2, 2010 (Commission File No. 000-21827)) |
|||
4(5) | Amendment No. 1 to ABL Credit Agreement, dated as of December 2, 2010 (this Amendment No.1),
is by and among Wells Fargo Bank, National Association successor by merger to Wells Fargo Retail
Finance, LLC, in its capacity as administrative and collateral agent for the Lenders (as
hereinafter defined) pursuant to the Credit Agreement defined below (in such capacity,
Administrative Agent), the parties to the Credit Agreement as lenders (individually, each a
Lender and collectively, Lenders), Amscan Inc., a New York corporation (Amscan Inc.), Anagram
International, Inc., a Minnesota corporation (International), Am-Source, LLC, a Rhode Island
limited liability company (Am-Source), Factory Card Outlet of America Ltd., an Illinois
corporation (Factory), Gags and Games, Inc., a Michigan corporation (Gags and Games), PA
Acquisition Corp., a Delaware corporation (PA Acquisition), Party City Corporation, a Delaware
corporation (Party City), Party City Franchise Group, LLC, a Delaware limited liability company
(PCFG and together with Amscan Inc., International, Am-Source, Factory, Gags and Games, PA
Acquisition and Party City, each individually a Borrower and collectively, Borrowers), AAH
Holdings Corporation, a Delaware corporation (Holdings), Amscan Holdings, Inc., a Delaware
corporation (Amscan), JCS Packaging, Inc., a New York corporation (JCS), M&D Industries, Inc.,
a Delaware corporation (M&D), SSY Realty Corp., a New York corporation (SSY), Trisar, Inc., a
California corporation (Trisar), Anagram Eden Prairie Property Holdings LLC, a Delaware limited
liability company (Eden Prairie), Anagram International, LLC, a Nevada limited liability company
(AIL), Anagram International Holdings, Inc., a Minnesota corporation (AIHI), Factory Card &
Party Outlet Corp., a Delaware corporation (Outlet), Party America Franchising, Inc., a Minnesota
corporation (Franchising), Party City Franchise Group Holdings, LLC, a Delaware limited liability
company (PCFG Holdings and, together with Holdings, Amscan, JCS, M&D, SSY, Trisar, Eden Prairie,
AIL, AIHI, Outlet and Franchising, each individually a Guarantor and collectively, Guarantors). |
|||
4(6) | Term Loan Credit Agreement and Related Exhibits dated as of December 2, 2010
among AAH Holdings Corporation, AMSCAN Holdings, Inc., the subsidiaries of AMSCAN Holdings, Inc. from time to time party hereto,
the financial institutions party hereto as the Lenders, and Credit Suisse AG, as Administrative Agent and Collateral Agent,
Credit Suisse Securities (USA) LLC and Goldman Sachs Lending Partners LLC as Joint Lead Arrangers;
Credit Suisse Securities (USA) LLC, Goldman Sachs Lending Partners LLC, Barclays Capital, Deutsche Bank Securities Inc. and
Wells Fargo Securities, LLC as Joint Bookrunners; Goldman Sachs Lending Partners LLC and Wells Fargo Securities, LLC
as Co-Syndication Agents; Barclays Capital and Deutsche Bank Securities Inc. as Co-Documentation Agents. |
|||
10(1) | Purchase Agreement dated April 27, 2004 by and among AAH Holdings
Corporation, Amscan Holdings, Inc., the Guarantors named therein and
Goldman, Sachs & Co. and Credit Suisse First Boston LLC.
(incorporated by reference to Exhibit 10(3) to the Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
(Commission File No. 000-21827)) |
|||
10(2) | Stockholders Agreement of AAH Holdings Corporation dated as of April
30, 2004 (incorporated by reference to Exhibit 10(4) to the
Registrants Quarterly Report on Form 10-Q for the quarter ended June
30, 2004 (Commission File No. 000-21827)) |
|||
10(3) | Amendment No. 1 to the Stockholders Agreement of AAH Holdings
Corporation dated as of May 24, 2004 (incorporated by reference to
Exhibit 10(5) to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004 (Commission File No. 000-21827)) |
|||
10(4) | Amendment No. 2 to the Stockholders Agreement of AAH Holdings
Corporation dated as of December 21, 2005 (incorporated by reference
to Exhibit 10-1 to the Registrants Current Report on Form 8-K dated
October 5, 2006 (Commission File No. 000-21827)) |
|||
10(5) | Amendment No. 3 to the Stockholders Agreement of AAH Holdings
Corporation dated as of September 29, 2006 (incorporated by reference
to Exhibit 10-1 to the Registrants Current Report on Form 8-K dated
October 5, 2006 (Commission File No. 000-21827)) |
|||
10(6) | 2004 Equity Incentive Plan of AAH Holdings Corporation (incorporated
by reference to Exhibit 10(6) to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004 (Commission File No.
000-21827)) |
|||
10(7) | The MetLife Capital Corporation Master Lease Purchase Agreement
between MetLife Capital Corporation and Amscan Inc., Deco Paper
Products, Inc., Kookaburra USA Ltd., and Trisar, Inc., dated November
21, 1991, as amended (incorporated by reference to Exhibit 10(n) to
Amendment No. 2 to the Registrants Registration Statement on Form
S-1 (Registration No. 333-14107)) |
57
Exhibit | ||||
Number | Description | |||
10(8) | Form of Indemnification Agreement between the Company and each of the
directors of the Company (incorporated by reference to Exhibit 10(o)
to Amendment No. 2 to the Registrants Registration Statement on Form
S-1 (Registration No. 333-14107)) |
|||
10(9) | Agreement and Plan of Merger, dated as of March 26, 2004, by and
among Amscan Holdings, Inc., AAH Holdings Corporation and AAH
Acquisition Corporation (incorporated by reference to Exhibit 2.1 to
the Registrants Current Report on Form 8-K dated March 29, 2004
(Commission File No. 000-21827)) |
|||
10(10) | Form of Support Agreement, dated as of March 26, 2004, by and among
AAH Holdings Corporation and Stockholder (incorporated by reference
to Exhibit 2.2 to the Registrants Current Report on Form 8-K dated
March 29, 2004 (Commission File No. 000-21827)) |
|||
11 | Statement re: computation of ratio of earnings to fixed charges |
|||
14 | Code of Business Conduct (incorporated by reference to Exhibit 14 to
the Registrants Annual Report on Form 10-K for the year ended
December 31, 2003 (Commission File No. 000-21827)) |
|||
21 | Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 to the Registrants Registration Statement on Form S-1
(Registration No. 333-90404)) |
|||
23 | Consent of Ernst & Young LLP |
|||
31.1 | Section 302 Certifications |
|||
31.2 | Section 302 Certifications |
|||
32 | Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley
Act of 2002) |
58
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
The Company will not send to its security holders an annual report for the
year ended December 31, 2010.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMSCAN HOLDINGS, INC. | ||||
By: | /s/ Michael A. Correale | |||
Michael A. Correale | ||||
Chief Financial Officer (on behalf of the Company and as principal financial officer) |
||||
Date: April 13, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Robert J. Small | Chairman of the Board of Directors | April 13, 2011 | ||
/s/ Steven J. Collins | Director | April 13, 2011 | ||
/s/ Michael F. Cronin | Director | April 13, 2011 | ||
/s/ Kevin M. Hayes | Director | April 13, 2011 | ||
/s/ Jordan A. Kahn | Director | April 13, 2011 | ||
/s/ William A Kussell | Director | April 13, 2011 | ||
/s/ Richard K. Lubin | Director | April 13, 2011 | ||
/s/ Carol M. Meyrowitz | Director | April 13, 2011 | ||
/s/ David M. Mussafer | Director | April 13, 2011 | ||
/s/ Gerald C. Rittenberg | Chief Executive Officer and Director | April 13, 2011 | ||
/s/ James M. Harrison | President, Chief Operating Officer and | April 13, 2011 | ||
Director |
59
AMSCAN HOLDINGS, INC.
FORM 10-K
Item 8, Item 15(a) 1 and 2
Item 8, Item 15(a) 1 and 2
AMSCAN HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Financial Statement Schedule for the Years Ended December 31, 2010, 2009 and 2008: |
||||
F-46 |
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (SEC) are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Amscan Holdings, Inc.
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Amscan
Holdings, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2010. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amscan Holdings, Inc. and
subsidiaries at December 31, 2010 and 2009, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
April 13, 2011
April 13, 2011
F-2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,454 | $ | 15,420 | ||||
Accounts receivable, net of allowances |
107,331 | 82,781 | ||||||
Inventories, net of allowances |
424,317 | 335,950 | ||||||
Prepaid expenses and other current assets |
65,672 | 58,719 | ||||||
Total current assets |
617,774 | 492,870 | ||||||
Property, plant and equipment, net |
190,729 | 174,994 | ||||||
Goodwill |
630,492 | 559,261 | ||||||
Trade names |
129,954 | 157,283 | ||||||
Other intangible assets, net |
55,362 | 54,669 | ||||||
Other assets, net |
28,840 | 41,424 | ||||||
Total assets |
$ | 1,653,151 | $ | 1,480,501 | ||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Loans and notes payable |
$ | 150,098 | $ | 77,635 | ||||
Accounts payable |
108,172 | 76,901 | ||||||
Accrued expenses |
111,054 | 93,680 | ||||||
Income taxes payable |
34,325 | 32,061 | ||||||
Redeemable warrants |
15,086 | 15,444 | ||||||
Current portion of long-term obligations |
9,046 | 34,906 | ||||||
Total current liabilities |
427,781 | 330,627 | ||||||
Long-term obligations, excluding current portion |
841,112 | 538,892 | ||||||
Deferred income tax liabilities |
94,981 | 101,570 | ||||||
Deferred rent and other long-term liabilities |
14,766 | 11,901 | ||||||
Total liabilities |
1,378,640 | 982,990 | ||||||
Redeemable common securities (including 597.52 and 592.84 common shares issued and
outstanding at December 31, 2010 and December 31, 2009 ) |
18,089 | 18,389 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,226.50
shares issued and outstanding at December 31, 2010 and December 31, 2009, ) |
| | ||||||
Additional paid-in capital |
287,583 | 335,823 | ||||||
Retained (deficit) earnings |
(27,558 | ) | 149,557 | |||||
Accumulated other comprehensive loss |
(5,915 | ) | (8,395 | ) | ||||
Amscan Holdings, Inc. stockholders equity |
254,110 | 476,985 | ||||||
Noncontrolling interests |
2,312 | 2,137 | ||||||
Total stockholdersequity |
256,422 | 479,122 | ||||||
Total liabilities, redeemable common securities and stockholders equity |
$ | 1,653,151 | $ | 1,480,501 | ||||
See accompanying notes to consolidated financial statements.
F-3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 1,579,677 | $ | 1,467,324 | $ | 1,537,641 | ||||||
Royalties and franchise fees |
19,417 | 19,494 | 22,020 | |||||||||
Total revenues |
1,599,094 | 1,486,818 | 1,559,661 | |||||||||
Expenses: |
||||||||||||
Cost of sales |
943,058 | 899,041 | 966,426 | |||||||||
Selling expenses |
42,725 | 39,786 | 41,894 | |||||||||
Retail operating expenses |
296,891 | 261,691 | 273,627 | |||||||||
Franchise expenses |
12,269 | 11,991 | 13,686 | |||||||||
General and administrative expenses |
134,392 | 119,193 | 120,272 | |||||||||
Art and development costs |
14,923 | 13,243 | 12,462 | |||||||||
Impairment of trade name |
27,400 | | 17,376 | |||||||||
Total expenses |
1,471,658 | 1,344,945 | 1,455,743 | |||||||||
Income from operations |
127,436 | 141,873 | 113,918 | |||||||||
Interest expense, net |
40,850 | 41,481 | 50,915 | |||||||||
Other expense (income), net |
4,208 | (32 | ) | (818 | ) | |||||||
Income before income taxes |
82,378 | 100,424 | 63,821 | |||||||||
Income tax expense |
32,945 | 37,673 | 24,188 | |||||||||
Net income |
49,433 | 62,751 | 39,633 | |||||||||
Less: net income (loss) attributable to noncontrolling interest |
114 | 198 | (877 | ) | ||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 49,319 | $ | 62,553 | $ | 40,510 | ||||||
See accompanying notes to consolidated financial statements.
