As filed with the Securities and Exchange
Commission on April 22, 2011.
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Party City Holdings
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-1033029
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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80 Grasslands Road, Elmsford, NY 10523
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
(914) 345-2020
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Keith F. Higgins, Esq.
Jane D. Goldstein, Esq.
Andrew J. Terry, Esq.
Ropes & Gray LLP
Prudential Tower, 800 Boylston Street
Boston, MA
02199-3600
Telephone
(617) 951-7000
Fax
(617) 951-7050
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Marc D. Jaffe, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022-4834
Telephone (212) 906-1200
Fax (212) 751-4864
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Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of
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Securities to be Registered
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Offering Price(1)(2)
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Registration Fee
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Common Stock, $0.01 par value per share
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$
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350,000,000
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$
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40,635
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(1) |
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act. |
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(2) |
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Includes shares to be sold upon exercise of the
underwriters option to purchase additional shares. See
Underwriting. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. Neither we nor the selling stockholders may sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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Subject
to Completion. Dated April 22, 2011
Party City Holdings
Inc.
Shares
Common Stock
This is the initial public offering of shares of common stock of
Party City Holdings Inc., or Party City Holdings.
Party City Holdings is
offering shares
to be sold in the offering. The selling stockholders identified
in this prospectus are offering an
additional shares.
Party City Holdings will not receive any of the proceeds from
the sale of the shares being sold by the selling stockholders.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . Party City Holdings intends to
list the common stock on
the
under the symbol PRTY.
See Risk Factors on page 10 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds before expenses to Party City Holdings
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$
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$
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Proceeds before expenses to the selling stockholders
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$
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$
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To the extent the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from
at the initial public offering price less the underwriting
discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2011.
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Goldman, Sachs & Co.
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BofA Merrill Lynch
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Barclays Capital
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Deutsche Bank Securities
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Credit Suisse
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Morgan Stanley
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Wells Fargo Securities
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Baird
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William Blair & Company
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RBC Capital Markets
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Stifel Nicolaus Weisel
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Prospectus
dated ,
2011
TABLE OF
CONTENTS
Through and
including ,
2011 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
We have not authorized anyone to provide any information or to
make any representations other than those contained in this
prospectus or in any free writing prospectuses we have prepared.
We take no responsibility for, and can provide no assurance as
to the reliability of, any other information that others may
give you. This prospectus is an offer to sell only the shares
offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
MARKET,
RANKING AND OTHER INDUSTRY DATA
The market, ranking and other industry data included in this
prospectus, including the size of certain markets and our
position and the position of our competitors within these
markets, are based on published industry sources and estimates
based on our managements knowledge and experience in the
markets in which we operate. These estimates have been based on
information obtained from our trade and business organizations
and other contacts in the markets in which we operate. We
believe these estimates to be accurate as of the date of this
prospectus. However, this information may prove to be inaccurate
because of the method by which we obtained some of the data for
the estimates or because this information cannot always be
verified with complete certainty due to the limits on the
availability and reliability of raw data, the voluntary nature
of the data gathering process and other limitations and
uncertainties. As a result, you should be aware that market,
ranking and other similar industry data included in this
prospectus, and estimates and beliefs based on that data, may
not be reliable.
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PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information you should consider before investing in our common
stock. You should read this entire prospectus carefully,
especially the Risk Factors section of this
prospectus and our consolidated financial statements and related
notes appearing at the end of this prospectus, before making an
investment decision.
When we use the terms we, us,
our or the Company, we mean Party City
Holdings Inc., a Delaware corporation, formerly known as
AAH Holdings Corporation, and its consolidated
subsidiaries, including Amscan Holdings, Inc. (Amscan
Holdings), taken as a whole, unless the context otherwise
indicates.
Our
Company
We are a global leader in decorated party supplies. We make it
easy and fun to enhance special occasions with the widest
assortment of innovative and exciting merchandise at a
compelling value. With the 2005 acquisition of Party City
Corporation (Party City), we created a vertically
integrated business combining the leading product design,
manufacturing and distribution platform, Amscan, with the
largest U.S. retailer of party supplies. We have the
industrys broadest selection of decorated party supplies,
which we distribute to over 100 countries. Our party superstore
retail network consists of approximately 800 locations in the
United States and is approximately 15 times larger than
that of our next largest party superstore competitor. Our
vertically integrated business model and scale differentiate us
from other party supply companies and allow us to capture the
manufacturing-to-retail
margin on a significant portion of the products sold in our
stores. We believe our widely recognized brands, broad product
offering, low-cost global sourcing model and category-defining
retail concept are significant competitive advantages. We
believe these characteristics, combined with our vertical
business model and scale, position us for continued organic and
acquisition-led growth in the United States and
internationally.
Founded in 1947, we started as a wholesaler and have grown to
become the largest global designer, manufacturer and distributor
of decorated party supplies. Today, through our wholesale
activities, we distribute the broadest selection of decorated
party supplies with approximately 37,000 SKUs that range from
paper and plastic tableware, decorations and metallic and latex
balloons to novelties, costumes, party kits, stationery and
gifts for everyday, themed and seasonal events. Our products are
available in over 40,000 retail outlets worldwide, including our
own retail network, independent party supply stores, dollar
stores, mass merchants, grocery retailers and gift shops. We
believe that through our extensive offering as well as
industry-leading innovation, customer service levels and value,
we will continue to win with our customers.
The acquisition of Party City represented an important step in
our evolution. Over the last five years, we have established the
largest network of party supply stores in the United States with
over 1,200 locations consisting of approximately 800 party
superstores (including approximately 230 franchised stores),
principally under the Party City banner, and a temporary
Halloween network of over 400 locations under the Halloween City
banner. We also operate PartyCity.com, our primary
e-commerce
site, which provides a broader merchandise selection and
party-planning ideas while also allowing us to reach markets
where we do not currently have a retail presence. Underscored by
our slogan Nobody Has More Party for Less, we
believe we offer a superior one-stop shopping experience with a
broad selection, consistently high in-stock positions and
compelling value, making us the favored destination for all of
our customers party-supply needs.
Through a combination of organic growth and strategic
acquisitions, we increased our consolidated revenues from
$1,015 million in 2006 to $1,599 million in 2010,
representing a compounded annual growth rate of 12.0%. During
this same period, we grew our Adjusted EBITDA from
$122 million to $226 million, representing a
compounded annual growth rate of 16.7%. Adjusted EBITDA as a
percentage of revenues has increased 213 basis points from
12.0% in 2006 to 14.1% in 2010.
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Evolution
of Our Business
Over the last 60 years, we have grown to become a global,
vertically integrated designer, manufacturer, distributor and
retailer of decorated party supplies. Below we summarize some of
our key acquisitions and strategic initiatives:
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Enhancing Our Wholesale Platform. The
acquisition of Anagram International in 1998 and the subsequent
acquisition of M&D Balloons in 2002 positioned us as the
largest manufacturer and distributor of metallic balloons in the
world. In 2001, we opened a
state-of-the-art
distribution center to enhance our industry-leading service
levels and, in 2003, we opened a Hong Kong office to support our
growing Asian-based sourcing and sales organization.
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Establishing Retail Leadership and Our Vertically Integrated
Model. Through the acquisitions of Party City in
2005, Party America Corporation (Party America) in
2006 and Factory Card and Party Outlet (FCPO) in
2007, we have become the largest party goods specialty retailer
in the United States. Following each acquisition, we
capitalized on our vertically integrated model by increasing the
percentage of Amscan products sold at our retail stores,
allowing us to capture the
manufacturing-to-retail
margin on a significant portion of our retail sales. In 2007, we
entered the temporary Halloween business through the acquisition
of Gags & Games Inc. and have since grown that
business from 94 to over 400 temporary Halloween City locations.
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Re-Launching Our
E-commerce
Platform. In August 2009, we re-launched
PartyCity.com with
e-commerce
capabilities, providing us with an additional
direct-to-consumer
sales channel. We believe PartyCity.com will continue to grow
based on its differentiated content, strong brand recognition
and vertical integration.
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Broadening Products and Channel Reach. Our
March 2010 acquisition of the Designware party goods division
(Designware) from American Greetings Corporation
(American Greetings) strengthened our juvenile
licensed character portfolio and enhanced our reach into the
grocery retail and mass merchant channels. Our September 2010
acquisition of U.K.-based Christys By Design Limited and
affiliated companies (the Christys Group)
provided costume design and additional sourcing capabilities and
enhanced our platform in European markets.
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Growing International Presence. Our January
2011 acquisition of Germany-based Riethmuller GmbH
(Riethmuller), which included the Malaysian
operations of latex balloon manufacturer Everts Balloon,
expanded our reach in Europe while also enabling us to directly
supply a significant portion of our latex balloon requirements
previously sourced from third-party vendors.
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As a result of these investments, we have created a
differentiated, vertically integrated business model. We believe
that our superior selection of party supplies, scale, innovation
and service position us for future growth across all of our
channels.
Competitive
Strengths
We are well-positioned to continue to capitalize on the growing
trend to celebrate lifes memorable events as a result of
the following competitive strengths:
Leading Market Position with Industry Defining
Brands. We are the largest vertically integrated
provider of decorated party supplies in the world. Through our
category-defining brands, Amscan and Party City, we offer the
broadest selection of continuously updated and innovative
merchandise at a compelling value. We distribute products to
over 100 countries and, with approximately 800 party superstores
in 41 states, our domestic retail footprint is
approximately 15 times larger than that of our next largest
party superstore competitor. We believe that our scale, brand
recognition and value proposition underscore our credibility as
the destination of choice for party supplies in any channel.
Unique Vertically Integrated Operating
Model. We manufacture, source and distribute
party supplies, acting as a one-stop shop for decorated party
goods to both wholesale and retail customers. Our vertically
integrated model provides us with a number of advantages
including the ability to (i) realize the
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manufacturing-to-retail
margin on a significant portion of our retail sales,
(ii) leverage a global sourcing network to reinforce our
position as the low-cost provider of quality party supplies and
(iii) effectively respond to changes in consumer trends
through our in-house design and innovation team.
Broad and Innovative Product Offering. We
offer the broadest and deepest product assortment in the party
supply industry with over 37,000 SKUs available in wholesale and
an average of 25,000 SKUs offered at any one time in our Party
City superstores. Our extensive selection supports our leading
position as the party supply destination as we offer customers a
single source for all of their party needs. Over the last three
years, our in-house design team has introduced an average of
3,500 new products annually, driving newness in our product
offering and supporting increased sales across our channels.
Category Defining Retail Concept. With our
extensive selection, consistently high in-stock positions,
convenient locations and compelling value proposition, we
believe customers associate Party City with successful
celebrations, and, as a result, our stores will continue to be
seen as the favored destination for party supplies and
innovative ideas for great parties.
Highly Efficient Global Sourcing and Distribution
Capabilities. Over the last 60 years, we
have developed a global network of owned and third-party
manufacturers that we believe optimizes speed to market, quality
and cost. In 2010, we manufactured approximately 40% of our
wholesale product sales with the balance sourced from a network
of third-party manufacturers. We also have warehousing and
distribution facilities around the world, including our
state-of-the-art
distribution center in Chester, New York, which has nearly
900,000 square feet under one roof. Our global sourcing and
distribution capabilities offer our customers
best-in-class
service levels, rapid fulfillment and competitive prices, and
have capacity for continued growth with our business.
World-Class Management Team with a Proven Track
Record. Our senior management team averages
20 years of industry experience and possesses a unique
combination of management skills and experience in the party
goods sector. Our team has successfully grown our sales and
profits during various economic cycles and through several
business transformations. Additionally, our team has a strong
track record of successful acquisitions and integrations, which
continue to be an important part of our overall strategy.
Growth
Strategy
We believe we have significant opportunities to enhance our
leadership position in the party goods industry and improve
profitability. Key elements of our growth strategy include:
Growing Market Share and Earnings. We believe
we have significant opportunities to continue to grow our
business by capitalizing on our leading scale, vertical
operating model and strong innovation capabilities as well as
strategic acquisitions. We will continue to broaden our product
assortment by adding new party themed events and licenses,
which, combined with our enhanced in-house capabilities, will
enable us to continue to increase our market share and grow the
percentage of our own products sold at retail, including in our
company-owned and franchised stores. Since the acquisition of
Party City in 2005, we have increased the selection of Amscan
merchandise offered in Party City stores from approximately 25%
to over 60%, with a target of 70% to 75% over the long term. Our
ability to create new and enhance existing celebration
opportunities will continue to be a consistent driver of our
growth.
Expand Our Retail Store Base. Our retail
network includes approximately 800 party superstores and over
400 temporary Halloween locations. We believe there is an
opportunity to open more than 400 additional Party City stores
in North America. In 2011, we plan to open 25 Party City stores
and close five locations. Starting in 2012, we plan to open 25
to 35 Party City stores per year. Based on historical
performance, we expect our new stores to have a payback period
of approximately three years and to generate an average
pre-tax
cash-on-cash
return of approximately 50% in their fourth year (including the
margin generated from our vertical model).
Drive Additional Growth and Productivity From Existing Retail
Stores. We plan to grow our comparable store
sales by continuing to improve our brand image and awareness and
by converting FCPO stores to the Party City banner. In late
2009, we modified our advertising strategy to focus on a
national
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broadcasting campaign to further develop brand awareness and
expand our customer base. In addition, in 2010 we began
converting our FCPO stores to the Party City banner and expect
to have the remaining 93 FCPO stores converted to the Party City
banner by the end of 2013.
