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EX-11 - EX-11 - AMSCAN HOLDINGS INC | y83599exv11.htm |
EX-32 - EX-32 - AMSCAN HOLDINGS INC | y83599exv32.htm |
EX-23 - EX-23 - AMSCAN HOLDINGS INC | y83599exv23.htm |
EX-31.1 - EX-31.1 - AMSCAN HOLDINGS INC | y83599exv31w1.htm |
EX-31.2 - EX-31.2 - AMSCAN HOLDINGS INC | y83599exv31w2.htm |
Table of Contents
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, 2009
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
If this report is an annual or transition report, 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 o | Smaller reporting company þ | |||
(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, 2009, the last
business day of the registrants most recently completed second fiscal quarter, was
$49,669,000.
The number of outstanding shares of the registrants common stock as of
March 31, 2010 was 1,000.00.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
FORM 10-K
December 31, 2008
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EX-32 |
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
Table of Contents
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, gifts and stationery. The
Company also operates retail party goods and social expressions supply stores in the
United States under the names Party City, Party America, The Paper Factory, Halloween
USA and Factory Card & Party Outlet, and franchises both individual stores and
franchise areas throughout the United States and Puerto Rico principally under the
names Party City and Party America. 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 2009, approximately 77% of our
net sales at wholesale consisted of products designed for non-seasonal occasions,
with the remaining 23% comprised of 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 52% of our
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 generally accounting for 25% of our
sales at wholesale. Approximately 42% of the product sold at wholesale are products
manufactured by the Company. The remaining 58% of products sold are supplied by
third-party manufacturers, many of whom are located in Asia.
Recent Wholesale Acquisition
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. In connection with the Asset Purchase
Agreement, the companies also entered into a Supply and Distribution Agreement and a
Licensing Agreement (collectively, the Agreements). Under the terms of the
Agreements, on 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, drug, grocery and specialty retail customers. American
Greetings will purchase substantially all of their party goods requirements from the
Company and the Company will license from American Greetings the Designware brand
and other character licenses.
In connection with the Agreements, American Greetings received total
consideration of $45.9 million, including cash of $24.9 million and a warrant to
purchase approximately 2% of the Common Stock of AAH.
3
Table of Contents
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 under the names Party City, Party America, The Paper Factory, Factory Card &
Party Outlet and Halloween USA. 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, 2009, the Companys retail network consisted of 386 party
goods supply superstores, 161 party goods and social expressions supply stores, 54
party goods outlet stores and 248 franchisee-owned party goods supply superstores. In
addition, during the year ended December 31, 2009, the Company operated 247 temporary
Halloween stores principally under the name Halloween USA. The Companys 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, and offer an assortment 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 70% 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 30% of our annual retail sales.
Our retail operations generate revenue primarily through the sale of party goods
at company-owned stores. Our Party City and Party America chains also generate
revenue through the assessment of an initial one-time franchise fee and ongoing
franchise royalty payments based on retail sales.
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
On November 16, 2007, (the Factory Card & Party Outlet Acquisition Date), the
Company completed the merger of its wholly-owned subsidiary, Amscan Acquisition, Inc.
with and into Factory Card & Party Outlet Corp. (FCPO), in accordance with the
terms of the Agreement and Plan of Merger, dated as of September 17, 2007 (the
Factory Card & Party Outlet Merger Agreement). FCPO common stock was suspended from
trading on the Nasdaq Global Market as of the close of trading on November 16, 2007.
The merger followed the completion of a tender offer for all of the outstanding
shares of FCPO common stock by Amscan Acquisition. As a result of the merger, each
outstanding share of FCPO common stock was converted into the right to receive $16.50
per share, net to the seller in cash, without interest.
In addition, in November 2007, Party City Corporation (Party City), a
wholly-owned subsidiary of the Company, completed the acquisition of additional
stores from franchisees in a series of transactions involving Party City, Party City
Franchise Group Holdings, LLC (PCFG Holdings), a majority-owned subsidiary of Party
City, and Party City Franchise Group, LLC (PCFG), a wholly-owned subsidiary of PCFG
Holdings, on November 2, 2007 (Party City Franchise Group Transaction Date). Party
City contributed cash and eleven of its corporate retail stores located in Florida to
PCFG Holdings and PCFG Holdings and PCFG acquired 55 retail stores from three
franchisees located in Florida and Georgia. The franchisee sellers received
approximately $43.0 million in cash and, in certain instances, equity interests in
PCFG Holdings in exchange for the retail stores. The acquisitions were financed
through the combination of cash contributed by Party City, which included borrowings
under the Companys existing credit facility, a new credit facility entered into by
PCFG (PCFG Credit Agreement) and PCFG Holdings equity issued to two franchisees in
exchange for certain stores. PCFG Holdings is an unrestricted subsidiary under the
Companys existing debt facilities and the new PCFG Credit Agreement is a stand-alone
facility which is not guaranteed by the Company or its other subsidiaries.
On December 30, 2008, the Company acquired the PCFG Holdings equity held by the
two former franchisees, in exchange for total consideration of $15.9 million, which
included cash of $0.5 million and warrants to purchase 544.75 shares of AAH common
stock at $0.01 per share.
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Table of Contents
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, 2009, 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.
The Company does business in the United States and in other geographic
areas of the world.
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. 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 receivables and inventory balances during
these 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 also 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.
The results of operations for FCPO and PCFG are included in the consolidated
results of operations since their respective dates of acquisition during November
2007.
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
supply stores, 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 and helping retailers promote coordinated ensembles that increase average purchase volume per consumer through add-on or impulse purchases. | ||
| Expand International Presence. We believe there is an opportunity to expand our international business, which represented approximately 13% of our net sales at wholesale in each of the years in the three-year period ended December 31, 2009. We currently have a presence in Europe, Mexico, Canada, Asia and Australia. We have our own sales force in the United Kingdom, 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, increasing accessorization and customization of our products to local tastes and holidays and continuing to deepen retail penetration. | ||
| Capitalize on Investments in Infrastructure. We intend to increase our net sales and profitability by leveraging the significant investments we have made in our infrastructure. We believe that our state-of-the-art 896,000 square foot distribution facility provides us with warehousing and distribution capabilities to serve anticipated future growth. | ||
| 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. |
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Table of Contents
Retail Operations
| Offer a Broad Selection of Merchandise. We will continue to provide customers with convenient one-stop shopping for party supplies by offering what we believe is one of the most extensive selections of party supplies available. The 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 Amscan and other desired products. | ||
| 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 15 new company-owned retail stores and anticipate that our franchisees will open between five and ten franchise stores during 2010. In addition, based on the strong performance of our temporary Halloween stores, subject to the availability of suitable, short-term lease locations, we plan to open more than 100 additional temporary stores in 2010. | ||
| 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. During 2010, we plan to implement software systems that will align the POS systems of Halloween USA stores with those of our party goods superstores, to further automate its merchandise forecasting and planning functions. |
Innovative Product Development and Design Capabilities
Our 120 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 2009, we introduced approximately
3,700 new products and 50 new ensembles. Our proprietary designs and strength in
developing new product programs at value prices help us keep our products
differentiated from the competition.
6
Table of Contents
Product Lines
The following table sets forth the principal products distributed by the
Company at the wholesale level, by product line:
Party Goods and Stationery | 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
|
Gift Wrap, Bows and Bags | Sing-A-Tune SuperShapes | Decorative Frames | |||
Crepe
|
Invitations, Notes and Stationery | Weights | Mugs | |||
Cutouts
|
Photograph Albums | |||||
Flags and Banners
|
Stickers and Confetti | |||||
Latex Balloons
|
Serveware, Drinkware | |||||
Novelty Gifts
|
Games | |||||
Party Favors
|
Costumes, Costume Accessories | |||||
Piñatas |
||||||
Scene Setters |
||||||
Wearables |
The percentage of net sales at wholesale for each product line for 2009, 2008
and 2007 are set forth in the following table:
2009 | 2008 | 2007 | ||||||||||
Party Goods and Stationery |
78 | % | 77 | % | 77 | % | ||||||
Metallic Balloons |
18 | 20 | 19 | |||||||||
Gift |
4 | 3 | 4 | |||||||||
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. Approximately 77% of our net sales at wholesale consist of items
designed for non-seasonal occasions, with the remaining 23% comprised 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 | ||
Fall
|
Fifties Rock and Roll | Graduations | ||
Thanksgiving
|
Hawaiian Luau | Weddings | ||
Hanukkah
|
Hollywood | |||
Christmas
|
Mardi Gras | |||
Masquerade | ||||
Patriotic | ||||
Retirement | ||||
Sports | ||||
Summer Barbeque Western |
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Table of Contents
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. We
manufacture items generally representing approximately 42% 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.
Purchased Products
We purchase products created and designed by us, generally representing
approximately 58% 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 process development and quality
control.
Raw Materials
The principal raw materials used in manufacturing our products are paper
and petroleum-based resin. 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.
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 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 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.
Our practice of including other party goods retailers in the various facets
of our product development is a key element of our sales and marketing efforts. We
target important consumer preferences by integrating our own market research with the
input of other party goods retailers in the creation of our designs and products. In
addition, our sales force may assist customers in the actual layout of displays of
our products.
To support our sales and marketing efforts, we produce five key decorative
party product catalogues annually (five 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 which displays and describes our product assortment and capabilities. We
utilize 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
United States and Canada from company-owned and leased distribution facilities that
employ computer assisted systems. 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.
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Table of Contents
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. Products for markets outside the United States
are also shipped from leased distribution facilities in the United Kingdom, Mexico,
Japan and Australia.
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. To deepen our retail
penetration at key European hypermarket and supermarket accounts, our focus includes
broadening our distribution network, increasing 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%, 18% and 22% of the
Companys net sales at wholesale for the years ended December 31, 2009, 2008
and 2007, respectively; each franchisee is financially independent and represent
a diversified credit exposure. For the years ended December 31, 2009, 2008
and 2007, 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 design and production of
our metallic balloons and, primarily as a result of the Agreements with American
Greetings, we will have access, in 2010, 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 Party City, Party America and FCPO stores
range in size from approximately 7,000 to 20,000 square feet with a typical store
size between 8,000 and 12,000 square feet. Our Paper Factory Outlet stores range in
size from 3,000 to 5,000 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 Amscan 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.
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Table of Contents
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. Historically, Halloween business has
represented approximately 20% of the annual retail net sales at our party
superstores. To maximize our seasonal opportunity, the Company also operates a chain
of temporary Halloween stores, generally under the name Halloween USA, during the
months of September and October of each year.
During 2009 we began marketing 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 operations are the largest
supplier to our retail stores, providing 48%, 47% and 47% of the merchandise
purchased by our company-owned party goods superstores for the years ended
December 31, 2009, 2008 and 2007, 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 business, results
of operations, financial condition and cash flow. We consider numerous factors in
supplier selection including, but not limited to, price, credit terms, product
offerings and quality.
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 as
well as general themes, with a strong emphasis on our price-value position.
Historically, we have advertised primarily via the use of free-standing inserts in
newspapers throughout our market areas. We also utilize other marketing techniques to
supplement the inserts, including outdoor, direct mail, newspaper, television and
radio advertising in selected markets, with the goal of increasing customer traffic
and building our brand. In 2010, we plan to launch a 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, 2009, we had 248 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. 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% of net sales to a group
advertising fund to cover common advertising materials. We do not offer
financing to our franchisees for one-time fees and ongoing royalty fees.
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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 Party America ® 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, 2009, 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 highly 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.
We believe that our retail stores maintain a leading position in the party
goods supply business by offering a wider breadth of merchandise than most
competitors, a greater selection within merchandise classes and low prices on most
items in our stores. We believe that our significant buying power, which results from
the size of our retail store network, is an important advantage.
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.
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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 150 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 USA ®.
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. In 2008 and 2009, we implemented new Point of Sale systems
and upgraded merchandising systems to standardize technology across Party City, Party
America, PCFG and FCPO. In 2010, we plan to implement similar systems at our
Halloween USA stores.
Employees
As of December 31, 2009, the Company had approximately 5,058 full-time
employees and 7,858 part-time employees, none of whom is covered by a collective
bargaining agreement. The Company considers its relationship with its employees to be
good.
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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 highly 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, generally
represent approximately 42% of our net sales at wholesale. We believe our ability to
manufacture product representing approximately 42% 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 during production and
to be responsive to our customers product design demands.
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.
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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.
Franchise Program
Our success depends, in part, upon our ability to contract with and retain
qualified franchisees, as well as the ability of those franchisees to operate their
stores and promote and develop our store concept. Although we have established
criteria to evaluate prospective franchisees and our franchise agreements include
certain operating standards, each franchisee operates independently. We cannot assure
you that our franchisees will operate stores in a manner consistent with our concept
and standards, which could reduce the gross revenues of these stores and therefore
reduce our franchise revenue and possibly our wholesale sales. The closing of
unprofitable stores or the failure of franchisees to comply with our policies could
adversely affect our reputation as well as our revenues. These factors could have a
material adverse effect on our revenues and operating income.
If we are unable to attract new franchisees or to convince existing
franchisees to open additional stores, any growth in royalties from franchised stores
will depend solely upon increases in revenues at existing franchised stores. In
addition, our ability to open additional franchise locations is limited by the
territorial restrictions in our existing franchise agreements as well as our ability
to identify additional markets in the United States that are not currently saturated
with the products we offer. If we are unable to open additional franchise locations,
we will have to sustain additional growth through acquisitions, opening new
company-owned stores and by attracting new and repeat customers to our existing
locations. If we are unable to do so, our revenues and operating income may decline.
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.
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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.
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.
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Item 2. | Properties |
The Company maintains its corporate headquarters in Elmsford, New York and
conducts its principal design, manufacturing and distribution operations at the
following facilities:
Owned or Leased | ||||||
(With | ||||||
Principal | Square | Expiration | ||||
Location | Activity | Feet | Date) | |||
Elmsford, New York |
Executive offices, show
rooms, design and art
production for party
products |
119,525 square feet | Leased (expiration date: December 31, 2014) |
|||
Harriman, New York |
Manufacture of paper napkins |
74,400 square feet | Leased (expiration
date: March 31,
2011) |
|||
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) |
|||
Louisville, Kentucky |
Manufacture and distribution
of paper plates |
189,175 square feet | Leased (expiration
date: March 31, 2013) |
|||
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) |
|||
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 |
|||
Milton Keynes, Buckinghamshire, England |
Distribution of party
products throughout Europe |
110,000 square feet | Leased (expiration
date: June 30, 2017) |
|||
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) |
|||
Rockaway, New Jersey |
Party City corporate offices |
106,000 square feet | Leased (expiration
date: July 31, 2017) |
|||
Naperville, Illinois |
Office and distribution of
party goods for internet sales |
340,000 square-foot | Leased (expiration
date: December 31, 2018) |
|||
Atlanta, Georgia |
Office and storage facilities |
13,918 square foot | Leased (expiration
date: November 30, 2011) |
(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, 2009, the lien mortgage note bears interest at a rate of 2.45%, subject to adjustments semi annually. |
In addition to the facilities listed above, we maintain smaller distribution
facilities in Australia, Canada and Mexico. We also maintain sales offices in
Australia, Canada, Hong Kong and Japan and showrooms in New York, California,
Georgia, Texas, Canada and Hong Kong.
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As of December 31, 2009, there were 386 company-owned Party City and Party
America superstores, 161 company-owned FCPO stores and 54 Paper Factory Outlet stores
open in the United States. We lease the property for all of our company-owned stores.
Our Party City, Party America and FCPO stores range in size from 6,800 to
19,800 square feet,
with a typical store size between 8,000 and 12,000 square feet. Our Paper
Factory Outlet stores 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, 106 expire in
2010, 77 expire in 2011, 96 expire in 2012, 108 expire in 2013, 97 expire in 2014 and
the balance expire in 2015 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, 2009.