F-4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2008, 2009 and 2010
(Dollars in thousands)
Accumulated | Amscan | |||||||||||||||||||||||||||||||
Additional | Retained | Other | Holdings Inc. | Non- | ||||||||||||||||||||||||||||
Common | Common | Paid-in | (Deficit) | Comprehensive | Stockholders | controlling | ||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | Income (Loss) | Equity | Interests | Total | |||||||||||||||||||||||||
Balance at December 31, 2007 |
29,543.16 | $ | | $ | 326,741 | $ | 46,494 | $ | 2,351 | $ | 375,586 | $ | 2,488 | $ | 378,074 | |||||||||||||||||
Net income |
40,510 | 40,510 | (877 | ) | 39,633 | |||||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
(11,338 | ) | (11,338 | ) | (231 | ) | (11,569 | ) | ||||||||||||||||||||||||
Change in fair value of interest
rate swap contracts, net of income
tax benefit |
(4,855 | ) | (4,855 | ) | (4,855 | ) | ||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income
taxes |
1,990 | 1,990 | 1,990 | |||||||||||||||||||||||||||||
Comprehensive income |
26,307 | (1,108 | ) | 25,199 | ||||||||||||||||||||||||||||
Purchase and revaluation of
redeemable common securities |
308.64 | 2,155 | 2,155 | 2,155 | ||||||||||||||||||||||||||||
Tax benefit on exercised options |
397.30 | 1,823 | 1,823 | 1,823 | ||||||||||||||||||||||||||||
Equity based compensation expense |
4,357 | 4,357 | 4,357 | |||||||||||||||||||||||||||||
Acquisition of PCFG minority interest |
| 509 | 509 | |||||||||||||||||||||||||||||
Other |
(22.60 | ) | | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2008 |
30,226.50 | $ | | $ | 335,076 | $ | 87,004 | $ | (11,852 | ) | $ | 410,228 | 1,889 | $ | 412,117 | |||||||||||||||||
Net income |
62,553 | 62,553 | 198 | 62,751 | ||||||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
4,007 | 4,007 | 50 | 4,057 | ||||||||||||||||||||||||||||
Change in fair value of interest
rate swap contracts, net of income
taxes |
1,317 | 1,317 | 1,317 | |||||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income
tax benefit |
(1,867 | ) | (1,867 | ) | (1,867 | ) | ||||||||||||||||||||||||||
Comprehensive income |
66,010 | 248 | 66,258 | |||||||||||||||||||||||||||||
Purchase of redeemable common
securities |
(129 | ) | (129 | ) | (129 | ) | ||||||||||||||||||||||||||
Equity based compensation expense |
876 | 876 | 876 | |||||||||||||||||||||||||||||
Balance at December 31, 2009 |
30,226.50 | $ | | $ | 335,823 | $ | 149,557 | $ | (8,395 | ) | $ | 476,985 | $ | 2,137 | $ | 479,122 | ||||||||||||||||
Net income |
49,319 | 49,319 | 114 | 49,433 | ||||||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
(376 | ) | (376 | ) | 61 | (315 | ) | |||||||||||||||||||||||||
Change in fair value of interest
rate swap contracts, net of income
taxes |
2,563 | 2,563 | 2,563 | |||||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income
tax benefit |
293 | 293 | 293 | |||||||||||||||||||||||||||||
Comprehensive income |
51,799 | 175 | 51,974 | |||||||||||||||||||||||||||||
Revaluation of
redeemable common securities |
(5,305 | ) | (5,305 | ) | (5,305 | ) | ||||||||||||||||||||||||||
Issuance of non-redeemable warrants |
21,000 | 21,000 | 21,000 | |||||||||||||||||||||||||||||
Dividend distribution |
(64,658 | ) | (226,434 | ) | (291,092 | ) | (291,092 | ) | ||||||||||||||||||||||||
Equity based compensation expense |
723 | 723 | 723 | |||||||||||||||||||||||||||||
Balance at December 31, 2010 |
30,226.50 | $ | | $ | 287,583 | $ | (27,558 | ) | $ | (5,915 | ) | $ | 254,110 | $ | 2,312 | $ | 256,422 | |||||||||||||||
See accompanying notes to consolidated financial statements
F-5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows provided by operating activities: |
||||||||||||
Net income |
$ | 49,433 | $ | 62,751 | $ | 39,633 | ||||||
Less: net income (loss) attributable to noncontrolling interest |
114 | 198 | (877 | ) | ||||||||
Net income attributable to Amscan Holdings, Inc. |
49,319 | 62,553 | 40,510 | |||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization expense |
49,418 | 44,382 | 47,278 | |||||||||
Amortization of deferred financing costs |
2,475 | 2,163 | 2,221 | |||||||||
Provision for doubtful accounts |
637 | 3,982 | 1,092 | |||||||||
Deferred income tax (benefit) expense |
(8,942 | ) | 8,803 | (7,885 | ) | |||||||
Deferred rent |
4,500 | 1,763 | 1,202 | |||||||||
Undistributed income in unconsolidated joint venture |
(678 | ) | (632 | ) | (538 | ) | ||||||
Impairment of trade names |
27,400 | | 17,376 | |||||||||
Impairment of fixed assets |
597 | 156 | | |||||||||
Loss (gain) on disposal of equipment |
191 | 122 | (1,195 | ) | ||||||||
Equity based compensation |
6,018 | 876 | 4,357 | |||||||||
Tax benefit on exercised options |
| | (1,823 | ) | ||||||||
Debt retirement costs |
2,448 | | | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
(Increase) decrease in accounts receivable |
(6,507 | ) | 6,337 | 8,237 | ||||||||
(Increase) decrease in inventories |
(85,767 | ) | 30,933 | (52,347 | ) | |||||||
(Increase) decrease in prepaid expenses and other current assets |
(22,993 | ) | (21,173 | ) | 31,240 | |||||||
Increase (decrease) in accounts payable, accrued expenses and
income taxes payable |
43,052 | (16,323 | ) | (9,796 | ) | |||||||
Net cash provided by operating activities |
61,168 | 123,942 | 79,929 | |||||||||
Cash flows used in investing activities: |
||||||||||||
Cash paid in connection with acquisitions |
(53,348 | ) | (3,378 | ) | (1,616 | ) | ||||||
Cash held in escrow in connection with acquisitions |
| (24,881 | ) | | ||||||||
Capital expenditures |
(49,623 | ) | (26,195 | ) | (53,001 | ) | ||||||
Proceeds from disposal of property and equipment |
205 | 96 | 3,418 | |||||||||
Net cash used in investing activities |
(102,766 | ) | (54,358 | ) | (51,199 | ) | ||||||
Cash flows provided by (used in) financing activities: |
||||||||||||
Repayment of loans, notes payable and long-term obligations |
(393,289 | ) | (70,247 | ) | (26,842 | ) | ||||||
Proceeds from loans, notes payable and long-term obligations, net of
debt issuance costs |
742,153 | | | |||||||||
Tax benefit on exercised options |
| | 1,823 | |||||||||
Sale of additional interest to minority shareholder |
| | 2,500 | |||||||||
Payments
related to redeemable common stock and rollover options |
(572 | ) | | (514 | ) | |||||||
Dividend distribution |
(301,829 | ) | | | ||||||||
Proceeds from issuance of common stock and exercise of options,
net of retirements |
52 | 90 | | |||||||||
Net cash provided by (used in) financing activities |
46,515 | (70,157 | ) | (23,033 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
117 | 2,935 | (9,913 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
5,034 | 2,362 | (4,216 | ) | ||||||||
Cash and cash equivalents at beginning of period |
15,420 | 13,058 | 17,274 | |||||||||
Cash and cash equivalents at end of period |
$ | 20,454 | $ | 15,420 | $ | 13,058 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the period |
||||||||||||
Interest |
$ | 38,363 | $ | 40,207 | $ | 52,511 | ||||||
Income Tax |
$ | 39,743 | $ | 22,297 | $ | 14,832 | ||||||
Supplemental information on non-cash activities:
Capital lease obligations of $619, $59, and $700 were incurred during the
years ended December 31, 2010, 2009 and 2008, respectively.
See accompanying notes to consolidated financial statements.
F-6
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
Note 1 Organization and Description of Business
Amscan Holdings, Inc. (Amscan or the Company) designs, manufactures,
contracts for manufacture and distributes party goods, including paper and plastic
tableware, metallic balloons, accessories, novelties, costumes, other garments, gifts
and stationery throughout the world. In addition, the Company operates specialty retail
party goods and social expressions supply stores in the United States principally under
the names Party City, Halloween City, Factory Card & Party Outlet and The Paper Factory
and franchises both individual stores and franchise areas throughout the United States
and Puerto Rico principally under the name Party City. The Company is a wholly-owned
subsidiary of AAH Holdings Corporation. (AAH).
Note 2 Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements of the Company include the
accounts of Amscan and all majority-owned subsidiaries and controlled entities. All
significant intercompany balances and transactions have been eliminated.
Retail operations define a fiscal year (Fiscal Year) as the 52-week
period or 53-week period ended on the Saturday nearest December 31st of each year, and
define their fiscal quarters (Fiscal Quarter) as the four interim 13-week periods
following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal
Year when the fourth Fiscal Quarter is extended to 14 weeks.
The Company has determined the difference between the retail
operations Fiscal Year and Fiscal Quarters and the calendar year and quarters to be
insignificant.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those
estimates.
Management periodically evaluates estimates used in the preparation of
the consolidated financial statements for continued reasonableness. Appropriate
adjustments, if any, to the estimates used are made prospectively based on such
periodic evaluations.
Reclassification
of prior year amounts
Prior year balance sheet amounts that had been
reflected in prepaid expenses and other current assets have been
reclassified to goodwill to reflect certain adjustments related to
purchase accounting.
Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased
are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. The Company
determines the cost of inventory at its retail stores using the weighted average
method. All other inventory cost is determined using the first-in, first-out method.
The Company estimates retail inventory shortage for the period between
physical inventory dates on a store-by-store basis. Inventory shrinkage estimates are
affected by changes in merchandise mix and changes in actual shortage trends. The
shrinkage rate from the most recent physical inventory, in combination with historical
experience, is the basis for estimating shrinkage.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Companys customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate realization of
these receivables including consideration of the Companys history of receivable
write-offs, the level of past due accounts and the economic status of our customers. If
the financial condition of the Companys customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required.
F-7
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Long-Lived and Intangible Assets
Property, plant and equipment are stated at cost. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the assets.
Equipment under capital leases are stated at the present value of the minimum lease
payments at the inception of the lease. Equipment under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the lease term
or the estimated useful life of the asset. Leasehold improvements are
depreciated over the useful life of the asset, or the term of the
lease, whichever is shorter.
Goodwill represents the excess of the purchase price of acquired companies over
the estimated fair value of the net assets acquired. Goodwill and other intangibles
with indefinite lives are not amortized but are reviewed for impairment annually or
more frequently if certain indicators arise. The Company evaluates the goodwill
associated with its acquisitions and other intangibles with indefinite lives as of the
first day of its fourth quarter based on current and projected performance. The
Company estimates fair value of each reporting unit using expected discounted cash
flows (see Note 6).
The Company evaluates finite-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144).
Finite-lived assets are evaluated for recoverability whenever events or changes in
circumstances indicate that an asset may have been impaired. In evaluating an asset for
recoverability, the Company estimates the future cash flows expected to result from the
use of the asset and eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the
asset, an impairment loss, equal to the excess of the carrying amount over the fair
market value of the asset, is recognized.
During
2010, the Company tested the effect of converting approximately 20 of
its FCPO stores to the Party City name. The test was especially
important during Halloween, and based on the results, proved
successful. As a result of this outcome the Company concluded during the
fourth quarter that it
will begin to convert the remaining FCPO non-outlet stores, over time,
to the Party City name. The Company performed an impairment test and determined that the FCPO
trade name of $27,400 became fully impaired during the fourth
quarter 2010, and impaired the entire amount of the trade name. The
fair value calculation utilized Level 3 fair value inputs, as
defined in Note 20.
Deferred Financing Costs
Deferred financing costs are amortized to interest expense using the
effective interest method over the lives of the related debt.
Investments
The Company maintains a 49.9% interest in Convergram Mexico, a joint venture
distributing metallic balloons principally in Mexico and Latin America. The Company
accounts for its investment in the joint venture using the equity method. The Companys
investment in the joint venture is included in other assets on the consolidated balance
sheet and the results of the joint ventures operations are included in other expense
(income) on the consolidated statement of income (see Note 13).
Insurance Accruals
The Company maintains certain self-insured workers compensation and general
liability insurance plans. The Company estimates the required liability for claims
under such plans based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual payroll and
other data. The required liability is also subject to adjustment in the future based
upon changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity).
Revenue Recognition
The Companys terms of sale to retailers and other distributors are generally
F.O.B. shipping point and, accordingly, title and the risks and rewards of ownership
are generally transferred to the customer, and revenue is recognized, when goods are
shipped. The Company estimates reductions to revenues for volume-based rebate programs
at the time sales are recognized.
Revenue from retail operations is recognized at the point of sale. The
Company estimates future retail sales returns and records a provision in the period
that the related sales are recorded based on historical information. Retail sales are
reported net of taxes collected.
F-8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Shipping and Handling
Outbound shipping costs billed to customers are included in net sales. The
costs of shipping and handling incurred by the Company are included in cost of sales.
Store Closure Costs
The Company records estimated store closure costs, estimated lease commitment
costs, net of estimated sublease income, and other miscellaneous store closing costs
when the liability is incurred.
Product Royalty Agreements
The Company enters into product royalty agreements that allow the Company to
use licensed designs on certain of its products. These contracts require the Company to
pay royalties, generally based on the sales of such product, and may require guaranteed
minimum royalties, a portion of which may be paid in advance. The Company matches
royalty expense with revenue by recording royalties at the time of sale, at the greater
of the contractual rate or an effective rate calculated based on the guaranteed minimum
royalty and the Companys estimate of sales during the contract period. If a portion of
the guaranteed minimum royalty is determined to be unrecoverable, the unrecoverable
portion is charged to expense at that time. Guaranteed minimum royalties paid in
advance are recorded in the consolidated balance sheets as other assets.
Catalogue Costs
The Company expenses costs associated with the production of catalogues when
incurred.
Advertising
Advertising
expenses are expensed as incurred. Retail advertising expenses for
2010, 2009, and 2008 were $53,256, $43,896, and $50,642,
respectively.
Art and Development Costs
Art and development costs are primarily internal costs that are not easily
associated with specific designs, some of which may not reach commercial production.
Accordingly, the Company expenses these costs as incurred.
Derivative Financial Instruments
The Company accounts for derivative financial instruments pursuant to
Accounting Standards Codification (ASC) Subtopic 815, Accounting for Derivative
Instruments and Hedging Activities. ASC Subtopic 815, as amended and interpreted,
requires that all derivative financial instruments be recognized on the balance sheet
at fair value and establishes criteria for both the designation and effectiveness of
hedging activities. The Company uses derivatives in the management of interest rate and
foreign currency exposure. ASC Subtopic 815, requires the Company to formally document
the assets, liabilities or other transactions the Company designates as hedged items,
the risk being hedged and the relationship between the hedged items and the hedging
instruments. The Company must measure the effectiveness of the hedging relationship at
the inception of the hedge and on an on-going basis.
If derivative financial instruments qualify as fair value hedges, the gain or loss
on the instrument and the offsetting loss or gain on the hedged item attributable to
the hedged risk are recognized in current earnings during the period of the change in
fair values. For derivative financial instruments that qualify as cash flow hedges
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the
derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a cash flow hedge, if any, is
determined based on the dollar-offset method (i.e., the gain or loss on the derivative
financial instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item) and is recognized in current earnings during the period
of change. As long as hedge effectiveness is maintained, interest rate swap
arrangements and foreign currency exchange agreements qualify for hedge accounting as
cash flow hedges (see Note 21.)
F-9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Income Taxes
The Company accounts for income taxes in accordance with the provisions of ASC
Subtopic 740, Accounting for Income Taxes. Under the asset and liability method of
ASC Subtopic 740, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and liabilities and
operating loss and tax credit carryforwards applying enacted statutory tax rates in
effect for the year in which the differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance when, in the judgment of management, it is
more likely than not that some portion or all of the deferred tax assets will not be
realized.
Stock-Based Compensation
The Company adopted ASC Subtopic 718 Share-Based Payment, which is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation as amended. ASC
Subtopic 718 establishes standards for the accounting for transactions where an entity
exchanges its equity for goods or services and transactions that are based on the fair
value of the entitys equity instruments or that may be settled by the issuance of
those equity instruments. ASC Subtopic 718 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. Generally, the fair value approach in ASC Subtopic 718 is similar to the
fair value approach described in SFAS No. 123.
The Company adopted ASC Subtopic 718 using the prospective method. Since the
Companys common stock was not publicly traded, the options granted prior to January 1,
2006 were expensed under the provisions of SFAS No. 123 using a minimum value method.
Options issued subsequent to January 1, 2006 are expensed under the provisions of ASC
Subtopic 718 (see Note 15).
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31, 2010 and 2009 consisted
of the Companys foreign currency translation adjustment and the fair value of interest
rate swap and foreign exchange contracts, net of income taxes, that qualify as hedges
(see Notes 20 and 21).
Foreign Currency Transactions and Translation
The functional currencies of the Companys foreign operations are the local
currencies in which they operate. Realized foreign currency exchange gains or losses
resulting from the settlement of receivables or payables in currencies other than the
functional currencies are credited or charged to operations. Unrealized gains or losses
on foreign currency transactions are insignificant. The balance sheets of foreign
subsidiaries are translated into U.S. dollars at the exchange rates in effect on the
balance sheet date. The results of operations of foreign subsidiaries are translated
into U.S. dollars at the average exchange rates effective for the periods presented.
The differences from historical exchange rates are recorded as comprehensive income
(loss) and are included as a component of accumulated other comprehensive income
(loss).
Recently Issued Accounting Pronouncements
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires
increased disclosures about the credit quality of financing receivables and allowances
for credit losses, including disclosure about credit quality indicators, past due
information and modifications of finance receivables. The guidance is generally effective
for reporting periods ending after December 15, 2010. There was no material impact from
this Update.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805).
This Update requires a public entity to disclose pro forma information for business
combinations that occurred in the current reporting period and specifically
requires the same information for the comparative prior period. This guidance is
generally effective for annual reporting periods beginning on or after December 15, 2010.