Increase International Presence. We believe
international growth will be driven, in part, by increasing
customization of our products to local tastes and holidays and
the expansion of our retail presence, particularly through our
store-within-a-store concept with selected international
retailers. Our recent acquisitions of Christys Group and
Riethmuller also expanded our presence in select markets,
including the U.K., Germany and Poland. We believe international
sales, which represented 6.9% of total revenues in 2010, are
likely to grow to 10% to 15% of our total revenues over the next
three to five years through organic and acquisition-led growth.
Grow Our E-commerce Platform. In August 2009,
we re-launched our primary
e-commerce
platform PartyCity.com, providing us with an additional
direct-to-consumer
sales channel. We expect
e-commerce
will continue to experience significant growth as we increase
online content for party products and ideas, invest in
additional online advertising and target customers through the
four million email addresses that we have captured through our
stores and website.
Pursue Accretive Acquisitions. Over the past
15 years, we have successfully integrated nine
acquisitions, strengthening our manufacturing, distribution and
retail platforms. We have also acquired, and will continue to
acquire, franchised stores as such opportunities emerge. We
believe our significant experience in identifying attractive
acquisition targets, proven integration process and global
infrastructure create a strong platform for future acquisitions.
Industry
Overview
We operate in the broadly defined $10 billion retail party
goods industry (including decorative paper and plastic
tableware, decorations, accessories and balloons), which is
supported by a range of suppliers from commodity paper goods
producers to party goods specialty retailers. The retail
landscape is comprised primarily of party superstores, dollar
stores, mass merchants, grocery retailers and craft stores.
Party superstores have emerged as the preferred destination for
party goods shoppers because they offer a wide variety of
merchandise at more compelling prices in a convenient setting.
Other retailers that cater to the party goods market typically
offer a limited assortment of party supplies and seasonal items.
Sales of party goods are fueled by everyday events such as
birthdays, baby showers, weddings and anniversaries, as well as
seasonal events such as holidays and other special occasions. As
a result of numerous and diverse occasions, the U.S. party
goods market enjoys broad demographic appeal. We also operate in
the Halloween market, which represents a $6 billion retail
opportunity and includes costumes, candy and makeup.
Risks
That We Face
Our business is subject to a number of risks of which you should
be aware before making an investment decision. The risks are
discussed more fully in the Risk Factors section of
this prospectus immediately following this prospectus summary.
These risks include, but are not limited to, the following:
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we operate in a competitive industry, and our failure to compete
effectively could cause us to lose our market share, revenues
and growth prospects;
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our business may be adversely affected by fluctuations in
commodity prices;
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our failure to appropriately respond to changing merchandise
trends and consumer preferences could significantly harm our
customer relationships and financial performance;
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we may not be able to successfully implement our store growth
strategy;
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a decrease in our Halloween sales could have a material adverse
effect on our operating results for the year;
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our substantial indebtedness and lease obligations could
adversely affect our financial flexibility and our competitive
position; and
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investment funds affiliated with Advent International
Corporation (Advent), Berkshire Partners LLC
(Berkshire Partners) and Weston Presidio will have
the ability to control the outcome of matters submitted for
stockholder approval and may have interests that differ from
those of our other stockholders.
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The
Sponsors
On April 30, 2004, our business was acquired by an entity
jointly controlled by funds affiliated with Berkshire Partners
and Weston Presidio. On August 19, 2008, certain of our
stockholders, in a secondary transaction, sold Class B
common stock representing approximately 38% of our outstanding
common stock to an entity controlled by funds managed by Advent.
As a result of these transactions, investment funds sponsored by
each of Berkshire Partners and Weston Presidio and the funds
managed by Advent (collectively, the Sponsors)
collectively own approximately 93% of our common stock as of
March 31, 2011. Upon completion of this offering, the
Sponsors will continue to beneficially own
approximately % of our outstanding
common stock.
Advent
International Corporation
Since 1984, Advent has raised $26 billion in private equity
capital and completed over 260 transactions valued at more than
$60 billion in 35 countries. Advents current
portfolio is comprised of investments in 52 companies in 15
countries and across five sectors Retail,
Consumer & Leisure; Financial and Business Services;
Industrial; Technology, Media & Telecoms; and
Healthcare. The Advent team includes more than 160 investment
professionals in 17 offices around the world.
Berkshire
Partners LLC
Berkshire Partners is a private equity firm focused on investing
in mid-sized private companies. Berkshire Partners has raised
seven investment funds with aggregate commitments of
$6.5 billion. Berkshire Partners is currently investing
from its seventh fund, which totals $3.1 billion in
committed capital, and has completed more than 100 private
equity transactions during its nearly
25-year
investment history.
Weston
Presidio
Weston Presidio, founded in 1991, is a private equity firm that
has managed five investment funds aggregating over
$3.3 billion. The firm focuses its investment activities on
growth companies in the consumer, business services and
industrial growth sectors. With offices in Boston and
San Francisco, Weston Presidio targets middle-market
opportunities primarily in the United States.
Corporate
Information
Party City Holdings Inc. is the parent company of our collective
businesses. Our address is 80 Grasslands Road, Elmsford, NY
10523. Our telephone number is
(914) 345-2020.
Our primary website addresses are www.amscan.com and
www.partycity.com. Information contained in, and that can be
accessed through, our websites is not incorporated into and does
not form a part of this prospectus.
We own a number of trademarks and service marks registered with
the United States Patent and Trademark Office, including Party
City®,
The Discount Party Super
Store®,
Halloween Costume
Warehouse®,
Party America®,
The Paper
Factory®,
The Factory Card & Party
Outlet®
and Halloween
City®.
5
THE
OFFERING
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Common stock offered by us |
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shares |
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Common stock to be offered by selling stockholders |
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shares |
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Common stock to be outstanding after this offering |
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shares |
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Option to purchase additional shares offered to underwriters |
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We, along with some of our stockholders, have granted the
underwriters an option to purchase up
to
additional shares. If this option is exercised in full, we will
issue and
sell
shares and the selling stockholders will
sell
shares. |
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Use of proceeds |
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Assuming an initial public offering price of
$ , which is the midpoint of the
range listed on the cover page of this prospectus, we estimate
that the net proceeds to us from this offering will be
approximately $ million. We
intend to use the net proceeds from this offering to repay
indebtedness and for working capital and other general corporate
purposes. See Use of Proceeds. |
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We will not receive any proceeds from the shares sold by the
selling stockholders. |
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Risk factors |
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You should read the Risk Factors section of this
prospectus beginning on page 10 for a discussion of factors
to consider carefully before deciding whether to purchase shares
of our common stock. |
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Proposed
symbol |
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PRTY |
The number of shares of our common stock to be outstanding after
this offering is based on 32,112.29 shares of common stock
outstanding as of March 31, 2011 and excludes:
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3,283.47 shares of Class A common stock issuable upon
the exercise of stock options issued under our 2004 Equity
Incentive Plan with a weighted average exercise price of
$15,030.00 per share;
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additional
shares of Class A common stock reserved for future issuance
under our 2004 Equity Incentive Plan; and
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additional
shares of common stock reserved for future issuance under our
2011 Equity Incentive Plan.
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Unless otherwise indicated, all information in this prospectus
assumes:
|
|
|
|
|
A
-for-one stock split on our Class A common stock and
Class B common stock effected as a stock dividend
immediately prior to the conversion described below;
|
|
|
|
The conversion of all outstanding shares of our Class B common
stock into shares of our Class A common stock on a
one-for-one
basis and renaming the Class A common stock as Common
Stock (the Common Stock Conversion);
|
|
|
|
The adoption of our amended and restated certificate of
incorporation (certificate of incorporation) and our
amended and restated bylaws (bylaws), to be
effective upon the closing of this offering; and
|
|
|
|
No exercise by the underwriters of their option to purchase up
to
additional shares of our common stock from us and the selling
stockholders in this offering.
|
6
SUMMARY
FINANCIAL DATA
The following table sets forth our summary historical and pro
forma consolidated financial and other data as of the dates and
for the periods presented. The historical consolidated
statements of income data are derived from our audited
consolidated financial statements included elsewhere in this
prospectus. You should read the following tables together with
Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
As Adjusted(1)
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,537,641
|
|
|
$
|
1,467,324
|
|
|
$
|
1,579,677
|
|
|
|
|
|
Royalties and franchise fees
|
|
|
22,020
|
|
|
|
19,494
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,559,661
|
|
|
|
1,486,818
|
|
|
|
1,599,094
|
|
|
|
|
|
Cost of sales
|
|
|
966,426
|
|
|
|
899,041
|
|
|
|
943,058
|
|
|
|
|
|
Operating expenses
|
|
|
479,317
|
|
|
|
445,904
|
|
|
|
528,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
113,918
|
|
|
|
141,873
|
|
|
|
127,436
|
|
|
|
|
|
Interest expense, net
|
|
|
50,915
|
|
|
|
41,481
|
|
|
|
40,850
|
|
|
|
|
|
Other (income) expense, net
|
|
|
(818
|
)
|
|
|
(32
|
)
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
63,821
|
|
|
|
100,424
|
|
|
|
82,378
|
|
|
|
|
|
Income tax expense
|
|
|
24,188
|
|
|
|
37,673
|
|
|
|
32,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
39,633
|
|
|
|
62,751
|
|
|
|
49,433
|
|
|
|
|
|
Less: net (loss) income attributable to noncontrolling interests
|
|
|
(877
|
)
|
|
|
198
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
40,510
|
|
|
$
|
62,553
|
|
|
$
|
49,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
79,929
|
|
|
$
|
123,942
|
|
|
$
|
61,168
|
|
|
|
|
|
Investing activities
|
|
|
(51,199
|
)
|
|
|
(54,358
|
)
|
|
|
(102,766
|
)
|
|
|
|
|
Financing activities
|
|
|
(23,033
|
)
|
|
|
(70,157
|
)
|
|
|
46,515
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
As Adjusted(1)
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale (after intercompany eliminations)
|
|
$
|
438,505
|
|
|
$
|
411,359
|
|
|
$
|
470,892
|
|
|
|
|
|
Retail
|
|
|
1,121,156
|
|
|
|
1,075,459
|
|
|
|
1,128,202
|
|
|
|
|
|
Consolidated
|
|
|
1,559,661
|
|
|
|
1,486,818
|
|
|
|
1,599,094
|
|
|
|
|
|
EBITDA(2)
|
|
|
162,891
|
|
|
|
186,089
|
|
|
|
172,532
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
186,040
|
|
|
|
190,479
|
|
|
|
226,114
|
|
|
|
|
|
Adjusted EBITDA margin
|
|
|
11.9
|
%
|
|
|
12.8
|
%
|
|
|
14.1
|
%
|
|
|
|
|
Number of company-owned and franchised retail stores (at end of
period)(3)
|
|
|
916
|
|
|
|
851
|
|
|
|
828
|
|
|
|
|
|
Number of Party City superstores
|
|
|
385
|
|
|
|
382
|
|
|
|
439
|
|
|
|
|
|
Party City comparable store sales growth(4)
|
|
|
0.5
|
%
|
|
|
(3.3
|
)%
|
|
|
1.4
|
%
|
|
|
|
|
Capital expenditures including assets under capital leases
(excluding acquisitions)
|
|
|
53,701
|
|
|
|
26,254
|
|
|
|
53,967
|
|
|
|
|
|
Working capital (excluding cash)
|
|
|
63,846
|
|
|
|
146,823
|
|
|
|
169,539
|
|
|
|
|
|
Ratio of debt to Adjusted EBITDA(2)
|
|
|
3.9x
|
|
|
|
3.4x
|
|
|
|
4.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
$
|
20,454
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
1,653,151
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
|
1,000,256
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
256,422
|
|
|
|
|
|
|
|
|
(1) |
|
The pro forma as adjusted financial data in the table above give
effect to: (i) this offering and the use of proceeds
therefrom; (ii) the refinancing of Amscan Holdings
revolving and term debt credit facilities in 2010; and
(iii) the one-time cash dividend declared in December 2010,
assuming in each case such event occurred on January 1,
2010 with respect to any operating and other financial data and
as of December 31, 2010 with respect to any balance sheet
data. The pro forma as adjusted financial data do not
necessarily represent what our financial position and results of
operations would have been if the transactions described above
had actually been completed as of January 1, 2010, and are
not intended to project our financial position or results of
operations for any future period. |
|
(2) |
|
We present Adjusted EBITDA as a supplemental measure of our
performance. We define Adjusted EBITDA, per the terms of the
credit agreement for our revolving and term debt, as net income
(loss) plus (i) interest expense, (ii) provision for
taxes and (iii) depreciation and amortization, as further
adjusted to eliminate the impact of certain items that we do not
consider indicative of our ongoing operating performance. These
further adjustments are itemized below. You are encouraged to
evaluate these adjustments and the reasons we consider them
appropriate for supplemental analysis. In evaluating Adjusted
EBITDA, you should be aware that in the future we may incur
expenses that are the same as or similar to some of the
adjustments in this presentation. Our presentation of Adjusted
EBITDA should not be construed as an inference that our future
results will be unaffected by unusual or non-recurring items.