2009 | 2008 | 2007 | ||||||||||
Company-owned: |
||||||||||||
Stores open at beginning of year |
643 | 673 | 630 | |||||||||
Stores opened |
6 | 19 | 6 | |||||||||
Stores acquired |
3 | 6 | 65 | |||||||||
Stores closed / sold |
(51 | ) | (55 | ) | (28 | ) | ||||||
Stores open at end of year |
601 | 643 | 673 | |||||||||
Franchise: |
||||||||||||
Stores open at beginning of year |
273 | 283 | 324 | |||||||||
Stores opened |
1 | 13 | 22 | |||||||||
Stores acquired |
2 | 7 | 7 | |||||||||
Stores closed, sold or converted to independent |
(28 | ) | (30 | ) | (70 | ) | ||||||
Stores open at end of year |
248 | 273 | 283 | |||||||||
Total company-owned and franchise stores |
849 | 916 | 956 | |||||||||
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As of December 31, 2009, Company and franchise-owned retail stores were located
in the following states and Puerto Rico:
State | Company-owned | Franchise | Chain-wide | |||||||||
Alabama |
3 | 8 | 11 | |||||||||
Arizona |
1 | 21 | 22 | |||||||||
Arkansas |
1 | 3 | 4 | |||||||||
California |
86 | 20 | 106 | |||||||||
Colorado |
14 | 1 | 15 | |||||||||
Connecticut |
5 | 3 | 8 | |||||||||
Delaware |
1 | 1 | 2 | |||||||||
Florida |
56 | 11 | 67 | |||||||||
Georgia |
26 | 1 | 27 | |||||||||
Hawaii |
0 | 1 | 1 | |||||||||
Illinois |
63 | 0 | 63 | |||||||||
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 |
34 | 0 | 34 | |||||||||
Minnesota |
0 | 21 | 21 | |||||||||
Mississippi |
2 | 3 | 5 | |||||||||
Missouri |
22 | 3 | 25 | |||||||||
Montana |
0 | 1 | 1 | |||||||||
Nebraska |
6 | 0 | 6 | |||||||||
Nevada |
6 | 0 | 6 | |||||||||
New Hampshire |
1 | 0 | 1 | |||||||||
New Jersey |
14 | 14 | 28 | |||||||||
New Mexico |
0 | 3 | 3 | |||||||||
New York |
42 | 14 | 56 | |||||||||
North Carolina |
3 | 19 | 22 | |||||||||
North Dakota |
0 | 3 | 3 | |||||||||
Ohio |
31 | 0 | 31 | |||||||||
Oklahoma |
3 | 0 | 3 | |||||||||
Oregon |
2 | 5 | 7 | |||||||||
Pennsylvania |
20 | 11 | 31 | |||||||||
Puerto Rico |
0 | 5 | 5 | |||||||||
South Carolina |
2 | 6 | 8 | |||||||||
Tennessee |
8 | 10 | 18 | |||||||||
Texas |
38 | 24 | 62 | |||||||||
Virginia |
11 | 9 | 20 | |||||||||
Washington |
16 | 2 | 18 | |||||||||
West Virginia |
2 | 0 | 2 | |||||||||
Wisconsin |
19 | 0 | 19 | |||||||||
Total |
601 | 248 | 849 | |||||||||
In 2009, the Company operated 247 temporary Halloween stores principally under
the Halloween USA 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
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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.
Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
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 March 31, 2010, there were 120 holders of
record of the Companys common stock.
Dividends
The Company has not paid any dividends on its Common Stock and has no
current plans to pay cash dividends in the foreseeable future. The Company currently
intends to retain its earnings for working capital, repayment of indebtedness,
capital expenditures and general corporate purposes. In addition, the Companys
current credit facility and the indenture governing its notes contain restrictive
covenants which have the effect of limiting the Companys ability to pay 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 agreements is to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on cost, as defined
therein.
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Equity Compensation Plan Information
The following table sets forth certain information as of December 31,
2009, 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 |
2,933.03 | $ | 13,462 | 48.04 | ||||||||
Equity compensation plans not approved by security holders |
| | | |||||||||
Total |
2,933.03 | $ | 13,462 | 48.04 |
(1) | See Note 15 to our consolidated financial statements included herein for a description of our equity incentive plan. |
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Table of Contents
Item 6. | Selected Consolidated Financial Data |
The selected consolidated financial data presented below as of and for the years
ended December 31, 2009, 2008, 2007, 2006 and 2005, are derived from the consolidated
financial statements of the Company. The consolidated financial statements as of and
for the years ended December 31, 2009, 2008 and 2007, 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, | ||||||||||||||||||||
2009 | 2008 | 2007(1) | 2006(2) | 2005(3) | ||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Income Statement Data : |
||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Net sales |
$ | 1,467,324 | $ | 1,537,641 | $ | 1,221,516 | $ | 993,342 | $ | 417,226 | ||||||||||
Royalties and franchise fees |
19,494 | 22,020 | 25,888 | 21,746 | 509 | |||||||||||||||
Total revenues |
1,486,818 | 1,559,661 | 1,247,404 | 1,015,088 | 417,735 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Cost of sales |
899,041 | 966,426 | 777,586 | 676,527 | 281,632 | |||||||||||||||
Selling expenses |
39,786 | 41,894 | 41,899 | 39,449 | 36,181 | |||||||||||||||
Retail operating expenses |
261,691 | 273,627 | 191,423 | 126,224 | 1,824 | |||||||||||||||
Franchise expenses |
11,991 | 13,686 | 12,883 | 13,009 | 779 | |||||||||||||||
General and administrative expenses |
119,193 | 120,272 | 105,707 | 84,836 | 36,026 | |||||||||||||||
Art and development costs |
13,243 | 12,462 | 12,149 | 10,338 | 8,941 | |||||||||||||||
Impairment of trade name(4) |
| 17,376 | | | | |||||||||||||||
Income from operations |
141,873 | 113,918 | 105,757 | 64,705 | 52,352 | |||||||||||||||
Interest expense, net |
41,481 | 50,915 | 54,590 | 54,887 | 31,907 | |||||||||||||||
Other (income) expense, net (5)(6) |
(32 | ) | (818 | ) | 18,214 | (1,000 | ) | 3,224 | ||||||||||||
Income before income taxes |
100,424 | 63,821 | 32,953 | 10,818 | 17,221 | |||||||||||||||
Income tax expense |
37,673 | 24,188 | 13,246 | 4,295 | 4,940 | |||||||||||||||
Net income |
62,751 | 39,633 | 19,707 | 6,523 | 12,281 | |||||||||||||||
Less: net income (loss) attributable to noncontrolling
interests |
198 | (877 | ) | 446 | 83 | 21 | ||||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 62,553 | $ | 40,510 | $ | 19,261 | $ | 6,440 | $ | 12,260 | ||||||||||
Other Financial Data: |
||||||||||||||||||||
Capital expenditures, including assets under capital leases |
26,254 | 53,701 | 36,648 | 40,376 | 17,051 | |||||||||||||||
Depreciation and amortization |
44,382 | 47,278 | 38,093 | 38,619 | 18,602 | |||||||||||||||
Ratio of earnings to fixed charges(7) |
2.2 | x | 1.6 | x | 1.4 | x | 1.1 | x | 1.5 | x |
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At December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands) |
||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 173,065 | $ | 87,726 | $ | 108,374 | $ | 167,561 | $ | 157,139 | ||||||||||
Total assets(8)(9) |
1,480,501 | 1,507,977 | 1,498,845 | 1,217,371 | 1,118,947 | |||||||||||||||
Short-term obligations(10) |
$ | 112,541 | $ | 170,880 | $ | 161,790 | $ | 8,633 | $ | 2,643 | ||||||||||
Long-term obligations(8)(9) |
538,892 | 550,755 | 584,336 | 558,372 | 561,567 | |||||||||||||||
Total obligations |
$ | 651,433 | $ | 721,635 | $ | 746,126 | $ | 567,005 | $ | 564,210 | ||||||||||
Redeemable common
securities(11) |
$ | 18,389 | $ | 18,171 | $ | 33,782 | $ | 9,343 | $ | 6,821 | ||||||||||
AHI stockholders
Equity(8) (9) (11) |
$ | 476,985 | $ | 410,228 | $ | 375,586 | $ | 359,839 | $ | 320,810 | ||||||||||
Non controlling interest |
2,137 | 1,889 | 2,488 | 2,052 | 1,985 | |||||||||||||||
Total equity |
$ | 479,122 | $ | 412,117 | $ | 378,074 | $ | 361,891 | $ | 322,795 | ||||||||||
(1) | 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. | |
(2) | 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). | |
(3) | Party City is included in the balance sheet data beginning with December 31, 2005 and the statement of operations and other financial data from the Party City Acquisition Date (December 23, 2005). | |
(4) | During the fourth quarter of 2008, the Company instituted a program to convert its company-owned and franchised Party America stores to Party City stores and recorded a $17.4 million charge for the impairment of the Party America trade name | |
(5) | 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. | |
(6) | In connection with the Party City Acquisition in December 2005, the Company recorded non-recurring expenses for the write-off of $4.0 million of deferred financing costs associated with the repayment of the then outstanding 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) | 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. | |
(9) | Cash paid to consummate the Party City Acquisition totaled $567.0 million. Financing for the acquisition, including the repayment of borrowings under the Companys 2004 Senior Secured Credit Facility, was provided by: (i) the $166.4 million Equity Investment in the Companys parent, AAH, (ii) the $325 million First Term Loan (net of an original issue discount of $3.25 million), (iii) the $60 million Second Term Loan (net of an original issue discount of $1.5 million) and (iv) cash on-hand of $20.4 million. | |
(10) | 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 has been classified as current due to the PCFGs noncompliance with the loan agreements financial covenants. See Liquidity and Capital Resources. | |
(11) | Under the terms of the AAH stockholders agreement dated April 30, 2004, we have 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 us 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 us to all management stockholders, based on fully paid and vested shares, is classified as redeemable common securities. |
22
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
General
Our wholesale revenues are generated from the sales of approximately 35,000
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 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 601 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, 2009, our network included 248 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.
Results of Operations
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, 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 income (loss) attributable to noncontrolling interests |
0.0 | (0.1 | ) | |||||
Net income attributable to Amscan Holdings, Inc. |
4.2 | % | 2.6 | % | ||||
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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 franchised 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. 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 of 2007. 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 and the operation of fewer Factory Card & Party Outlet and Paper
Factory Outlet stores during 2009 and the inclusion of a 53rd week in our
2008 retail calendar. Net retail sales of our company-owned Big Box party goods
stores (i.e., stores generally greater than 8,000 square feet) totaled $790.9 million
and were $42.2 million or 5.1% lower than in 2008. Same store sales during 2009
decreased 3.4% compared to 2008 as the result of a decrease in transaction count, as
the average dollar per transaction remained consistent between 2009 and 2008. 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 TPF 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 end, 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.
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Table of Contents
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 | Total Revenue | Thousands | Total Revenue | |||||||||||||
Wholesale |
$ | 148,424 | 36.1 | % | $ | 142,438 | 32.5 | % | ||||||||
Retail |
419,859 | 39.8 | % | 428,777 | 39.0 | % | ||||||||||
Total |
$ | 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 the benefit of 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 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.
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Table of Contents
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 were based upon the estimated consolidated
effective income tax rates of 37.5% and 37.9% for the years ended December 31, 2009
and December 31, 2008, respectively. The decrease in the 2009 effective income tax
rate is primarily attributable to a lower average state income tax rate 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.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Percentage of Total Revenues
Year Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Revenues: |
||||||||
Net sales |
98.6 | % | 97.9 | % | ||||
Royalties and franchise fees |
1.4 | 2.1 | ||||||
Total revenues |
100.0 | 100.0 | ||||||
Expenses: |
||||||||
Cost of sales |
62.0 | 62.3 | ||||||
Selling expenses |
2.7 | 3.4 | ||||||
Retail operating expenses |
17.5 | 15.3 | ||||||
Franchise expenses |
0.9 | 1.0 | ||||||
General and administrative expenses |
7.7 | 8.5 | ||||||
Art and development costs |
0.8 | 1.0 | ||||||
Impairment of trade name |
1.1 | | ||||||
Total expenses |
92.7 | 91.5 | ||||||
Income from operations |
7.3 | 8.5 | ||||||
Interest expense, net |
3.3 | 4.4 | ||||||
Other (income) expense, net |
(0.1 | ) | 1.5 | |||||
Income before income taxes |
4.1 | 2.6 | ||||||
Income tax expense |
1.6 | 1.1 | ||||||
Net income |
2.5 | 1.5 | ||||||
Less net (loss) income attributable to noncontrolling interests |
(0.1 | ) | 0.0 | |||||
Net income attributable to Amscan Holdings, Inc. |
2.6 | % | 1.5 | % | ||||
26
Table of Contents
Total Revenues
The following table sets forth the Companys total revenues for the
years ended December 31, 2008 and 2007, respectively.
Year Ended December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
thousands | Total Revenue | thousands | Total Revenue | |||||||||||||
Revenues: |
||||||||||||||||
Sales: |
||||||||||||||||
Wholesale |
$ | 653,403 | 41.9 | % | $ | 626,476 | 50.2 | % | ||||||||
Eliminations |
(214,898 | ) | (13.8 | ) | (173,143 | ) | (13.9 | ) | ||||||||
Net wholesale |
438,505 | 28.1 | 453,333 | 36.3 | ||||||||||||
Retail |
1,099,136 | 70.5 | 768,183 | 61.6 | ||||||||||||
Total net sales |
1,537,641 | 98.6 | 1,221,516 | 97.9 | ||||||||||||
Franchise related |
22,020 | 1.4 | 25,888 | 2.1 | ||||||||||||
Total revenues |
$ | 1,559,661 | 100.0 | % | $ | 1,247,404 | 100.0 | % | ||||||||
Wholesale
Net sales for 2008 of $438.5 million were $14.8 million or 3.3% lower than
net sales for 2007. Net sales for 2008 reflect the elimination of intercompany
sales to PCFG and FCPO for the entire year. Net sales for 2007 reflect the
elimination of intercompany sales to PCFG and FCPO from the Party City Franchise
Transaction Date and the Factory Card & Party Outlet Acquisition Date,
respectively. Had the PCFG transactions and FCPO acquisition occurred January 1,
2007, the Company would have eliminated an additional $31.0 million of
intercompany sales during 2007 and net sales for 2008 would have been $16.2
million or 3.8% higher than adjusted sales for 2007.
Net sales to party goods superstores (including our franchisees) and
independent party stores totaled $151.5 million and were $5.2 million or 3.6%
higher than adjusted 2007 sales, reflecting synergy-driven increases in sales to
franchisees. Net sales of metallic balloons were $92.7 million or 4.5% higher
than in 2007, principally the result of increased sales to international balloon
distributors and the domestic mass market. Net sales to other retail channels
(including card and gift stores, mass merchant, drug, craft and contract
manufacturing) were $110.8 million or 3.2% higher than 2007, principally due to
higher contract manufacturing sales early in 2008. International sales totaled
$83.5 million and were $3.5 million or 4.4% higher than in 2007, as strong demand
for new party programs at several European national accounts was partially offset
by the impact of foreign currency fluctuations.
Retail
Net retail sales for company-owned stores for 2008 of $1,099 million were
$331.0 million or 43.1% higher than net retail sales for 2007, reflecting the
inclusion of FCPO and PCFG sales for the entire year 2008, which were $319.8
million higher than those sales included in 2007.
Net retail sales of Party City and Party America company-owned stores
totaled $685.6 million and were essentially flat compared to 2007, as a 3.6%
decrease in average store count and a 13.0% decrease in same stores sales at our
outlet stores offset a 1.2% increase in same store sales at our Big Box party
stores (i.e., generally greater than 8,000 square feet) and the inclusion of a
53rd week in our 2008 retail calendar. Net sales at our temporary
Halloween stores totaled $39.5 million or 38.0% higher than in 2007 due to an
increase in store count.
Royalties and franchise fees
Franchise related revenue for the year ended December 31, 2008, consisting of
royalties and franchise fees, totaled $22.0 million or 14.9% lower than in 2007
principally as a result of the elimination in 2008 of royalties from the 55 former
franchise stores acquired by PCFG in November 2007. During 2008, 23 stores were
either opened or acquired by franchisees and 14 franchise stores were closed or
sold, as compared to 29 stores opened or acquired by franchisees and 15 franchise
stores were closed or sold during 2007. Franchise stores reported same-store net
sales of $468.4 million or an increase of 0.7% for the year ended December 31,
2008 compared to the year ended December 31, 2007.
27
Table of Contents
Gross Profit
The following table sets forth the Companys consolidated gross profit
on net sales for the years ended December 31, 2008 and 2007, respectively.
Year Ended December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Dollars in | % of associated | Dollars in | % of associated | |||||||||||||
thousands | sales | thousands | sales | |||||||||||||
Net Wholesale |
$ | 142,438 | 32.5 | % | $ | 131,674 | 29.0 | % | ||||||||
Net Retail |
428,777 | 39.0 | % | 312,256 | 40.6 | % | ||||||||||
Total Gross Profit |
$ | 571,215 | 37.1 | % | $ | 443,930 | 36.3 | % | ||||||||
The gross profit margin on net sales at wholesale for 2008 was 32.5%
or 350 basis points higher than in 2007. The increase in gross profit margin
principally reflects the elimination of certain low margin full case sales, other
changes in product mix and lower distribution costs.
Retail gross profit margin for 2008 was 39.0% or 160 basis points lower than in
2007, primarily due to increased promotional product pricing and inventory shrink
and damage reserves and higher occupancy costs, as a percent of sales, principally
as a result of the acquisition of FCPO.