We do not anticipate any material impact from this Update.
F-10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 3 Inventories
Inventories consisted of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
Finished goods |
$ | 416,831 | $ | 325,421 | ||||
Raw materials |
11,879 | 12,650 | ||||||
Work in process |
6,112 | 6,431 | ||||||
434,822 | 344,502 | |||||||
Less: reserve for slow moving and obsolete inventory |
(10,505 | ) | (8,552 | ) | ||||
$ | 424,317 | $ | 335,950 | |||||
Note 4 Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following: |
December 31, | ||||||||||||
2010 | 2009 | Useful lives | ||||||||||
Machinery and equipment |
$ | 128,655 | $ | 117,780 | 3-15 years | |||||||
Buildings |
47,909 | 47,840 | 40 years | |||||||||
Data processing |
67,631 | 50,691 | 3-5 years | |||||||||
Leasehold improvements |
72,114 | 64,617 | 1-20 years | |||||||||
Furniture and fixtures |
115,043 | 93,870 | 5-10 years | |||||||||
Land |
6,059 | 6,009 | ||||||||||
437,411 | 380,807 | |||||||||||
Less: accumulated depreciation |
(246,682 | ) | (205,813 | ) | ||||||||
$ | 190,729 | $ | 174,994 | |||||||||
Depreciation and amortization expense related to property, plant and
equipment was $39,073, $37,823, and $38,696 for the years ended December 31, 2010, 2009
and 2008, respectively.
The Company is obligated under various capital leases for certain machinery and
equipment which expire on various dates through 2015 (see Note 8). The amount of
machinery and equipment and related accumulated amortization recorded under capital
leases and included within property, plant and equipment, net consisted of the
following:
December 31, | ||||||||
2010 | 2009 | |||||||
Machinery and equipment under capital leases |
$ | 10,030 | $ | 9,444 | ||||
Less: accumulated amortization |
(6,269 | ) | (4,212 | ) | ||||
$ | 3,761 | $ | 5,232 | |||||
Amortization of assets held under capitalized leases is included in depreciation
and amortization expense.
F-11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 5
Acquisitions and Transactions
Wholesale Acquisitions
On September 30, 2010, the Company acquired Christys By Design Limited and three
affiliated companies (the Christys Group) from Christy Holdings Limited, a UK based
company. The Christys Group designs and distributes costumes and other garments and
accessories through its operations in Asia and the UK. The fair value of the total
consideration paid at date of acquisition was $30,368. The results of this newly
acquired business are included in the consolidated financial statements since the
September 30, 2010 acquisition date and are reported in the operating results of the
Companys Wholesale segment.
The Christys Group acquisition has been accounted for as a purchase business
combination. The preliminary estimate of the excess of the purchase price over the
tangible assets and identified intangible assets acquired was assigned to goodwill. The
following summarizes the estimated fair value of the assets and liabilities acquired:
accounts receivable of $17,656, inventory of $457, fixed assets of $582, and accounts
payable and accrued expenses of $13,636. The remaining $25,309 has been initially
recorded as goodwill. The allocation of the purchase price is based on our preliminary
estimates of the fair value of the tangible and identifiable intangible assets acquired
and liabilities assumed. The Company is still in the process of accumulating
information to complete the determination of the fair value of certain acquired assets.
Goodwill arises because the purchase price reflects the strategic fit and expected
synergies this business will bring to the Companys operations. The Company elected to
treat the UK entities acquired as foreign branches for US tax purposes. As a result,
the entire excess of the purchase price over the fair value of the tangible assets and
liabilities acquired is deductible for US tax purposes over 15 years.
On December 21, 2009, the Company entered into an Asset Purchase Agreement with
American Greetings Corporation (American Greetings) under which it acquired certain
assets, equipment and processes used in the manufacture and distribution of party goods
effective on March 1, 2010 (the Designware Acquisition). In connection with the
Designware Acquisition, the companies also entered into a Supply and Distribution
Agreement and a Licensing Agreement (collectively, the Agreements). Under the terms
of the Agreements, effective March 1, 2010, the Company has exclusive rights to
manufacture and distribute products into various channels including the party store
channel. American Greetings will continue to distribute party goods to various
channels including to its mass market, drug, grocery, and specialty retail customers.
American Greetings will purchase substantially all of its party goods requirements from
the Company and the Company will license from American Greetings the Designware brand
and other character licenses. The results of this business are included in the
consolidated financial statements since the March 1, 2010 acquisition date and are
reported in the operating results of the Companys Wholesale segment.
The acquisition-date fair value of the total consideration transferred was
$45,881, including cash of $24,881 which was held in escrow at December 31, 2009 and
reported in other assets in the consolidated balance sheet at that date, and a warrant
to purchase approximately 2% of the Common Stock of AAH valued at $21,000. The fair
value of the warrant was determined based on the agreement between the parties.
The Designware Acquisition has been accounted for as a purchase business
combination. The excess of the purchase price over the tangible assets and identified
intangible assets acquired was assigned to goodwill. The following summarizes the
estimated fair value of the assets acquired: inventory of $4,000, fixed assets of
$3,445 and intangible license rights of $10,973, which are being amortized over the
remaining license periods averaging 2.5 years. The remaining $27,463 represents
goodwill. Goodwill arises because the purchase price reflects the strategic fit and
expected synergies this business will bring to the Companys operations. The entire
excess of the purchase price over the fair value of the tangible assets acquired is
deductible for tax purposes over 15 years.
Franchise Store Acquisitions
During 2010 the Company acquired 20 franchisee stores located throughout several
states for total consideration of $24,300. Total consideration
consisted of $21,500
in cash and the exchange of five corporate stores located in Pennsylvania. Excluding
the assets exchanged of $2,800, the fair value of the assets and liabilities acquired for
cash were $2,500 of inventory and $1,600 of fixed assets. The
remaining $17,400 has been
recorded as goodwill. The entire excess of the purchase price over the fair value of
the tangible assets acquired is deductible for tax purposes over 15 years
F-12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 6 Other Intangible Assets, net
The Company had the following balances of other identifiable intangible
assets as a result of various acquisitions:
At December 31, 2010 | ||||||||||||||
Accumulated | Net Carrying | |||||||||||||
Cost | Amortization | Value | Useful lives | |||||||||||
Retail franchise licenses |
$ | 63,630 | $ | 24,754 | $ | 38,876 | 20 years | |||||||
Customer lists and relationships |
14,500 | 6,444 | 8,056 | 15 years | ||||||||||
Copyrights, designs, and other |
13,710 | 13,096 | 614 | 2-3 years | ||||||||||
Leasehold and other intangibles |
2,087 | 1,593 | 494 | 1-15 years | ||||||||||
Acquired design licenses |
10,973 | 3,651 | 7,322 | 1-7 years | ||||||||||
Total |
$ | 104,900 | $ | 49,538 | $ | 55,362 | ||||||||
At December 31, 2009 | ||||||||||||||
Accumulated | Net Carrying | |||||||||||||
Cost | Amortization | Value | Useful lives | |||||||||||
Retail franchise licenses |
$ | 63,630 | $ | 19,431 | $ | 44,199 | 20 years | |||||||
Customer lists and relationships |
14,500 | 5,477 | 9,023 | 15 years | ||||||||||
Copyrights, designs, and other |
13,632 | 12,989 | 643 | 2-3 years | ||||||||||
Leasehold and other intangibles |
2,087 | 1,283 | 804 | 1-15 years | ||||||||||
Total |
$ | 93,849 | $ | 39,180 | $ | 54,669 | ||||||||
The amortization expense for finite-lived intangible assets for the years ended
December 31, 2010, 2009, and 2008 was $10,345, $6,559, and $8,582, respectively.
Estimated amortization expense for each of the next five years will be approximately
$10,184, $9,121, $7,089, $6,621, and $2,691, respectively.
Note 7 Loans and Notes Payable
On August 13, 2010, the Company entered into an amended and extended ABL revolving
credit facility (the New ABL Facility), for an aggregate principal amount of up to
$325,000 for working capital, general corporate purposes and the issuance of letters of
credit. The New ABL Facility was used to refinance the Companys prior ABL revolving
credit facility (the Prior ABL Facility) and its Party City Franchise Group (PCFG)
revolving credit facility and term loan agreement (the PCFG Credit Facility). At
closing, PCFG, a previously unrestricted subsidiary of the Company, became a borrower
under the New ABL Facility and a restricted subsidiary under the terms of the Companys
New Term Loan Credit Agreement, its 8.75% $175,000 senior subordinated notes and the New
ABL Facility.
Below is a discussion of the Companys ABL credit agreements. See Note 8 for a
discussion of the Companys long-term obligations
F-13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
New ABL Facility
The New ABL Facility provides for (a) revolving loans during the five-year period
ending August 12, 2015 in an aggregate principal amount at any time outstanding not to
exceed $325,000, subject to a borrowing base described below, (b) swing-line loans in an
aggregate principal amount at any time outstanding not to exceed 10% of the aggregate
commitments under the facility and (c) letters of credit, in an aggregate face amount at
any time outstanding not to exceed $50,000, to support payment obligations incurred in
the ordinary course of business by the Company and its subsidiaries.
Under the New ABL Facility, the borrowing base at any time equals (a) 85% of
eligible trade receivables plus (b) 85% of eligible inventory at its net orderly
liquidation value and (c) 90% of eligible credit card receivables, less (d) certain
reserves.
The New ABL Facility provides for two pricing options: (i) an alternate base
interest rate (ABR) equal to the greater of (a) the prime rate, (b) the federal funds
rate plus 1/2 of 1% or (c) the LIBOR rate plus 1%, in each case, on the date of such
borrowing or (ii) a LIBOR based interest rate determined by reference to the LIBOR cost
of funds for U.S. dollar deposits for the relevant interest period adjusted for certain
additional costs and, in each case, plus an applicable margin. The applicable margin
ranges from 1.25% to 1.75% with respect to ABR borrowings and from 2.25% to 2.75% with
respect to LIBOR borrowings.
In addition to paying interest on outstanding principal under the New ABL Facility,
the Company is required to pay a commitment fee of between 0.375% and 0.50% per annum in
respect of the unutilized commitments thereunder. The Company must also pay customary
letter of credit fees and agency fees.
In connection with the New ABL Facility, the Company incurred $3,862 in finance
costs that have been capitalized and will be amortized over the life of the loan.
The obligations of the Company under the New ABL Facility are jointly and severally
guaranteed by AAH and each domestic subsidiary of the Company. Each guarantor has
secured its obligations under the guaranty by a first priority lien on its accounts
receivable and inventories and a second priority lien on substantially all of its other
assets.
The New ABL Facility contains negative covenants that are substantially similar to
the Term Loan Credit Agreement (see Note 8) and require the Company to comply with
certain financial covenants if its excess availability is less than 15% of the lower of
the aggregate commitment or the borrowing base for three consecutive days.
The New ABL Facility also contains certain customary affirmative covenants and
events of default.
Borrowings under the New ABL Facility totaled $150,098 at interest rates ranging from
2.77% to 4.75% at December 31, 2010. Outstanding standby letters of credit totaled $12,927
and the Company had $161,976 of available borrowing capacity under the terms of the New ABL
Facility at December 31, 2010.
Prior ABL Facility
On May 25, 2007, the Company and AAH entered into (i) a term loan
credit agreement (the Prior Term Loan Credit Agreement) to borrow $375,000 and (ii)
the Prior ABL Facility to borrow up to $250,000, as amended, for working capital and
general corporate purposes and the issuance of letters of credit.
F-14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Under the terms of the Prior ABL Credit Agreement, the borrowing base at any
time equaled (a) 85% of eligible trade receivables, plus (b) the lesser of (i) 75% of
eligible inventory and eligible in-transit inventory, valued at the lower of cost or
market value, or (ii) 85% of net orderly liquidation value of eligible inventory and
eligible in transit inventory (subject, in the case of eligible in-transit inventory,
to a cap of $10,000) , plus (c) 85% of eligible credit card receivables, less (d)
certain reserves.
The Prior ABL Credit Agreement provided for two pricing options: (i) an
alternate base rate (ABR) equal to the greater of (a) Credit Suisses prime rate in
effect on such day and (b) the federal funds effective rate in effect on such day
plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for
U.S. dollar deposits for the interest period relevant to such borrowing adjusted for
certain additional costs, in each case plus an applicable margin. The applicable
margin was up to 0.50% with respect to ABR borrowings and from 1.00% to 1.50% with
respect to LIBOR borrowings.
In addition to paying interest on outstanding principal under the ABL Credit
Agreement, the Company was required to pay a commitment fee of between 0.30% and
0.25% per annum in respect of the unutilized commitments thereunder. The Company also
paid customary letter of credit fees and agency fees.
At December 31, 2009, borrowings under the Prior ABL Credit Agreement were
$76,990.
PCFG Credit Facility
On November 2, 2007, PCFG entered into the PCFG Credit Facility under which it
borrowed $30,000 in term loans (the PCFG Term Loan) (see Note 8) and obtained a
committed revolving credit facility in an aggregate principal amount of up to $10,000,
for working capital and general corporate purposes and the issuance of letters of
credit (the PCFG Revolver). PCFG and Party City Franchise Group Holdings, LLC
(PCFG Holdings), the sole member of PCFG were designated by the Board of Directors
of the Company as Unrestricted Subsidiaries pursuant to the Prior ABL Credit
Agreement and the indenture governing its 8.75% Senior Subordinated Notes and neither
PCFG nor PCFG Holdings guaranteed any of the Companys other credit facilities or
indenture.
At December 31, 2009, borrowings under the PCFG Revolver were $645. There were
no outstanding letters of credit at December 31, 2009.
Other Credit Agreements
In addition to the New ABL Facility, at December 31, 2010, the Company has a
Canadian dollar denominated revolving credit facility in the amount of CDN$400 which
bears interest at the Canadian prime rate plus 1.1% and expires in June 2011, and a
₤1,400 denominated revolving credit facility which bears interest at the UK base rate
plus 1.75% on the first ₤1,000 and 4.75% over the UK base rate on the remaining ₤400.
The UK credit facility expires on June 30, 2011. We expect to renew these revolving
credit facilities upon expiration.
There were no borrowings under the Canadian dollar denominated revolving credit
facility at December 31, 2010 and 2009. There were no borrowings under the British
Pound Sterling revolving credit facility at December 31, 2010. At December 31, 2009,
there were outstanding borrowings of ₤357 under the revolving credit facility.
F-15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 8 Long-Term Obligations
Long-term obligations consisted of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
First lien term loan due 2017(a) |
$ | 666,644 | $ | | ||||
Term loan (b) |
| 364,688 | ||||||
PCFG term loan (c) |
| 23,000 | ||||||
Mortgage obligation (d) |
4,539 | 5,600 | ||||||
Capital lease obligations(e) |
3,975 | 5,510 | ||||||
8.75% senior subordinated notes(f) |
175,000 | 175,000 | ||||||
Total long-term obligations |
$ | 850,158 | $ | 573,798 | ||||
Less: current portion |
(9,046 | ) | (34,906 | ) | ||||
Long-term obligations, excluding current portion |
$ | 841,112 | $ | 538,892 | ||||
New Term Loan Credit Agreement
(a) On December 2, 2010, the Company and its parent company, AAH, entered into a
$675,000 Term Loan Agreement (the New Term Loan Credit
Agreement). The Company used the proceeds from the new term loan to terminate the
previously existing $342,000 term loan guaranty credit agreement and pay a distribution
of $311,199 to its stock, warrant and vested option holders (see Note 9). The new term
loan was issued at a 1% discount that is being amortized by the effective interest
method over the term of the loan.