The reconciliation from net income to EBITDA and Adjusted EBITDA
for the periods presented is as follows: |
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
As Adjusted
|
|
|
|
(dollars in thousands)
|
|
|
Net Income
|
|
$
|
40,510
|
|
|
$
|
62,553
|
|
|
$
|
49,319
|
|
|
|
|
|
Interest expense, net
|
|
|
50,915
|
|
|
|
41,481
|
|
|
|
40,850
|
|
|
|
|
|
Income taxes
|
|
|
24,188
|
|
|
|
37,673
|
|
|
|
32,945
|
|
|
|
|
|
Depreciation and amortization
|
|
|
47,278
|
|
|
|
44,382
|
|
|
|
49,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
162,891
|
|
|
|
186,089
|
|
|
|
172,532
|
|
|
|
|
|
Equity based compensation and other charges
|
|
|
4,546
|
|
|
|
882
|
|
|
|
6,019
|
|
|
|
|
|
Non-cash purchase accounting adjustments
|
|
|
2,329
|
|
|
|
(344
|
)
|
|
|
2,533
|
|
|
|
|
|
Management fee
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
|
|
Loss (gain) from joint venture
|
|
|
(538
|
)
|
|
|
(632
|
)
|
|
|
(678
|
)
|
|
|
|
|
Impairment charges
|
|
|
17,376
|
(a)
|
|
|
|
|
|
|
27,997
|
(a)
|
|
|
|
|
Restructuring, retention and severance
|
|
|
|
|
|
|
2,670
|
|
|
|
1,780
|
|
|
|
|
|
Payment in lieu of dividend
|
|
|
|
|
|
|
|
|
|
|
9,395
|
(b)
|
|
|
|
|
Refinancing charges
|
|
|
|
|
|
|
|
|
|
|
2,448
|
|
|
|
|
|
Acquisition related expenses
|
|
|
|
|
|
|
270
|
|
|
|
1,660
|
|
|
|
|
|
Other
|
|
|
(1,812
|
)
|
|
|
296
|
|
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
186,040
|
|
|
$
|
190,479
|
|
|
$
|
226,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During 2008 and 2010, we implemented plans to convert and
rebrand our company-owned and franchised Party America stores
and our FCPO stores to Party City stores, respectively. As a
result, we recorded charges for the impairment of the Party
America trade name and the FCPO trade name of $17.4 million
and $27.4 million in the fourth quarters of 2008 and 2010,
respectively. |
|
(b) |
|
Represents payment to holders of vested time-based options in
connection with a one-time cash dividend paid in 2010. This
payment is included as stock-based compensation expense in
general and administrative expenses in 2010. |
We present Adjusted EBITDA because we believe it assists
investors and analysts in comparing our performance across
reporting periods on a consistent basis by excluding items that
we do not believe are indicative of our core operating
performance. In addition, we use Adjusted EBITDA: (i) as a
factor in determining incentive compensation, (ii) to
evaluate the effectiveness of our business strategies and
(iii) because the credit facility agreements use Adjusted
EBITDA to measure compliance with certain covenants.
Adjusted EBITDA has limitations as an analytical tool. Some of
these limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to service interest
or principal payments, on our indebtedness;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for such replacements;
|
|
|
|
non-cash compensation is and will remain a key element of our
overall long-term incentive compensation package, although we
exclude it as an expense when evaluating our ongoing operating
performance for a particular period;
|
|
|
|
Adjusted EBITDA does not reflect the impact of certain cash
charges resulting from matters we consider not to be indicative
of our ongoing operations; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered in isolation or as a substitute for performance
measures calculated in accordance with GAAP. We compensate for
these limitations by relying primarily on our GAAP results and
using Adjusted EBITDA only supplementally.
|
|
|
(3) |
|
Excludes temporary locations under our Halloween City banner and
includes Party City superstores. |
|
(4) |
|
Party City comparable store sales exclude FCPO store
conversions, as presented here. |
9
RISK
FACTORS
Investing in our common stock involves a certain degree of
risk. You should carefully consider the following risk factors,
as well as the other information in this prospectus, before
deciding to invest in our common stock. The occurrence of any of
the following risks could harm our business, financial
condition, results of operations or prospects. In that case, the
trading price of our common stock could decline, and you may
lose all or part of your investment. Certain statements in
Risk Factors are forward-looking
statements. See Special Note Regarding
Forward-Looking Statements elsewhere in this
prospectus.
Risks
Related to Our Business
We
operate in a competitive industry, and our failure to compete
effectively could cause us to lose our market share, revenues
and growth prospects.
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 and
have broader access to mass market retailers that could provide
them with a competitive advantage.
The party goods retail industry is large and highly fragmented.
Our retail stores compete with a variety of smaller and larger
retailers, including specialty retailers, warehouse/merchandise
clubs, drug stores, supermarkets, dollar stores, mass merchants,
and catalogue and online merchants. Our stores compete, among
other ways, on the basis of location and store layout, product
mix and availability, customer convenience and price. We may not
be able to continue to compete successfully against existing or
future competitors in the retail space. 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 performance.
We must remain competitive in the areas of quality, price,
breadth of selection, customer service and convenience.
Competing effectively may require us to reduce our prices or
increase our costs, which could lower our margins and adversely
affect our revenues and growth prospects.
Our
business may be adversely affected by fluctuations in commodity
prices.
The costs of our key raw materials (paper, petroleum-based resin
and cotton) fluctuate. In general, we absorb movements in raw
material costs that 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.
Raw material prices may increase in the future and we may not be
able to pass on these increases to our customers. A significant
increase in the price of raw materials that we cannot pass on to
customers could have a material adverse effect on our results of
operations and financial performance. In addition, the
interruption in supply of certain key raw materials essential to
the manufacturing of our products may have an adverse impact on
our and our suppliers abilities to manufacture the
products necessary to maintain our existing customer
relationships.
Although not used in the actual manufacture of our products,
helium gas is currently used to inflate the majority of our
metallic balloons. Although adequate quantities of helium are
currently available for this purpose, we will rely upon future
exploration and refining of natural gas to assure continued
adequate supply.
Our
failure to appropriately respond to changing merchandise trends
and consumer preferences could significantly harm our customer
relationships and financial performance.
As a manufacturer, distributor and retailer of consumer goods,
our products must appeal to a broad range of consumers whose
preferences are constantly changing. We also sell certain
licensed products, with images such as cartoon or motion picture
characters, which are in great demand for short time periods,
making it difficult to project our inventory needs for these
products. 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.
10
The success of our business depends upon many factors, such as
our ability to accurately predict the market for our products
and our customers purchasing habits, to identify product
and merchandise trends, to innovate and develop new products, to
manufacture and deliver our products in sufficient volumes and
in a timely manner and to differentiate our product offerings
from those of our competitors. We may not be able to continue to
offer assortments of products that appeal to our customers or
respond appropriately to consumer demands. We could misinterpret
or fail to identify trends on a timely basis. Our failure to
anticipate, identify or react appropriately to changes in
consumer tastes could, among other things, lead to excess
inventories and significant markdowns or a shortage of products
and lost sales. Our failure to do so could harm our customer
relationships and financial performance.
We may
not be able to successfully implement our store growth
strategy.
If we are unable to increase the number of retail stores we
operate and increase the productivity and profitability of
existing retail stores, our ability to increase sales,
profitability and cash flow could be impaired. To the extent we
are unable to open new stores as we planned, our sales growth
would come primarily from increases in comparable store sales.
We may not be able to increase our comparable store sales,
improve our margins or reduce costs as a percentage of sales.
Growth in profitability in that case would depend significantly
on our ability to increase margins or reduce costs as a
percentage of sales. Further, as we implement new initiatives to
reduce the cost of operating our stores, sales and profitability
may be negatively impacted.
Our ability to successfully open and operate new stores depends
on many factors including, among others, our ability to:
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identify suitable store locations, including temporary lease
space for our Halloween City locations, the availability of
which is largely outside of our control;
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negotiate and secure acceptable lease terms, desired tenant
allowances and assurances from operators and developers that
they can complete the project, which depend in part on the
financial resources of the operators and developers;
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obtain or maintain adequate capital resources on acceptable
terms, including the availability of cash for rent outlays under
new leases;
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manufacture and source sufficient levels of inventory at
acceptable costs;
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hire, train and retain an expanded workforce of store managers
and other personnel;
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successfully integrate new stores into our existing control
structure and operations, including information system
integration;
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maintain adequate manufacturing and distribution facilities,
information system and other operational system capabilities;
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identify and satisfy the merchandise and other preferences of
our customers in new geographic areas and markets; and
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address competitive, merchandising, marketing, distribution and
other challenges encountered in connection with expansion into
new geographic areas and markets, including geographic
restrictions on the opening of new stores based on certain
agreements with our franchisees and other business partners.
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In addition, as the number of our stores increases along with
our online sales, we may face risks associated with market
saturation of our product offerings. To the extent our new store
openings are in markets where we have existing stores, we may
experience reduced net sales in existing stores in those
markets. Finally, there can be no assurance that any newly
opened stores will be received as well as, or achieve net sales
or profitability levels comparable to those of, our existing
stores in the time periods estimated by us, or at all. If our
stores fail to achieve, or are unable to sustain, acceptable net
sales and profitability levels, our business may be materially
harmed and we may incur significant costs associated with
closing those stores. Our failure to effectively address
challenges such as these could adversely affect our
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ability to successfully open and operate new stores in a timely
and cost-effective manner, and could have a material adverse
effect on our business, results of operations and financial
condition.
A
decrease in our Halloween sales could have a material adverse
effect on our operating results for the year.
Our retail business, including our Party City stores, online
sales from our
e-commerce
website and our temporary Halloween City locations, realizes a
significant portion of its revenues, net income and cash flow in
September and October, principally due to our Halloween 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. Any unanticipated decrease in demand for our
products during the Halloween season could require us to
maintain excess inventory or sell excess inventory at a
substantial markdown, which could have a material adverse effect
on our business, profitability, ability to repay any
indebtedness and our brand image. In addition, our sales during
the Halloween season could be affected if we are not able to
find sufficient and adequate lease space for our temporary
Halloween City locations or if we are unable to hire temporary
personnel to adequately staff these stores and our distribution
facility during the Halloween season. Failure to have proper
lease space and adequate personnel could hurt our business,
financial condition and results of operations.
Disruption
to the transportation system or increases in transportation
costs may negatively affect our operating results.
We rely upon various means of transportation, including
shipments by air, sea, rail and truck, to deliver products to
our distribution centers from vendors and manufacturers and from
other distribution centers to our stores, as well as for direct
shipments from vendors to stores. Independent third parties with
whom we conduct business may employ personnel represented by
labor unions. Labor stoppages, shortages or capacity constraints
in the transportation industry, disruptions to the national and
international transportation infrastructure, fuel shortages or
transportation cost increases could adversely affect our
business, results of operations, cash flows and financial
performance.
Product
recalls and/or product liability may adversely impact our
business, merchandise offerings, reputation, results of
operations, cash flow and financial performance.
We may be subject to product recalls if any of the products that
we manufacture or sell are believed to cause injury or illness.
In addition, as a retailer of products manufactured by third
parties, we may also be liable for various product liability
claims for products we do not manufacture. Indemnification
provisions that we may enter into are typically limited by their
terms and depend on the creditworthiness of the indemnifying
party and its insurer and the absence of significant defenses.
We may be unable to obtain full recovery from the insurer or any
indemnifying third party in respect of any claims against us in
connection with products manufactured by such third party. In
addition, if our vendors fail to manufacture or import
merchandise that adheres to our quality control standards or
standards established by applicable law, our reputation and
brands could be damaged, potentially leading to an increase in
customer litigation against us. Furthermore, to the extent we
are unable to replace any recalled products, we may have to
reduce our merchandise offerings, resulting in a decrease in
sales, especially if a recall occurs near or during a peak
seasonal period. If our vendors are unable or unwilling to
recall products failing to meet our quality standards, we may be
required to recall those products at a substantial cost to us.
Our
business is sensitive to consumer spending and general economic
conditions, and an economic slowdown could adversely affect our
financial performance.
In general, our retail sales, and the retail sales of our
business partners to whom we sell, represent discretionary
spending by our customers and our business partners
customers. Discretionary spending is affected by many factors,
such as general business conditions, interest rates,
availability of consumer credit, unemployment levels, taxation,
weather and consumer confidence in future economic conditions.
Our customers and our business partners
customers purchases of discretionary items, including our
products,
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often 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, economic downturns may make it difficult
for us to accurately forecast future demand trends, which could
cause us to purchase excess inventories, resulting in increases
in our inventory carrying cost, or insufficient inventories,
resulting in our inability to satisfy our customer demand and
potential loss of market share.
Our
business may be adversely affected by the loss or actions of our
third-party vendors, and the loss of the right to use licensed
material could harm our business and our results of
operations.
Our ability to find new qualified vendors who meet our standards
and supply products in a timely and efficient manner can be a
significant challenge, especially for goods sourced from outside
the United States. 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, costs would increase. Should we be unable to pass
cost increases to consumers, our profitability would be reduced.