Operating expenses
Selling expenses totaled $41.9 million for both 2008 and 2007 as a decrease
in variable expenses, attributable to a decrease in sales at wholesale, was offset by
increases principally in base compensation and employee benefits. Selling expenses
decreased to 2.7% of total revenue in 2008 from 3.4% in 2007, as a result of the
increase in retail sales.
Retail operating expenses of $273.6 million for 2008 were $82.2 million
higher than 2007, reflecting the full year expenses of PCFG and FCPO. Retail
operating expenses were 24.9% of retail sales in both 2008 and 2007. Franchise
expenses for 2008 of $13.7 million increased to 62.1% of franchise related revenue in
2008 compared to 49.8% in 2007, principally as a result of the elimination of
royalties from PCFGs former franchise stores.
General and administrative expenses for 2008 were $120.3 million,
increasing by $14.6 million over 2007. After adjusting general and administrative
expenses for the full year impact of PCFG and FCPO, comparable expenses decreased by
$10.3 million. The decrease in general and administrative expenses principally
reflects lower retail expenses resulting from the completion of the Party America
integration, partially offset by higher base compensation and employee benefits. As
a percentage of total revenues, general and administrative expenses were 7.7% for
2008 compared to 8.5% for 2007.
Art and development costs of $12.5 million for 2008 were comparable to the
costs for 2007. As a percentage of total revenues, art and development costs were
0.8% and 1.0% of total revenues for 2008 and 2007, respectively.
During the fourth quarter of 2008, the Company instituted a program to convert
its company-owned and franchised Party America stores to Party City stores and
recorded a $17.4 million charge for the impairment of the Party America trade name.
Interest expense, net
Interest expense of $50.9 million for 2008 was $3.8 million lower than for
2007, reflecting the impact of lower Libor as well as lower margin rates following
our May 2007 debt refinancing, on higher average debt, following the PCFG transaction
and the FCPO acquisition.
28
Table of Contents
Other (income) expense, net
Other income, net, totaled $0.8 million in 2008, as a net gain on the disposal
of assets and our share of income from an unconsolidated balloon distribution joint
venture located in Mexico were partially offset by the cost to amend a licensing
agreement. In 2007, other expense, net of $18.2 million principally consists of debt
retirement costs related to the refinancing of our term and revolving credit
facilities during the second quarter of 2007, and a reserve recorded against an
investment in a foreign subsidiary. It also includes derivative gains and losses, a
net loss on the disposal of assets and our share of income from the unconsolidated
joint venture. The undistributed income from the unconsolidated joint venture
includes the elimination of intercompany profit in the joint ventures inventory at
December 31, 2008 and 2007.
Income tax expense
Income tax expense for 2008 and 2007 were based upon the estimated consolidated
effective income tax rates of 37.9% and 40.2% for the years ended December 31, 2008
and December 31, 2007, respectively. The decrease in the 2008 effective income tax
rate is primarily attributable to a lower average state income tax rate.
Liquidity and Capital Resources
Capital Structure
On May 25, 2007, the Company and its parent company, AAH, entered into (i) a
$375 million Term Loan Credit Agreement (the Term Loan Credit Agreement), and (ii)
an ABL Credit Agreement (the ABL Credit Agreement) with a committed revolving
credit facility in an aggregate principal amount of up to $250 million (as amended).
The Company used the proceeds from these facilities to terminate a previously
existing $410 million first lien credit and guaranty agreement and (ii) the $60
million second lien credit and guaranty agreement.
Term Loan Credit Agreement
The Term Loan Credit Agreement provides 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 is 1.25% with respect to ABR borrowings and 2.25% with respect to LIBOR
borrowings.
The 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 March 31,
2013, with the remaining amount payable on the maturity date of May 25, 2013.
The obligations of the Company under the Term Loan Credit Agreement are jointly
and severally guaranteed by AAH and each wholly-owned 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 $100 million from one or more lenders (which may include any existing Lender)
willing to provide such additional incremental term loans in their own discretion.
The 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; pay dividends and distributions or 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 Term Loan Credit Agreement also contains certain customary affirmative
covenants and events of default.
At December 31, 2009, the balance of the Term Loan was $364.7 million.
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ABL Credit Agreement
The Company has a committed revolving credit facility in an aggregate principal
amount of up to $250 million for working capital, general corporate purposes and the
issuance of letters of credit. The ABL Credit Agreement provides for (a) extension
of credit in the form of Revolving Loans at any time and from time to time during
the period ended May 25, 2012 (the Availability Period), in an aggregate principal
amount at any time outstanding not in excess of $250 million, subject to a borrowing
base described below, (b) commitments to obtain credit, at any time and from time to
time during the Availability Period, in the form of Swingline Loans, in an aggregate
principal amount at any time outstanding not in excess of $10 million and (c)
ability to utilize Letters of Credit, in an aggregate face amount at any time
outstanding not in excess of $25 million, to support payment obligations incurred in
the ordinary course of business by the Company and its subsidiaries.
The borrowing base at any time equals (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, and (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 million) , plus (c) 85%
of eligible credit card receivables, less (d) certain reserves.
The ABL Credit Agreement provides 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 is up to 0.50% with respect to ABR borrowings and from 1.00% to 1.50% with
respect to LIBOR borrowings. The applicable margin at December 31, 2009 was 0.0%
with respect to ABR borrowings and 1.00% with respect to LIBOR borrowings.
In addition to paying interest on outstanding principal under the ABL Credit
Agreement, the Company is required to pay a commitment fee of between 0.30% and
0.25% per annum in respect of the unutilized commitments thereunder. The
Company must also pay customary letter of credit fees and agency fees.
Upon prior notice, the Company may prepay any borrowing under the ABL Credit
Agreement, in whole or in part, without premium or penalty other than customary
breakage costs with respect to LIBOR loans.
There is no scheduled amortization under the ABL Credit Agreement. The
principal amount outstanding of the loans under the ABL Credit Agreement is due and
payable in full on the fifth anniversary of the closing date.
The obligations of the Company under the ABL Credit Agreement are jointly and
severally guaranteed by AAH and each wholly-owned 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 ABL Credit Agreement contains negative covenants that are substantially
similar to the Term Loan Credit Agreement. The ABL Credit Agreement requires the
Company to comply with certain financial covenants if it has less than $25 million
of excess availability. The ABL Credit Agreement also limits the amount of
consolidated capital expenditures in any fiscal year
The ABL Credit Agreement also contains certain customary affirmative covenants
and events of default.
Borrowings under the ABL Credit Agreement were $77.0 million and outstanding
standby letters of credit totaled $11.6 million at December 31, 2009.
Unrestricted Subsidiary Credit Agreement
On November 2, 2007, PCFG entered into a Credit Agreement (the PCFG Credit
Agreement), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent
and Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital
Securities LLC, as Sole Arranger, and the Lenders party thereto.
Pursuant to the PCFG Credit Agreement, PCFG borrowed $30.0 million in term
loans (PCFG Term Loan) and obtained a committed revolving credit facility in an
aggregate principal amount of up to $10.0 million, as amended, for working capital
and general corporate purposes and the issuance of letters of credit (of up to $5.0
million at any time outstanding) (PCFG Revolver). At December 31, 2009, the
balance of the term loan was $23.0 million, borrowings under the PCFG Revolver were
$0.6 million and there were no outstanding letters of credit. The Company is in
compliance with the terms the PCFG Credit Agreement at December 31, 2009.
PCFG and PCFG Holdings, the sole member of PCFG, have been designated by the
Board of Directors of the Company as Unrestricted Subsidiaries pursuant to the
Companys existing ABL Credit Agreement, and the indenture governing its 8.75%
Senior Subordinated Notes and neither PCFG nor PCFG Holdings is a guarantor of any
of the Companys other credit
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facilities or indenture. In addition, PCFGs credit
facility is a stand-alone facility for PCFG and is not guaranteed by the Company or
its other subsidiaries.
At December 31, 2008, PCFG had not been in compliance with the financial
covenants contained in the PCFG Credit Agreement. Effective September 30, 2009, PCFG
and its lenders entered into a Waiver and Amendment Agreement which provided that,
among other things, (1) interest would be accrued prospectively at either (i) for
ABR borrowings, the Alternate Base Rate plus 6.00%, with a floor of 4.00% for the
Alternate Base Rate or (ii) the Adjusted LIBO Rate plus 7.00% with a floor of 3.00%
for the Adjusted LIBO Rate,
(2) PCFG would pay an additional $1.5 million in principal on the Term Loans at
the effective date of the waiver and amendment , and thereafter the quarterly
amortization payment for the Term Loans would be $1.0 million each quarter until the
Maturity Date, (3) the PCFG Revolver would be limited to a maximum of $10.0 million,
and (4) financials covenants related to leverage ratio, fixed charge coverage ratio,
minimum EBITDA, and maximum capital expenditures, were revised. As PCFG is an
unrestricted subsidiary, the acceleration of our obligation under the PCFG Term Loan
would not constitute an event of default under our other debt instruments.
Other Credit Agreements
At December 31, 2009, 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 April 2010, 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, 2010. At December 31, 2009 the borrowings
outstanding under the British Pound Sterling revolving credit facility was 0.4
million British Pound Sterling. We expect to renew these revolving credit facilities
upon expiration.
Long-term borrowings at December 31, 2009 include a mortgage note with the
New York State Job Development Authority of $5.6 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 2.45%, 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 in April 2004, the Company issued
$175.0 million 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 the notes and the exchange notes were substantially identical. The exchange was
completed in October 2004. Interest is payable semi-annually on May 1 and November 1
of each year.
We have entered into various capital leases for machinery and equipment and
automobiles with implicit interest rates ranging from 4.39% to 11.65% which extend to
2013. 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
2020 and generally contain renewal options and require the Company to pay real estate
taxes, utilities and related insurance costs.
Rent expense for the years ended December 31, 2009 and 2008 totaled $136.8
million and $142.5 million, respectively. Minimum lease payments currently required
under non-cancelable operating leases for the year ending December 31, 2010,
approximate $108.7 million.
Restructuring costs associated with the Factory Card & Party Outlet Acquisition
of $9.1 million were accrued for as part of net assets acquired. Through December 31,
2009, the Company incurred $6.7 million in restructuring costs, including $3.8 million incurred in 2009. The Company expects to incur the balance
in 2010.
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 $1.8 million during 2009 and expects to incur additional retention costs of $1.5 million through April 2010. The Company
will continue to utilize the Naperville facility as a distribution center for greeting cards and other products.
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.
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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, 2009 Compared to Year Ended
December 31, 2008
Net cash provided by operating activities during the year ended December 31,
2009 totaled $123.9 million, as compared to $79.9 million for the year ended
December 31, 2008. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2009 and 2008, was
$124.2 million and $102.6 million, respectively. Changes in operating assets and
liabilities for the year ended December 31, 2009 and 2008 resulted in the use of
cash of $0.2 million and $22.7 million, respectively. 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.
During the years ended December 31, 2009 and 2008, net cash used in investing
activities totaled $54.4 million and $51.2 million, respectively. 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.
During the years ended December 31, 2009 and 2008, net cash used in financing
activities was $70.2 million and $23.0 million respectively. During 2009, the
majority of cash used in financing activities was used to reduce borrowings under
our revolving line of credit. Additionally, cash used in financing activities
included scheduled payments on our long-term obligations that totaled $11.0 million
compared to $8.9 million during the year ended December 31, 2008. Scheduled payments
during the year ended December 31, 2009 included an additional $2.5 million for
payments on the PCFG term loan in connection with the amended credit agreement.
Cash Flow Data Year Ended December 31, 2008 Compared to Year Ended December 31,
2007
Net cash provided by operating activities during the year ended December 31,
2008 totaled $79.9 million, as compared to $9.6 million for the year ended December
31, 2007. Net cash flow provided by operating activities before changes in operating
assets and
liabilities for the years ended December 31, 2008 and 2007, were $102.6 million
and $70.8 million, respectively. Changes in operating assets and liabilities for the
years ended December 31, 2008 and 2007 resulted in the use of cash of $22.7 million
and $61.2 million, respectively. The increase in cash provided by operating
activities during 2008 principally reflects cash generated by the retail operations
acquired in the fourth quarter of 2007, partially offset by higher levels of
inventory.
During the years ended December 31, 2008 and 2007, net cash used in investing
activities totaled $51.2 million and $133.4 million, respectively. Investing
activities for 2008 include $1.6 million of costs associated with our prior year
acquisition of FCPO and our investment in PCFG. Retail capital expenditures,
principally for store renovations and updated information systems, totaled $42.7
million in 2008, while wholesale capital expenditures totaled $10.3 million.
Investing activities for 2007 include our $73.6 million acquisition of FCPO, our
$32.4 million, net, investments in PCFG, Halloween USA and other franchise store
transactions, retail capital expenditures of $13.5 million and wholesale capital
expenditures of $13.9 million.
During the years ended December 31, 2008, net cash used in financing activities
was $23.0 million. During 2008, cash used to reduce borrowings under our revolving
line of credit and for scheduled payments on our long-term obligations totaled $26.8
million. In addition, in 2008, the Company used $0.5 million to purchase
redeemable common stock. Sources of cash included $2.5 million generated by the
sale of an additional minority interest in PCFG and $1.8 million in tax benefits
related to the exercise of common stock options held by employees. During the year
ended December 31, 2007, net cash provided by financing activities was $134.6
million. Sources included (i) net borrowings under our revolving credit agreements
of $152.7 million, principally used to acquire FCPO, PCFG, and Halloween USA, and
(ii) capital contributions of $4.7 million. These sources were partially offset by
a $10 million reduction of our term loan resulting from the refinancing, a $11.8
million cost to refinance current debt and retire prior debt, and scheduled payments
on capital leases and other long-term obligations.
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Tabular Disclosure of Contractual Obligations
Our contractual obligations at December 31, 2009 are summarized by the year
in which the payments are due in the following table (dollars in thousands):
Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
Long-term debt obligations (a) |
$ | 568,288 | $ | 38,819 | $ | 8,845 | $ | 19,870 | $ | 324,583 | $ | 176,171 | $ | | ||||||||||||||
Capital lease obligations (a) |
5,510 | 2,087 | 2,065 | 1,346 | 12 | | | |||||||||||||||||||||
Operating lease obligations (b) |
408,567 | 108,719 | 91,906 | 75,845 | 49,607 | 28,736 | 53,754 | |||||||||||||||||||||
Merchandise purchase commitments (c) |
9,950 | 4,422 | 4,422 | 1,106 | | | | |||||||||||||||||||||
Minimum product royalty obligations |
11,575 | 3,292 | 5,077 | 2,289 | 451 | 466 | | |||||||||||||||||||||
Total contractual obligations |
$ | 1,003,890 | $ | 157,339 | $ | 112,315 | $ | 100,456 | $ | 374,653 | $ | 205,373 | $ | 53,754 | ||||||||||||||
(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 seven stores sold to franchisees that expire through 2014. 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, 2009, the maximum amount of the assigned lease obligations was approximately $4.2 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 2009), 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 2012. |
At December 31, 2009 there were no non-cancelable purchase orders
related to capital expenditures.
At December 31, 2009, there were $77.0 million of borrowings under our ABL
Credit Agreement, and standby letters of credit totaling $11.6 million. Under our
PCFG Revolver there were $0.6 million borrowings and no standby letters of credit.
See Note 8 to our Consolidated Financial Statements which are included in this report
beginning on page F-2.
Not included in the above table are $1.0 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.
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.
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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
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.
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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 assets exceeds the fair value of
the asset. When fair values are not readily available, we estimate fair values using
expected discounted future cash flows.
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 estimated 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 FIN No. 48. See further
discussion in Note 16 of the Notes to the Consolidated Financial Statements.
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards, Accounting Standards Codification or ASC Subtopic 718 (SFASNo. 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 (SFAS No. 123(R)) focuses primarily on accounting for
transactions in which an entity obtains employee
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services in share-based payment
transactions. Generally, the fair value approach in ASC Subtopic 718 (SFAS No.
123(R)) is similar to the fair value approach described in SFAS No. 123.
The Company adopted ASC Subtopic 718 (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 ASC Subtopic 718 (SFAS No.
123(R)) (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 Standards
Implemented:
Effective in the third quarter 2009, the Company adopted ASC 105 Generally Accepted Accounting
Standards which became the single source for all authoritative generally accepted accounting
principles, or GAAP, recognized by the FASB. ASC 105 does not change GAAP and did not impact the
Companys results of operations, cash flows or financial position. Subsequent revisions to GAAP
will be incorporated into the ASC through issuance of Accounting Standards Updates (ASU).