The New Term Loan Credit Agreement provides for two pricing options: (i) an
alternate base rate (ABR) for any day, a rate per annum equal to the greater of (a)
Credit Suisses prime rate in effect on such day, (b) the federal funds effective rate
in effect on such day plus 1/2 of 1% and (c) the adjusted LIBOR rate plus 1% or (ii) the
LIBOR rate, adjusted for certain additional costs, with a LIBOR floor of 1.5%, in each
case plus an applicable margin. The applicable margin is 4.25% with respect to ABR
borrowings and 5.25% with respect to LIBOR borrowings.
The New Term Loan Credit Agreement provides that the term loans may be prepaid any
time prior to their maturity. The term loans are subject to mandatory prepayment out of
(i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds,
subject to reinvestment provisions, (ii) 50% of net proceeds arising from certain equity
issuances by the Company or its subsidiaries (which percentage will be reduced to 25% or
0% if the Companys total leverage ratio is less than specified ratios), (iii) net
proceeds arising from any debt issued by the Company or its subsidiaries and (iv) 50%
(which percentage will be reduced to 25% or 0% if the Companys total leverage ratio is
less than specified ratios) of the Companys Excess Cash Flow, as defined, if any.
The Company is required to repay installments on the term loans in quarterly
principal amounts of 0.25% of their funded total principal amount through September 30,
2017, with the remaining amount payable on the maturity date of December 2, 2017.
The obligations of the Company under the New Term Loan Credit Agreement are jointly
and severally guaranteed by AAH and each domestic subsidiary of the Company. Each
guarantor has secured its obligations under the guaranty by a first priority lien on
substantially all of its assets, with the exception of accounts receivable and
inventories, which are under a second priority lien.
The Company may, by written notice to the Administrative Agent from time to time,
request additional incremental term loans, in an aggregate amount not to exceed $175,000
million from one or more lenders (which may include any existing Lender) willing to
provide such additional incremental term loans in their own discretion.
F-16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
The New Term Loan Credit Agreement contains a number of covenants that, among other
things, restrict, subject to certain exceptions, the ability of the Company and its
Subsidiaries to incur additional indebtedness; create, incur or suffer to exist liens on
any of their property or assets; make investments or enter into joint venture
arrangements, repurchase capital stock of the Company; engage in mergers, consolidations
and sales of all or substantially all their assets; sell assets; make capital
expenditures; enter into agreements restricting dividends and advances by the Companys
subsidiaries; and engage in transactions with affiliates.
The New Term Loan Credit Agreement also contains certain customary affirmative
covenants and events of default.
In connection with the New Term Loan Credit Agreement, the Company incurred $12,193
in finance costs that have been capitalized and will be amortized over the life of the
loan.
At December 31, 2010, the balance of the Term Loan was $666,644, which includes an
original issue discount of $6,668, net of $81 of accumulated amortization. At December
31, 2010, the interest rate on term loan borrowings ranged from 6.75% to 7.50%
Prior Term Loan Credit Agreements
(b) On May 25, 2007, the Company, a wholly owned subsidiary of AAH , and AAH,
entered into (i) a $375,000 Term Loan Credit Agreement, and (ii) an ABL Credit
Agreement (see Note 7), and used the proceeds to refinance certain existing
indebtedness and to pay transactions costs.
The Prior Term Loan Credit Agreement provided for two pricing options: (i) an
ABR equal to the greater of (a) Credit Suisses prime rate in effect on such day and
(b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a
LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for
the interest period relevant to such borrowing adjusted for certain additional
costs, in each case plus an applicable margin. The applicable margin is 1.25% with
respect to ABR borrowings and 2.25% with respect to LIBOR borrowings.
The Company was required to repay installments on the term loans in
quarterly principal amounts of 0.25% of their funded total principal amount,
beginning September 30, 2007 and ending March 31, 2013, with the remaining amount
payable on the maturity date of May 25, 2013.
The Prior Term Loan Credit Agreement contained covenants similar to those in the
New Term Loan Credit Agreement
At December 31, 2009, the balance of the Prior Term Loan was $364,688.
Other Long Term Debt Agreements
(c) On November 2, 2007, PCFG entered into the PCFG Credit Facility. Pursuant
to the PCFG Credit Agreement, PCFG borrowed $30,000 in term loans (the PCFG Term
Loan) and obtained a committed revolving credit facility in an aggregate principal
amount of up to $10,000, as amended, for working capital and general corporate
purposes and the issuance of letters of credit (PCFG Revolver) (See Note 7).
PCFG and PCFG Holdings, the sole member of PCFG, had been designated by the
Board of Directors of the Company as Unrestricted Subsidiaries pursuant to the
Companys Prior ABL Credit Agreement and the indenture governing its 8.75% Senior
Subordinated Notes and neither PCFG nor PCFG Holdings guaranteed any of the Companys
other credit facilities or indenture.
At December 31, 2009, the balance of the PCFG Term Loan was $23,000. The PCFG
Term Loan was repaid in August 2010, in connection with the New ABL Facility (see
Note 7).
F-17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share)
(d) In conjunction with the construction of a new distribution facility, the
Company borrowed $10,000 from the New York State Job Development Authority on December
21, 2001, pursuant to the terms of a second lien mortgage note. On December 18, 2009
the mortgage note was amended, extending the fixed monthly payments of principal and
interest for a period of 60 months up to and including December 31, 2014. The interest
rate under the amended mortgage note remains variable and subject to review and
adjustment semi-annually based on the New York State Job Development Authoritys
confidential internal protocols. At December 31, 2010, the amended mortgage note bears
at an interest rate of 2.22%. At December 31, 2009, the mortgage note bore interest at
a rate of 2.45%. The principal amounts outstanding under the mortgage note as of
December 31, 2010 and 2009, were $4,539 and $5,600, respectively. At December 31, 2010,
the distribution facility had a carrying value of $39,795.
(e) The Company has entered into various capital leases for machinery and
equipment and automobiles with implicit interest rates ranging from 5.69% to 17.40%
which extend to 2015.
(f) The $175,000 senior subordinated notes due 2014 bear interest at a rate of
8.75% per annum. Interest is payable semi-annually on May 1 and November 1 of each
year. The senior subordinated notes are redeemable at the option of the Company, in
whole or in part, at any time on or after May 1, 2009, at redemption prices ranging
from 104.375% to 100%, plus accrued and unpaid interest to the date of redemption. If a
Change of Control, as defined in the note indenture, were to occur, the Company would
be obligated to make an offer to purchase the senior subordinated notes, in whole or in
part, at a price equal to 101% of the aggregate principal amount of the senior
subordinated notes, plus accrued and unpaid interest, if any, to the date of purchase.
If a Change of Control were to occur, the Company may not have the financial
resources to repay all of its obligations under the New Term Loan Credit Agreement, the
note indenture and the other indebtedness that would become payable upon the occurrence
of such Change of Control.
At December 31, 2010, maturities of long-term obligations consisted of the
following:
Long-term Debt | Capital Lease | |||||||||||
Obligations | Obligations | Totals | ||||||||||
2011 |
$ | 6,810 | $ | 2,236 | $ | 9,046 | ||||||
2012 |
6,835 | 1,446 | 8,281 | |||||||||
2013 |
6,860 | 147 | 7,007 | |||||||||
2014 |
181,982 | 131 | 182,113 | |||||||||
2015 |
5,737 | 15 | 5,752 | |||||||||
Thereafter |
637,959 | | 637,959 | |||||||||
Long-term obligations |
$ | 846,183 | $ | 3,975 | $ | 850,158 | ||||||
Note 9 Capital Stock
At December 31, 2010 and 2009, the Companys authorized capital stock
consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares
were issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of
which 30,824.02 and 30,819.35 shares were issued and outstanding, respectively. Of
these shares 597.52 and 592.85 shares were redeemable at December 31, 2010 and 2009,
respectively, and classified as redeemable common securities on the balance sheet, as
described below.
F-18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Under the terms of the AAH stockholders agreement dated April 30, 2004, as
amended, the Company has an option to purchase all of the shares of common stock held
by these employees and, upon their death or disability, these employee stockholders can
require the Company to purchase all of their shares. The purchase price as prescribed
in the stockholders agreements is to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on cost, as defined
therein. The aggregate amount that may be payable by the Company to all employee
stockholders, based on the estimated fair value of fully paid and vested common
securities, totaled $16,547 and $16,807 at December 31, 2010 and 2009, respectively,
and is classified as redeemable common securities on the consolidated balance sheet,
with a corresponding adjustment to stockholders equity. As there is no active market
for the Companys common stock, the Company estimates the fair value of its common
stock based on a valuation model confirmed periodically by its recent acquisitions or
independent appraisals.
As explained in Note 15, in 2004, the CEO and the President exchanged vested
Amscan stock options for vested AAH stock options (Rollover Options) to purchase
98.182 shares. In 2008, 37 Rollover Options were exercised. The remaining Rollover
Options are valued at $1,542 and $1,582 at December 31, 2010 and 2009, respectively,
and are classified as redeemable common securities on the consolidated balance sheet.
These options are Level 2 in the fair value hierarchy.
Total redeemable common securities on the balance sheet were as follows:
2010 | 2009 | |||||||
Redeemable common shares |
$ | 16,547 | $ | 16,807 | ||||
2004 Rollover Options |
1,542 | 1,582 | ||||||
$ | 18,089 | $ | 18,389 | |||||
On December 30, 2008, the Company exchanged 544.75 warrants to purchase AAH
common stock at $.01 per share, valued at $28,350 per share, plus $500 in cash, to
acquire the minority interest in PCFG common stock. As a result of this transaction,
the Company charged $558 to goodwill. The warrants, which have a term of 10 years, were
exercisable into AAH common stock under certain conditions, with the right to require
the Company to purchase the shares upon the death or disability of the employees and
were classified on the balance sheet as a current liability under the provisions of ASC
480-10 Distinguishing Liabilities from Equity Under those rules, any change in value of
the warrants must be marked to market to reflect the change in liability, with an
offsetting charge to compensation.
These warrants are Level 2 in the fair value hierarchy.
As the result of an independent appraisal performed
in December 2010, these warrants were marked to market resulting in a charge to
compensation expense of $4,763. For tax purposes, the warrants are not considered
compensation and therefore this charge is never deductible for tax purposes. In
February 2011, the warrants were exercised with the corresponding share issuance
recorded as redeemable common stock.
In December 2010, in connection with the refinancing of the Companys term loan
agreement (see Note 8), the Companys Board of Directors declared a one-time cash
dividend of $9,400 per shares of outstanding Common Stock totaling $289,746 and similar
distributions to the holders of vested common stock warrants of $12,083 and vested time
options of $9,370. The distribution to vested time option holders resulted in a charge
to stock compensation expense in 2010. In addition, holders of unvested time and
performance options at the declaration date may also receive a distribution of $9,400
per share, if and when the time and performance options vest. At December 31, 2010,
the aggregate potential distribution associated with unvested time and performance
options is $18,492.
Note 10 Provision for Doubtful Accounts
The provision for doubtful accounts is included in general and
administrative expenses. For the years ended December 31, 2010, 2009 and 2008, the
provision for doubtful accounts was $637, $3,982, and $1,092, respectively.
F-19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 11 Non-recurring Expenses and Write-off of Deferred Financing Costs
In connection with the refinancing of the Companys debt obligations in 2010, the
Company wrote off $2,448 of deferred financing costs associated with the repayment of
debt. Additionally, the Company expensed acquisition related costs of $1,607 primarily
associated with the Designware and Christys Group acquisitions.
Note 12 Restructuring Charges
In connection with the Party America Acquisition in 2006, $4,100 was accrued
related to plans to restructure Party Americas administrative operations and
involuntarily terminate a limited number of Party America personnel. All related costs
have been incurred, with the last $2,100 incurred during 2008.
In connection with the FCPO Acquisition in 2007, $9,101 was accrued related to
plans to restructure FCPOs merchandising assortment and administrative operations and
involuntarily terminate a limited number of FCPO personnel. Through December 31, 2010,
the Company incurred $7,605 in restructuring costs including $902 incurred in 2010.
The Company expects to incur $1,496 in 2011.
During October of 2009, the Company communicated its plan to close the FCPO
corporate office in Naperville, Illinois and to consolidate its retail corporate office
operations with those of Party City, in Rockaway, New Jersey. In connection with the
closing, the Company recorded additional planned severances costs of $1,800 during 2009
all of which have been paid by December 2010. The Company will continue to utilize the
Naperville facility as a distribution center for greeting cards and other products.
Restructuring costs associated with the 2007 acquisition of PCFG of $1,000 were
accrued related to plans to restructure PCFGs merchandising assortment and
administrative operations and involuntarily terminate a limited number of PCFG
personnel. PCFG incurred $100 and $900 in restructuring costs in 2009 and 2008,
respectively.
Note 13 Other Expense (Income)
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Other expense (income) consists of the following: |
||||||||||||
Undistributed income in unconsolidated joint venture |
$ | (678 | ) | $ | (632 | ) | $ | (538 | ) | |||
Change in fair market value of the interest rate cap |
| | (187 | ) | ||||||||
Foreign currency loss (gain) |
354 | 670 | (476 | ) | ||||||||
Write-off of deferred finance charges in connection
with the extinguishment of debt |
2,448 | | | |||||||||
Other acquisition costs |
1,607 | | | |||||||||
Royalty amendment fee |
| | 400 | |||||||||
Other, net |
477 | (70 | ) | (17 | ) | |||||||
Other expense (income), net |
$ | 4,208 | $ | (32 | ) | $ | (818 | ) | ||||
F-20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 14 Employee Benefit Plans
Certain subsidiaries of the Company maintain profit sharing plans for
eligible employees providing for annual discretionary contributions to a trust.
Eligible employees are full time domestic employees who have completed a certain length
of service, as defined, and attained a certain age, as defined. In addition, the plans
require the subsidiaries to match from 25% to 100% of voluntary employee contributions
to the plans, not to exceed a maximum amount of the employees annual salary, ranging
from 4% to 6%. Profit sharing expense for the years ended December 31, 2010, 2009, and
2008 totaled $4,470, $4,201, and $3,518, respectively.
Note 15 Equity Incentive Plan
On May 1, 2004, the Company adopted the 2004 Equity Incentive Plan (the
Plan) under which the Company may grant incentive awards in the form of restricted
and unrestricted common stock options to purchase shares of the Companys common stock
(Company Stock Options) to certain directors, officers, employees and consultants of
the Company and its affiliates. A committee of the Companys board of directors (the
Committee), or the board itself in the absence of a Committee, is authorized to make
grants and various other decisions under the Plan. Unless otherwise determined by the
Committee, any participant granted an award under the Plan must become a party to, and
agree to be bound by, the Companys stockholders agreement. Company Stock Options
reserved under the Plan total 3,260.93 and may include incentive and nonqualified
stock options. Company Stock Options are nontransferable (except under certain limited
circumstances) and, unless otherwise determined by the Committee, vest over five years
and have a term of ten years from the date of grant.
The Company has three types of options rollover options, time-based options,
and performance-based options, each of which is described below.