Additionally, certain of our suppliers may control various
product licenses for widely recognized images, such as cartoon
or motion picture characters. The loss of these suppliers, or
the termination of our ability to use certain licensed material,
would prevent us from manufacturing and distributing the
licensed products and could cause our customers to purchase
these products from our competitors. This could materially
adversely affect our business, results of operations, financial
performance and cash flow.
Because
we rely heavily on our own manufacturing operations, disruptions
at our manufacturing facilities could adversely affect our
business, results of operations, cash flows and financial
performance.
In 2010, we manufactured items representing approximately 40% of
our net sales at wholesale. Any significant disruption in our
manufacturing facilities, in the United States or abroad, for
any reason, including regulatory requirements, the loss of
certifications, power interruptions, fires, hurricanes, war or
other force of nature, could disrupt our supply of products,
adversely affecting our business, results of operations, cash
flows and financial performance. The occurrence of one or more
natural disasters, or other disruptive geo-political events,
could also result in increases in fuel (or other energy) prices
or a fuel shortage, the temporary or permanent closure of one or
more of manufacturing or distribution centers, the temporary
lack of an adequate work force in a market, the temporary or
long-term disruption in the supply of products from some local
and overseas suppliers, the temporary disruption in the
transport of goods from overseas or delays in the delivery of
goods to our distribution centers or stores or to third parties
who purchase from us. If one or more of these events occurred,
our revenues and profitability would be reduced.
We may
suffer risks if our suppliers or third-party manufacturers fail
to follow our guidelines, including risks that a supplier or a
manufacturer may fail to use acceptable labor practices, comply
with other applicable laws or face interruption with its
operations.
Many of the products sold in our stores and on our website are
manufactured outside of the United States, which may increase
the risk that the labor, manufacturing safety and other
practices followed by the manufacturers of these products may
differ from those generally accepted in the United States as
well as those with which we are required to comply under many of
our image or character licenses. Although we require each of our
vendors to sign a purchase order and vendor agreement that
requires adherence to accepted labor practices and compliance
with labor, manufacturing safety and other laws and we test
merchandise for product safety standards, we do not supervise,
control or audit our vendors or the manufacturers that produce
the merchandise we sell to our customers. The violation of
labor, manufacturing safety or other laws by any of our vendors
or manufacturers, or the divergence of the labor practices
followed by any of our vendors or manufacturers from those
generally accepted in the United States could interrupt or
otherwise disrupt the shipment of finished products to us,
damage our brand image, subject us to boycotts by our customers
or activist groups or cause some of our licensors of popular
images to terminate their licenses to us. Our future operations
and performance will be subject to these factors, which are
beyond our control and could materially hurt our business,
financial condition and results of operations or require us to
modify our current business practices or incur increased costs.
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Our
international operations subject us to additional risks, which
risks and costs may differ in each country in which we do
business and may cause our profitability to
decline.
We conduct our business in a number of foreign countries,
including contracting with manufacturers and suppliers located
outside of the United States, many of which are located in Asia.
Our operations and financial condition may be adversely affected
if the markets in which we compete or source our products are
affected by changes in political, economic or other factors.
These factors, over which we have no control, may include:
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recessionary or expansive trends in international markets;
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changes in foreign currency exchange rates, principally
fluctuations in the Euro, British pound sterling, Mexican peso,
Canadian dollar and Chinese renminbi;
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hyperinflation or deflation in the foreign countries in which we
operate;
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work stoppages or other employee rights issues;
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the imposition of restrictions on currency conversion or the
transfer of funds;
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transportation delays and interruptions;
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increases in the taxes we pay and other changes in applicable
tax laws;
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legal and regulatory changes and the burdens and costs of our
compliance with a variety of laws, including trade restrictions
and tariffs; and
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political and economic instability.
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We may
face risks associated with litigation and claims.
From time to time, we are involved in class actions and other
lawsuits, claims and other proceedings relating to the conduct
of our business, including but not limited to employee-related
and consumer matters. Due to the uncertainties of litigation, we
can give no assurance that we will prevail on all claims made
against us in the lawsuits that we currently face or that
additional claims will not be made against us in the future.
While it is not feasible to predict the outcome of pending
lawsuits and claims, we do not believe that any such matters are
material or that the disposition thereof is likely to have a
material adverse effect on our business, financial condition and
results of operations, although the resolution in any reporting
period of any matter could have an adverse effect on our
operating results for that period. Also, we can give no
assurance that any other lawsuits or claims brought in the
future will not have a material adverse effect on our business,
financial condition and results of operations.
We may
require additional capital to fund our business, which may not
be available to us on satisfactory terms or at
all.
Our management currently believes that the cash generated by
operations, together with the borrowing availability under our
credit facilities, will be sufficient to meet our working
capital needs. 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.
Our
success depends on key personnel whom we may not be able to
retain or hire.
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
14
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, motivate 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 service.
We are
subject to risks associated with leasing substantial amounts of
space.
We lease all of our company-owned stores, our corporate
headquarters and most of our distribution facilities. Our
continued growth and success depends in part on our ability to
renew leases for successful stores and negotiate leases for new
stores, including temporary leases for our Halloween City
stores. There is no assurance that we will be able to negotiate
leases at similar or favorable terms, and we may decide not to
enter a market or be forced to exit a market if a favorable
arrangement cannot be made. If an existing or future store is
not profitable and we decide to close it, we may nonetheless be
committed to perform our obligations under the applicable lease,
including, among other things, paying the base rent for the
balance of the lease term. Moreover, even if a lease has an
early cancellation clause, we may not satisfy the contractual
requirements for early cancellation under the lease.
Our
business could be harmed if our existing franchisees do not
conduct their business in accordance with the standards that we
have agreed to.
Our success depends, in part, upon the ability of our
franchisees to operate their stores and promote and develop our
store concept. Although our franchise agreements include certain
operating standards, all franchisees operate independently and
their employees are not our employees. We provide certain
training and support to our franchisees, but the quality of
franchise store operations may be diminished by any number of
factors beyond our control. Consequently, franchisees may not
successfully operate stores in a manner consistent with our
standards and requirements, or may not hire and train qualified
managers and other store personnel. If they do not, our image,
brand and reputation could suffer.
Our
information systems, order fulfillment and distribution
facilities may prove inadequate or may be
disrupted.
We depend on our management information systems for many aspects
of our business. We will be materially adversely affected if our
management information systems are disrupted or we are unable to
improve, upgrade, maintain and expand our systems. In
particular, we believe our perpetual inventory, automated
replenishment and weighted average cost stock ledger systems are
necessary to properly forecast, manage and analyze our inventory
levels, margins and merchandise ordering quantities. We may fail
to properly optimize the effectiveness of these systems, or to
adequately support and maintain the systems. Moreover, we may
not be successful in developing or acquiring technology that is
competitive and responsive to our customers and might lack
sufficient resources to make the necessary investments in
technology needs and to compete with our competitors, which
could have a material adverse impact on our business, results of
operations, cash flows and financial performance.
In addition, we may not be able to prevent a significant
interruption in the operation of our electronic order entry and
information systems,
e-commerce
platform or manufacturing and distribution facilities due to
natural disasters, accidents, systems failures or other events.
Any significant interruption in the operation of these
facilities, including an interruption caused by our failure to
successfully expand or upgrade our systems or manage our
transition to utilizing the expansions or upgrades, could reduce
our ability to receive and process orders and provide products
and services to our stores, third-party stores, and other
customers, which could result in lost sales, cancelled sales and
a loss of loyalty to our brand.
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We may
fail to adequately maintain the security of our electronic and
other confidential information.
We have become increasingly centralized and dependent upon
automated information technology processes. In addition, a
portion of our business operations is now conducted over the
Internet. We could experience operational problems with our
information systems and
e-commerce
platform as a result of system failures, viruses, computer
hackers or other causes. Any material disruption or
slowdown of our systems could cause information, including data
related to customer orders, to be lost or delayed, which
could especially if the disruption or slowdown
occurred during a peak sales season result in delays
in the delivery of merchandise to our stores and customers or
lost sales, which could reduce demand for our merchandise and
cause our sales to decline.
In addition, in the ordinary course of our business, we collect
and store certain personal information from individuals, such as
our customers and suppliers, and we process customer payment
card and check information, including via our
e-commerce
platform. Computer hackers may attempt to penetrate our computer
system and, if successful, misappropriate personal information,
payment card or check information or confidential Company
business information. In addition, a Company employee,
contractor or other third party with whom we do business may
attempt to circumvent our security measures in order to obtain
such information and may purposefully or inadvertently cause a
breach involving such information. Any failure to maintain the
security of our customers confidential information, or
data belonging to us or our suppliers, could put us at a
competitive disadvantage, result in deterioration in our
customers confidence in us, subject us to potential
litigation and liability, and fines and penalties, resulting in
a possible material adverse impact on our business, results of
operations, cash flows and financial performance.
Changes
in regulations or enforcement may adversely impact our
business.
We are subject to federal, state, provincial and local
regulations with respect to our operations in the United States
and abroad. There are a number of legislative and regulatory
initiatives, the enactment or enforcement of which could
adversely impact our business. These initiatives include those
affecting wage or workforce issues, collective bargaining
matters, healthcare mandates, environmental regulation, price
and promotion regulation, trade regulations and others. If
applicable regulations were to change or were violated by our
management, employees, vendors, buying agents or other business
partners, the costs of certain goods could increase, or we could
experience delays in shipments of our goods, be subject to fines
or penalties or suffer reputational harm, which could reduce
consumer demand and hurt our business and results of operations.
In addition, proposed changes in tax regulations may also change
our effective tax rate as our business is subject to a
combination of applicable tax rates in the various countries,
states and other jurisdictions in which we operate.
We may
be subject to future unionization, work stoppages, slowdowns or
increased labor costs.
Currently, none of our employees is represented by a union.
However, our employees have the right at any time under the
National Labor Relations Act to form or affiliate with a union.
Furthermore, the Employee Free Choice Act of 2007, which would
amend the National Labor Relations Act by streamlining union
certification, facilitating initial collective bargaining
agreements and strengthening enforcement, could, if enacted,
make it easier for employees to unionize and obtain employee
favorable bargaining agreements. If some or all of our workforce
were to become unionized and the terms of the collective
bargaining agreement were significantly different from our
current compensation arrangements, it could increase our costs
and adversely impact our profitability.
Our
intellectual property rights may be inadequate to protect our
business.
We hold a variety of United States trademarks, service marks,
patents, copyrights, and registrations and applications
therefor, as well as a number of foreign counterparts thereto
and/or
independent foreign intellectual property asset registrations.
In some cases, we rely solely on unregistered trademarks and
copyrights under United States common law rights to distinguish
and/or
protect our products, services and branding from the products,
services and branding of our competitors. We cannot assure you
that no one will
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challenge our intellectual property rights in the future. In the
event that our intellectual property rights are successfully
challenged by a third party, we could be forced to re-brand,
re-design or discontinue the sale of certain of our products or
services, which could result in loss of brand recognition
and/or sales
and could require us to devote resources to advertising and
marketing new branding or re-designing our products. Further, we
cannot assure you that competitors will not infringe our
intellectual property rights, or that we will have adequate
resources to enforce these rights. We also permit our
franchisees to use a number of our trademarks and service marks,
including Party
City®,
The Discount Party Super
Store®,
Halloween Costume
Warehouse®,
Party
America®,
The Paper
Factory®,
The Factory Card & Party
Outlet®
and Halloween
City®.
Our failure to properly control our franchisees use of
such trademarks could adversely affect our ability to enforce
them against third parties. A loss of any of our material
intellectual property rights could have a material adverse
effect on our business, financial condition and results of
operations.
We license from many third parties and do not own the
intellectual property rights necessary to sell products
capturing many popular images, such as cartoon or motion picture
characters. While none of these licenses is individually
material to our aggregate business, a large portion of our
business depends on the continued ability to license the
intellectual property rights to these images in the aggregate.
Any injury to our reputation or our inability to comply with, in
many cases, stringent licensing guidelines in these agreements
may adversely affect our ability to maintain these
relationships. A large loss of these licensed rights in the
aggregate could have a material adverse effect on our business,
financial condition and results of operations.
We also face the risk of claims that we have infringed third
parties intellectual property rights, which could be
expensive and time consuming to defend, cause us to cease using
certain intellectual property rights or selling certain products
or services, result in our being required to pay significant
damages or require us to enter into costly royalty or licensing
agreements in order to obtain the rights to use third
parties intellectual property rights, which royalty or
licensing agreements may not be available at all, any of which
could have a negative impact on our operating profits and harm
our future prospects.
Risks
Related to Our Indebtedness
Our
substantial indebtedness and lease obligations could adversely
affect our financial flexibility and our competitive
position.
We have, and will continue to have, a significant amount of
indebtedness. As of December 31, 2010, we had
$1,000 million of outstanding indebtedness. As of
December 31, 2010, we had $162 million excess
availability under our senior secured asset-based revolving
credit facility. Our substantial level of indebtedness increases
the risk that we may be unable to generate cash sufficient to
pay amounts due in respect of our indebtedness. We also have,
and will continue to have, significant lease obligations. As of
December 31, 2010, our minimum annual rental obligations
under long-term operating leases for 2011 and 2012 were
$112 million and $95 million, respectively. Our
substantial indebtedness and lease obligations could have other
important consequences to you and significant effects on our
business. For example, they could:
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increase our vulnerability to adverse changes in general
economic, industry and competitive conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to make payments for our indebtedness and
leases, thereby reducing the availability of our cash flow to
fund working capital, capital expenditures and other general
corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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restrict us from exploiting business opportunities;
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make it more difficult to satisfy our financial obligations,
including payments on our indebtedness;
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place us at a disadvantage compared to our competitors that have
less debt and lease obligations; and
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limit our ability to borrow additional funds for working
capital, capital expenditures, acquisitions, debt service
requirements, execution of our business strategy or other
general corporate purposes.