Effective January 1, 2009, the Company adopted an amendment to ASC 810 Consolidation which changes
presentation of the financial statements. This standard governs the accounting for, and reporting
of, noncontrolling interests in partially owned consolidated subsidiaries and the loss of control
of subsidiaries. The standard requires that: (i) noncontrolling interest, previously referred to as
minority interest, be reported as part of equity in the consolidated financial statements; (ii)
losses be allocated to a noncontrolling interest even when such allocation might result in a
deficit balance, reducing the losses attributed to the controlling interest; (iii) changes in
ownership interests be treated as equity transactions if control is maintained; (iv) changes in
ownership interests resulting in gain or loss be recognized in earnings if control is gained or
lost; and (v) in a business combination the noncontrolling interests share of net assets acquired
be recorded at the fair value, plus its share of goodwill. The Companys consolidated balance
sheet as of December 31, 2009 and 2008 and consolidated statements of income, stockholders equity
and cash flow for each of the three years in the period ended December 31, 2009, have been
retrospectively adjusted upon application of the standard.
During the second quarter of 2009, the Company adopted ASC 855 Subsequent Events which (i)
incorporates the principles and accounting guidance for recognizing and disclosing subsequent
events that originated as auditing standards into the body of authoritative literature issued by
the FASB and also (ii) prescribes disclosure regarding the date through which subsequent events
have been evaluated. In February 2010, the FASB amended this new standard to eliminate the
disclosure requirement regarding the date through which subsequent events have been evaluated. As
the new standard was not intended to significantly change the current practice of reporting
subsequent events, it did not have an impact on our results of operations, cash flows or financial
positions. Refer to Note 23.
Effective January 1, 2009, the Company adopted ASC 815 Derivatives and Hedging which enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for and (iii) how derivative instruments and
related hedged items affect an entitys financial position, results of operations and cash flows.
The adoption of ASC 815 did not have a financial impact on the Companys financial statements.
Effective January 1, 2009, the Company adopted an amendment to ASC 805 Business Combinations which
significantly changes the accounting for business acquisitions both during the period of the
acquisition and in subsequent periods. These amendments will be considered for all business
combinations completed subsequent to the adoption date (none in 2009). Among the more significant
changes:
| Acquired in-process research and development, which was previously expensed at acquisition, is now accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. | ||
| Contingent consideration, which was previously accounted for as a subsequent adjustment to purchase price, is now recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. | ||
| Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill. | ||
| Transaction costs, which were previously treated as costs of the acquisition, are now expensed. | ||
| Upon gaining control of an entity in which the equity method or cost basis investment was held, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in earnings. Previously, this fair value adjustment would not have been made. | ||
| Effective January 1, 2009, the Company retrospectively adopted an amendment to ASC 805 released in April 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of ASC 450 Contingencies. |
The Company adopted ASC 820 Fair Value Measurement and Disclosure in two steps: Effective January
1, 2008, the Company adopted it for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. Effective January 1, 2009, the Company adopted it
for all non-financial instruments accounted for at fair value on a non-recurring basis. This
standard also establishes a new framework for measuring fair value and expands related disclosures.
Refer to Note 20.
Not Yet Implemented:
The Company is currently evaluating all applicable outstanding ASUs and does not believe any will
have a material impact on the consolidated financial statements.
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During the second quarter of 2009, we adopted a newly issued accounting
standard for subsequent events. The new standard incorporates the principles and
accounting guidance for recognizing and disclosing subsequent events that originated
as auditing standards into the body of authoritative literature issued by the FASB
and also prescribes disclosure regarding the date through which subsequent events
have been evaluated. We are required to evaluate subsequent events through the date
our financial statements are issued. In February 2010, the FASB amended this new
standard to eliminate the disclosure requirement regarding the date through which
subsequent events have been evaluated. As the new standard was not intended to
significantly change the current practice of reporting subsequent events, it did not
have an impact on our results of operations, cash flows or financial positions.
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 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.
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The following table sets forth our historical revenues, gross profit, income
(loss) from operations and net income (loss), by quarter, for 2009 and 2008.
For the Three Months Ended, | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
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 | ||||||||||||
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 income
(loss) attributable to Amscan Holdings, Inc. |
(2,537 | ) | 14,669 | 4,563 | 23,815 | (a) |
(a) | During the fourth quarter of 2008, the Company instituted a program to convert its company-owned and franchised Party America stores to Party City stores and recorded a $17.4 million charge for the impairment of the Party America 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, 2009, 2008 and 2007, 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 $6.7 million, $7.3 million, and $7.9 million, respectively. These
amounts are determined by considering the impact of the hypothetical interest rates
on our 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 income (expense) 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 $5.5 million, $5.6 million, and $5.4
million for the years ended December 31, 2009, 2008 and 2007, 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.
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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, 2009.
(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 2009 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 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,
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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, 2009.
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 pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only managements report in this
annual report.
Item 9 (A) (T)
The information required by Item 9
(A) (T) of Regulation S-K is included herein in Item 9A(b).
Item 9B. Other Information
Not applicable.
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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
March 31, 2010.
Name | Age | Position | ||||
Gerald C. Rittenberg
|
58 | Chief Executive Officer and Director | ||||
James M. Harrison
|
58 | President, Chief Operating Officer and Director | ||||
Michael D. Heller
|
54 | Executive Vice President Retail Operations | ||||
Michael A. Correale
|
52 | Chief Financial Officer | ||||
Robert J. Small
|
43 | Chairman of the Board of Directors | ||||
Steven J. Collins
|
41 | Director | ||||
Michael F. Cronin
|
56 | Director | ||||
Kevin M. Hayes
|
41 | Director | ||||
Jordan A. Kahn
|
68 | Director | ||||
Richard K. Lubin
|
63 | Director | ||||
Carol M. Meyrowitz
|
56 | Director | ||||
David M. Mussafer
|
46 | 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 the President of Amscan
Inc. from April 1996 to October 1996, and as our President from the time of our
formation in 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. Prior to that time, Mr.
Harrison served as the Chief Financial Officer of Amscan Inc., from August 1996 to
February 1997.
Michael D. Heller became our Executive Vice President Retail Operations in
December 2008. From December 2007 to December 2008, Mr. Heller served as the
Executive Vice President of PCFG following our Party City Franchise Group
transaction. Prior to that time, Mr. Heller was a significant franchisee of Party
City.
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.
Robert J. Small became one of our directors upon the consummation of 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 and has served on the
board of directors of Tweeter Home Entertainment Group and Tekni-Plex Inc.
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Kevin M. Hayes became one of our directors upon the consummation of the
2004 Transactions. Mr. Hayes is a General Partner of Weston Presidio and has
served in that position since 2000. Mr. Hayes is also a director of Associated
Materials Incorporated.
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.
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
Electro-Motive Diesel. Mr. Lubin has also served on the board
of directors of Holmes Products Corporation and U.S. Can Corporation.
Carol M. Meyrowitz became a director in August 2006. Ms. Meyrowitz is
currently a Director and President 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, is
currently a member of the board of directors of lululemon athletica inc. and
several 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 seven additional non-employee directors
and two employee
directors. The Board of Directors has determined that Jordan A. Kahn 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.
Audit Committee
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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 Executive Vice President Retail
Operations and our Chief Financial Officer (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.
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 (as defined hereafter). The Compensation Committee met periodically
in 2009, and all members of the Compensation Committee attended each meeting. Our
Board of Directors determined that each of these directors is a non-employee
director within the meaning of Section 16 of the Securities Exchange Act.
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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 2009.
Compensation Philosophy
The executive compensation program of the Company has been designed to
motivate, reward, attract, and retain the management deemed essential to ensure
the success of the Company. The program seeks to align executive compensation with
Company objectives, business strategy, and financial performance. Our Companys
goal is 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 January, to evaluate the performance of the executive and senior
officers, and to establish their base salaries, annual cash bonus 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 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 size and responsibility of the
officers
position, the Companys overall performance, the officers overall
performance and future potential, the compensation paid by competitors to
employees in comparable positions, and the officers income potential resulting
from common stock acquired and stock options received in prior years.
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, taking into account competitive market compensation paid
by other companies for similar positions. Generally, we believe that executive
base salaries should be targeted near the median of the range of salaries 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.
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Annual Cash Bonus Plan
Officers are eligible to receive cash bonuses based on the Companys
actual performance compared to budgeted amounts approved by the Board of Directors
on an annual basis. The bonus program focuses on Adjusted EBITDA, as well as the
accomplishment of individual goals. 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 transaction. Bonus targets are approved by the
Compensation Committee on an annual basis and range between 10% and 100% of the
employees base salary, based on the employees position with the Company, before
any adjustments based on actual Adjusted EBITDA achieved or individual
performance.
Stock-based Incentive Program
The Company has adopted the AAH Holdings Corporation 2004 Equity
Incentive Plan (the Equity Incentive Plan) under which the Company may grant
incentive awards in the form of options to purchase shares of Company common stock
and shares of restricted or unrestricted Company common stock to certain
directors, officers, employees and consultants (Participants) of the Company and
its affiliates. The Compensation Committee is authorized to make grants and
various other decisions under the Equity Incentive Plan. Unless otherwise
determined by the Compensation
Committee, any Participant granted an award under the Equity Incentive Plan
must become a party to, and agree to be bound by, the Companys Stockholders
Agreement.
The Compensation Committee uses the Equity Incentive Plan as an
important component of our overall compensation program due to its effect on
retaining key employees, aligning key employees financial interests with the
interests of shareholders, and rewarding the achievement of the Companys
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.
At December 31, 2009, there are 2,981.07 shares of Company common stock
reserved for issuance under the Equity Incentive Plan, which may include
restricted and unrestricted common stock awards and basic and
performance incentive and nonqualified stock options. The Companys common stock
and stock options are nontransferable (except under certain limited
circumstances). Common stock options issued under the plan are issued at the
current fair market value on the date of grant. The grant dates for these stock
options are the dates the Compensation Committee approves such awards. Common
stock options generally vest 20% each year over a five-year period and, unless
otherwise determined by the Compensation Committee, have a term of ten years. Upon
a Participants death or when the Participants employment with the Company or the
applicable affiliate of the Company is terminated for any reason, such
Participants previously unvested stock options are forfeited and the Participant
or his or her legal representative may, within 60 days (if termination of
employment is for any reason other than death) or 90 days (in the case of the
Participants death), exercise any previously vested Company stock options and in
the case of performance options, within 30 days following the date value is
determined as specified by the Board in the agreement evidencing the grant of such
options.
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.
The Equity Incentive Plan will terminate ten years after its effective
date; however, awards outstanding as of such date will not be affected or impaired
by such termination. The Companys Board of Directors and the Compensation
Committee has authority to amend the Equity Incentive Plan and awards granted
thereunder, subject to the terms of the Equity Incentive Plan.
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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 plan, 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 receives 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.
Executive officers did not receive any other perquisites or personal
benefits or property in 2009.
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 $1,000,000, 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.
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.
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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,
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.
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Summary of Compensation Table
Option | Other | |||||||||||||||||||||||
Name and Principal Position | Year | Salary (a) | Bonus (b) | Awards (c) | Compensation (d) | Total | ||||||||||||||||||
Gerald C, Rittenberg |
2009 | $ | 1,050,000 | $ | 1,367,000 | $ | | $ | 21,400 | $ | 2,438,400 | |||||||||||||
Chief Executive Officer |
2008 | 1,000,000 | 1,066,000 | 595,300 | 21,400 | 2,682,700 | ||||||||||||||||||
2007 | 825,000 | 879,000 | | 27,100 | 1,731,000 | |||||||||||||||||||
James M. Harrison |
2009 | $ | 892,500 | $ | 1,114,500 | $ | | $ | 20,600 | $ | 2,027,600 | |||||||||||||
President and |
2008 | 850,000 | 858,600 | 446,500 | 19,800 | 2,174,900 | ||||||||||||||||||
Chief Operating Officer |
2007 | 742,500 | 791,100 | | 24,700 | 1,558,300 | ||||||||||||||||||
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 |
2009 | $ | 333,125 | $ | 129,100 | $ | | $ | 40,400 | $ | 502,625 | |||||||||||||
Chief Financial Officer |
2008 | 325,000 | 93,100 | | 37,400 | 455,500 | ||||||||||||||||||
2007 | 300,000 | 128,000 | | 33,300 | 461,300 |
(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 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 (formerly SFAS No. 123(R)). 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) | 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. |
Grants of Plan Based Awards
There were no time or performance-based stock option awards granted to
the named officers during the year ended December 31, 2009.
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.
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Options Exercised
There were no time or performance based options exercised by our named
executives during the year ended December 31, 2009.
Outstanding Equity Awards
The following table sets forth certain information with respect to
outstanding equity awards at December 31, 2009 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 | ||||||||||||
32.40 | 137.20 | 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 | ||||||||||||
29.16 | 123.48 | 12,000 | 4/1/2016 | |||||||||||||
103.01 | 108.58 | 10,000 | 4/1/2015 | |||||||||||||
20.29 | | 2,500 | 4/30/2014 | |||||||||||||
Michael D. Heller |
4.53 | 53.42 | 28,350 | 12/30/2018 | ||||||||||||
Michael A. Correale |
9.72 | 28.44 | 12,000 | 4/1/2016 | ||||||||||||
10.44 | 17.40 | 10,000 | 4/1/2015 |
Director Compensation
Annual Compensation
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, 2009.
Fees Earned or | Option | |||||||||||
Name | Paid in Cash | Awards(a) | Total | |||||||||
Jordan A. Kahn |
$ | 26,000 | $ | | $ | 26,000 | ||||||
Carol M. Meyrowitz |
26,000 | | $ | 26,000 |
There were no time or performance based stock option awards granted to
our independent directors in during the year ended December 31, 2009.
Directors who are also our employees receive no additional compensation
for serving as a director.
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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 2009, 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 shall be 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, 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 2009, 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.
Employment Agreement with Michael D. Heller. Michael D. Heller entered into
an employment agreement with us, dated December 2, 2008, which is referred to as
the Heller Employment Agreement, pursuant to which Mr. Heller would serve as our
Executive Vice President Retail Operation, through November 2, 2010. During
2009, Mr. Heller received
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an annual base salary of $0.5 million, which will
increase per the terms of the Heller Employment Agreement. The Heller Employment
Agreement contains provisions for annual bonus payments, severance, other benefits
and provisions for non-competition and non-solicitation similar to those in the
Rittenberg Employment Agreement. However, provisions for severance,
non-competition and non-solicitation are limited to a one year period
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of December 31, 2009, the issued and outstanding capital stock of AAH
consisted of 30,819.36 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, 2009. 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 March 31, 2010 (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) |
33.66 | * | ||||||
Michael F. Cronin(6) |
5,605.16 | 18.19 | % | |||||
James M. Harrison(7), |
228.31 | * | ||||||
Kevin M. Hayes(6) |
5,605.16 | 18.19 | % | |||||
Michael D. Heller(8) |
4.53 | * | ||||||
Jordan A. Kahn(9) |
59.33 | * | ||||||
Richard K. Lubin(10) |
11,210.31 | 36.37 | % | |||||
Carol M. Meyrowitz(11) |
26.95 | * | ||||||
David M. Mussafer (4) |
11,918.71 | 38.67 | % | |||||
Gerald C. Rittenberg(12), |
388.69 | 1.25 | % | |||||
Robert J. Small(10) |
11,210.31 | 36.37 | % | |||||
All directors and executive officers as a group (12 persons) |
29,475.66 | 94.39 | % |
* | Less than 1% | |
| Director | |
| Named Executive Officer | |
(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. |
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(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 20.16 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 152.46 shares which could be acquired by Mr. Harrison within 60 days upon exercise of options. | |
(8) | Includes 4.53 shares which could be acquired by Mr. Heller within 60 days upon exercise of options. Does not include warrants to purchase 264.55 shares that are exercisable only upon the occurrence of certain events | |
(9) | Includes 2.5 shares which could be acquired by Mr. Kahn within 60 days upon exercise of options. | |
(10) | 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. | |
(11) | Includes 1.12 shares which could be acquired by Ms. Meyrowitz within 60 days upon exercise of options. | |
(12) | Includes 227.49 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 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.
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, 2009, 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
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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 $1.7 million and $1.8 million for the
years ended December 31, 2009 and 2008, 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 and $0.1 million
for the years ended December 31, 2009 and 2008, respectively. Such fees related to
the audits of the Companys employee benefit plans; due diligence services; 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 each of the years ended December 31, 2009 and
2008.
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)) | |
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)) |
53
Table of Contents
Exhibit | ||
Number | Description | |
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)) | |
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)) | |
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)) |
54
Table of Contents
Exhibit | ||
Number | Description | |
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) |
55
Table of Contents
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, 2009.