Rollover Options
In 2004, the Companys CEO and its President exchanged vested options in the
predecessor company for 98.18 vested options to purchase common shares at $2,500 per
share (the Rollover Options). These options had an intrinsic value of $737 and a fair
value of $880. Under ASC 805-30-30-11 Goodwill or Gain from Bargain Purchase, Including
Consideration Transferred, vested options granted by the acquiring company in exchange
for outstanding options of the target company should be considered part of the purchase
transaction.. The fair value is accounted for as part of the purchase price of the
target company.
Since these options were vested immediately and can be exercised upon death or
disability of the executives and put back to the Company, they are reflected as
redeemable common securities on the Companys consolidated balance sheet.
However, these options have an additional condition, whereby they may be put back
to the Company at fair market value upon retirement. Because the terms of the Rollover
Options could extend beyond the retirement dates of these two executives, it is
possible that they could exercise these options within six months of the specified
retirement date and then put the immature shares back to the Company at retirement less
than six months later. GAAP requires variable accounting for awards with puts that can
be exercised within six months of the issuance of the shares.
Therefore, regardless of the probability of this occurrence, changes in market
value of the shares are expensed as additional stock compensation because the put, even
if not probable, is within the control of the employee.
During 2008, a reduction in redeemable common stock caused by the exercise of 37
of these options, net of the increase in valuation of the remaining 61.18 options,
resulted in a net credit to pre tax income of $210. During 2010, an increase in the
valuation of the 61.18 options resulted in a charge to pre-tax income
of $572. There
was no charge to earnings for these options in 2009 because the valuation did not
change from 2008.
F-21
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Time-based options
In April 2005, the Company granted 722 time-based options (TBOs) to key
employees and its outside directors, exercisable at a strike price of $10,000. The
Company used a minimum value method under SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure, to determine
the fair value of the Company Stock Options granted in April 2005, together with the
following assumptions: dividend yield of 0%, risk-free interest rate of 3.1%,
forfeitures, expected cancellation of 3%, and an expected life of four years. The
estimated fair value of the options granted in 2005 is amortized on a straight line
basis to compensation expense, net of taxes, over the vesting period of four years.
The Company recorded compensation expense of approximately $140 and $201 in general
and administrative expenses during the years ended December 31, 2009 and 2008,
respectively. There is no remaining stock compensation in future years related to
these options.
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R) Share-Based Payment, which is a revision of SFAS No.
123 Accounting for Stock-Based Compensation as amended. SFAS No. 123(R) establishes
standards for the accounting for transactions where an entity exchanges its equity for
goods or services and transactions that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of those equity instruments.
SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. Generally, the fair
value approach in SFAS No. 123(R) is similar to the fair value approach described in
SFAS No. 123.
The Company adopted SFAS No. 123(R) using the prospective method. Since the
Companys common stock is not publicly traded, the options granted in 2005 under SFAS
No. 123 continue to be expensed under the provisions of SFAS No. 123 using a minimum
value method. Options issued subsequent to January 1, 2006 are expensed under the
provisions of SFAS No. 123(R).
Since April 2004, the Company granted the following TBOs to key eligible
employees and outside directors:
Options Granted | Exercise Price per Share | |||
722.00 |
$ | 10,000 | ||
489.50 |
12,000 | |||
187.00 |
14,250 | |||
20.00 |
17,500 | |||
122.00 |
20,750 | |||
5.00 |
22,340 | |||
95.00 |
28,350 | |||
57.00 |
27,700 |
In addition, in connection with the acquisition of Party America, certain Party
America employees elected to roll their options to purchase Party America common stock
into fully vested TBOs. As a result, the Company issued 19.02 fully vested TBOs
exercisable at strike prices of $6,267 and $10,321 per share and with a fair market
value of $170. The fair value of these options was recorded as part of the Party
America purchase price.
F-22
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
The Company recorded compensation expense of $723, $736, and $677 during the years
ended December 31, 2010, 2009, and 2008 related to the options granted since 2006 under
SFAS No. 123(R), in general and administrative expenses. The fair value of each grant
is estimated on the grant date using a Black-Scholes option valuation model based on
the assumptions in the following table.
Expected dividend rate |
| |||
Risk free interest rate |
1.76% to 5.08% | |||
Price volatility |
15.00 | |||
Weighted average expected life |
7.5 | |||
Forfeiture rate |
7.75 |
The weighted average expected life (estimated period of time outstanding) was
estimated using the Companys best estimate for determining the expected term. Expected
volatility was based on implied historical volatility of an applicable Dow Jones
Industrial Average sector index for a period equal to the stock options expected life.
The remaining stock compensation expense to be recorded in future years for these
options is $1,339.
In addition, as noted in an earlier footnote, the Company made a distribution to
holders of all vested time options granted before December, 2010, of $9,370, which was charged to
compensation expense. The remaining stock compensation expense that
would be recorded in future years if and when these time options vest
is $1,601.
Performance-based options
In April 2005, the Company granted 760 performance based options
(PBOs) to key employees and its outside directors, exercisable at a strike price of
$10,000. Under the PBO feature, the ability to exercise vested option awards is
contingent upon the occurrence of an initial public offering of the Companys common
stock or a change in control of the Company and the achievement of specified investment
returns to the Companys shareholders. Since a change in control condition cannot be
assessed as probable before it occurs, in accordance with EITF 96-5, Recognition of
Liabilities for Contractual Termination Benefits or Changing Benefit Plan Assumptions
in Anticipation of a Business Combination no compensation expense is recorded in
connection with the issuance of PBOs until an initial public offering of the Companys
common stock is completed or a change in control occurs. At that
time, holders of performance-based options granted before
December 2010 would receive a distribution of $9,400 per vested
option, which would be included in the recognition of compensation
expense if and when that occurs.
Since April 2005, the Company granted the following PBOs to key eligible
employees and outside directors:
Options Granted | Exercise Price per Share | |||
760.00 |
$ | 10,000 | ||
893.50 |
12,000 | |||
314.00 |
14,250 | |||
30.00 |
17,500 | |||
147.00 |
20,750 | |||
185.00 |
22,340 | |||
116.00 |
28,350 | |||
99.00 |
27,700 |
F-23
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
During the third quarter of 2008, a new investor acquired 38% of the outstanding
stock held by existing shareholders as well as 37 rollover options, 258 time-based
options, and 333 performance-based options held by option holders, at a price of
$28,350 per share.
Although this transaction did not result in a change in control, the Companys
majority shareholders decided to waive the requirements of change in control, and
permitted the time-vested portion of the performance-based options to be exercisable.
Additionally, for both performance-based and time-based options, employees were
permitted to have their net shares exercised settled for cash.
This waiver did not change the terms of the option plans for any remaining options
still outstanding, or obligate the Company to permit any future waiver of the change in
control requirement.
For the performance-based options that were exercised as a result of the
transaction noted above, the waiver of the change in control requirement resulted in a
vesting of these options. Therefore, the performance condition for those exercised
options was met immediately upon exercise. Therefore, the effect of the vesting and
settlement was accounted for as stock compensation. The fair value of the
performance-based options at exercise required to be charged to income is $5,639, of
which $2,002 was charged to income in prior years.
The following table summarizes the changes in outstanding options under the Equity
Incentive Plan for the years ended December 31, 2008, 2009 and 2010:
Average Fair | ||||||||||||
Average | Market | |||||||||||
Exercise | Value of Options at | |||||||||||
Options | Price | Grant Date | ||||||||||
Outstanding at December 31, 2007 |
3,399.14 | $ | 11,700 | |||||||||
Granted |
305.90 | 24,617 | $ | 5,736 | ||||||||
Exercised |
(627.90 | ) | 14,283 | |||||||||
Canceled |
(144.54 | ) | 10,193 | |||||||||
Outstanding at December 31, 2008 |
2,932.60 | 13,242 | ||||||||||
Granted |
40.00 | 28,350 | 5,712 | |||||||||
Exercised |
(7.70 | ) | 11,573 | |||||||||
Canceled |
(31.87 | ) | 12,459 | |||||||||
Outstanding at December 31, 2009 |
2,933.03 | 13,462 | ||||||||||
Granted |
327.00 | 28,035 | 7,399 | |||||||||
Exercised |
(4.68 | ) | 11,090 | |||||||||
Canceled |
(133.10 | ) | 21,622 | |||||||||
Outstanding at December 31, 2010 |
3,122.25 | 14,350 | ||||||||||
Exercisable at December 31, 2010 |
996.79 | 11,139 |
F-24
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 16 Income Taxes
A summary of domestic and foreign income before income taxes and minority
interest follows:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Domestic |
$ | 77,537 | $ | 92,364 | $ | 54,701 | ||||||
Foreign |
4,841 | 8,060 | 9,120 | |||||||||
Total |
$ | 82,378 | $ | 100,424 | $ | 63,821 | ||||||
The income tax expense consisted of the following:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 34,752 | $ | 22,643 | $ | 24,515 | ||||||
State |
5,281 | 3,930 | 4,817 | |||||||||
Foreign |
1,854 | 2,297 | 2,741 | |||||||||
Total current provision |
41,887 | 28,870 | 32,073 | |||||||||
Deferred: |
||||||||||||
Federal |
(7,187 | ) | 7,705 | (6,627 | ) | |||||||
State |
(1,739 | ) | 1,150 | (1,139 | ) | |||||||
Foreign |
(16 | ) | (52 | ) | (119 | ) | ||||||
Total deferred (benefit) provision |
(8,942 | ) | 8,803 | (7,885 | ) | |||||||
Income tax expense |
$ | 32,945 | $ | 37,673 | $ | 24,188 | ||||||
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
F-25
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Deferred income tax assets and liabilities from domestic jurisdictions consisted
of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
Current deferred income tax assets: |
||||||||
Inventory valuation |
$ | 17,246 | $ | 16,186 | ||||
Allowance for doubtful accounts |
1,129 | 941 | ||||||
Accrued liabilities |
11,637 | 10,733 | ||||||
Contribution carryforward |
107 | 56 | ||||||
Tax loss carryforward |
405 | 1,761 | ||||||
Tax credit carryforward |
576 | 576 | ||||||
Current deferred income tax assets (included in
prepaid expenses and other current assets) |
$ | 31,100 | $ | 30,253 | ||||
Non-current deferred income tax liabilities, net: |
||||||||
Property, plant and equipment |
$ | 12,194 | $ | 11,631 | ||||
Intangible assets |
59,031 | 69,774 | ||||||
Amortization of goodwill and other assets |
22,599 | 19,457 | ||||||
Other |
1,157 | 708 | ||||||
Non-current deferred income tax liabilities, net |
$ | 94,981 | $ | 101,570 | ||||
At December 31, 2010, the Company had a net operating loss carryforward
remaining from FCPO of approximately $1,217,
expiring in 2026. In addition, the Company had alternative
minimum tax credit carryforwards of $576, which do not expire.
The difference between the Companys effective income tax rate and the federal
statutory income tax rate is reconciled below:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Provision at federal statutory income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income tax, net of federal income tax benefit |
2.8 | 3.1 | 4.2 | |||||||||
Warrant compensation charge not deductible |
2.0 | | | |||||||||
Domestic manufacturing deductions |
(3.0 | ) | (0.8 | ) | (1.3 | ) | ||||||
Adjustments
related to previous acquisitions |
3.5 | | | |||||||||
Other |
(0.3 | ) | 0.2 | | ||||||||
Effective income tax rate |
40.0 | % | 37.5 | 37.9 | % | |||||||
In
2010, the Company recorded certain adjustments related to deferred tax
accounts recorded during the current year related to activities
associated with previous acquisitions which resulted in domestic tax expense
of $2,905.
Other differences between the effective income tax rate and the federal
statutory income tax rate are composed of favorable permanent differences related to
inventory contributions and favorable foreign rate differences, offset by the
non-deductible portion of meals and entertainment expenses.
F-26
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
The Company treats the Christys Group UK subsidiaries
for U.S. tax purposes as if they were foreign branches
of the US entities
so their earnings are not considered permanently reinvested. The Company has determined that the earnings of its subsidiary,
Amscan Distributors (Canada) Ltd. should not be considered permanently reinvested,
and accordingly has provided U.S. and additional foreign taxes on those undistributed
earnings.
Since Canadian and U.S. tax rates are similar,
the effect of this decision was to decrease the Companys 2010 tax
provision by only $10.
At December 31, 2010 and 2009, the Companys share of the cumulative
undistributed earnings of its other foreign subsidiaries was approximately $26,185
and $25,138, respectively. No provision has been made for U.S. or additional foreign
taxes on the undistributed earnings of these foreign subsidiaries, because such
earnings are expected to be reinvested indefinitely in the subsidiaries operations.
It is not practical to estimate the amount of additional tax that might be payable on
these foreign earnings in the event of distribution or sale; however, under existing
law, foreign tax credits would be available to substantially reduce incremental U.S.
taxes payable on amounts repatriated.
The Company and its subsidiaries file a U.S. federal income tax
return, and over 100 state, city, and foreign tax returns.
The following table summarizes the activity related to our gross unrecognized tax
benefits:
2010 | 2009 | 2008 | ||||||||||
Balance as of January 1, |
$ | 992 | $ | 2,024 | $ | 2,485 | ||||||
Increases related to current year tax positions |
73 | 81 | 172 | |||||||||
Increases related to prior year tax positions |
505 | |||||||||||
Decrease related to settlements |
(334 | ) | (822 | ) | ||||||||
Decreases related to lapsing of statutes of
limitations |
(405 | ) | (291 | ) | (633 | ) | ||||||
Balance as of December 31, |
$ | 831 | $ | 992 | $ | 2,024 | ||||||
Our total net unrecognized tax benefits that, if recognized, would impact our
effective tax rate were $654, $1,032 and $1,787 as of December 31, 2010, 2009 and 2008,
respectively.
Liabilities for unrecognized tax benefits are reflected in other long-term
liabilities in the consolidated balance sheet. Included in the balance of unrecognized
tax benefits at December 31, 2009, is $341 related to tax positions for which it is
possible that the total amounts could significantly change during the next twelve
months.
The Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income tax expense. The Company has accrued $90 and $146 for the potential
payment of interest and penalties at December 31, 2010 and 2009, respectively. The
Company credited $56 in interest to income tax expense in 2010 and $119 in 2009.
For federal income tax purposes, the years 2008 through 2010 are open to
examination at December 31, 2010. For non-U.S. income tax purposes, tax years from 2006
through 2010 remain open. Lastly, the Company is open to state and local income tax
examinations for the tax years 2006 through 2010.
F-27
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 17 Commitments, Contingencies and Related Party Transactions
Lease Agreements
The Company has non-cancelable operating leases for its numerous retail store
sites as well as for its corporate offices, certain distribution and manufacturing
facilities, showrooms, and warehouse equipment that expire on various dates through
2017. These leases generally contain renewal options and require the Company to pay
real estate taxes, utilities and related insurance.
At December 31, 2010, future minimum lease payments under all operating leases
consisted of the following:
Future Minimum | ||||
Operating Lease | ||||
Payments | ||||
2011 |
$ | 112,172 | ||
2012 |
95,026 | |||
2013 |
67,314 | |||
2014 |
45,510 | |||
2015 |
33,369 | |||
Thereafter |
71,773 | |||
$ | 425,164 | |||
We are also an assignor with contingent lease liability for seven stores sold
to franchisees. The potential contingent lease obligations continue until the
applicable leases expire in 2014. The maximum amount of the contingent lease
obligations may vary, but is limited to the sum of the total amount due under the
leases. At December 31, 2010, the maximum amount of the contingent lease obligations
was approximately $4,200 and is not included in the table above as such amount is
contingent upon certain events occurring, which management has not assessed as probable
or estimable at this time.