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Restrictions
under our existing and future indebtedness may prevent us from
taking actions that we believe would be in the best interest of
our business.
The agreements governing our existing indebtedness contain and
the agreements governing our future indebtedness will likely
contain customary restrictions on us or our subsidiaries,
including covenants that, among other things and subject to
certain exceptions, restrict us or our subsidiaries, as the case
may be, from:
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incurring additional indebtedness or issuing disqualified stock;
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paying dividends or distributions on, redeeming, repurchasing or
retiring our capital stock;
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making payments on, or redeeming, repurchasing or retiring
subordinated indebtedness;
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making investments, loans, advances or acquisitions;
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entering into sale and leaseback transactions;
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engaging in transactions with affiliates;
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creating liens;
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transferring or selling assets;
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guaranteeing indebtedness;
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creating restrictions on the payment of dividends or other
amounts to us from our subsidiaries; and
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consolidating, merging or transferring all or substantially all
of our assets and the assets of our subsidiaries.
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In addition, we are required to maintain compliance with certain
financial ratios. These restrictions may prevent us from taking
actions that we believe would be in the best interest of our
business. Our ability to comply with these restrictive covenants
will depend on our future performance, which may be affected by
events beyond our control. If we violate any of these covenants
and are unable to obtain waivers, we would be in default under
the applicable agreements and payment of the indebtedness could
be accelerated. The acceleration of our indebtedness under one
agreement may permit acceleration of indebtedness under other
agreements that contain cross-default or cross-acceleration
provisions. If our indebtedness is accelerated, we may not be
able to repay that indebtedness or borrow sufficient funds to
refinance it. Even if we are able to obtain new financing, it
may not be on commercially reasonable terms or on terms that are
acceptable to us. Furthermore, we and our subsidiaries may still
be able to incur substantially more debt. This could further
exacerbate the risks associated with our substantial leverage.
If we are for any reason in default under any of the agreements
governing our indebtedness, our business could be materially and
adversely affected. In addition, complying with our covenants
may also cause us to take actions that are not favorable to
holders of the common stock and may make it more difficult for
us to successfully execute our business strategy and compete
against companies that are not subject to such restrictions.
Significant
interest rate changes could affect our profitability and
financial performance.
Our earnings are affected by changes in interest rates as a
result of our variable rate indebtedness under our senior
secured asset-based revolving facility and senior secured loan
facility. The interest rate swap agreements that we use to
manage the risk associated with fluctuations in interest rates
may not be able to fully eliminate our exposure to these changes.
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Risks
Related to This Offering
An
active public market for our common stock may not develop
following this offering.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which investor
interest in our company will lead to the development of an
active trading market in our common stock or how liquid that
market might become. An active market for our common stock may
not develop or be sustained after the offering. If an active
public market does not develop or is not sustained, it may be
difficult for you to sell your shares of common stock at a price
that is attractive to you, or at all. In addition, an inactive
market may impair our ability to raise capital by selling shares
and may impair our ability to acquire other companies by using
our shares as consideration, which, in turn, could materially
adversely affect our business.
The
Sponsors will have the ability to control the outcome of matters
submitted for stockholder approval and may have interests that
differ from those of our other stockholders.
Investment funds affiliated with the Sponsors own a majority of
our capital stock, on a fully-diluted basis, as of
March 31, 2011. After the completion of this offering, the
Sponsors will own approximately %
of our common stock, or % on a
fully-diluted basis. The Sponsors have significant influence
over corporate transactions. So long as investment funds
associated with or designated by the Sponsors continue to own a
significant amount of the outstanding shares of our common
stock, even if such amount is less than 50%, the Sponsors will
continue to be able to strongly influence or effectively control
our decisions, regardless of whether or not other stockholders
believe that the transaction is in their own best interests.
Such concentration of voting power could also have the effect of
delaying, deterring or preventing a change of control or other
business combination that might otherwise be beneficial to our
stockholders.
In addition, the Sponsors and their affiliates are in the
business of making investments in companies and may, from time
to time in the future, acquire interests in businesses that
directly or indirectly compete with certain portions of our
business. To the extent the Sponsors invest in such other
businesses, the Sponsors may have differing interests than our
other stockholders.
Our
stock price may be volatile or may decline regardless of our
operating performance, and you may not be able to resell your
shares at a price at or above the initial public offering
price.
The initial public offering price for the shares of our common
stock sold in this offering will be determined by negotiation
between the representatives of the underwriters and us. This
price may not reflect the market price of our common stock
following this offering. In addition, the market price of our
common stock is likely to be highly volatile and may fluctuate
substantially in response to a number of factors, most of which
we cannot control, including:
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actual or anticipated fluctuations in our results of operations;
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variance in our financial performance from the expectations of
equity research analysts;
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conditions and trends in the markets we serve;
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announcements of new products or significant price reductions by
us or our competitors;
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additions or changes to key personnel;
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the commencement or outcome of litigation;
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changes in market valuation or earnings of our competitors;
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the trading volume of our common stock;
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future sale of our equity securities;
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stock price performance of our competitors;
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19
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changes in the estimation of the future size and growth rate of
our markets; and
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economic, legal and regulatory factors unrelated to our
performance.
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The initial public offering price of our common stock will be
determined by negotiations between us and the underwriters based
upon a number of factors and may not be indicative of prices
that will prevail following the completion of this offering.
Volatility in the market price of our common stock may prevent
investors from being able to sell their common stock at or above
the initial public offering price. As a result, you may suffer a
loss on your investment.
In addition, the stock markets in general have experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance or
the particular companies affected. These broad market and
industry factors may materially harm the market price of our
common stock irrespective of our operating performance. As a
result of these factors, you might be unable to resell your
shares at or above the initial public offering price after this
offering. In addition, in the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against the affected company. This
type of litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
We do
not expect to pay any cash dividends for the foreseeable future
and, consequently, your only opportunity to achieve a return on
your investment is if the price of our common stock
appreciates.
Following this offering, we do not anticipate that we will pay
any cash dividend on shares of our common stock for the
foreseeable future. Any determination to pay dividends in the
future will be at the discretion of our board of directors and
will depend upon results of operations, financial performance,
contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant.
Additionally, our current credit facilities and the indenture
governing our notes contain restrictive covenants which have the
effect of limiting our ability to pay cash dividends.
Accordingly, if you purchase shares in this offering,
realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never
occur. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock.
Future
sales of our common stock, or the perception in the public
markets that these sales may occur, may depress our stock
price.
Sales of substantial amounts of our common stock in the public
market after this offering, or the perception that these sales
could occur, could adversely affect the price of our common
stock and could impair our ability to raise capital through the
sale of additional shares. Upon completion of this offering, we
will
have million
shares of common stock outstanding. The shares of common stock
offered in this offering will be freely tradable without
restriction under the Securities Act, except for any shares of
our common stock that may be held or acquired by our directors,
executive officers and other affiliates, as that term is defined
in the Securities Act, which will be restricted securities under
the Securities Act. Restricted securities may not be sold in the
public market unless the sale is registered under the Securities
Act or an exemption from registration is available.
In the future, we may also issue our securities if we need to
raise capital in connection with a capital raise or
acquisitions. The amount of shares of our common stock issued in
connection with a capital raise or acquisition could constitute
a material portion of our then-outstanding shares of our common
stock.
Upon
expiration of
lock-up
agreements between the underwriters and our officers, directors,
the selling stockholders and certain other holders of our common
stock, a substantial number of shares of our common stock could
be sold into the public market shortly after this offering,
which could depress our stock price.
Our officers, directors, the selling stockholders and certain
other holders of our common stock have entered into
lock-up
agreements with our underwriters which prohibit, subject to
certain limited exceptions,
20
the disposal or pledge of, or the hedging against, any of their
common stock or securities convertible into or exchangeable for
shares of common stock for a period through the date
180 days after the date of this prospectus, subject to
extension in certain circumstances. See Shares Eligible
for Future Sale for a more detailed description of the
restrictions on selling shares of our common stock after this
offering. The market price of our common stock could decline as
a result of sales by our existing stockholders in the market
after this offering and after the expiration of these
lock-up
periods, or the perception that these sales could occur. Once a
trading market develops for our common stock, and after these
lock-up
periods expire, many of our stockholders will have an
opportunity to sell their stock for the first time. These
factors could also make it difficult for us to raise additional
capital by selling stock.
If you
purchase shares of common stock in this offering, you will incur
immediate and substantial dilution.
If you purchase shares of common stock in this offering, you
will incur immediate and substantial dilution in the amount of
$ per share because the initial
public offering price of $ per
share is substantially higher than the pro forma net tangible
book value per share of our common stock. This dilution is due
in large part to the fact that our earlier investors paid
substantially less than the initial public offering price when
they purchased their shares. In addition, you may also
experience additional dilution upon future equity issuances or
the exercise of stock options to purchase common stock granted
to our employees, consultants and directors under our equity
incentive plans.
We may
undertake acquisitions to expand our business, which may pose
risks to our business and dilute the ownership of our existing
shareholders.
We may selectively pursue acquisitions of businesses,
technologies or services. Integrating any newly acquired
businesses, technologies or services is likely to be expensive
and time consuming. To finance any acquisitions, it may be
necessary for us to raise additional funds through public or
private financings. Additional funds may not be available on
terms that are favorable to us, and, in the case of equity
financings, would result in dilution to our shareholders. If we
do complete any acquisitions, we may be unable to operate the
acquired businesses profitably or otherwise implement our
strategy successfully. If we are unable to integrate any newly
acquired entities, technologies or services effectively, our
business and results of operations will suffer. The time and
expense associated with finding suitable and compatible
businesses, technologies or services could also disrupt our
ongoing business and divert our managements attention.
Future acquisitions by us could also result in large and
immediate write-offs or assumptions of debt and contingent
liabilities, any of which could substantially harm our business
and results of operations.
Our
management will have broad discretion over the use of the
proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
If the underwriters exercise their option to purchase additional
shares in this offering in full, we estimate that net proceeds
of the sale of the common stock that we are offering will be
approximately $ million. Our
management will have broad discretion to use our net proceeds
from this offering, and you will be relying on the judgment of
our management regarding the application of these proceeds. Our
management might not apply the net proceeds of this offering in
ways that increase the value of your investment. Our management
might not be able to yield any return on the investment and use
of these net proceeds. You will not have the opportunity to
influence our decisions on how to use the proceeds.
If
securities or industry analysts do not publish research or
reports or publish unfavorable research or reports about our
business, our stock price and trading volume could
decline.
The trading market for our common stock will depend in part on
the research and reports that securities and industry analysts
publish about us, our business, our market or our competitors.
We may not obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price of our stock could be
negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us publishes unfavorable research or
21
reports or downgrades our stock, our stock price would likely
decline. If one or more of these analysts ceases to cover us or
fails to regularly publish reports on us, interest in our stock
could decrease, which could cause our stock price or trading
volume to decline.
Anti-takeover
provisions in our charter documents and Delaware law might
discourage, delay or prevent a change in control of our
company.
Our certificate of incorporation and bylaws contain provisions
that may make the acquisition of our company more difficult
without the approval of our board of directors. These provisions
include:
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the division of our board of directors into three classes and
the election of each class for three-year terms;
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advance notice requirements for stockholder proposals and
director nominations;
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the sole ability of the board of directors to fill a vacancy
created by the expansion of the board of directors;
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the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of the directors to
remove directors only for cause;
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the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of directors to adopt,
amend or repeal our bylaws, or amend or repeal certain
provisions of our certificate of incorporation;
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limitations on the ability of stockholders to call special
meetings and, when the Sponsors cease to collectively own 50% of
our outstanding common stock, to take action by written
consent; and
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provisions that reproduce much of the provisions that limit the
ability of interested stockholders (other than the
Sponsors and certain of their transferees) from engaging in
specified business combinations with us absent prior approval of
the board of directors or holders of
662/3%
of our voting stock.
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The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in the acquisition.
We
will incur increased costs as a result of becoming a public
company.
As a public company, we will incur significant legal, accounting
and other expenses that we have not incurred as a private
company, including costs associated with complying with
requirements of the Sarbanes-Oxley Act of 2002 and related rules
implemented by the SEC and the
.
We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more
time-consuming and costly, although we are currently unable to
estimate these costs with any degree of certainty. These laws
and regulations could also make it more difficult for us to
attract and retain qualified persons to serve on our board of
directors, our board committees or as our executive officers.
Furthermore, if we are unable to satisfy our obligations as a
public company, we could be subject to delisting of our common
stock, sanctions and other regulatory action and potentially
civil litigation.
22
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that convey
our current expectations or forecasts of future events. All
statements in this prospectus other than statements of
historical fact are forward-looking statements. Forward-looking
statements include statements about our future financial
position, business strategy, budgets, projected costs, plans and
objectives of management for future operations. The words
may, might, should,
predict, potential,
continue, estimate, intend,
plan, will, believe,
project, expect, seek,
anticipate and similar expressions may identify
forward-looking statements, but the absence of these words does
not necessarily mean that a statement is not forward-looking.