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
|
|||||
Chief Financial Officer | ||||||
(on behalf of the Company and | ||||||
as principal financial officer) | ||||||
Date: March 31, 2010 |
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 | March 31, 2010 | ||
/s/ Steven J. Collins |
Director | March 31, 2010 | ||
/s/ Michael F. Cronin |
Director | March 31, 2010 | ||
/s/ Kevin M. Hayes |
Director | March 31, 2010 | ||
/s/ Jordan A. Kahn |
Director | March 31, 2010 | ||
/s/ Richard K. Lubin |
Director | March 31, 2010 | ||
/s/ Carol M. Meyrowitz |
Director | March 31, 2010 | ||
/s/ David M. Mussafer |
Director | March 31, 2010 | ||
/s/ Gerald C. Rittenberg |
Chief Executive Officer and Director | March 31, 2010 | ||
/s/ James M. Harrison |
President, Chief Operating Officer and Director |
March 31, 2010 |
56
Table of Contents
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, 2009, 2008 and 2007: |
||
F-44 |
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.
F1
Table of Contents
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, 2009 and 2008, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated
results of its operations and its cash flows for each of the three years in the period
ended December 31, 2009, 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
March 31, 2010
March 31, 2010
F2
Table of Contents
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,420 | $ | 13,058 | ||||
Accounts receivable, net of allowances |
82,781 | 89,443 | ||||||
Inventories, net of allowances |
335,950 | 366,965 | ||||||
Prepaid expenses and other current assets |
69,541 | 47,812 | ||||||
Total current assets |
503,692 | 517,278 | ||||||
Property, plant and equipment, net |
174,994 | 187,026 | ||||||
Goodwill |
548,439 | 543,731 | ||||||
Trade names |
157,283 | 157,283 | ||||||
Other intangible assets, net |
54,669 | 61,626 | ||||||
Other assets, net |
41,424 | 41,033 | ||||||
Total assets |
$ | 1,480,501 | $ | 1,507,977 | ||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Loans and notes payable |
$ | 77,635 | $ | 136,878 | ||||
Accounts payable |
76,901 | 126,638 | ||||||
Accrued expenses |
93,680 | 87,985 | ||||||
Income taxes payable |
32,061 | 28,605 | ||||||
Redeemable warrants |
15,444 | 15,444 | ||||||
Current portion of long-term obligations |
34,906 | 34,002 | ||||||
Total current liabilities |
330,627 | 429,552 | ||||||
Long-term obligations, excluding current portion |
538,892 | 550,755 | ||||||
Deferred income tax liabilities |
101,570 | 87,824 | ||||||
Deferred rent and other long-term liabilities |
11,901 | 9,558 | ||||||
Total liabilities |
982,990 | 1,077,689 | ||||||
Redeemable common securities (including 592.84 and 585.15 common shares issued
and outstanding at December 31, 2009 and 2008) |
18,389 | 18,171 | ||||||
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, 2009 and 2008) |
| | ||||||
Additional paid-in capital |
335,823 | 335,076 | ||||||
Retained earnings |
149,557 | 87,004 | ||||||
Accumulated other comprehensive loss |
(8,395 | ) | (11,852 | ) | ||||
Amscan Holdings Inc. stockholders equity |
476,985 | 410,228 | ||||||
Noncontrolling interests |
2,137 | 1,889 | ||||||
Total equity |
479,122 | 412,117 | ||||||
Total liabilities, redeemable common securities and stockholders equity |
$ | 1,480,501 | $ | 1,507,977 | ||||
See accompanying notes to consolidated financial statements.
F3
Table of Contents
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 1,467,324 | $ | 1,537,641 | $ | 1,221,516 | ||||||
Royalties and franchise fees |
19,494 | 22,020 | 25,888 | |||||||||
Total revenues |
1,486,818 | 1,559,661 | 1,247,404 | |||||||||
Expenses: |
||||||||||||
Cost of sales |
899,041 | 966,426 | 777,586 | |||||||||
Selling expenses |
39,786 | 41,894 | 41,899 | |||||||||
Retail operating expenses |
261,691 | 273,627 | 191,423 | |||||||||
Franchise expenses |
11,991 | 13,686 | 12,883 | |||||||||
General and administrative expenses |
119,193 | 120,272 | 105,707 | |||||||||
Art and development costs |
13,243 | 12,462 | 12,149 | |||||||||
Impairment of trade name |
| 17,376 | | |||||||||
Total expenses |
1,344,945 | 1,455,743 | 1,141,647 | |||||||||
Income from operations |
141,873 | 113,918 | 105,757 | |||||||||
Interest expense, net |
41,481 | 50,915 | 54,590 | |||||||||
Other (income) expense, net |
(32 | ) | (818 | ) | 18,214 | |||||||
Income before income taxes |
100,424 | 63,821 | 32,953 | |||||||||
Income tax expense |
37,673 | 24,188 | 13,246 | |||||||||
Net income |
62,751 | 39,633 | 19,707 | |||||||||
Less: net income (loss) attributable to noncontrolling interest |
198 | (877 | ) | 446 | ||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 62,553 | $ | 40,510 | $ | 19,261 | ||||||
See accompanying notes to consolidated financial statements.
F4
Table of Contents
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2007, 2008 and 2009
(Dollars in Thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2007, 2008 and 2009
(Dollars in Thousands)
Accumulated | Amscan | |||||||||||||||||||||||||||||||
Additional | Other | Holdings Inc. | Non- | |||||||||||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | Shareholders | controlling | ||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | Income (Loss) | Equity | Interests | Total | |||||||||||||||||||||||||
Balance at December 31, 2006 |
29,526.07 | $ | | $ | 331,113 | $ | 27,264 | $ | 1,463 | $ | 359,840 | 2,052 | $ | 361,892 | ||||||||||||||||||
Net income |
19,261 | 19,261 | 446 | 19,707 | ||||||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
1,633 | 1,633 | (10 | ) | 1,623 | |||||||||||||||||||||||||||
Cumulative change from adoption of FIN
48 (see Note 5) |
(31 | ) | (31 | ) | (31 | ) | ||||||||||||||||||||||||||
Change in fair value of interest rate
swap contracts, net of income tax
benefit |
(514 | ) | (514 | ) | (514 | ) | ||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income tax
benefit |
(231 | ) | (231 | ) | (231 | ) | ||||||||||||||||||||||||||
Comprehensive income |
20,118 | 436 | 20,554 | |||||||||||||||||||||||||||||
Issuance of shares of common stock |
22.71 | 222 | 222 | 222 | ||||||||||||||||||||||||||||
Revaluation of common stock |
(6,442 | ) | (6,442 | ) | (6,442 | ) | ||||||||||||||||||||||||||
Purchase and retirement of common stock |
(5.62 | ) | (80 | ) | (80 | ) | (80 | ) | ||||||||||||||||||||||||
Equity based compensation expense |
1,928 | 1,928 | 1,928 | |||||||||||||||||||||||||||||
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 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
F5
Table of Contents
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows provided by operating activities: |
||||||||||||
Net income |
$ | 62,553 | $ | 40,510 | $ | 19,261 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization expense |
44,382 | 47,278 | 38,093 | |||||||||
Amortization of deferred financing costs |
2,163 | 2,221 | 2,142 | |||||||||
Provision for doubtful accounts |
3,982 | 1,092 | 1,290 | |||||||||
Deferred income tax provision |
8,803 | (7,885 | ) | (5,973 | ) | |||||||
Deferred rent |
1,763 | 1,202 | 1,165 | |||||||||
Undistributed income in unconsolidated joint venture |
(632 | ) | (538 | ) | (628 | ) | ||||||
Impairment of intangible assets |
17,376 | 2,005 | ||||||||||
Loss (gain) on disposal of equipment |
278 | (1,195 | ) | 1,452 | ||||||||
Equity based compensation |
876 | 4,357 | 1,928 | |||||||||
Tax benefit on exercised options |
| (1,823 | ) | | ||||||||
Debt retirement costs |
| | 3,781 | |||||||||
Write-off of deferred financing costs |
| | 6,333 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Decrease in accounts receivable |
6,337 | 8,237 | 1,981 | |||||||||
Decrease (increase) in inventories |
30,933 | (52,347 | ) | (22,914 | ) | |||||||
(Increase) decrease in prepaid expenses and other assets |
(21,173 | ) | 31,240 | (14,219 | ) | |||||||
Decrease in accounts payable, accrued expenses and income
taxes payable |
(16,323 | ) | (9,796 | ) | (26,053 | ) | ||||||
Net cash provided by operating activities |
123,942 | 79,929 | 9,644 | |||||||||
Cash flows used in investing activities: |
||||||||||||
Cash paid in connection with acquisitions |
(3,378 | ) | (1,616 | ) | (106,123 | ) | ||||||
Cash held in escrow in connection with acquisitions |
(24,881 | ) | | | ||||||||
Capital expenditures |
(26,195 | ) | (53,001 | ) | (27,445 | ) | ||||||
Proceeds from disposal of property and equipment |
96 | 3,418 | 162 | |||||||||
Net cash used in investing activities |
(54,358 | ) | (51,199 | ) | (133,406 | ) | ||||||
Cash flows (used in) provided by financing activities: |
||||||||||||
Repayment of loans, notes payable and long-term obligations |
(70,247 | ) | (26,842 | ) | (387,549 | ) | ||||||
Proceeds from loans, notes payable and long-term
obligations, net of debt issuance costs |
| | 523,609 | |||||||||
Tax benefit on exercised options |
| 1,823 | | |||||||||
Debt retirement costs |
| | (6,218 | ) | ||||||||
Sale of additional interest to minority shareholder |
| 2,500 | | |||||||||
Purchase and retirement of redeemable common stock |
| (514 | ) | | ||||||||
Proceeds from issuance of common stock and exercise of
options, net of retirements |
90 | | 4,734 | |||||||||
Net cash (used in) provided by financing activities |
(70,157 | ) | (23,033 | ) | 134,576 | |||||||
Effect of exchange rate changes on cash and cash equivalents |
2,935 | (9,913 | ) | 1,494 | ||||||||
Net increase (decrease) in cash and cash equivalents |
2,362 | (4,216 | ) | 12,308 | ||||||||
Cash and cash equivalents at beginning of period |
13,058 | 17,274 | 4,966 | |||||||||
Cash and cash equivalents at end of period |
$ | 15,420 | $ | 13,058 | $ | 17,274 | ||||||
Supplemental information on non-cash activities:
Capital lease obligations of $59, $700, and $9,203 were incurred during the years ended December 31, 2009, 2008 and 2007, respectively.
See accompanying notes to consolidated financial statements.
F6
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
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, gifts and stationery throughout
the world. In addition, the Company operates specialty retail party goods and social
expressions supply stores in the United States under the names Party City, Party
America, The Paper Factory, Halloween USA and Factory Card & Party Outlet and
franchises both individual stores and franchise areas throughout the United States and
Puerto Rico principally under the names Party City and Party America. 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, and will be reconciled in the financial consolidation process.
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.
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.
F7
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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.
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. The Company completed its review and determined that goodwill and other
intangible assets with indefinite lives were not impaired.
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.
Deferred Financing Costs
Deferred financing costs are amortized to interest expense using the
effective interest method over the lives of the related debt.
Investments
In December 2003, the Company exchanged 50.1% of the common stock of a
wholly-owned subsidiary for the balloon assets of a competitor. Following the
exchange, the entity, Convergram Mexico, operates as 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 (income) expense on the
statement of income (also separately disclosed in 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 the 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.
F8
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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. A liability is incurred when it becomes probable that
the Company is legally obligated for these closure costs.
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.
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
Statement of Financial Accounting Standards (SFAS) No. 133 or Accounting Standards
Codification Subtopic 815, Accounting for Derivative Instruments and Hedging
Activities. Accounting Standards Codification or ASC Subtopic 815 (SFAS No. 133), 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 (SFAS
No. 133) 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.)
F9
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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
Accounting Standards Codification Subtopic 740 (SFAS No. 109), 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
On January 1, 2006, the Company adopted Accounting Standard 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 (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 ASC Subtopic 718 (SFAS No.
123(R)) is similar to the fair value approach described in SFAS No. 123.
The Company adopted ASC Subtopic 718 (SFAS No. 123(R)) using the prospective
method. Since the Companys common stock is not publicly traded, the options granted
prior to January 1, 2006 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 (SFAS No. 123(R)) (see Note 15).
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) at December 31, 2009 and 2008
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 Standards
Implemented:
Effective in the third quarter 2009, the Company adopted ASC 105 Generally Accepted Accounting
Standards which became the single source for all authoritative generally accepted accounting
principles, or GAAP, recognized by the FASB. ASC 105 does not change GAAP and did not impact the
Companys results of operations, cash flows or financial position. Subsequent revisions to GAAP
will be incorporated into the ASC through issuance of Accounting Standards Updates (ASU).
Effective January 1, 2009, the Company adopted an amendment to ASC 810 Consolidation which changes
presentation of the financial statements. This standard governs the accounting for, and reporting
of, noncontrolling interests in partially owned consolidated subsidiaries and the loss of control
of subsidiaries. The standard requires that: (i) noncontrolling interest, previously referred to as
minority interest, be reported as part of equity in the consolidated financial statements; (ii)
losses be allocated to a noncontrolling interest even when such allocation might result in a
deficit balance, reducing the losses attributed to the controlling interest; (iii) changes in
ownership interests be treated as equity transactions if control is maintained; (iv) changes in
ownership interests resulting in gain or loss be recognized in earnings if control is gained or
lost; and (v) in a business combination the noncontrolling interests share of net assets acquired
be recorded at the fair value, plus its share of goodwill. The Companys consolidated balance
sheet as of December 31, 2009 and 2008 and consolidated statements of income, stockholders equity
and cash flow for each of the three years in the period ended December 31, 2009, have been
retrospectively adjusted upon application of the standard.
F10
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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 second quarter of 2009, the Company adopted ASC 855 Subsequent Events which (i)
incorporates the principles and accounting guidance for recognizing and disclosing subsequent
events that originated as auditing standards into the body of authoritative literature issued by
the FASB and also (ii) prescribes disclosure regarding the date through which subsequent events
have been evaluated. In February 2010, the FASB amended this new standard to eliminate the
disclosure requirement regarding the date through which subsequent events have been evaluated. As
the new standard was not intended to significantly change the current practice of reporting
subsequent events, it did not have an impact on our results of operations, cash flows or financial
positions. Refer to Note 23.
Effective January 1, 2009, the Company adopted ASC 815 Derivatives and Hedging which enhanced
disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for and (iii) how derivative instruments and
related hedged items affect an entitys financial position, results of operations and cash flows.
The adoption of ASC 815 did not have a financial impact on the Companys financial statements.
Effective January 1, 2009, the Company adopted an amendment to ASC 805 Business Combinations which
significantly changes the accounting for business acquisitions both during the period of the
acquisition and in subsequent periods. These amendments will be considered for all business
combinations completed subsequent to the adoption date (none in 2009). Among the more significant
changes:
| Acquired in-process research and development, which was previously expensed at acquisition, is now accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. | ||
| Contingent consideration, which was previously accounted for as a subsequent adjustment to purchase price, is now recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. | ||
| Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill. | ||
| Transaction costs, which were previously treated as costs of the acquisition, are now expensed. | ||
| Upon gaining control of an entity in which the equity method or cost basis investment was held, the carrying value of that investment is adjusted to fair value with the related gain or loss recorded in earnings. Previously, this fair value adjustment would not have been made. | ||
| Effective January 1, 2009, the Company retrospectively adopted an amendment to ASC 805 released in April 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of ASC 450 Contingencies. |
The Company adopted ASC 820 Fair Value Measurement and Disclosure in two steps: Effective January
1, 2008, the Company adopted it for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. Effective January 1, 2009, the Company adopted it
for all non-financial instruments accounted for at fair value on a non-recurring basis. This
standard also establishes a new framework for measuring fair value and expands related disclosures.
Refer to Note 20.
Not Yet Implemented:
The Company is currently evaluating all applicable outstanding ASUs and does not believe any will
have a material impact on the consolidated financial statements.
Note 3 Inventories
Inventories consisted of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Finished goods |
$ | 325,421 | $ | 353,713 | ||||
Raw materials |
12,650 | 13,756 | ||||||
Work in process |
6,431 | 7,814 | ||||||
344,502 | 375,283 | |||||||
Less: reserve for slow moving and obsolete inventory |
(8,552 | ) | (8,318 | ) | ||||
$ | 335,950 | $ | 366,965 | |||||
F11
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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 4 Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
December 31, | ||||||||||||
2009 | 2008 | Useful lives | ||||||||||
Machinery and equipment |
$ | 117,780 | $ | 109,841 | 3-15 years | |||||||
Buildings |
47,840 | 47,809 | 40 years | |||||||||
Data processing |
50,691 | 48,555 | 3-5 years | |||||||||
Leasehold improvements |
64,617 | 61,999 | 1-20 years | |||||||||
Furniture and fixtures |
93,870 | 85,586 | 5-10 years | |||||||||
Land |
6,009 | 5,923 | ||||||||||
380,807 | 359,713 | |||||||||||
Less: accumulated depreciation |
(205,813 | ) | (172,687 | ) | ||||||||
$ | 174,994 | $ | 187,026 | |||||||||
Depreciation and amortization expense related to property, plant and
equipment was $37,823, $38,696, and $31,530 for the years ended December 31, 2009, 2008
and 2007, respectively.