The operating leases included in the above table also do not include
contingent rent based upon sales volume or other variable costs such as maintenance,
insurance and taxes.
Rent expense for the years ended December 31, 2010, 2009 and 2008, was
$144,006, $136,785, and $142,471, respectively, and include immaterial amounts of rent
expense related to contingent rent.
F-28
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Product Royalty Agreements
The Company has entered into product royalty agreements with various
licensors of copyrighted and trademarked characters and designs that are used on the
Companys products which require royalty payments based on sales of the Companys
products, and, in some cases, include annual minimum royalties.
At December 31, 2010, the Companys commitment to pay future minimum product
royalties was as follows:
Future Minimum | ||||
Royalty Payments | ||||
2011 |
$ | 8,271 | ||
2012 |
7,320 | |||
2013 |
1,724 | |||
2014 |
800 | |||
2015 |
550 | |||
Thereafter |
1,100 | |||
$ | 19,765 | |||
Product royalty expense for the years ended December 31, 2010, 2009 and 2008, was
$14,693, $8,615, and $8,455, respectively.
The Company has entered into product purchase commitments with certain
vendors. At December 31, 2010, the Companys future product commitments were as
follows:
Product Purchase | ||||
Commitments | ||||
2011 |
$ | 26,700 | ||
2012 |
27,200 | |||
2013 |
27,700 | |||
$ | 81,600 | |||
Legal Proceedings
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will result,
individually or in the aggregate, in a material adverse effect upon its financial
condition or future results of operations.
Related Party Transactions
Pursuant to the terms of a management agreement, Berkshire Partners LLC and
Weston Presidio were paid annual management fees of $833 and $417, respectively, for
each of the years ended December 31, 2010, 2009 and 2008. Management fees payable to
Berkshire Partners LLC and Weston Presidio totaled $139 and $69, respectively, at
December 31, 2010, and 2009 and are included in accrued expenses on the consolidated
balance sheet. Although the indenture governing the 8.75% senior subordinated notes
will permit the annual payments under the management agreement, such payments will be
restricted during an event of default under the notes and will be subordinated in right
of payment to all obligations due with respect to the notes in the event of a
bankruptcy or similar proceeding of Amscan.
F-29
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 18 Segment Information
Industry Segments
The Company has two identifiable business segments. The Wholesale
segment includes the design, manufacture, contract for manufacture and distribution of
party goods, including paper and plastic tableware, metallic balloons, accessories,
novelties, gifts and stationery, at wholesale. The Retail segment includes the
operation of company-owned specialty retail party goods and social expressions supply
stores in the United States and the sale of franchises on an individual store and
franchise area basis throughout the United States and Puerto Rico.
The Companys industry segment data for the years ended December 31, 2010,
2009 and 2008 are as follows:
Wholesale | Retail | Consolidated | ||||||||||
Year Ended December 31, 2010 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 769,247 | $ | 1,108,785 | $ | 1,878,032 | ||||||
Royalties and franchise fees |
| 19,417 | 19,417 | |||||||||
Total revenues |
769,247 | 1,128,202 | 1,897,449 | |||||||||
Eliminations |
(298,355 | ) | | (298,355 | ) | |||||||
Net revenues |
$ | 470,892 | $ | 1,128,202 | $ | 1,599,094 | ||||||
Income from operations |
$ | 85,636 | $ | 41,800 | $ | 127,436 | ||||||
Interest expense, net |
40,850 | |||||||||||
Other expense, net |
4,208 | |||||||||||
Income before income taxes |
$ | 82,378 | ||||||||||
Depreciation
and amortization |
$ | 18,979 | $ | 30,439 | $ | 49,418 | ||||||
Total assets |
$ | 948,850 | $ | 704,301 | $ | 1,653,151 | ||||||
Wholesale | Retail | Consolidated | ||||||||||
Year Ended December 31, 2009 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 633,006 | $ | 1,055,965 | $ | 1,688,971 | ||||||
Royalties and franchise fees |
| 19,494 | 19,494 | |||||||||
Total revenues |
633,006 | 1,075,459 | 1,708,465 | |||||||||
Eliminations |
(221,647 | ) | | (221,647 | ) | |||||||
Net revenues |
$ | 411,359 | $ | 1,075,459 | $ | 1,486,818 | ||||||
Income from operations |
$ | 65,007 | $ | 76,866 | $ | 141,873 | ||||||
Interest expense, net |
41,481 | |||||||||||
Other income, net |
(32 | ) | ||||||||||
Income before income taxes |
$ | 100,424 | ||||||||||
Depreciation
and amortization |
$ | 14,652 | $ | 29,730 | $ | 44,382 | ||||||
Total assets |
$ | 747,262 | $ | 733,239 | $ | 1,480,501 | ||||||
F-30
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Wholesale | Retail | Consolidated | ||||||||||
Year Ended December 31, 2008 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 653,403 | $ | 1,099,136 | $ | 1,752,539 | ||||||
Royalties and franchise fees |
| 22,020 | 22,020 | |||||||||
Total revenues |
653,403 | 1,121,156 | 1,774,559 | |||||||||
Eliminations |
(214,898 | ) | | (214,898 | ) | |||||||
Net revenues |
$ | 438,505 | $ | 1,121,156 | $ | 1,559,661 | ||||||
Income from operations |
$ | 58,290 | $ | 55,628 | $ | 113,918 | ||||||
Interest expense, net |
50,915 | |||||||||||
Other expense, net |
(818 | ) | ||||||||||
Income before income taxes |
$ | 63,821 | ||||||||||
Depreciation
and amortization |
$ | 14,926 | $ | 32,352 | $ | 47,278 | ||||||
Total assets |
$ | 702,938 | $ | 805,039 | $ | 1,507,977 | ||||||
Geographic Segments
The Companys export sales, other than those intercompany sales reported below as
sales between geographic areas, are not material. Intercompany sales between geographic
areas consist of sales of finished goods for distribution in foreign markets. No single
foreign operation is significant to the Companys consolidated operations. Intercompany
sales between geographic areas are made at cost plus a share of operating profit.
The Companys geographic area data are as follows:
Domestic | Foreign | Eliminations | Consolidated | |||||||||||||
Year Ended December 31, 2010 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales to unaffiliated customers |
$ | 1,469,533 | $ | 110,144 | $ | | $ | 1,579,677 | ||||||||
Net sales between geographic areas |
23,570 | | (23,570 | ) | | |||||||||||
Net sales |
1,493,103 | 110,144 | (23,570 | ) | 1,579,677 | |||||||||||
Royalties and franchise fees |
19,417 | | | 19,417 | ||||||||||||
Total revenues |
$ | 1,512,520 | $ | 110,144 | $ | (23,570 | ) | $ | 1,599,094 | |||||||
Income from operations |
$ | 120,058 | $ | 6,129 | $ | 1,249 | $ | 127,436 | ||||||||
Interest expense, net |
40,850 | |||||||||||||||
Other income, net |
4,208 | |||||||||||||||
Income before income taxes |
$ | 82,378 | ||||||||||||||
Depreciation
and amortization |
$ | 48,427 | $ | 991 | $ | 49,418 | ||||||||||
Total assets |
$ | 1,645,154 | $ | 108,646 | $ | (100,649 | ) | $ | 1,653,151 | |||||||
Domestic | Foreign | Eliminations | Consolidated | |||||||||||||
Year Ended December 31, 2009 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales to unaffiliated customers |
$ | 1,371,611 | $ | 95,713 | $ | | $ | 1,467,324 | ||||||||
Net sales between geographic areas |
24,247 | | (24,247 | ) | | |||||||||||
Net sales |
1,395,858 | 95,713 | (24,247 | ) | 1,467,324 | |||||||||||
Royalties and franchise fees |
19,494 | | | 19,494 | ||||||||||||
Total revenues |
$ | 1,415,352 | $ | 95,713 | $ | (24,247 | ) | $ | 1,486,818 | |||||||
Income from operations |
$ | 132,115 | $ | 8,686 | $ | 1,072 | $ | 141,873 | ||||||||
Interest expense, net |
41,481 | |||||||||||||||
Other income, net |
(32 | ) | ||||||||||||||
Income before income taxes |
$ | 100,424 | ||||||||||||||
Depreciation and amortization |
$ | 43,496 | $ | 886 | $ | 44,382 | ||||||||||
Total assets |
$ | 1,478,493 | $ | 82,890 | $ | (80,882 | ) | $ | 1,480,501 | |||||||
F-31
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Domestic | Foreign | Eliminations | Consolidated | |||||||||||||
Year Ended December 31, 2008 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales to unaffiliated customers |
$ | 1,454,145 | $ | 83,496 | $ | | $ | 1,537,641 | ||||||||
Net sales between geographic areas |
23,194 | | (23,194 | ) | | |||||||||||
Net sales |
1,477,339 | 83,496 | (23,194 | ) | 1,537,641 | |||||||||||
Royalties and franchise fees |
22,020 | | | 22,020 | ||||||||||||
Total revenues |
$ | 1,499,359 | $ | 83,496 | $ | (23,194 | ) | $ | 1,559,661 | |||||||
Income from operations |
$ | 104,217 | $ | 8,536 | $ | 1,165 | $ | 113,918 | ||||||||
Interest expense, net |
50,915 | |||||||||||||||
Other expense, net |
(818 | ) | ||||||||||||||
Income before income taxes |
$ | 63,821 | ||||||||||||||
Depreciation and amortization |
$ | 46,328 | $ | 950 | $ | 47,278 | ||||||||||
Total assets |
$ | 1,508,310 | $ | 49,319 | $ | (49,652 | ) | $ | 1,507,977 | |||||||
Note 19 Quarterly Results (Unaudited)
Despite a concentration of holidays in the fourth quarter of the year, as a result
of our expansive product lines, wholesale customer base and increased promotional
activities, the impact of seasonality on the quarterly results of our wholesale
operations in recent years has been limited. Promotional activities, including special
dating terms, particularly with respect to Halloween and Christmas products sold at
wholesale during the third quarter, and the introduction of our new everyday products
and designs during the fourth quarter generally result in higher accounts receivables
and inventory balances. Our retail operations are subject to substantial seasonal
variations. Historically, our retail operations have realized a significant portion of
their net sales, net income and cash flow in the fourth quarter of the year,
principally due to the sales in October for the Halloween season and, to a lesser
extent, due to sales for end of year holidays.
The following table sets forth our historical revenues, gross profit, income from
operations and net income, by quarter, for the years ended December 31, 2010, 2009, and
2008.
For the Three Months Ended, | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2010 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 304,379 | $ | 352,705 | $ | 358,772 | $ | 563,821 | ||||||||
Royalties and franchise fees |
3,844 | 4,453 | 4,035 | 7,085 | ||||||||||||
Gross profit |
104,479 | 141,840 | 132,437 | 257,863 | ||||||||||||
Income from operations |
8,288 | 35,367 | 17,963 | 65,818 | (a) | |||||||||||
Net (loss) income attributable
to Amscan Holdings, Inc. |
(412 | ) | 16,460 | 4,603 | 28,668 | (a) | ||||||||||
2009 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 309,046 | $ | 337,536 | $ | 336,944 | $ | 483,798 | ||||||||
Royalties and franchise fees |
3,694 | 4,536 | 4,164 | 7,100 | ||||||||||||
Gross profit |
103,629 | 128,425 | 121,453 | 214,776 | ||||||||||||
Income from operations |
12,201 | 27,818 | 14,937 | 86,917 | ||||||||||||
Net income attributable to
Amscan Holdings, Inc. |
2,403 | 10,952 | 3,079 | 46,119 |
F-32
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
For the Three Months Ended, | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2008 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 325,032 | $ | 365,174 | $ | 356,231 | $ | 491,204 | ||||||||
Royalties and franchise fees |
5,342 | 6,350 | 5,863 | 4,465 | ||||||||||||
Gross profit |
110,347 | 139,414 | 125,311 | 196,143 | ||||||||||||
Income from operations |
8,778 | 35,511 | 18,573 | 51,056 | (a) | |||||||||||
Net (loss) income attributable
to Amscan Holdings, Inc. |
(2,537 | ) | 14,669 | 4,563 | 23,815 | (a) |
(a) | During 2010 and 2008, the Company instituted programs to convert its FCPO stores and its company-owned and franchised Party America stores to Party City stores and recorded fourth quarter charges of $27,400, and $17,376, respectively, for the impairment of the Factory Card & Party Outlet and Party America trade names. |
Note 20 Fair Value Measurements
The provisions of Accounting Standards Codification or ASC, Subtopic 820 defines
fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at the
measurement date. ASC 820 established a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. This hierarchy requires entities
to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar techniques
that use significant unobservable inputs.
The following table shows assets and liabilities as of December 31, 2010 that are
measured at fair value on a recurring basis:
Significant | ||||||||||||||||
Quoted Prices in | Other | |||||||||||||||
Active Markets for | Observable | Unobservable | Total as of | |||||||||||||
Identical Assets or | Inputs | Inputs | December 31, | |||||||||||||
Liabilities (Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Derivative assets |
| $ | 241 | | $ | 241 | ||||||||||
Derivative liabilities |
| (2,288 | ) | | (2,288 | ) |
F-33
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
The following table shows assets and liabilities as of December 31, 2009 that are measured at
fair value on a recurring basis:
Significant | ||||||||||||||||
Quoted Prices in | Other | |||||||||||||||
Active Markets for | Observable | Unobservable | Total as of | |||||||||||||
Identical Assets or | Inputs | Inputs | December 31, | |||||||||||||
Liabilities (Level 1) | (Level 2) | (Level 3) | 2009 | |||||||||||||
Derivative assets |
| | | | ||||||||||||
Derivative liabilities |
| $ | (6,582 | ) | | $ | (6,582 | ) |
In addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record other assets and liabilities at
fair value on a nonrecurring basis, generally as a result of impairment charges.
The carrying amounts for cash and cash equivalents, accounts receivables, prepaid
expenses and other current assets, accounts payable, accrued expenses and other
current liabilities approximate fair value at December 31, 2010 and December 31, 2009
because of the short-term maturity of those instruments or their variable rates of
interest.
The carrying amount and fair value (based on market prices) of the Companys term
loans and $175,000 Senior Subordinated Notes are as follows:
December 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Term Loans |
$ | 666,644 | $ | 674,060 | $ | 364,688 | $ | 331,866 | ||||||||
$175,000 Senior Subordinated Notes |
175,000 | 176,750 | 175,000 | 166,250 |
The carrying amounts for other long-term debt approximate fair value at December
31, 2010 and 2009, based on the discounted future cash flow of each instrument at
rates currently offered for similar debt instruments of comparable maturity.
Note 21 Derivative Financial Instruments
Interest Rate Risk Management
As part of the Companys risk management strategy, the Company
periodically uses interest rate swap agreements to hedge the variability of cash flows
on floating rate debt obligations (see Notes 7 and 8). Accordingly, interest rate swap
agreements are reflected in the consolidated balance sheets at fair value and the
related gains and losses on these contracts are deferred in stockholders equity and
recognized in interest expense over the same period in which the related interest
payments being hedged are recognized in income. The fair value of an interest rate swap
agreement is the estimated amount that the counterparty would receive or pay to
terminate the swap agreement at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap counterparty.