Any or all of our forward-looking statements in this prospectus
may turn out not to occur as contemplated. They are based
largely on our current expectations and projections about future
events and financial trends that we believe may affect our
financial condition, results of operations, business strategy
and financial needs. There are important factors that could
cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by
the forward-looking statements. These factors include the
effects of competition in the industry, the failure by us to
anticipate changes in tastes and preferences of party goods
retailers and consumers, the inability to increase store growth,
the inability to increase prices to recover fully future
increases in commodity prices, the loss of key employees,
changes in general business conditions and other factors which
are beyond our control. In particular, you should consider the
numerous risks described in the Risk Factors section
of this prospectus.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, in light of these
risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur as
contemplated and actual results could differ materially from
those anticipated or implied by the forward-looking statements.
You should not unduly rely on these forward-looking statements,
which speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to publicly update
or revise any forward-looking statements to reflect new
information or future events or otherwise. You should, however,
review the factors and risks we describe in the reports we will
file from time to time with the SEC after the date of this
prospectus. See Where You Can Find Additional
Information.
23
USE OF
PROCEEDS
We estimate that the net proceeds of the sale of the common
stock that we are offering will be approximately
$ million,
or
$ million
if the underwriters exercise their option to purchase additional
shares in full, assuming an initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us. We will not
receive any proceeds from the sale of shares of common stock by
the selling stockholders.
We expect to use approximately
$ million
of the net proceeds from this offering received by us to repay
or repurchase indebtedness, including amounts outstanding under
our senior credit facilities or senior subordinated notes. We do
not currently have a firm expectation as to how we will allocate
the reduction of our indebtedness among these borrowing
arrangements but intend to determine the allocation following
the completion of this offering based on a number of factors,
including amounts remaining at maturity, applicable interest
rates, available pricing of repurchases, outstanding balance and
ability to reborrow. As of December 31, 2010:
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approximately $150.1 million was outstanding under our ABL
facility due 2015 at interest rates ranging from 2.77% to 4.75%;
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approximately $666.6 million was outstanding under our
first lien term loan due 2017 at interest rates ranging from
6.75% to 7.5%; and
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approximately $175.0 million of our 8.75% senior
subordinated notes due 2014 were outstanding.
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We used some of the proceeds under the first lien term loan due
2017 to pay a dividend to holders of our common stock and to
make a cash payment to certain option and warrant holders. See
Dividend Policy.
For additional information on our liquidity and outstanding
indebtedness, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
We may also use the remaining portion of the net proceeds for
working capital and other general corporate purposes.
This expected use of net proceeds from this offering represents
our intentions based upon our current plans and business
conditions. The amounts and timing of our actual expenditures
may vary significantly depending on numerous factors and any
unforeseen cash needs. As a result, our management will retain
broad discretion over the allocation of the net proceeds from
this offering. Pending our use of the net proceeds from this
offering, we intend to invest the net proceeds in a variety of
capital preservation investments, including short-term,
investment-grade, interest-bearing instruments and
U.S. government securities.
24
DIVIDEND
POLICY
We currently intend to retain all of our future earnings, if
any, to finance operations, development and growth of our
business, and repay debt. Most of our indebtedness contains
restrictions on our activities, including paying dividends on
our capital stock and restricting dividends or other payments to
us. Any future determination relating to our dividend policy
will be made at the discretion of our board of directors and
will depend on a number of factors, including future earnings,
capital requirements, financial conditions, future prospects,
contractual restrictions and covenants and other factors that
our board of directors may deem relevant.
In December 2010, in connection with the refinancing of our term
loan agreement, Amscan Holdings board of directors
declared and paid to us a one-time cash dividend totaling
approximately $311.2 million. We used the aggregate
proceeds from this dividend to pay a one-time cash dividend to
our holders of common stock and to make a cash payment in lieu
of a dividend to certain option and warrant holders (such
dividend and payments, the 2010 Dividend). In
addition, holders of unvested options at the date such dividend
was declared will receive a comparable distribution, if and when
the options vest. The 2010 Dividend was the only dividend that
we have paid on our common stock during the past four years.
25
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 2010:
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on an actual basis; and
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on an as adjusted basis to give effect to the issuance and sale
by us
of
shares of our common stock in the offering at an assumed initial
public offering price of $ per
share, the mid-point of the range set forth on the cover of this
prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us and
the application of the net proceeds from this offering as
described in Use of Proceeds.
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You should read this table in conjunction with Use of
Proceeds, Selected Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and related notes thereto
included elsewhere in this prospectus.
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December 31, 2010
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Actual
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As Adjusted
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(dollars in thousands)
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Cash and cash equivalents
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$
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20,454
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Debt:
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Revolving credit facilities(1)
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$
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150,098
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Term loan due 2017
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666,644
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Mortgage obligation
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4,539
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Capital lease obligations
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3,975
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8.75% senior subordinated notes
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175,000
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Total debt
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1,000,256
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Stockholders Equity:
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Class A common stock, $0.01 par value,
80,000,000 shares
authorized, shares
issued and outstanding, actual; no shares authorized, and no
shares issued and outstanding, as adjusted
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Class B common stock, $0.01 par value,
30,400,000 shares
authorized, shares
issued and outstanding, actual; no shares authorized, and
no shares
issued and outstanding, as adjusted
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Common stock, $0.01 par
value, shares
authorized, no shares issued and outstanding,
actual; shares
authorized,
and shares
issued and outstanding, as adjusted(2)
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Preferred stock, $0.01 par value, 10,000 shares
authorized, no shares issued and outstanding,
actual; shares
authorized, and no shares issued and outstanding, as adjusted
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Additional paid-in capital
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287,583
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Retained (deficit) earnings
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(27,558
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Accumulated other comprehensive loss
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(5,915
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Party City Holdings Inc. stockholders equity(3)
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254,110
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Noncontrolling interest
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2,312
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Total equity
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256,422
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Total capitalization
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$
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1,256,678
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(1) |
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At December 31, 2010, there were $150.1 million of
outstanding borrowings under the secured revolving credit
facilities, a total of $12.9 million of outstanding letters
of credit and excess availability of $162.0 million. |
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(2) |
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The Class B common stock will convert into Class A
common stock upon completion of the offering. At that time, we
will rename Class A common stock to Common
Stock. |
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(3) |
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would (decrease) increase our total long-term obligations and
would increase (decrease) equity by
$ and
$ , respectively, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
expenses payable by us. To the extent we raise more proceeds in
this offering, we may repay additional indebtedness. To the
extent we raise less proceeds in this offering, we may reduce
the amount of indebtedness that will be repaid. |
27
DILUTION
If you purchase our common stock in this offering, you will
experience an immediate dilution of net tangible book value per
share from the initial public offering price. Dilution in net
tangible book value per share of our common stock represents the
difference between the initial public offering price per share
and the net tangible book value per share immediately after this
offering. We calculate net tangible book value per share of our
common stock by dividing the net tangible book value (total
consolidated tangible assets less total consolidated
liabilities) by the number of outstanding shares of our common
stock
At December 31, 2010, the net tangible book value of our
common stock was approximately $(559,386) million, or
approximately
$
per share of our common stock. After giving effect to
(1) the sale of shares of our common stock in this offering
at an assumed initial public offering price of
$ per share, and after deducting
estimated underwriting discounts and commissions and the
estimated offering expenses of this offering, and (2) the
Common Stock Conversion, the as adjusted net tangible book value
at December 31, 2010 attributable to common stockholders
would have been approximately
$ million, or approximately
$ per share of our common stock.
This represents a net increase in net tangible book value of
$ per existing share and an
immediate dilution in net tangible book value of
$ per share to new stockholders.
The following table illustrates this per share dilution to new
stockholders:
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Assumed initial public offering price per share
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$
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Net tangible book value per share as of December 31, 2010
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$
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Increase in net tangible book value per share attributable to
this offering
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$
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As adjusted net tangible book value per share after this offering
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$
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Dilution in net tangible book value per share to new stockholders
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$
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The table below summarizes, as of December 31, 2010, the
differences for (1) our existing stockholders, and
(2) investors in this offering, with respect to the number
of shares of common stock purchased from us, the total
consideration paid, and the average price per share paid before
deducting fees and expenses.
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Average
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Shares Issued
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Total Consideration
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Price per
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Number
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Percentage
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Amount
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Percentage
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Share
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Existing stockholders
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%
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%
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$
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New stockholders in this offering
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|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing discussion and tables assume no exercise of stock
options to
purchase shares
of our common stock subject to outstanding stock options with a
weighted average exercise price of
$
per share as of December 31, 2010 and
excludes shares
of our common stock available for future grant or issuance under
our stock plans. To the extent that any options having an
exercise price that is less than the offering price of this
offering are exercised, new investors will experience further
dilution.
28
SELECTED
CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below are
derived from our audited consolidated financial statements. The
consolidated financial data as of December 31, 2009 and
2010 and for the years ended December 31, 2008, 2009 and
2010 were derived from our audited consolidated financial
statements included elsewhere in this prospectus. The
consolidated financial data as of December 31, 2006, 2007
and 2008 and for the years ended December 31, 2006 and 2007
have been derived from our audited consolidated financial
statements for such years, which are not included in this
prospectus.