The Company is obligated under various capital leases for certain machinery and
equipment which expire on various dates through 2013 (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, | ||||||||
2009 | 2008 | |||||||
Machinery and equipment under capital leases |
$ | 9,444 | $ | 9,495 | ||||
Less: accumulated amortization |
(4,212 | ) | (2,284 | ) | ||||
$ | 5,232 | $ | 7,211 | |||||
Amortization of assets held under capitalized leases is included in depreciation
and amortization expense.
Note 5 Retail Acquisitions and Transactions
The Factory Card & Party Outlet Acquisition
On the Factory Card & Party Outlet Acquisition Date, the Company completed its
acquisition of FCPO, in accordance with the terms of the Agreement and Plan of Merger,
dated as of September 17, 2007 (the Factory Card & Party Outlet Merger Agreement).
FCPO common stock was suspended from trading on the Nasdaq Global Market as of the
close of trading on November 16, 2007. The merger followed tender offer for all of the
outstanding shares of FCPO common stock by the Company. As a result of the merger,
FCPO is a wholly-owned subsidiary of the Company, and each remaining outstanding share
of FCPO common stock was converted into the right to receive $16.50 per share, net to
the seller in cash.
The excess of the FCPO purchase price over the tangible net assets acquired has
been allocated to intangible assets consisting of trade names ($27,400) and goodwill
($14,100), which are not being amortized, and net deferred tax liabilities ($12,900).
In addition, assets acquired totaled $70,100, including an allocation to recognize
below-market leases ($1,400) and to adjust property, plant and equipment to market
value ($7,100). Liabilities assumed totaled $41,800.
F12
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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)
Party City Franchise Group Transaction
Party City Corporation (Party City), a wholly-owned subsidiary of the Company,
completed the acquisition of new stores from franchisees in a series of transactions
involving Party City, Party City Franchise Group Holdings, LLC (PCFG Holdings), a
majority owned subsidiary of Party City, and Party City Franchise Group, LLC (PCFG),
a wholly-owned subsidiary of PCFG Holdings on November 2, 2007 (Party City Franchise
Group Transaction Date). Party City contributed cash and 11 of its corporate retail
stores located in Florida to PCFG Holdings. In addition, PCFG Holdings and PCFG
acquired 55 retail stores located in Florida and Georgia from franchisees. PCFG
operates the acquired 66 stores in the Florida and Georgia regions.
The franchisee sellers received approximately $43,000 in cash and, in certain instances,
equity interests in PCFG Holdings in exchange for the retail stores. The acquisitions were
financed through the combination of cash contributed by Party City, borrowings under the
Companys existing credit facility and a new credit facility entered into by PCFG (see Note 7)
and equity issued in exchange for certain stores. PCFG and PCFG Holdings are unrestricted
subsidiaries under the Companys existing debt facilities and the new PCFG credit facility is
a stand-alone facility which is not guaranteed by the Company or its other subsidiaries.
The excess of the PCFG purchase price over the tangible net assets acquired has
been allocated to intangible assets consisting of goodwill ($30,300), which is not
being amortized and franchise rights ($28,400), which are amortized over 20 years. In
addition, assets acquired totaled $37,700 and liabilities assumed were $24,800.
On December 30, 2008, the Company acquired the PCFG Holdings equity held by the
two former franchisees, in exchange for total consideration of $15,444 which included
cash of $500 and warrants to purchase 544.75 shares of AAH common stock at $0.01 per
share. The Company has allocated the purchase price to the fair value of net assets,
which resulted in an additional $558 charge to goodwill. As the AAH stock underlying
the warrants and the PCFG equity previously held by the two former franchisees could
be put back to the Company in certain instances, per the terms of the Company and PCFG
shareholders agreements, the warrants and PCFG equity are classified as redeemable
common securities in the Companys consolidated balance sheets at December 31, 2009
and 2008, respectively.
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, 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 Cost |
$ | 93,849 | $ | 39,180 | $ | 54,669 | ||||||||||
At December 31, 2008 | ||||||||||||||||
Accumulated | Net Carrying | |||||||||||||||
Cost | Amortization | Value | Useful lives | |||||||||||||
Retail franchise licenses |
$ | 63,630 | $ | 14,117 | $ | 49,513 | 20 years | |||||||||
Customer lists and relationships |
14,500 | 4,511 | 9,989 | 15 years | ||||||||||||
Copyrights, designs, and other |
13,880 | 13,093 | 787 | 2-3 years | ||||||||||||
Leasehold and other intangibles |
2,237 | 900 | 1,337 | 1-15 years | ||||||||||||
Total Cost |
$ | 94,247 | $ | 32,621 | $ | 61,626 | ||||||||||
F13
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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 amortization expense for finite-lived intangible assets for the years ended
December 31, 2009, 2008, and 2007 was $6,559, $8,582, and $6,563, respectively.
Estimated amortization expense for each of the next five years will be approximately
$6,722, $6,715, $6,590, $6,518, and $6,186, respectively.
During the fourth quarter of 2008, the Company instituted a program to convert its
company-owned and franchised Party America stores to Party City stores and recorded a
$17,376 charge for the impairment of the Party America trade name.
Note 7 Loans and Notes Payable
On May 25, 2007, the Company and AAH entered into (i) a Term Loan
Credit Agreement (the Term Loan Credit Agreement) to borrow $375,000 and (ii) an
ABL Credit Agreement (the ABL Credit Agreement) to borrow up to $250,000, as
amended, for working capital and general corporate purposes.
On November 2, 2007, PCFG entered into a Credit Agreement (the PCFG Credit
Agreement) to borrow $30,000 in term loans (PCFG Term Loan Agreement) and up to
$10,000, as amended, for working capital and general corporate purposes (PCFG
Revolver).
Below is a discussion of the Companys ABL Credit Agreement and the PCFG Credit
Agreement. See Note 8 for discussion of the Companys Term Loan Credit Agreement.
ABL Credit Agreement
The Company has a committed revolving credit facility in an aggregate principal
amount of up to $250,000 for working capital, general corporate purposes and the
issuance of letters of credit. The ABL Credit Agreement provides for (a) extension of
credit in the form of Revolving Loans at any time and from time to time during the
period ending May 25, 2012 (the Availability Period), in an aggregate principal
amount at any time outstanding not in excess of $250,000, subject to the borrowing
base described below, (b) commitments to obtain credit, at any time and from time to
time during the Availability Period, in the form of Swing Line Loans, in an aggregate
principal amount at any time outstanding not in excess of $10,000 and (c) ability to
utilize Letters of Credit, in an aggregate face amount at any time outstanding not in
excess of $25,000 to support payment obligations incurred in the ordinary course of
business by the Company and its subsidiaries.
The borrowing base at any time equals (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, and (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 ABL Credit Agreement provides 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 is 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 is required to pay a commitment fee of between 0.30% and 0.25%
per annum in respect of the unutilized commitments thereunder. The Company must also
pay customary letter of credit fees and agency fees.
Upon prior notice, the Company may prepay any borrowing under the ABL Credit
Agreement, in whole or in part, without premium or penalty other than customary
breakage costs with respect to LIBOR loans.
There is no scheduled amortization under the ABL Credit Agreement. The principal
amount outstanding of the loans under the ABL Credit Agreement is due and payable in
full on the fifth anniversary of the closing date.
The obligations of the Company under the ABL Credit Agreement are jointly and
severally guaranteed by AAH and each wholly-owned 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.
F14
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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)
On November 2, 2007, the Company entered into an amendment to its ABL credit
facility with the lenders party thereto. The Amendment increased the aggregate
commitments of the lenders under the ABL Credit Agreement by $50,000 to $250,000.
Borrowings under the ABL Credit Agreement continue to be subject to the borrowing base
and affirmative and negative covenants and events of default that are substantially
similar to the Term Loan Credit Agreement. In addition, the Amendment modifies the ABL
Credit Agreement by providing that the Company must maintain a Fixed Charge Coverage
Ratio, as defined, of not less than 1.0 to 1.0 if it has less than $25,000 of excess
availability under the ABL Credit Agreement.
At December 31, 2009, borrowings under the ABL Credit Agreement were $76,990, and
outstanding standby letters of credit totaled $11,587.
PCFG Credit Agreement
On November 2, 2007, PCFG entered into a Credit Agreement (the PCFG Credit
Agreement), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent and
Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital
Securities LLC, as Sole Arranger, and the Lenders party thereto. PCFG and Party City
Franchise Group Holdings, LLC (PCFG Holdings), the sole member of PCFG have been
designated by the Board of Directors of the Company as Unrestricted Subsidiaries
pursuant to the Companys existing ABL Credit Agreement, and the indenture governing
its 8.75% Senior Subordinated Notes and neither PCFG nor PCFG Holdings guaranty any
of the Companys other credit facilities or indenture. In addition, PCFGs credit
facility is a stand-alone facility for PCFG and is not guaranteed by the Company or
its other subsidiaries.
Pursuant to the PCFG Credit Agreement, PCFG borrowed $30,000 in term loans
(PCFG Term Loan) 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 (of up to $5,000 at any time outstanding)
(PCFG Revolver). At December 31, 2009, the balance of the term loan was $23,000 and
borrowings under the PCFG Revolver were $645. There were no outstanding letters of
credit at December 31, 2009.
At December 31, 2008, PCFG had not been in compliance with the financial
covenants contained in the PCFG Credit Agreement. Effective September 30, 2009, PCFG
and its lenders entered into a Waiver and Amendment Agreement which provided that,
among other things, (1) interest would be accrued prospectively at either (i) for ABR
borrowings, the Alternate Base Rate plus 6.00%, with a floor of 4.00% for the
Alternate Base Rate or (ii) the Adjusted LIBO Rate plus 7.00% with a floor of 3.00%
for the Adjusted LIBO Rate, (2) PCFG would pay an additional $1,500 in principal on
the Term Loans at the effective date of the waiver and amendment , and thereafter the
quarterly amortization payment for the Term Loans would be $1,000 each quarter until
Maturity Date, (3) the PCFG Revolver would be limited to a maximum of $10,000, and
(4) financials covenants related to leverage ratio, fixed charge coverage ratio,
minimum EBITDA, and maximum capital expenditures, were revised.
Under the terms of our other indebtedness, PCFG is an unrestricted subsidiary
and the acceleration of our obligation under the PCFG Term Loan would not constitute
an event of default under our other debt instruments.
Other Credit Agreements
In addition to the Term Loan Credit Agreement, the ABL Credit Agreement and the
PCFG Credit Agreement, at December 31, 2009, we have a 400 Canadian dollar denominated
revolving credit facility which bears interest at the Canadian prime rate plus 1.1% and
expires in April 2010, and a 1,400 British Pound Sterling denominated revolving credit
facility which bears interest at the UK base rate plus 1.75% on the first 1,000 British
Pound Sterling and 4.75% over the UK base rate on the remaining 400 British Pound
Sterling. The UK credit facility expires on June 30, 2010. We expect to renew these
revolving credit facilities upon expiration.
Borrowings under the British Pound Sterling revolving credit facility at December
31, 2009 totaled 357 British Pound Sterling. There were no borrowings under the
British Pound Sterling revolving credit facility at December 31, 2008 nor under the
Canadian dollar denominated revolving credit facility at December 31, 2009 and 2008.
F15
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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, | ||||||||
2009 | 2008 | |||||||
Term Loan due 2013(a) |
$ | 364,688 | $ | 368,437 | ||||
PCFG Term Loan due 2012(b) |
23,000 | 27,500 | ||||||
Mortgage obligation (c) |
5,600 | 6,285 | ||||||
Capital lease obligations(d) |
5,510 | 7,535 | ||||||
8.75% senior subordinated notes(e) |
175,000 | 175,000 | ||||||
Total long-term obligations |
$ | 573,798 | $ | 584,757 | ||||
Less: current portion |
(34,906 | ) | (34,002 | ) | ||||
Long-term obligations, excluding current portion |
$ | 538,892 | $ | 550,755 | ||||
(a) 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 Term Loan Credit Agreement provides 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 term loans may be prepaid at any time and 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.
The Company is 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 obligations of the Company under the Term Loan Credit Agreement are
jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary
of the Company. Each guarantor has secured its obligations under the guaranty by a
first priority lien on substantially all of the Companys 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 $100,000 from one or more lenders (which may include any existing Lender)
willing to provide such additional incremental term loans in their own discretion.
The 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; pay dividends and distributions or 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 Term Loan Credit Agreement also contains certain customary affirmative
covenants and events of default.
At December 31, 2009 and 2008, the balance of the Term Loans was $364,688 and
$368,437, respectively.
F16
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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)
(b) At December 31, 2009 and 2008, the balance of the PCFG Term Loans was $23,000
and $27,500, respectively. There were $645 of borrowings outstanding under the PCFG
Revolver and no outstanding letters of credit at December 31, 2009. (See Note 7.)
(c) 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 remained variable and subject to review and
adjustment semi-annually based on the New York State Job Development Authoritys
confidential internal protocols. At December 31, 2009, the amended mortgage note bears
at an interest rate of 2.45%. At December 31, 2008, the mortgage note bore interest at
a rate of 4.89%. The principal amounts outstanding under the mortgage note as of
December 31, 2009 and 2008, were $5,600 and $6,285, respectively. At December 31, 2009,
the distribution facility had a carrying value of $40,798.
(d) The Company has entered into various capital leases for machinery and
equipment and automobiles with implicit interest rates ranging from 4.39% to 11.65%
which extend to 2013.
(e) 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 will 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 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, 2009, maturities of long-term obligations consisted of the
following:
Long-term Debt | Capital Lease | |||||||||||
Obligations | Obligations | Totals | ||||||||||
2010 |
$ | 32,819 | $ | 2,087 | $ | 34,906 | ||||||
2011 |
8,845 | 2,065 | 10,910 | |||||||||
2012 |
19,870 | 1,346 | 21,216 | |||||||||
2013 |
330,583 | 12 | 330,595 | |||||||||
2014 |
176,171 | 0 | 176,171 | |||||||||
Long-term obligations |
$ | 568,288 | $ | 5,510 | $ | 573,798 | ||||||
Note 9 Capital Stock
At December 31, 2009 and 2008, 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 30,819.35 and 30,811.65 shares were issued and outstanding, respectively. Of
these shares 592.85 and 585.15 shares were redeemable at December 31, 2009 and 2008,
respectively, and classified as redeemable common securities on the balance sheet, as
described below.
F17
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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 year ended December 31, 2008, in connection with the sale of
approximately 38% of the Companys outstanding common stock to a new investor,
management shareholders sold 308.64 shares of common stock previously classified as
redeemable.
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 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 $16,807 and $16,589 at December 31, 2009 and 2008, 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.
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, 60.87 Rollover Options were exercised. The remaining Rollover
Options are valued at $1,582 at December 31, 2009 and 2008, respectively, and are
classified as redeemable common securities on the consolidated balance sheet.
Total redeemable common securities on the balance sheet were as follows:
2009 | 2008 | |||||||
Redeemable common shares |
$ | 16,807 | $ | 16,589 | ||||
2004 Rollover Options |
1,582 | 1,582 | ||||||
$ | 18,389 | $ | 18,171 | |||||
At December 31, 2007, two officers of PCFG owned 8,443.72 and 5,000.00 shares
of PCFG common stock, respectively. Under the terms of the PCFG stockholders agreement
dated November 2, 2007, under certain circumstances the employee stockholders were
entitled to receive at least the original cost of their shares, if purchased by the
Company. Including an additional 2008 investment of $2,500, the employee shareholders
held 15,943.72 shares of PCFG common stock. 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 15,943.72 shares of PCFG common
stock. As a result of this transaction, the Company charged $558 to goodwill. The
warrants, which have a term of 10 years, are 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 are classified on the balance sheet as a
current liability under the provisions of FASB Staff Position No. 150-5 Issuers
Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar
Instruments on Shares that are Redeemable.
The Company has not paid any dividends on the Common Stock and has no current
plans to pay cash dividends in the foreseeable future. The Company currently intends to
retain its earnings for working capital, repayment of indebtedness, capital
expenditures and general corporate purposes. In addition, the Companys current credit
facility and the indenture governing its notes contain restrictive covenants which have
the effect of limiting the Companys ability to pay dividends or distributions to its
stockholders.