To effectively fix the interest rate on a portion of its term loans (see Note 8),
the Company entered into an interest rate swap agreement with a financial institution
in 2006, for an aggregate notional amount of $57,000, which expired in February 2009.
In 2008, the Company entered into a second interest rate swap agreement with a
financial institution for an initial aggregate notional amount of $118,505, which
increased to a maximum of $163,441 during its term and expired in March 2011.
The swap agreements had unrealized net losses of $1,414 and $3,977 at December 31,
2010 and 2009, respectively, which were included in accumulated other comprehensive
loss (see Note 22). No components of these agreements are excluded in the measurement
of hedge effectiveness. As these hedges are 100% effective, there is no current impact
on earnings due to hedge ineffectiveness.
The Company anticipates that substantially all gains and losses in
accumulated other comprehensive loss related to these swap agreements
will be reclassified into earnings by December 2011.
The fair value of interest rate contracts at
December 31, 2010 and 2009 of $(2,244) and $(6,313) are reported in current liabilities
in the consolidated balance sheet.
F-34
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Foreign Exchange Risk Management
A portion of the Companys cash flows is derived from transactions
denominated in foreign currencies. The United States dollar value of transactions
denominated in foreign currencies fluctuates as the United States dollar strengthens or
weakens relative to these foreign currencies. In order to reduce the uncertainty of
foreign exchange rate movements on transactions denominated in foreign currencies,
including the British Pound Sterling and the Euro, the Company enters into foreign
exchange contracts with major international financial institutions. These forward
contracts, which typically mature within one year, are designed to hedge anticipated
foreign currency transactions, primarily inter-company inventory purchases and trade
receivables. No components of the contracts are excluded in the measurement of hedge
effectiveness. The critical terms of the foreign exchange contracts are the same as the
underlying forecasted transactions; therefore, changes in the fair value of foreign
exchange contracts should be highly effective in offsetting changes in the expected
cash flows from the forecasted transactions.
At December 31, 2010 and 2009, the Company had foreign currency exchange
contracts with notional amounts of $13,468, and $19,200, respectively. The foreign
currency exchange contracts are reflected in the consolidated balance sheets at fair
value. The fair value of the foreign currency exchange contracts is the estimated
amount that the counterparties would receive or pay to terminate the foreign currency
exchange contracts at the reporting date, taking into account current foreign exchange
spot rates. The fair value adjustment at December 31, 2010 and 2009 resulted in an
unrealized net gain (loss) of $124, and $(169), respectively, which are included in
accumulated other comprehensive loss (see Note 22). No components of these agreements
are excluded in the measurement of hedge effectiveness. As these hedges are 100%
effective, there is no current impact on earnings due to hedge ineffectiveness. The
Company anticipates that substantially all gains and losses in accumulated other
comprehensive loss related to these foreign exchange contracts will be reclassified
into earnings by December 2011. The fair value of foreign exchange contracts for the
years ended December 31, 2010 and 2009 of $197 and $(269) are reported in accrued
expenses and other current assets in the consolidated balance sheets, respectively.
Notional Amounts | Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||
Balance | Balance | Balance | Balance | |||||||||||||||||||||||||||||||||||||
Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | |||||||||||||||||||||||||||||||||
December 31, | December 31, | Line | Value | Line | Value | Line | Value | Line | Value | |||||||||||||||||||||||||||||||
Derivative Instrument | 2010 | 2009 | December 31, 2010 | December 31, 2009 | December 31, 2010 | December 31, 2009 | ||||||||||||||||||||||||||||||||||
Interest Rate Hedge |
$ | 135,374 | $ | 163,441 | $ | | $ | | (b) AE | $ | (2,244 | ) | (b) AE | $ | (6,313 | ) | ||||||||||||||||||||||||
Foreign Exchange
Contracts |
13,468 | 19,200 | (a) PP | 241 | $ | | (a) AE | (44 | ) | (a) AE | (269 | ) | ||||||||||||||||||||||||||||
Total Hedges |
$ | 148,842 | $ | 182,641 | $ | 241 | $ | | $ | (2,288 | ) | $ | (6,582 | ) | ||||||||||||||||||||||||||
(a) | PP = Prepaid expenses and other current assets | |
(b) | AE = Accrued expenses |
F-35
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 22 Comprehensive Income
Comprehensive income consisted of the following:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 49,319 | $ | 62,553 | $ | 40,510 | ||||||
Net change in cumulative translation adjustment |
(376 | ) | 4,007 | (11,338 | ) | |||||||
Change in fair value of interest rate swap contracts, net
of income taxes of $1,505, $773, and $(2,851) |
2,563 | 1,317 | (4,855 | ) | ||||||||
Change in fair value of foreign exchange contracts, net
of income tax (benefit) expense of $172, $(1,097),
and $1,169 |
293 | (1,867 | ) | 1,990 | ||||||||
Comprehensive income attributable to Amscan Holdings, Inc. |
$ | 51,799 | $ | 66,010 | $ | 26,307 | ||||||
Accumulated other comprehensive loss consisted of the following:
Year Ended December 31, | ||||||||||||
2010 | 2009 | |||||||||||
Cumulative translation adjustment |
$ | (4,625 | ) | $ | (4,249 | ) | ||||||
Interest rate swap contracts, net of
income tax benefit of $(830) and $(2,336) |
(1,414 | ) | (3,977 | ) | ||||||||
Foreign exchange contracts, net of income
tax expense (benefit) of $73 and $(100) |
124 | (169 | ) | |||||||||
Total accumulated other comprehensive income |
$ | (5,915 | ) | $ | (8,395 | ) | ||||||
Note 23 Subsequent Events
On January 30, 2011, the Company acquired the common stock of Riethmuller GmbH
(Riethmuller) for $46,810, in a transaction accounted for as a purchase business
combination. Riethmuller is a German distributor of party goods and carnival items
with latex balloon manufacturing operations in Malaysia and the ability to manufacture
certain party goods in Poland. The acquisition expands the Companys vertical business
model into the latex balloon category and gives the Company an additional significant
presence in Germany, Poland and Malaysia.
The Company is still in the process of accumulating information to
complete the determination of the fair value of certain acquired
assets.
F-36
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share)
Note 24 Condensed Consolidating Financial Information
Borrowings under the New Term Loan Credit Agreement, the New ABL Credit
Agreement and the Companys $175,000 8.75% senior subordinated notes are guaranteed
jointly and severally, fully and unconditionally, by the following domestic
subsidiaries of the Company (the Guarantors):
| Amscan Inc. | ||
| Am-Source, LLC | ||
| Anagram Eden Prairie Property Holdings LLC | ||
| Anagram International, Inc. | ||
| Anagram International Holdings, Inc. | ||
| Anagram International, LLC | ||
| Gags & Games, Inc. | ||
| JCS Packaging Inc. | ||
| M&D Industries, Inc. | ||
| Party City Corporation | ||
| PA Acquisition Corporation | ||
| SSY Realty Corp. | ||
| Party City Franchise Group Holdings, LLC (PCFG) | ||
| Trisar, Inc. |
Non-guarantor subsidiaries (Non-guarantors) include the following:
| Amscan Distributors (Canada) Ltd. | ||
| Amscan Holdings Limited | ||
| Amscan (Asia-Pacific) Pty. Ltd. | ||
| Amscan de Mexico, S.A. de C.V. | ||
| Anagram International (Japan) Co., Ltd. | ||
| Christys Asia, Ltd. | ||
| Christys By Design, Ltd. | ||
| Christys Dress Up, Ltd. | ||
| Christys Garments & Accessories Ltd. | ||
| JCS Hong Kong Ltd. |
The following unaudited information presents condensed consolidating balance
sheets at December 31, 2010 and December 31, 2009, Condensed Consolidating Statements of
Operations for the years ended December 31, 2010, 2009 and 2008, and the related Condensed
Consolidating Statements of cash flows for the years ended December 31, 2010, 2009 and 2008,
for the Combined Guarantors and the Combined Non-Guarantors, together with the elimination
entries necessary to consolidate the entities comprising the combined companies.
Certain amounts in the condensed consolidating balance sheet at December 31, 2009 have
been reclassified between the combined Non-Guarantors and the Eliminations. These
reclassifications have no effect on the balance sheet amounts for the Combined Guarantors or
the consolidated amounts.
As a result of the repayment of PCFGs debt during the third quarter of 2010, PCFG
became a Guarantor and is included under AHI and Combined Guarantors in the Consolidating
Financial Statements for the year ended December 31, 2010. For the prior periods presented
PCFG was reflected under Combined Non-Guarantors.
F-37
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING BALANCE SHEET
December 31, 2010
December 31, 2010
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 14,198 | $ | 6,256 | $ | | $ | 20,454 | ||||||||
Accounts receivable , net |
76,699 | 30,632 | | 107,331 | ||||||||||||
Inventories, net |
405,452 | 19,883 | (1,018 | ) | 424,317 | |||||||||||
Prepaid expenses and other current assets |
61,211 | 4,461 | | 65,672 | ||||||||||||
Total current assets |
557,560 | 61,232 | (1,018 | ) | 617,774 | |||||||||||
Property, plant and equipment, net |
187,574 | 3,155 | | 190,729 | ||||||||||||
Goodwill |
600,014 | 30,478 | | 630,492 | ||||||||||||
Trade names |
129,954 | | | 129,954 | ||||||||||||
Other intangible assets, net |
55,362 | | | 55,362 | ||||||||||||
Investment in and advances to
unconsolidated subsidiaries |
64,485 | | (64,485 | ) | | |||||||||||
Due from affiliates |
22,148 | 12,998 | (35,146 | ) | | |||||||||||
Other assets, net |
28,057 | 783 | | 28,840 | ||||||||||||
Total assets |
1,645,154 | $ | 108,646 | $ | (100,649 | ) | 1,653,151 | |||||||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND
STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
150,098 | | | 150,098 | ||||||||||||
Accounts payable |
97,510 | 10,662 | | 108,172 | ||||||||||||
Accrued expenses |
102,749 | 8,305 | | 111,054 | ||||||||||||
Income taxes payable |
35,706 | (1,355 | ) | (26 | ) | 34,325 | ||||||||||
Due to affiliates |
11,593 | 23,553 | (35,146 | ) | | |||||||||||
Redeemable warrants |
15,086 | | | 15,086 | ||||||||||||
Current portion of long-term obligations |
9,005 | 41 | | 9,046 | ||||||||||||
Total current liabilities |
421,747 | 41,206 | (35,172 | ) | 427,781 | |||||||||||
Long-term obligations, excluding current portion |
841,023 | 89 | | 841,112 | ||||||||||||
Deferred income tax liabilities |
94,427 | 554 | | 94,981 | ||||||||||||
Other |
14,766 | | | 14,766 | ||||||||||||
Total liabilities |
1,371,963 | 41,849 | (35,172 | ) | 1,378,640 | |||||||||||
Redeemable common securities |
18,089 | | | 18,089 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common Stock |
| 336 | (336 | ) | | |||||||||||
Additional paid-in capital |
287,583 | 31,025 | (31,025 | ) | 287,583 | |||||||||||
Retained (deficit)earnings |
(26,566 | ) | 37,535 | (38,527 | ) | (27,558 | ) | |||||||||
Accumulated other comprehensive (loss) income |
(5,915 | ) | (4,411 | ) | 4,411 | (5,915 | ) | |||||||||
Amscan Holdings, Inc. stockholders equity |
255,102 | 64,485 | (65,477 | ) | 254,110 | |||||||||||
Noncontrolling interests |
| 2,312 | | 2,312 | ||||||||||||
Total stockholders equity |
255,102 | 66,797 | (65,477 | ) | 256,422 | |||||||||||
Total liabilities, redeemable common securities and
stockholders equity |
$ | 1,645,154 | $ | 108,646 | $ | (100,649 | ) | $ | 1,653,151 | |||||||
F-38
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING BALANCE SHEET
December 31, 2009
December 31, 2009
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
8,240 | 7,180 | | 15,420 | ||||||||||||
Accounts receivable, net of allowances |
60,655 | 22,126 | | 82,781 | ||||||||||||
Inventories, net of allowances |
295,004 | 41,893 | (947 | ) | 335,950 | |||||||||||
Prepaid expenses and other current assets |
52,706 | 6,013 | | 58,719 | ||||||||||||
Total current assets |
416,605 | 77,212 | (947 | ) | 492,870 | |||||||||||
Property, plant and equipment, net |
163,999 | 10,995 | | 174,994 | ||||||||||||
Goodwill |
521,222 | 38,039 | | 559,261 | ||||||||||||
Trade names |
157,283 | | | 157,283 | ||||||||||||
Other intangible assets, net |
29,948 | 24,721 | | 54,669 | ||||||||||||
Other assets, net |
160,401 | 7,033 | (126,010 | ) | 41,424 | |||||||||||
Total assets |
$ | 1,449,458 | $ | 158,000 | $ | (126,957 | ) | $ | 1,480,501 | |||||||
LIABILITIES, REDEEMABLE COMMON
SECURITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
$ | 76,990 | $ | 645 | $ | | $ | 77,635 | ||||||||
Accounts payable |
67,235 | 9,666 | | 76,901 | ||||||||||||
Accrued expenses |
83,430 | 10,250 | | 93,680 | ||||||||||||
Income taxes payable |
32,969 | (817 | ) | (91 | ) | 32,061 | ||||||||||
Redeemable warrants |
15,444 | | | 15,444 | ||||||||||||
Current portion of long-term obligations |
28,406 | 6,500 | | 34,906 | ||||||||||||
Total current liabilities |
304,474 | 26,244 | (91 | ) | 330,627 | |||||||||||
Long-term obligations, excluding current portion |
522,392 | 16,500 | | 538,892 | ||||||||||||
Deferred income tax liabilities |
101,000 | 570 | | 101,570 | ||||||||||||
Other |
20,288 | 71,569 | (79,956 | ) | 11,901 | |||||||||||
Total liabilities |
948,154 | 114,883 | (80,047 | ) | 982,990 | |||||||||||
Redeemable common securities |
18,389 | | | 18,389 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common Stock |
339 | (339 | ) | | ||||||||||||
Additional paid-in capital |
335,731 | 46,167 | (46,075 | ) | 335,823 | |||||||||||
Retained earnings |
155,579 | (5,476 | ) | (546 | ) | 149,557 | ||||||||||
Accumulated other comprehensive loss |
(8,395 | ) | (50 | ) | 50 | (8,395 | ) | |||||||||
Amscan Holdings, Inc. stockholders equity |
482,915 | 40,980 | (46,910 | ) | 476,985 | |||||||||||
Noncontrolling interests |
| 2,137 | | 2,137 | ||||||||||||
Total stockholders equity |
482,915 | 43,117 | (46,910 | ) | 479,122 | |||||||||||
Total liabilities, redeemable common
securities and stockholders equity |
$ | 1,449,458 | $ | 158,000 | $ | (126,957 | ) | $ | 1,480,501 | |||||||
F-39