Our historical results are not necessarily indicative of future
operating performance. The information set forth below should be
read in conjunction with, and is qualified in its entirety by
reference to, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and the related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
As Adjusted
|
|
|
|
|
|
|
2006(1)
|
|
|
2007(2)
|
|
|
2008
|
|
|
2009
|
|
|
2010(3)
|
|
|
(6)
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
993,342
|
|
|
$
|
1,221,516
|
|
|
$
|
1,537,641
|
|
|
$
|
1,467,324
|
|
|
$
|
1,579,677
|
|
|
|
|
|
|
|
|
|
Royalties and franchise fees
|
|
|
21,746
|
|
|
|
25,888
|
|
|
|
22,020
|
|
|
|
19,494
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,088
|
|
|
|
1,247,404
|
|
|
|
1,559,661
|
|
|
|
1,486,818
|
|
|
|
1,599,094
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
676,527
|
|
|
|
777,586
|
|
|
|
966,426
|
|
|
|
899,041
|
|
|
|
943,058
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
39,449
|
|
|
|
41,899
|
|
|
|
41,894
|
|
|
|
39,786
|
|
|
|
42,725
|
|
|
|
|
|
|
|
|
|
Retail operating expenses
|
|
|
126,224
|
|
|
|
191,423
|
|
|
|
273,627
|
|
|
|
261,691
|
|
|
|
296,891
|
|
|
|
|
|
|
|
|
|
Franchise expenses
|
|
|
13,009
|
|
|
|
12,883
|
|
|
|
13,686
|
|
|
|
11,991
|
|
|
|
12,269
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
84,836
|
|
|
|
105,707
|
|
|
|
120,272
|
|
|
|
119,193
|
|
|
|
134,392
|
|
|
|
|
|
|
|
|
|
Art and development costs
|
|
|
10,338
|
|
|
|
12,149
|
|
|
|
12,462
|
|
|
|
13,243
|
|
|
|
14,923
|
|
|
|
|
|
|
|
|
|
Impairment of trade name(4)
|
|
|
|
|
|
|
|
|
|
|
17,376
|
|
|
|
|
|
|
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
64,705
|
|
|
|
105,757
|
|
|
|
113,918
|
|
|
|
141,873
|
|
|
|
127,436
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
54,887
|
|
|
|
54,590
|
|
|
|
50,915
|
|
|
|
41,481
|
|
|
|
40,850
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net(5)
|
|
|
(1,000
|
)
|
|
|
18,214
|
|
|
|
(818
|
)
|
|
|
(32
|
)
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,818
|
|
|
|
32,953
|
|
|
|
63,821
|
|
|
|
100,424
|
|
|
|
82,378
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
4,295
|
|
|
|
13,246
|
|
|
|
24,188
|
|
|
|
37,673
|
|
|
|
32,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,523
|
|
|
|
19,707
|
|
|
|
39,633
|
|
|
|
62,751
|
|
|
|
49,433
|
|
|
|
|
|
|
|
|
|
Less: net income (loss) attributable to noncontrolling interests
|
|
|
83
|
|
|
|
446
|
|
|
|
(877
|
)
|
|
|
198
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
6,440
|
|
|
$
|
19,261
|
|
|
$
|
40,510
|
|
|
$
|
62,553
|
|
|
$
|
49,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale (after intercompany eliminations)
|
|
$
|
432,534
|
|
|
$
|
453,333
|
|
|
$
|
438,505
|
|
|
$
|
411,359
|
|
|
$
|
470,892
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
582,554
|
|
|
|
794,071
|
|
|
|
1,121,156
|
|
|
|
1,075,459
|
|
|
|
1,128,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
1,015,088
|
|
|
|
1,247,404
|
|
|
|
1,559,661
|
|
|
|
1,486,818
|
|
|
|
1,599,094
|
|
|
|
|
|
|
|
|
|
EBITDA(7)
|
|
|
104,241
|
|
|
|
125,190
|
|
|
|
162,891
|
|
|
|
186,089
|
|
|
|
172,532
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(7)
|
|
|
121,926
|
|
|
|
152,045
|
|
|
|
186,040
|
|
|
|
190,479
|
|
|
|
226,114
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA margin
|
|
|
12.0
|
%
|
|
|
12.2
|
%
|
|
|
11.9
|
%
|
|
|
12.8
|
%
|
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
Number of company-owned and franchised retail superstores (at
end of period)(8)
|
|
|
768
|
|
|
|
955
|
|
|
|
916
|
|
|
|
851
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
Number of Party City superstores
|
|
|
339
|
|
|
|
392
|
|
|
|
385
|
|
|
|
382
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
Party City comparable store sales growth(9)
|
|
|
6.5
|
%
|
|
|
5.8
|
%
|
|
|
0.5
|
%
|
|
|
(3.3
|
)%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Capital expenditures including assets under capital leases
(excluding acquisitions)
|
|
|
40,904
|
|
|
|
36,648
|
|
|
|
53,701
|
|
|
|
26,254
|
|
|
|
53,967
|
|
|
|
|
|
|
|
|
|
Working capital (excluding cash)
|
|
|
162,595
|
|
|
|
91,100
|
|
|
|
63,846
|
|
|
|
146,823
|
|
|
|
169,539
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
As Adjusted
|
|
|
|
|
|
|
2006(1)
|
|
|
2007(2)
|
|
|
2008
|
|
|
2009
|
|
|
2010(3)
|
|
|
(6)
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Ratio of debt to Adjusted EBITDA
|
|
|
4.7
|
x
|
|
|
4.9
|
x
|
|
|
3.9
|
x
|
|
|
3.4
|
x
|
|
|
4.4
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Year Ended December 31,
|
|
|
As Adjusted
|
|
|
|
2006(1)
|
|
|
2007(2)
|
|
|
2008
|
|
|
2009
|
|
|
2010(3)
|
|
|
(6)
|
|
|
|
(dollars in thousands)
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,966
|
|
|
$
|
17,274
|
|
|
$
|
13,058
|
|
|
$
|
15,420
|
|
|
$
|
20,454
|
|
|
|
|
|
Working capital
|
|
|
167,561
|
|
|
|
108,374
|
|
|
|
76,904
|
|
|
|
162,243
|
|
|
|
189,993
|
|
|
|
|
|
Total assets
|
|
|
1,217,371
|
|
|
|
1,498,845
|
|
|
|
1,507,977
|
|
|
|
1,480,501
|
|
|
|
1,653,151
|
|
|
|
|
|
Total debt
|
|
|
567,005
|
|
|
|
746,126
|
|
|
|
721,635
|
|
|
|
651,433
|
|
|
|
1,000,256
|
|
|
|
|
|
Total equity
|
|
|
361,891
|
|
|
|
378,074
|
|
|
|
412,117
|
|
|
|
479,122
|
|
|
|
256,422
|
|
|
|
|
|
|
|
|
(1) |
|
Party America is included in the balance sheet data beginning
with December 31, 2006, and the income statement and other
financial data from its acquisition date (September 29,
2006). |
|
(2) |
|
FCPO and PCFG are included in the balance sheet data as of
December 31, 2007, and the income statement and other
financial data from their respective acquisition dates (PCFG-
November 2, 2007 and FCPO-November 16, 2007). |
|
(3) |
|
The acquisitions of Designware and the Christys Group are
included in the balance sheet data as of December 31, 2010,
and the income statement and other financial data from their
respective acquisition dates (March 1, 2010 and
September 30, 2010). |
|
(4) |
|
During 2008 and 2010, we implemented plans to convert and
rebrand our company-owned and franchised Party America stores
and our FCPO stores to Party City stores, respectively. As a
result, we recorded charges for the impairment of the Party
America trade name and the FCPO trade name of $17.4 million
and $27.4 million in the fourth quarters of 2008 and 2010,
respectively. |
|
(5) |
|
In connection with the refinancing of debt in May 2007, we
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. In connection with the refinancing of the
Company and its subsidiaries revolving and term debt
credit facilities in August and December 2010, we wrote off
$2.4 million of deferred finance charges. |
|
(6) |
|
The pro forma as adjusted financial data in the table above give
effect to: (i) this offering and the use of proceeds
therefrom; (ii) the refinancing of Amscan Holdings
revolving and term debt credit facilities in 2010; and
(iii) the one-time cash dividend declared in December 2010,
assuming in each case such event occurred on January 1,
2010 with respect to any operating and other financial data and
as of December 31, 2010 with respect to any balance sheet
data. The pro forma as adjusted financial data do not
necessarily represent what our financial position and results of
operations would have been if the transactions had actually been
completed as of January 1, 2010, and are not intended to
project our financial position or results of operations for any
future period. |
30
|
|
|
(7) |
|
For a discussion of our use of Adjusted EBITDA, please refer to
Prospectus Summary Summary Financial
Data. The reconciliation from net income to EBITDA and
Adjusted EBITDA for the period presented is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Adjusted
|
|
|
|
(dollars in thousands)
|
|
|
Net Income
|
|
$
|
6,440
|
|
|
$
|
19,261
|
|
|
$
|
40,510
|
|
|
$
|
62,553
|
|
|
$
|
49,319
|
|
|
|
|
|
Interest expense, net
|
|
|
54,887
|
|
|
|
54,590
|
|
|
|
50,915
|
|
|
|
41,481
|
|
|
|
40,850
|
|
|
|
|
|
Income taxes
|
|
|
4,295
|
|
|
|
13,246
|
|
|
|
24,188
|
|
|
|
37,673
|
|
|
|
32,945
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,619
|
|
|
|
38,093
|
|
|
|
47,278
|
|
|
|
44,382
|
|
|
|
49,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
104,241
|
|
|
|
125,190
|
|
|
|
162,891
|
|
|
|
186,089
|
|
|
|
172,532
|
|
|
|
|
|
Equity based compensation and other charges
|
|
|
1,208
|
|
|
|
1,928
|
|
|
|
4,546
|
|
|
|
882
|
|
|
|
6,019
|
|
|
|
|
|
Non-cash purchase accounting adjustments
|
|
|
2,509
|
|
|
|
1,332
|
|
|
|
2,329
|
|
|
|
(344
|
)
|
|
|
2,533
|
|
|
|
|
|
Management fee
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
1,248
|
|
|
|
|
|
Loss (gain) from joint venture
|
|
|
|
|
|
|
(628
|
)
|
|
|
(538
|
)
|
|
|
(632
|
)
|
|
|
(678
|
)
|
|
|
|
|
Impairment charges
|
|
|
|
|
|
|
2,115
|
|
|
|
17,376
|
(a)
|
|
|
|
|
|
|
27,997
|
(a)
|
|
|
|
|
Restructuring, retention and severance
|
|
|
2,114
|
|
|
|
2,504
|
|
|
|
|
|
|
|
2,670
|
|
|
|
1,780
|
|
|
|
|
|
Payment in lieu of dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,395
|
(b)
|
|
|
|
|
Refinancing charges
|
|
|
|
|
|
|
16,360
|
|
|
|
|
|
|
|
|
|
|
|
2,448
|
|
|
|
|
|
Acquisition related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
1,660
|
|
|
|
|
|
Intercompany gross profit elimination(c)
|
|
|
10,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(295
|
)
|
|
|
1,996
|
|
|
|
(1,812
|
)
|
|
|
296
|
|
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
121,926
|
|
|
$
|
152,045
|
|
|
$
|
186,040
|
|
|
$
|
190,479
|
|
|
$
|
226,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During 2008 and 2010, we implemented plans to convert and
rebrand our company-owned and franchised Party America stores
and our FCPO stores to Party City stores, respectively. As a
result, we recorded charges for impairment of the Party America
trade and the FCPO trade name of $17.4 million and
$27.4 million in the fourth quarters of 2008 and 2010,
respectively. |
|
(b) |
|
Represents payment to holders of vested time-based options in
connection with a one-time cash dividend payment in 2010. This
payment is included as
stock-based
compensation expense in general and administrative expenses in
2010. |
|
(c) |
|
Prior to our May 2007 refinancing, the definition of Adjusted
EBITDA under our credit agreement provided for the add-back of
intercompany gross profit on sales from our wholesale operations
to our retail stores. |
|
|
|
(8) |
|
Excludes temporary locations under our Halloween City banner and
includes Party City superstores. |
|
(9) |
|
Party City comparable store sales exclude FCPO store
conversions, as presented here. |
31
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes to those
consolidated financial statements appearing elsewhere in this
prospectus. This discussion contains forward-looking statements
that involve significant risks and uncertainties. As a result of
many factors, such as those set forth under Risk
Factors and elsewhere in this prospectus, our actual
results may differ materially from those anticipated in these
forward-looking statements.
Business
Overview
Our
Company
We are a global leader in decorated party supplies. We make it
easy and fun to enhance special occasions with the widest
assortment of innovative and exciting merchandise at a
compelling value. With the 2005 acquisition of Party City, we
created a vertically integrated business combining the leading
product design, manufacturing and distribution platform, Amscan,
with the largest U.S. retailer of party supplies. We have
the industrys broadest selection of decorated party
supplies, which we distribute to over 100 countries. Our party
superstore retail network consists of approximately 800
locations in the United States and is approximately
15 times larger than that of our next largest party
superstore competitor. Our vertically integrated business model
and scale differentiate us from other party supply companies and
allow us to capture the
manufacturing-to-retail
margin on a significant portion of the products sold in our
stores. We believe our widely recognized brands, broad product
offering, low-cost global sourcing model and category-defining
retail concept are significant competitive advantages. We
believe these characteristics, combined with our vertical
business model and scale, position us for continued organic and
acquisition-led growth in the United States and internationally.
How We
Assess the Performance of Our Company
In assessing the performance of our company, we consider a
variety of performance and financial measures for our two
operating segments, Retail and Wholesale. These key measures
include revenues and gross profit, comparable retail same-store
sales and operating expenses. We also review other metrics such
as EBITDA and Adjusted EBITDA.
Segments
Our Wholesale segment generates revenues globally through sales
of our Amscan, Designware, Anagram and other party supplies to
party goods superstores, including our company-owned and
franchised stores, independent party supply stores, dollar
stores, mass merchants, grocery retailers and gift shops.
Domestic sales accounted for 86%, and international sales
accounted for 14% of our total wholesale sales, respectively.
International wholesale sales are expected to increase as a
result of our recent acquisitions and the further maturation of
international party supply markets.
Our Retail segment generates revenues from the sale of
merchandise to the end consumer through our chain of
company-owned party goods stores, online through our
e-commerce
websites, including PartyCity.com, and through our chain of
temporary Halloween locations. Franchise revenues include
royalties on franchise retail sales and franchise fees charged
for the initial franchise award and subsequent renewals. Our
retail sales of party goods are fueled by everyday events such
as birthdays, various seasonal events and other special
occasions occurring throughout the year. In addition, through
Halloween City, our temporary Halloween business, we seek to
maximize our Halloween seasonal opportunity. As a result, in the
year ended 2010, our Halloween business represented
approximately 25% of our total annual retail sales, generally
occurring in a five-week selling season ending on
October 31. We expect to continue to generate a significant
portion of our retail sales during the Halloween selling season.
Intercompany sales between the Wholesale and the Retail segment
are eliminated, and the profits on intercompany sales are
deferred and realized at the time merchandise is sold to the
consumer. For segment reporting purposes, certain general and
administrative expenses and art and development costs are
allocated based on total revenues.
32
Financial
Measures
Revenues. Revenues from retail operations are
recognized at point of sale. We estimate future retail sales
returns and record a provision in the period in which the
related sales are recorded based on historical information.
Retail revenues include shipping revenue related to
e-commerce
sales. Retail sales are reported net of taxes collected.
Franchise royalties are recognized based on reported franchise
retail sales. Revenues from our wholesale operations represent
the sale of our products to third parties, less rebates,
discounts and other allowances. The terms of our wholesale sales
are generally FOB shipping point, and revenue is recognized when
goods are shipped. We estimate reductions to revenues for
volume-based rebate programs and subsequent credits at the time
sales are recognized. Intercompany sales from our wholesale
operations to our retail stores are eliminated in our
consolidated total revenues.
Comparable Retail Same-Store Sales. The growth
in same-store sales represents the percentage change in
same-store sales in the period presented compared to the prior
year. Same-store sales exclude the net sales of a store for any
period if the store was not open during the same period of the
prior year. Comparable sales are calculated based upon stores
that were open at least thirteen full months as of the end of
the applicable reporting period. When a store is reconfigured or
relocated within the same general territory, the store continues
to be treated as the same store. If, during the period
presented, a store was closed, sales from that store up to and
including the closing day are included as same-store sales as
long as the store was open during the same period of the prior
year. FCPO stores that are in the process of being converted
have not been included in Party City same store-sales and will
not be included until the thirteenth month following conversion.
Gross Profit. Gross profit is equal to net
sales minus cost of goods sold. At wholesale, cost of goods sold
reflects the production costs (i.e., raw materials, labor and
overhead) of manufactured goods and the direct cost of purchased
goods, inventory shrinkage, inventory adjustments, inbound
freight to our manufacturing and distribution facilities,
distribution costs and outbound freight to get goods to our
wholesale customers. At retail, cost of goods sold reflects the
direct cost of goods purchased from third parties and the
production or purchase costs of goods acquired from our
wholesale operations. Retail cost of goods sold also includes
inventory shrinkage, inventory adjustments, inbound freight,
occupancy costs related to store operations (such as rent and
common area maintenance, utilities and depreciation on assets)
and all logistics costs associated with our
e-commerce
business. Gross margin measures gross profit as a percentage of
net sales.