Note 10 Provision for Doubtful Accounts
The provision for doubtful accounts is included in general and
administrative expenses. For the years ended December 31, 2009, 2008 and 2007, the
provision for doubtful accounts was $3,982, $1,092, and $1,290, respectively.
F18
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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 May 2007,
the Company incurred $3,781 of expenses associated with original issue discount and
wrote off $6,333 of deferred financing costs associated with the repayment of debt.
Note 12 Restructuring Charges
Restructuring costs associated with the Party City Acquisition of $3,680 were
accrued for as part of the net assets acquired. All related costs have been incurred,
with the last $480 incurred during 2008.
In connection with the Party America Acquisition, $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. The Company also incurred $1,700
in employee retention expense in 2007.
In connection with the Factory Card and Party Outlet Acquisition, $9,101 has been
accrued related to plans to restructure FCPOs merchandising assortment and
administrative operations and involuntarily terminate a limited number of FCPO
personnel. Through December 31, 2009, the Company incurred $6,703 in restructuring
costs including $3,834 incurred in 2009. The Company expects to incur the balance in 2010.
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 and expects to incur additional retention costs of $1,500 through April 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 Party City Franchise Group Transaction 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 (Income) Expense
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Other income (expense) consists of the following: |
||||||||||||
Undistributed income in
unconsolidated joint venture |
$ | (632 | ) | $ | (538 | ) | $ | (628 | ) | |||
Change in fair market value of the
interest rate cap |
| (187 | ) | 61 | ||||||||
Foreign currency loss (gain) |
670 | (476 | ) | 388 | ||||||||
Early extinguishment of debt |
| | 16,360 | |||||||||
Impairment of investment in subsidiary |
| | 2,005 | |||||||||
Royalty agreement amendment fee |
| 400 | | |||||||||
Other, net |
(70 | ) | (17 | ) | 28 | |||||||
Other (income) expense, net |
$ | (32 | ) | $ | (818 | ) | $ | 18,214 | ||||
F19
Table of Contents
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, 2009, 2008, and
2007 totaled $4,201, $3,518, and $4,736, 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 2004 Equity Incentive Plan. Unless
otherwise determined by the Committee, any participant granted an award under the 2004
Equity Incentive Plan must become a party to, and agree to be bound by, the Companys
stockholders agreement. Company Stock Options reserved under the 2004 Equity Incentive
Plan total 3,474.6898 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 intrinsic value of $737 and fair
value of $880. Under Paragraph 84 of FIN 44, vested options granted by the acquiring
company in exchange for outstanding options of the target company should be considered
part of the purchase transaction and accounted for under FAS 141. 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. FIN 44, Paragraphs 68 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 should be expensed as additional stock compensation because the
put, even if not probable, is within the control of the employee.
The Company did not consider this condition, because it considered that a change
in control was probable before 2014 and, as a result, the put of immature shares was
not ever probable. Since probability is not relevant under the guidance of FIN 44,
Paragraph 68 requires that future changes in market value after issue must follow
variable accounting and be marked to market.
Therefore, the Company should have charged pretax income for $638 in 2007, $221 in
2005, and $736 in 2004. Since the Company had been marking to market these securities
through a debit to equity and a corresponding increase to the redeemable securities,
the balance sheet was properly stated.
During 2008, the reduction in liability 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 pretax income of $210. There was no charge to earnings for these options
in 2009 because the valuation did not change from 2008.
F20
Table of Contents
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, $201, and $201 in
general and administrative expenses during each of the years ended December 31, 2009,
2008 and 2007, 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 January 1, 2006, the Company granted an additional 489.50 TBOs,
exercisable at a strike price of $12,000 per share, 187 TBOs exercisable at a strike
price of $14,250 per share, 20 TBOs exercisable at a strike price of $17,500 per
share, and 76.5 TBOs exercisable at a strike price of $20,750 , 5 TBOs exercisable
at a strike price of $22,340, and 55.28 TBOs exercisable at a strike price of $28,350
to key eligible employees and outside directors. 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 19.023 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.
The Company recorded compensation expense of $736, $677, and $538 during the years
ended December 31, 2009, 2008, and 2007 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 lives (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.
F21
Table of Contents
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)
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 January 1, 2006, the Company granted an additional 890.50 PBOs
exercisable at a strike price of $12,000 per share, 314 PBOs exercisable at a strike
price of $14,250 per share, 30 PBOs exercisable at a strike price of $17,500 per
share, 76.5 PBOs exercisable at a strike price of $20,750, 185 PBOs exercisable at a
strike price of $22,340, and 100.62 PBOs exercisable at a strike price of $28,350 to
key eligible employees and outside directors.
Prior to 2008, the Company had accounted for PBOs on the same basis as described
above for TBOs. Paragraph 44 of SFAS 123( R ) requires that if a performance condition
is not probable of achievement, no compensation expense is recorded. The Company
believed that a change in control was probable, and therefore that the options should
be accounted for under the same provisions of SFAS 123 and 123(R). However, that
accounting was incorrect.
While a change in control condition is not specifically discussed in SFAS 123 or
SFAS 123(R), EITF 96-5, Recognition of Liabilities for Contractual Termination
Benefits or Changing Benefit Plan Assumptions in Anticipation of a Business
Combination requires that compensation cost should not be recognized until a business
combination is consummated. This approach should be applied to other types of liquidity
events, including initial public offerings and change in control events.
Since a change in control condition cannot be assessed as probable before it
occurs, no compensation expense should have been recorded for these options in prior
periods.
The stock compensation amounts that had been recognized in prior years for
performance-based options were $1,140 in 2007, $709 in 2006, and $153 in 2005.
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 optionholders, 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. (As
noted above, $2,002 of this amount was charged to income in prior years.)
Summary
As a result of the Companys errors noted above regarding rollover options and
performance-based options, reported pretax income was understated by $502 in 2007 and
$488 in 2006 and was overstated by $43 in 2005 and $736 in 2004. The Company determined
that the net errors in previously reported pretax income were not material to any prior
year presented. Therefore, prior years were not restated.
SFAS No. 123(R) also requires that excess tax benefits related to stock option
exercises be reflected as financing cash inflows instead of operating cash inflows.
The tax benefit for the 295 exercised time-based options exceeded the net deferred tax
assets recognized in the stock compensation charge by $1,823. That excess benefit has
been reflected as a financing cash inflow, and has been reflected on the balance sheet
as additional paid-in capital.
F22
Table of Contents
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 summarizes the changes in outstanding options under the Equity
Incentive Plan for the years ended December 31, 2007, 2008 and 2009:
Average Fair | ||||||||||||
Average | Market | |||||||||||
Exercise | Value of Options at | |||||||||||
Options | Price | Grant Date | ||||||||||
Outstanding at December 31, 2006 |
2,858.20 | $ | 10,648 | |||||||||
Granted |
704.00 | 15,929 | $ | 5,341 | ||||||||
Exercised |
(14.52 | ) | 14,250 | |||||||||
Canceled |
(148.54 | ) | 11,259 | |||||||||
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 | ||||||||||
Exercisable at December 31, 2009 |
893.50 | 10,903 |
Note 16 Income Taxes
A summary of domestic and foreign income before income taxes and minority
interest follows:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Domestic |
$ | 92,364 | $ | 54,701 | $ | 27,444 | ||||||
Foreign |
8,060 | 9,120 | 5,509 | |||||||||
Total |
$ | 100,424 | $ | 63,821 | $ | 32,953 | ||||||
F23
Table of Contents
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 income tax expense consisted of the following:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 22,643 | $ | 24,515 | $ | 13,009 | ||||||
State |
3,930 | 4,817 | 4,074 | |||||||||
Foreign |
2,297 | 2,741 | 2,136 | |||||||||
Total current provision |
28,870 | 32,073 | 19,219 | |||||||||
Deferred: |
||||||||||||
Federal |
7,705 | (6,627 | ) | (5,229 | ) | |||||||
State |
1,150 | (1,139 | ) | (758 | ) | |||||||
Foreign |
(52 | ) | (119 | ) | 14 | |||||||
Total deferred provision (benefit) |
8,803 | (7,885 | ) | (5,973 | ) | |||||||
Income tax expense |
$ | 37,673 | $ | 24,188 | $ | 13,246 | ||||||
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. Deferred income tax assets and
liabilities from domestic jurisdictions consisted of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Current deferred income tax assets: |
||||||||
Inventory valuation |
$ | 16,186 | $ | 14,287 | ||||
Allowance for doubtful accounts |
941 | 832 | ||||||
Accrued liabilities |
10,733 | 7,519 | ||||||
Contribution carryforward |
56 | | ||||||
Tax loss carryforward |
1,761 | 3,078 | ||||||
Tax credit carryforward |
576 | 1,148 | ||||||
Current deferred income tax assets (included in
prepaid expenses and other current assets) |
$ | 30,253 | $ | 26,864 | ||||
Non-current deferred income tax liabilities, net: |
||||||||
Property, plant and equipment |
$ | 11,631 | $ | 2,446 | ||||
Intangible assets |
69,774 | 71,263 | ||||||
Amortization of goodwill and other assets |
19,457 | 14,109 | ||||||
Other |
708 | 6 | ||||||
Non-current deferred income tax liabilities, net |
$ | 101,570 | $ | 87,824 | ||||
At December 31, 2009, the Company had a net operating loss carryforward
remaining from FCPO of approximately $4,457. In addition, the Company had alternative
minimum tax credit carryforwards of $576.
F24
Table of Contents
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 difference between the Companys effective income tax rate and the federal
statutory income tax rate is reconciled below:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Provision at federal statutory income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income tax, net of federal income tax benefit |
3.1 | 4.2 | 6.6 | |||||||||
Non-deductible reserve for investment in foreign subsidiary |
| | 2.1 | |||||||||
Domestic manufacturing deductions |
(0.8 | ) | (1.3 | ) | (2.0 | ) | ||||||
Other |
0.2 | | (1.5 | ) | ||||||||
Effective income tax rate |
37.5 | % | 37.9 | 40.2 | % | |||||||
The non-deductible reserve of the investment in our subsidiary is not expected
to be deductible on the Companys foreign tax return.
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.
At December 31, 2009 and 2008, the Companys share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $36,882 and $31,767,
respectively. No provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of 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. Effective January 1, 2007,
the Company adopted Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48: Accounting for Uncertainty in Income Taxes. In accordance with FIN 48,
the Company recognized a cumulative-effect adjustment of $635, decreasing its income
tax liability for previously reserved tax items, interest, and penalties by that
amount, decreasing goodwill by $666, and decreasing the January 1, 2007 balance of
retained earnings by $31.
The following table summarizes the activity related to our gross unrecognized tax
benefits (in thousands):
2009 | 2008 | 2007 | ||||||||||
Balance as of January 1, |
$ | 2,024 | $ | 2,485 | $ | 2,550 | ||||||
Increases related to current year tax positions |
81 | 172 | 184 | |||||||||
Increases related to prior year tax positions |
160 | |||||||||||
Decrease related to settlements |
(822 | ) | (189 | ) | ||||||||
Decreases related to lapsing of statutes of limitations |
(291 | ) | (633 | ) | (220 | ) | ||||||
Balance as of December 31, |
$ | 992 | $ | 2,024 | $ | 2,485 | ||||||
F25
Table of Contents
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)
Our total net unrecognized tax benefits that, if recognized, would impact our
effective tax rate were $1,032, $1,787 and $1,242 as of December 31, 2009, 2008 and
2007, 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 $768 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 $146 and $265 for the
potential payment of interest and penalties at December 31, 2009 and 2008,
respectively. The Company credited $119 in interest to income tax expense in 2009 and
$54 in 2008.
For federal income tax purposes, the years 2007 through 2009 are open to
examination at December 31, 2009. For non-U.S. income tax purposes, tax years from 2005
through 2009 remain open. Lastly, the Company is open to state and local income tax
examinations for the tax years 2005 through 2009.
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, 2009, future minimum lease payments under all operating leases
consisted of the following:
Future Minimum | ||||
Operating Lease | ||||
Payments | ||||
2010 |
$ | 108,719 | ||
2011 |
91,906 | |||
2012 |
75,845 | |||
2013 |
49,607 | |||
2014 |
28,736 | |||
Thereafter |
53,754 | |||
$ | 408,567 | |||
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
lease. At December 31, 2009, the maximum amount of the contingent lease obligations was
approximately $4,200 and is not included in the table above as such amount are
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 expenses for the years ended December 31, 2009, 2008 and 2007, were
$136,785, $142,471, and $109,685, respectively, and include immaterial amounts of rent
expense related to contingent rent.
F26
Table of Contents
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, 2009, the Companys commitment to pay future minimum product
royalties was as follows:
Future Minimum | ||||
Royalty Payments | ||||
2010 |
$ | 3,292 | ||
2011 |
5,077 | |||
2012 |
2,289 | |||
2013 |
451 | |||
2014 |
466 | |||
$ | 11,575 | |||
Product royalty expense for the years ended December 31, 2009, 2008 and 2007, was
$8,615, $8,455, and $8,337, respectively.
The Company has entered into product purchase commitments with certain
vendors. At December 31, 2009, the Companys future product commitments were as
follows:
Product Purchase | ||||
Commitments | ||||
2010 |
$ | 4,422 | ||
2011 |
4,422 | |||
2012 |
1,106 | |||
$ | 9,950 | |||
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, 2009, 2008 and 2007. Management fees payable to
Berkshire Partners LLC and Weston Presidio totaled $139 and $69, respectively, at
December 31, 2009 and 2008 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.
F27
Table of Contents
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, 2009,
2008 and 2007 is as follows:
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 | ||||||||||
Total assets |
$ | 747,262 | $ | 733,239 | $ | 1,480,501 | ||||||
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 income, net |
(818 | ) | ||||||||||
Income before income taxes |
$ | 63,821 | ||||||||||
Total assets |
$ | 702,938 | $ | 805,039 | $ | 1,507,977 | ||||||
F28
Table of Contents
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, 2007 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 626,476 | $ | 768,183 | $ | 1,394,659 | ||||||
Royalties and franchise fees |
| 25,888 | 25,888 | |||||||||
Total revenues |
626,476 | 794,071 | 1,420,547 | |||||||||
Eliminations |
(173,143 | ) | | (173,143 | ) | |||||||
Net revenues |
$ | 453,333 | $ | 794,071 | $ | 1,247,404 | ||||||
Income from operations |
$ | 45,172 | $ | 60,585 | $ | 105,757 | ||||||
Interest expense, net |
54,590 | |||||||||||
Other expense, net |
18,214 | |||||||||||
Income before income taxes |
$ | 32,953 | ||||||||||
Total assets |
$ | 724,151 | $ | 774,692 | $ | 1,498,843 | ||||||
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, 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 | $ | 0 | $ | 0 | 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 | ||||||||||||||
Total assets |
$ | 1,478,493 | $ | 82,890 | $ | (80,882 | ) | $ | 1,480,501 | |||||||
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 income, net |
(818 | ) | ||||||||||||||
Income before income taxes |
$ | 63,821 | ||||||||||||||
Total assets |
$ | 1,508,310 | $ | 49,319 | $ | (49,652 | ) | $ | 1,507,977 | |||||||
F29
Table of Contents
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, 2007 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales to unaffiliated customers |
$ | 1,141,532 | $ | 79,984 | $ | | $ | 1,221,516 | ||||||||
Net sales between geographic areas |
23,906 | | (23,906 | ) | | |||||||||||
Net sales |
1,165,438 | 79,984 | (23,906 | ) | 1,221,516 | |||||||||||
Royalties and franchise fees |
25,888 | | | 25,888 | ||||||||||||
Total revenues |
$ | 1,191,326 | $ | 79,984 | $ | (23,906 | ) | $ | 1,247,404 | |||||||
Income from operations |
$ | 97,638 | $ | 6,956 | $ | 1,163 | $ | 105,757 | ||||||||
Interest expense, net |
54,590 | |||||||||||||||
Other expense, net |
18,214 | |||||||||||||||
Income before income taxes |
$ | 32,953 | ||||||||||||||
Total assets |
$ | 1,497,452 | $ | 53,760 | $ | (52,367 | ) | $ | 1,498,845 | |||||||
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 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 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, 2009, 2008, and
2007. The results of FCPOs and PCFGs operations are included in the
Companys consolidated results of operations for the year ended December 31, 2007, from
the Factory Card & Party Outlet Acquisition Date of November 16, 2007 and the Party
City Franchise Group Transaction Date of November 2, 2007, respectively.