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF INCOME
For The Year Ended December 31, 2010
For The Year Ended December 31, 2010
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 1,493,103 | $ | 110,144 | $ | (23,570 | ) | $ | 1,579,677 | |||||||
Royalties and franchise fees |
19,417 | | | 19,417 | ||||||||||||
Total revenues |
1,512,520 | 110,144 | (23,570 | ) | 1,599,094 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
884,957 | 81,600 | (23,499 | ) | 943,058 | |||||||||||
Selling expenses |
31,379 | 11,346 | | 42,725 | ||||||||||||
Retail operating expenses |
296,891 | | | 296,891 | ||||||||||||
Franchise expenses |
12,269 | | | 12,269 | ||||||||||||
General and administrative expenses |
124,542 | 11,170 | (1,320 | ) | 134,392 | |||||||||||
Art and development costs |
15,024 | (101 | ) | | 14,923 | |||||||||||
Impairment of trade name |
27,400 | | | 27,400 | ||||||||||||
Total expenses |
1,392,462 | 104,015 | (24,819 | ) | 1,471,658 | |||||||||||
Income from operations |
120,058 | 6,129 | 1,249 | 127,436 | ||||||||||||
Interest expense, net |
40,791 | 59 | | 40,850 | ||||||||||||
Other (income) expense, net |
(1,312 | ) | 1,159 | 4,361 | 4,208 | |||||||||||
Income before income taxes |
80,579 | 4,911 | (3,112 | ) | 82,378 | |||||||||||
Income tax expense |
31,215 | 1,756 | (26 | ) | 32,945 | |||||||||||
Net income |
$ | 49,364 | $ | 3,155 | $ | (3,086 | ) | $ | 49,433 | |||||||
Less net income attributable to noncontrolling interests |
| 114 | | 114 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 49,364 | $ | 3,041 | $ | (3,086 | ) | $ | 49,319 | |||||||
F-40
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF INCOME
For The Year Ended December 31, 2009
For The Year Ended December 31, 2009
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 1,291,848 | $ | 199,723 | $ | (24,247 | ) | $ | 1,467,324 | |||||||
Royalties and franchise fees |
19,494 | | | 19,494 | ||||||||||||
Total revenues |
1,311,342 | 199,723 | (24,247 | ) | 1,486,818 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
794,363 | 128,677 | (23,999 | ) | 899,041 | |||||||||||
Selling expenses |
29,580 | 10,206 | | 39,786 | ||||||||||||
Retail operating expenses |
226,159 | 35,532 | | 261,691 | ||||||||||||
Franchise expenses |
11,991 | | | 11,991 | ||||||||||||
General and administrative expenses |
104,072 | 16,441 | (1,320 | ) | 119,193 | |||||||||||
Art and development costs |
13,324 | (81 | ) | | 13,243 | |||||||||||
Total expenses |
1,179,489 | 190,775 | (25,319 | ) | 1,344,945 | |||||||||||
Income from operations |
131,853 | 8,948 | 1,072 | 141,873 | ||||||||||||
Interest expense, net |
38,785 | 2,696 | | 41,481 | ||||||||||||
Other (income) expense, net |
(7,818 | ) | 1,346 | 6,440 | (32 | ) | ||||||||||
Income before income taxes |
100,886 | 4,906 | (5,368 | ) | 100,424 | |||||||||||
Income tax expense |
36,631 | 1,133 | (91 | ) | 37,673 | |||||||||||
Net income |
64,255 | 3,773 | (5,277 | ) | 62,751 | |||||||||||
Less net income attributable to noncontrolling interests |
| 198 | | 198 | ||||||||||||
Net income attributable to Amscan Holdings Inc. |
$ | 64,255 | $ | 3,575 | $ | (5,277 | ) | $ | 62,553 | |||||||
F-41
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF INCOME
For Year Ended December 31, 2008
For Year Ended December 31, 2008
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 1,359,780 | $ | 201,055 | $ | (23,194 | ) | $ | 1,537,641 | |||||||
Royalties and franchise fees |
22,020 | | | 22,020 | ||||||||||||
Total revenues |
1,381,800 | 201,055 | (23,194 | ) | 1,559,661 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
861,368 | 128,097 | (23,039 | ) | 966,426 | |||||||||||
Selling expenses |
32,172 | 9,722 | | 41,894 | ||||||||||||
Retail operating expenses |
233,348 | 40,279 | | 273,627 | ||||||||||||
Franchise expenses |
13,686 | | | 13,686 | ||||||||||||
General and administrative expenses |
104,445 | 17,147 | (1,320 | ) | 120,272 | |||||||||||
Art and development costs |
12,462 | | | 12,462 | ||||||||||||
Impairment of trade name |
17,376 | | | 17,376 | ||||||||||||
Total expenses |
1,274,857 | 195,245 | (24,359 | ) | 1,445,743 | |||||||||||
Income from operations |
106,943 | 5,810 | 1,165 | 113,918 | ||||||||||||
Interest expense, net |
48,130 | 2,785 | | 50,915 | ||||||||||||
Other income, net |
(7,526 | ) | (552 | ) | 7,260 | (818 | ) | |||||||||
Income before income taxes |
66,339 | 3,577 | (6,095 | ) | 63,821 | |||||||||||
Income tax expense |
21,900 | 2,345 | (57 | ) | 24,188 | |||||||||||
Net income |
44,439 | 1,232 | (6,038 | ) | 39,633 | |||||||||||
Less net loss attributable to noncontrolling interests |
| (877 | ) | | (877 | ) | ||||||||||
Net income attributable to Amscan Holdings Inc. |
$ | 44,439 | $ | 2,109 | $ | (6,038 | ) | $ | 40,510 | |||||||
F-42
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF CASH FLOWS
For The Year Ended December 31, 2010
For The Year Ended December 31, 2010
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows used in operating activities: |
||||||||||||||||
Net income |
49,364 | 3,155 | (3,086 | ) | 49,433 | |||||||||||
Less: net income attributable to noncontrolling interest |
| 114 | | 114 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 49,364 | $ | 3,041 | $ | (3,086 | ) | $ | 49,319 | |||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||||||
Depreciation and amortization expense |
48,427 | 991 | | 49,418 | ||||||||||||
Amortization of deferred financing costs |
2,475 | | | 2,475 | ||||||||||||
Provision for doubtful accounts |
695 | (58 | ) | | 637 | |||||||||||
Deferred income tax expense |
(8,942 | ) | | | (8,942 | ) | ||||||||||
Deferred rent |
4,500 | | | 4,500 | ||||||||||||
Undistributed gain in unconsolidated joint venture |
(678 | ) | | | (678 | ) | ||||||||||
Impairment of trade name |
27,400 | | | 27,400 | ||||||||||||
Impairment of fixed assets |
597 | | | 597 | ||||||||||||
Loss (gain) on disposal of equipment |
206 | (15 | ) | | 191 | |||||||||||
Equity based compensation |
6,018 | | | 6,018 | ||||||||||||
Write-off of deferred financing costs |
2,448 | | | 2,448 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
(Increase) decrease in accounts receivable |
(14,428 | ) | 7,921 | | (6,507 | ) | ||||||||||
Increase in inventories |
(84,538 | ) | (1,300 | ) | 71 | (85,767 | ) | |||||||||
Increase in prepaid expenses and other current assets |
(21,711 | ) | (1,282 | ) | | (22,993 | ) | |||||||||
Increase (decrease) in accounts payable, accrued expenses and
income taxes payable |
44,254 | (4,217 | ) | 3,015 | 43,052 | |||||||||||
Net cash provided by operating activities |
56,087 | 5,081 | | 61,168 | ||||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions |
(53,350 | ) | 2 | | (53,348 | ) | ||||||||||
Capital expenditures |
(48,558 | ) | (1,065 | ) | | (49,623 | ) | |||||||||
Proceeds from disposal of property and equipment |
159 | 46 | | 205 | ||||||||||||
Net cash used in investing activities |
(101,749 | ) | (1,017 | ) | | (102,766 | ) | |||||||||
Cash flows provided by financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(393,259 | ) | (30 | ) | | (393,289 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
742,112 | 41 | | 742,153 | ||||||||||||
Dividend distribution |
(301,829 | ) | | | (301,829 | ) | ||||||||||
Payments
related to redeemable common stock and rollover options |
(572 | ) | | | (572 | ) | ||||||||||
Proceeds from issuance of common stock
and exercise of options, net of retirements |
52 | | | 52 | ||||||||||||
Net cash provided by financing activities |
46,504 | 11 | | 46,515 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(243 | ) | 360 | | 117 | |||||||||||
Net increase in cash and cash equivalents |
599 | 4,435 | | 5,034 | ||||||||||||
Cash and cash equivalents at beginning of period |
13,599 | 1,821 | 15,420 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 14,198 | $ | 6,256 | $ | | $ | 20,454 | ||||||||
F-43
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF CASH FLOWS
For The Year Ended December 31, 2009
For The Year Ended December 31, 2009
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows provided by operating activities: |
||||||||||||||||
Net income |
$ | 64,255 | 3,773 | $ | (5,277 | ) | $ | 62,751 | ||||||||
Less: net income attributable to noncontrolling interest |
| 198 | | 198 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 64,255 | $ | 3,575 | $ | (5,277 | ) | $ | 62,553 | |||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||||||
Depreciation and amortization expense |
39,885 | 4,497 | | 44,382 | ||||||||||||
Amortization of deferred financing costs |
1,888 | 275 | | 2,163 | ||||||||||||
Provision for doubtful accounts |
2,444 | 1,538 | | 3,982 | ||||||||||||
Deferred income tax expense |
8,803 | | | 8,803 | ||||||||||||
Deferred rent |
977 | 786 | | 1,763 | ||||||||||||
Undistributed gain in unconsolidated joint venture |
(632 | ) | | | (632 | ) | ||||||||||
Loss on disposal of equipment |
61 | 217 | | 278 | ||||||||||||
Equity based compensation |
876 | | | 876 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Decrease (increase) in accounts receivable |
11,498 | (5,161 | ) | | 6,337 | |||||||||||
Decrease (increase) in inventories |
35,824 | (5,139 | ) | 248 | 30,933 | |||||||||||
Increase in prepaid expenses and other assets |
(20,408 | ) | (765 | ) | | (21,173 | ) | |||||||||
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable |
(30,528 | ) | 9,176 | 5,029 | (16,323 | ) | ||||||||||
Net cash provided by operating activities |
114,943 | 8,999 | | 123,942 | ||||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions |
(726 | ) | (2,652 | ) | | (3,378 | ) | |||||||||
Cash in escrow in connection with acquisitions |
(24,881 | ) | | | (24,881 | ) | ||||||||||
Capital expenditures |
(23,860 | ) | (2,335 | ) | | (26,195 | ) | |||||||||
Proceeds from disposal of property and equipment |
77 | 19 | | 96 | ||||||||||||
Net cash used in investing activities |
(49,390 | ) | (4,968 | ) | | (54,358 | ) | |||||||||
Cash flows used in financing activities |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(66,392 | ) | (3,855 | ) | | (70,247 | ) | |||||||||
Proceeds from issuance of common stock and exercise of
options, net of retirements |
90 | | | 90 | ||||||||||||
Net cash used in financing activities |
(66,302 | ) | (3,855 | ) | | (70,157 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
488 | 2,447 | | 2,935 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
(261 | ) | 2,623 | | 2,362 | |||||||||||
Cash and cash equivalents at beginning of period |
8,501 | 4,557 | | 13,058 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 8,240 | $ | 7,180 | $ | | $ | 15,420 | ||||||||
F-44
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
CONSOLIDATING STATEMENT OF CASH FLOWS
For Year Ended December 31, 2008
For Year Ended December 31, 2008
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows provided by operating activities: |
||||||||||||||||
Net income |
$ | 44,439 | $ | 1,232 | $ | (6,038 | ) | $ | 39,633 | |||||||
Less: net loss attributable to noncontrolling interest |
| (877 | ) | | (877 | ) | ||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 44,439 | $ | 2,109 | $ | (6,038 | ) | $ | 40,510 | |||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||||||
Depreciation and amortization expense |
42,406 | 4,872 | | 47,278 | ||||||||||||
Amortization of deferred financing costs |
1,956 | 265 | | 2,221 | ||||||||||||
Provision for doubtful accounts |
945 | 147 | | 1,092 | ||||||||||||
Deferred income tax benefit |
(7,885 | ) | | | (7,885 | ) | ||||||||||
Deferred rent |
1,202 | | | 1,202 | ||||||||||||
Undistributed gain in unconsolidated joint venture |
(538 | ) | | | (538 | ) | ||||||||||
Impairment of trade name |
17,376 | | | 17,376 | ||||||||||||
(Gain) loss on disposal of equipment |
(1,198 | ) | 3 | | (1,195 | ) | ||||||||||
Equity based compensation |
4,311 | 46 | | 4,357 | ||||||||||||
Tax benefit on exercised options |
(1,823 | ) | | | (1,823 | ) | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Decrease in accounts receivable |
6,526 | 1,711 | | 8,237 | ||||||||||||
Increase in inventories |
(51,358 | ) | (1,144 | ) | 155 | (52,347 | ) | |||||||||
Decrease in prepaid expenses and other current assets |
29,595 | 1,645 | | 31,240 | ||||||||||||
(Decrease) increase in accounts payable, accrued expenses and
income taxes payable |
(22,075 | ) | 6,396 | 5,883 | (9,796 | ) | ||||||||||
Net cash provided by operating activities |
63,879 | 16,050 | | 79,929 | ||||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions |
(1,143 | ) | (473 | ) | | (1,616 | ) | |||||||||
Capital expenditures |
(44,457 | ) | (8,544 | ) | | (53,001 | ) | |||||||||
Proceeds from disposal of property and equipment |
3,390 | 28 | | 3,418 | ||||||||||||
Net cash used in investing activities |
(42,210 | ) | (8,989 | ) | | (51,199 | ) | |||||||||
Cash flows used in financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(24,250 | ) | (2,592 | ) | | (26,842 | ) | |||||||||
Tax benefit on exercised options |
1,823 | | | 1,823 | ||||||||||||
Sale of additional interest to minority shareholder |
2,500 | | | 2,500 | ||||||||||||
Purchase and retirement of redeemable common stock |
(514 | ) | | | (514 | ) | ||||||||||
Net cash used in financing activities |
(20,441 | ) | (2,592 | ) | | (23,033 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
(1,075 | ) | (8,838 | ) | | (9,913 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
153 | (4,369 | ) | | (4,216 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
8,391 | 8,883 | | 17,274 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 8,544 | $ | 4,514 | $ | | $ | 13,058 | ||||||||
F-45
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2010, 2009 and 2008
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2010, 2009 and 2008
Beginning | Ending | |||||||||||||||
(Dollars in thousands) | Balance | Write-Offs | Additions | Balance | ||||||||||||
Allowance for Doubtful Accounts: |
||||||||||||||||
For the year ended December 31, 2008 |
$ | 2,637 | $ | 1,546 | $ | 1,092 | $ | 2,183 | ||||||||
For the year ended December 31, 2009 |
2,183 | 3,168 | 3,982 | 2,997 | ||||||||||||
For the year ended December 31, 2010 |
2,997 | 920 | 637 | 2,714 | ||||||||||||
Inventory Reserves:: |
||||||||||||||||
For the year ended December 31, 2008 |
10,416 | 5,128 | 3,030 | 8,318 | ||||||||||||
For the year ended December 31, 2009 |
8,318 | 2,755 | 2,989 | 8,552 | ||||||||||||
For the year ended December 31, 2010 |
8,552 | 2,734 | 4,687 | 10,505 |
F-46