For the Three Months Ended, | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
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 | ||||||||||||
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) |
F30
Table of Contents
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, | |||||||||||||
2007 |
||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 243,529 | $ | 273,424 | $ | 277,564 | $ | 426,999 | (b) | |||||||
Royalties and franchise fees |
4,895 | 5,747 | 5,783 | 9,463 | (b) | |||||||||||
Gross profit |
77,706 | 98,399 | 96,783 | 171,042 | (b) | |||||||||||
Income from operations |
6,837 | 25,887 | 14,500 | 58,533 | (b) | |||||||||||
Net (loss) income attributable to Amscan Holdings, Inc. |
(4,402 | ) | (2,458 | ) | 424 | 25,697 | (b) |
(a) | During the fourth quarter of 2008, the Company instituted a program to convert its company-owned and franchised Party America stores to Party City stores and recorded a $17,376 charge for the impairment of the Party America trade name. | |
(b) | The results of operations for 2007 include the results of FCPO for the period from the Factory Card & Party Outlet Acquisition Date (November 16, 2007) through December 29, 2007, and the results of PCFG for the period from the Party City Franchise Transaction Date (November 2, 2007) through December 31, 2007. |
Note 20 Fair Value Measurements
The provisions of Accounting Standards Codification or ASC, Subtopic 820 (SFAS
No. 157) 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, 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 | ) |
F31
Table of Contents
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, 2008 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) | 2008 | |||||||||||||
Derivative assets |
| $ | 3,365 | | $ | 3,365 | ||||||||||
Derivative liabilities |
| (9,073 | ) | | (9,073 | ) |
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, 2009 and December 31, 2008
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
Loan and $175,000 Senior Subordinated Notes are as follows:
December 31, 2009 | December 31, 2008 | ||||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||||
Amount | Value | Amount | Value | ||||||||||||||||
Term Loan |
$ | 364,688 | $ | 331,866 | $ | 368,437 | $ | 247,000 | |||||||||||
$175,000 Senior Subordinated Notes |
175,000 | 166,250 | 175,000 | 107,000 |
The carrying amounts for other long-term debt approximate fair value at
December 31, 2009 and 2008, 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
increases to a maximum of $163,441 during its term and expires in March 2011.
The swap agreements had unrealized net losses of $3,977 and $5,294 at December 31,
2009 and 2008, 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 fair value of interest rate contracts at
December 31, 2009 and 2008 of $(6,313) and $(8,403) are reported in current liabilities
in the consolidated balance sheet.
In addition to the agreements above, during the year ended December 31, 2007, the
Company purchased a $73,000 interest rate cap at 6.00%, for $12, which was charged to
expense during the year.
F32
Table of Contents
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, 2009 and 2008, the Company had foreign currency exchange
contracts with notional amounts of $19,200, and $18,560, 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 counter-parties 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, 2009 and 2008 resulted in an
unrealized net (loss) gain of $(169), and $1,698, 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 2010. The fair value of foreign exchange contracts for the
years ended December 31, 2009 and 2008 of ($269) and $2,695 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 | 2009 | 2008 | December 31, 2009 | December 31, 2008 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||||||
Interest Rate Hedge |
$ | 163,441 | $ | 175,505 | $ | | $ | | (b) AE | $ | (6,313 | ) | (b) AE | $ | (8,403 | ) | ||||||||||||||||
Foreign Exchange Contracts |
19,200 | 18,560 | (a) PP | $ | | (a) PP | 3,365 | (a) PP | (269 | ) | (a) PP | (670 | ) | |||||||||||||||||||
Total Hedges |
$ | 182,641 | $ | 194,065 | $ | | $ | 3,365 | $ | (6,582 | ) | $ | (9,073 | ) | ||||||||||||||||||
(a) | PP = Prepaid expenses and other current assets | |
(b) | AE = Accrued expenses |
F33
Table of Contents
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, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net income |
$ | 62,553 | $ | 40,510 | $ | 19,261 | ||||||
Cumulative change from adoption of FIN 48 (see Note 5) |
| | (31 | ) | ||||||||
Net change in cumulative translation adjustment |
4,007 | (11,338 | ) | 1,633 | ||||||||
Change in fair value of interest rate swap contracts,
net of income taxes of $773, $(2,851), $(302) |
1,317 | (4,855 | ) | (514 | ) | |||||||
Change in fair value of foreign exchange contracts,
net of income tax (benefit) expense of $(1,097),
$1,169, $(136) |
(1,867 | ) | 1,990 | (231 | ) | |||||||
Comprehensive income |
$ | 66,010 | $ | 26,307 | $ | 20,118 | ||||||
Accumulated other comprehensive loss consisted of the following:
Year Ended Dec 31, | ||||||||
2009 | 2008 | |||||||
Cumulative translation adjustment |
$ | (4,249 | ) | $ | (8,256 | ) | ||
Interest rate swap contracts, net of
income tax (benefit) expense of $(2,336),
and $(3,109) |
(3,977 | ) | (5,294 | ) | ||||
Foreign exchange contracts, net of
income tax (benefit) expense of $(100),
and $997 |
(169 | ) | 1,698 | |||||
Total accumulated other comprehensive income |
$ | (8,395 | ) | $ | (11,852 | ) | ||
Note 23 Subsequent Events
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. In connection with the Asset Purchase Agreement,
the companies also entered into a Supply and Distribution Agreement and a Licensing
Agreement (collectively, the Agreements). Under the terms of the Agreements,
effective on or about March 1, 2010, the Company will have 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 their mass, drug, grocery and specialty retail customers.
American Greetings will purchase substantially all of their party goods requirements
from the Company and the Company will license from American Greetings the
Designware brand and other character licenses.
In connection with the Agreements, American Greetings received total
consideration of $45,880, including cash of $24,881, which was held in escrow at
December 31, 2009 and reported in other assets in the consolidated balance sheet, and
a warrant to purchase approximately 2% of the Common Stock of AAH.
Note 24 Condensed Consolidating Financial Information
On May 25, 2007, the Company, a wholly owned subsidiary of AAH, along with
AAH entered into (i) a $375,000 Term Loan Credit Agreement, and (ii) a $200,000 ABL
Credit Agreement (see Note 7).
F34
Table of Contents
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)
Borrowings under the Term Loan Credit Agreement, the ABL Credit Agreement and the
Companys $175,000 8.75% senior subordinated notes are guaranteed jointly and
severally, fully and unconditionally, by the following wholly-owned domestic
subsidiaries of the Company (the Guarantors):
| Amscan Inc. | ||
| Am-Source, LLC | ||
| Anagram International, Inc. | ||
| Anagram International Holdings, Inc. | ||
| Anagram International, LLC | ||
| M&D Industries, Inc. | ||
| Party City Corporation | ||
| PA Acquisition Corporation | ||
| SSY Realty Corp. | ||
| JCS Packaging Inc. | ||
| Anagram Eden Prairie Property Holdings LLC | ||
| 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. | ||
| JCS Hong Kong Ltd. | ||
| Party City Franchise Group, LLC |
The following consolidating information presents consolidating balance sheets
as of December 31, 2009 and 2008, and the related consolidating statements of
operations and cash flows for the years ended December 31, 2009, 2008 and 2007, for the
combined Guarantors and the combined Non-guarantors, and elimination entries necessary
to consolidate the entities comprising the combined companies.
F35
Table of Contents
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)
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 |
63,528 | 6,013 | | 69,541 | ||||||||||||
Total current assets |
427,427 | 77,212 | (947 | ) | 503,692 | |||||||||||
Property, plant and equipment, net |
163,999 | 10,995 | | 174,994 | ||||||||||||
Goodwill |
510,400 | 38,039 | | 548,439 | ||||||||||||
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 | |||||||
F36
Table of Contents
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)
CONSOLIDATING BALANCE SHEET
December 31, 2008
December 31, 2008
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 8,544 | $ | 4,514 | $ | | $ | 13,058 | ||||||||
Accounts receivable, net of allowances |
73,932 | 15,511 | | 89,443 | ||||||||||||
Inventories, net of allowances |
331,059 | 36,605 | (699 | ) | 366,965 | |||||||||||
Prepaid expenses and other current assets |
42,033 | 5,779 | | 47,812 | ||||||||||||
Total current assets |
455,568 | 62,409 | (699 | ) | 517,278 | |||||||||||
Property, plant and equipment, net |
175,532 | 11,494 | | 187,026 | ||||||||||||
Goodwill |
497,197 | 46,534 | | 543,731 | ||||||||||||
Trade names |
157,283 | 157,283 | ||||||||||||||
Other intangible assets, net |
35,496 | 26,130 | | 61,626 | ||||||||||||
Other assets, net |
123,315 | 12,207 | (94,489 | ) | 41,033 | |||||||||||
Total assets |
$ | 1,444,391 | $ | 158,774 | $ | (95,188 | ) | $ | 1,507,977 | |||||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND
STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
$ | 136,878 | $ | | $ | | $ | 136,878 | ||||||||
Accounts payable |
98,636 | 28,002 | | 126,638 | ||||||||||||
Accrued expenses |
77,470 | 10,515 | | 87,985 | ||||||||||||
Income taxes payable |
27,802 | 860 | (57 | ) | 28,605 | |||||||||||
Redeemable warrants |
15,444 | | | 15,444 | ||||||||||||
Current portion of long-term obligations |
6,488 | 27,514 | | 34,002 | ||||||||||||
Total current liabilities |
362,718 | 66,891 | (57 | ) | 429,552 | |||||||||||
Long-term obligations, excluding current portion |
550,755 | | | 550,755 | ||||||||||||
Deferred income tax liabilities |
76,360 | 11,464 | | 87,824 | ||||||||||||
Other |
21,988 | 36,107 | (48,537 | ) | 9,558 | |||||||||||
Total liabilities |
1,011,821 | 114,462 | (48,594 | ) | 1,077,689 | |||||||||||
Redeemable common securities |
18,171 | | | 18,171 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common Stock |
| 339 | (339 | ) | | |||||||||||
Additional paid-in capital |
334,983 | 45,629 | (45,536 | ) | 335,076 | |||||||||||
Retained earnings |
91,268 | (3,776 | ) | (488 | ) | 87,004 | ||||||||||
Accumulated other comprehensive (loss) income |
(11,852 | ) | 231 | (231 | ) | (11,852 | ) | |||||||||
Amscan Holdings Inc. stockholders equity |
414,399 | 42,423 | (46,594 | ) | 410,228 | |||||||||||
Noncontrolling interests |
| 1,889 | | 1,889 | ||||||||||||
Total stockholders equity |
414,399 | 44,312 | (46,594 | ) | 412,117 | |||||||||||
Total liabilities, redeemable common securities and stockholders equity |
$ | 1,444,391 | $ | 158,774 | $ | (95,188 | ) | $ | 1,507,977 | |||||||
F37
Table of Contents
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)
CONSOLIDATING STATEMENT OF OPERATIONS
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 | |||||||
F38
Table of Contents
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)
CONSOLIDATING STATEMENT OF OPERATIONS
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 | |||||||
F39
Table of Contents
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)
CONSOLIDATING STATEMENT OF OPERATIONS
For Year Ended December 31, 2007
For Year Ended December 31, 2007
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 1,146,791 | $ | 98,631 | $ | (23,906 | ) | $ | 1,221,516 | |||||||
Royalties and franchise fees |
25,888 | | | 25,888 | ||||||||||||
Total revenues |
1,172,679 | 98,631 | (23,906 | ) | 1,247,404 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
735,670 | 65,665 | (23,749 | ) | 777,586 | |||||||||||
Selling expenses |
32,292 | 9,607 | | 41,899 | ||||||||||||
Retail operating expenses |
184,768 | 6,655 | | 191,423 | ||||||||||||
Franchise expenses |
12,883 | | | 12,883 | ||||||||||||
General and administrative expenses |
97,564 | 9,463 | (1,320 | ) | 105,707 | |||||||||||
Art and development costs |
12,149 | | | 12,149 | ||||||||||||
Total expenses |
1,075,326 | 91,390 | (25,069 | ) | 1,141,647 | |||||||||||
Income from operations |
97,353 | 7,241 | 1,163 | 105,757 | ||||||||||||
Interest expense, net |
54,393 | 197 | | 54,590 | ||||||||||||
Other expense, net |
12,136 | 319 | 5,759 | 18,214 | ||||||||||||
Income before income taxes |
30,824 | 6,725 | (4,596 | ) | 32,953 | |||||||||||
Income tax expense |
11,646 | 1,658 | (58 | ) | 13,246 | |||||||||||
Net income |
19,178 | 5,067 | (4,538 | ) | 19,707 | |||||||||||
Less net income attributable to noncontrolling
interests |
| 446 | | 446 | ||||||||||||
Net income attributable to Amscan Holdings Inc. |
$ | 19,178 | $ | 4,621 | $ | (4,538 | ) | $ | 19,261 | |||||||
F40
Table of Contents
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)
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 | $ | 3,575 | $ | (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 loans, notes payable and long-term obligations |
| | | | ||||||||||||
Capital contributions and 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 | ||||||||
F41
Table of Contents
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)
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 | $ | 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 | ||||||||
F42
Table of Contents
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)
CONSOLIDATING STATEMENT OF CASH FLOWS
For Year Ended December 31, 2007
For Year Ended December 31, 2007
AHI and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows provided by (used in) operating activities: |
||||||||||||||||
Net income |
$ | 19,178 | $ | 4,621 | $ | (4,538 | ) | $ | 19,261 | |||||||
Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
||||||||||||||||
Depreciation and amortization expense |
37,076 | 1,017 | | 38,093 | ||||||||||||
Amortization of deferred financing costs |
2,142 | | | 2,142 | ||||||||||||
Provision for doubtful accounts |
1,045 | 245 | | 1,290 | ||||||||||||
Deferred income tax benefit |
(5,973 | ) | | | (5,973 | ) | ||||||||||
Deferred rent |
744 | 421 | | 1,165 | ||||||||||||
Undistributed gain in unconsolidated joint venture |
(628 | ) | | | (628 | ) | ||||||||||
Impairment of investment in subsidiary |
2,005 | | | 2,005 | ||||||||||||
Loss on disposal of equipment |
1,442 | 10 | | 1,452 | ||||||||||||
Equity based compensation |
1,882 | 46 | | 1,928 | ||||||||||||
Debt retirement costs |
3,781 | | | 3,781 | ||||||||||||
Write-off of deferred financing costs |
6,333 | | | 6,333 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Decrease (increase) in accounts receivable |
9,036 | (7,055 | ) | | 1,981 | |||||||||||
Increase in inventories |
(19,572 | ) | (3,499 | ) | 157 | (22,914 | ) | |||||||||
Increase in prepaid expenses and other current assets |
(13,627 | ) | (592 | ) | | (14,219 | ) | |||||||||
Decrease in accounts payable, accrued expenses and income taxes payable |
(19,481 | ) | (10,953 | ) | 4,381 | (26,053 | ) | |||||||||
Net cash provided by (used in) operating activities |
25,383 | (15,739 | ) | | 9,644 | |||||||||||
Cash flows (used in) provided by in investing activities: |
||||||||||||||||
Cash paid in connection with store acquisitions |
(132,262 | ) | 26,139 | | (106,123 | ) | ||||||||||
Capital expenditures |
(25,988 | ) | (1,457 | ) | | (27,445 | ) | |||||||||
Proceeds from disposal of property and equipment |
162 | | | 162 | ||||||||||||
Net cash (used in) provided by investing activities |
(158,088 | ) | 24,682 | | (133,406 | ) | ||||||||||
Cash flows provided by (used in) financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(385,438 | ) | (2,111 | ) | | (387,549 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
523,609 | | | 523,609 | ||||||||||||
Debt retirement costs |
(6,218 | ) | | | (6,218 | ) | ||||||||||
Capital contributions and proceeds from issuance of common stock and
exercise of options, net of retirements |
4,734 | | | 4,734 | ||||||||||||
Net cash provided by (used in) financing activities |
136,687 | (2,111 | ) | | 134,576 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
14 | 1,480 | | 1,494 | ||||||||||||
Net increase in cash and cash equivalents |
3,996 | 8,312 | | 12,308 | ||||||||||||
Cash and cash equivalents at beginning of period |
4,395 | 571 | | 4,966 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 8,391 | $ | 8,883 | $ | | $ | 17,274 | ||||||||
F43
Table of Contents
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2009, 2008 and 2007
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2009, 2008 and 2007
Beginning | Ending | |||||||||||||||
(Dollars in thousands) | Balance | Write-Offs | Additions | Balance | ||||||||||||
Allowance for Doubtful Accounts: |
||||||||||||||||
For the year ended December 31, 2007 |
$ | 2,151 | $ | 804 | $ | 1,290 | $ | 2,637 | ||||||||
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 | ||||||||||||
Inventory Reserves:: |
||||||||||||||||
For the year ended December 31, 2007 |
$ | 5,303 | $ | 1,459 | $ | 6,572 | $ | 10,416 | ||||||||
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 |
F44