Our cost of goods sold increases in higher volume periods as the
direct costs of manufactured and purchased goods, inventory
shrinkage and freight are generally tied to sales. However,
other costs are largely fixed or vary based on other factors and
do not necessarily increase as sales volume increases. Changes
in the mix of our products, such as changes in the proportion of
company manufactured goods, which have higher margins, may also
impact our overall cost of goods sold. The direct costs of
manufactured and purchased goods are influenced by raw material
costs (principally paper, petroleum-based resins and cotton),
domestic and international labor costs in the countries where
our goods are purchased or manufactured and logistics costs
associated with transporting our goods. We monitor our inventory
levels on an on-going basis in order to identify slow-moving
goods and generally use our outlet stores to clear such goods.
Selling Expenses. Selling expenses include the
costs associated with our wholesale sales and marketing efforts,
including licensing, merchandising and customer service. Costs
include the salaries and benefits of the related work force,
including sales-based bonuses and commissions. Other costs
include catalogues, showroom rent, travel and other operating
costs. Certain selling expenses, such as sales-based bonuses and
commissions, vary in proportion to sales, while other costs vary
based on other factors, such as our marketing efforts, or are
largely fixed and do not necessarily increase as sales volume
increases.
Retail Operating Expenses. Retail operating
expenses include all of the costs associated with retail store
operations, excluding occupancy-related costs included in the
cost of goods sold. Costs include store payroll and benefits,
advertising, supplies and credit card costs. Retail expenses are
largely variable but do not necessarily vary in proportion to
sales.
33
Franchise Expenses. Franchise expenses include
the costs associated with operating our franchise network,
including salaries and benefits of the administrative work force
and other administrative costs. These expenses generally do not
vary proportionally with net sales or franchise-related income.
General and Administrative Expenses. General
and administrative expenses include all operating costs not
included elsewhere. These expenses include payroll and other
expenses related to operations at our corporate offices
including occupancy costs, related depreciation and
amortization, legal and professional fees and data-processing
costs. These expenses generally do not vary proportionally with
net sales.
Art and Development Costs. Art and development
costs include the costs associated with art production, creative
development and product management. Costs include the salaries
and benefits of the related work force. These expenses generally
do not vary proportionally with net sales.
EBITDA and Adjusted EBITDA. We define EBITDA
as net income (loss) before interest expense, income taxes,
depreciation and amortization. We define Adjusted EBITDA as
EBITDA further adjusted to exclude certain cash and non-cash,
non-recurring items. We caution investors that amounts presented
in accordance with our definitions of EBITDA and Adjusted EBITDA
may not be comparable to similar measures disclosed by other
issuers, because not all issuers and analysts calculate EBITDA
or Adjusted EBITDA in the same manner. We present EBITDA in this
prospectus because we consider it an important supplemental
measure of our performance and believe it is frequently used by
securities analysts, investors and other interested parties in
the evaluation of companies in our industry. We present Adjusted
EBITDA in this prospectus as a further supplemental measure of
our performance and our liquidity. We use Adjusted EBITDA as a
performance measure for our annual cash incentive plan.
Executive
Overview
Our recent financial results demonstrate continued growth and
profitability enhancements during a difficult economic
environment. For the year ended December 31, 2010, we
posted revenue growth of 7.6% and Adjusted EBITDA growth of
18.7% as compared to the same period in 2009. The revenue growth
reflects the impact of our acquisitions as well as increased
purchases from our customers across all channels after the
decline in consumer demand experienced in 2009. In addition to
the higher sales, the Adjusted EBITDA growth also reflects an
increase in the percentage of Amscan products sold through our
company-owned stores allowing us to capture the manufacturing-
or
wholesale-to-retail
margin on a growing share of our sales.
In 2010, we completed two acquisitions that expanded our product
line and channel reach and, combined, contributed
$46.2 million to our revenue. The March 2010 acquisition of
the Designware party division of American Greetings strengthens
our juvenile licensed character portfolio while increasing our
reach into the grocery retail and mass merchant channels. The
September 2010 acquisition of the U.K.-based Christys
Group provides costume-design and sourcing capabilities as well
as additional resources in the U.K. and European markets. In
January 2011, we acquired Germany-based Riethmuller, including
the Malaysian operations of latex balloon manufacturer Everts
Balloon. This acquisition expanded our reach in Europe while
also enabling us to directly supply a significant portion of our
latex balloon requirements previously sourced from third-party
vendors. We expect these acquisitions to enhance our
distribution capabilities and product line and increase our
profits as we continue to capitalize on our vertical model by
increasing the percentage of our products sold through Party
City.
We also experienced growth in our retail business driven by
increases in our same-store sales combined with the addition of
new locations. We increased our
company-owned
Party City store count by 57 locations in 2010, including
FCPO conversions and stores acquired from our franchisees. Our
extensive product selection combined with the new advertising
strategy launched in late 2009 resulted in higher traffic which
drove an improvement in same-store sales during the year with
0.6%, 0.2%, 1.6% and 2.6% growth in each of the first, second,
third and fourth quarters. Same-store sales at our Party City
stores, excluding FCPO conversions, increased 1.4% in 2010. The
FCPO stores converted to the Party City format in 2010 have
experienced a 13.8% increase in sales over 2009. During 2010, we
also operated 404 temporary Halloween locations compared to 247
in 2009. While revenue resulting from the increased store count
contributed over $30.0 million to our sales in 2010, we
experienced reduced average sales per location. We believe that
we will
34
be able to improve Halloween City profitability in 2011. Our
e-commerce
platform, re-launched in 2009, experienced strong growth during
2010, and we expect it will continue to provide attractive
growth opportunities for us.
Other
Factors Affecting Our Results
Important events that have impacted or will impact the results
presented in Managements Discussion and Analysis of
Financial Condition and Results of Operations include:
Christys Group. On September 30,
2010, we acquired the Christys Group for total
consideration of approximately $30.4 million. The
Christys Group designs and distributes costumes and other
garments and accessories through its operations in Asia and the
U.K. The results of operations of the Christys Group are
included in our consolidated financial statements from the date
of acquisition and included revenues of $11.4 million for
2010. The Christys Group has historically had a lower
gross margin than we have and this acquisition is expected to
reduce our consolidated gross margin in 2011.
Riethmuller GmbH. On January 30, 2011, we
acquired Riethmuller for total consideration of approximately
$46.8 million. Riethmuller is a
150-year-old
German balloon producer and the pre-eminent brand for party and
carnival items in Germany, Austria and Switzerland. The
acquisition expands our vertical business model into the latex
balloon category and gives us a significant presence in Germany,
Poland and Malaysia. Similar to the Christys Group, the
historical gross margin of Riethmuller has been lower than the
margins generated by our wholesale operations. As a result, we
expect the inclusion of Riethmuller in our 2011 results of
operations to reduce our consolidated gross margin.
Refinancing. On August 13, 2010, we
entered into a new senior secured asset-based revolving credit
facility for an aggregate principal amount of up to
$325 million for working capital, general corporate
purposes and the issuance of letters of credit. The new
asset-based revolving credit facility, which matures in August
2015, was used to refinance our existing asset-based revolver
and certain other term debt.
On December 2, 2010, we entered into a $675.0 million
senior secured term loan facility and used the proceeds to
refinance our existing $342.0 million term loan facility,
pay a one-time cash dividend to common stockholders and make a
cash dividend equivalent payment to vested time-based option
holders and warrant holders aggregating approximately
$311.2 million and to pay $18.1 million of related fees and
expenses. The new term loan facility matures in December 2017.
As a result of higher interest rates and debt following these
refinancings, our interest expense will increase in future
periods.
Public Company Costs. As a result of the
initial public offering of our common stock we will incur
additional legal, accounting and other expenses that we did not
previously incur, including costs associated with public company
reporting and corporate governance requirements. These
requirements include compliance with the Sarbanes-Oxley Act of
2002 as well as other rules implemented by the SEC
and .
Termination of Management Agreement. We have a
management agreement with our Sponsors. Pursuant to the
management agreement, we pay annual management fees of
approximately $1.2 million and an advisory fee of 1% of the
value of specified transactions they assist us with. We intend
to terminate the agreement in connection with this offering.
Equity Based Compensation. In December 2010,
in connection with the refinancing of our term loan agreement
(see Liquidity and Capital Resources),
our Board of Directors declared a one-time cash dividend
totaling $311.2 million, which included $9.4 million to holders
of vested time-based options, which was included in stock
compensation expense in 2010. In addition, holders of unvested
options at the date such dividend was declared will receive a
comparable distribution, if and when the options vest. At
December 31, 2010, the aggregate potential distribution
associated with unvested options was $18.5 million, which
could be paid out within 12 months following completion of
this offering and would result in a charge to stock compensation
expense.
35
Results
of Operations
The following information presented for 2010, 2009 and 2008 was
derived from our audited consolidated financial statements and
related notes which are included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,579,677
|
|
|
|
98.8
|
%
|
|
$
|
1,467,324
|
|
|
|
98.7
|
%
|
|
$
|
1,537,641
|
|
|
|
98.6
|
%
|
Royalties and franchise fees
|
|
|
19,417
|
|
|
|
1.2
|
|
|
|
19,494
|
|
|
|
1.3
|
|
|
|
22,020
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,599,094
|
|
|
|
100.0
|
|
|
|
1,486,818
|
|
|
|
100.0
|
|
|
|
1,559,661
|
|
|
|
100.0
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
943,058
|
|
|
|
59.0
|
|
|
|
899,041
|
|
|
|
60.5
|
|
|
|
966,426
|
|
|
|
62.0
|
|
Selling expenses
|
|
|
42,725
|
|
|
|
2.7
|
|
|
|
39,786
|
|
|
|
2.7
|
|
|
|
41,894
|
|
|
|
2.7
|
|
Retail operating expenses
|
|
|
296,891
|
|
|
|
18.6
|
|
|
|
261,691
|
|
|
|
17.6
|
|
|
|
273,627
|
|
|
|
17.5
|
|
Franchise expenses
|
|
|
12,269
|
|
|
|
0.8
|
|
|
|
11,991
|
|
|
|
0.8
|
|
|
|
13,686
|
|
|
|
0.9
|
|
General and administrative expenses
|
|
|
134,392
|
|
|
|
8.4
|
|
|
|
119,193
|
|
|
|
8.0
|
|
|
|
120,272
|
|
|
|
7.7
|
|
Art and development costs
|
|
|
14,923
|
|
|
|
0.9
|
|
|
|
13,243
|
|
|
|
0.9
|
|
|
|
12,462
|
|
|
|
0.8
|
|
Impairment of trade name
|
|
|
27,400
|
|
|
|
1.7
|
|
|
|
|
|
|
|
0.0
|
|
|
|
17,376
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,471,658
|
|
|
|
92.0
|
|
|
|
1,344,945
|
|
|
|
90.5
|
|
|
|
1,445,743
|
|
|
|
92.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
127,436
|
|
|
|
8.0
|
|
|
|
141,873
|
|
|
|
9.5
|
|
|
|
113,918
|
|
|
|
7.3
|
|
Interest expense, net
|
|
|
40,850
|
|
|
|
2.6
|
|
|
|
41,481
|
|
|
|
2.8
|
|
|
|
50,915
|
|
|
|
3.3
|
|
Other expense (income), net
|
|
|
4,208
|
|
|
|
0.3
|
|
|
|
(32
|
)
|
|
|
0.0
|
|
|
|
(818
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
82,378
|
|
|
|
5.2
|
|
|
|
100,424
|
|
|
|
6.7
|
|
|
|
63,821
|
|
|
|
4.1
|
|
Income tax expense
|
|
|
32,945
|
|
|
|
2.1
|
|
|
|
37,673
|
|
|
|
2.5
|
|
|
|
24,188
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
49,433
|
|
|
|
3.1
|
|
|
|
62,751
|
|
|
|
4.2
|
|
|
|
39,633
|
|
|
|
2.5
|
|
Less: net income (loss) attributable to noncontrolling interest
|
|
|
114
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
(877
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
49,319
|
|
|
|
3.1
|
%
|
|
$
|
62,553
|
|
|
|
4.2
|
%
|
|
$
|
40,510
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Revenues
Total revenues for 2010 were $1,599.1 million, or 7.6%,
higher than in 2009 reflecting growth in both reporting
segments. The following table sets forth the composition of our
total revenues for 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
|
Thousands
|
|
|
Total Revenue
|
|
|
Thousands
|
|
|
Total Revenue
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
769,247
|
|
|
|
48.1
|
%
|
|
$
|
633,006
|
|
|
|
42.6
|
%
|
Eliminations
|
|
|
(298,355
|
)
|
|
|
(18.7
|
)
|
|
|
(221,647
|
)
|
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net wholesale
|
|
|
470,892
|
|
|
|
29.4
|
|
|
|
411,359
|
|
|
|
27.7
|
|
Retail
|
|
|
1,108,785
|
|
|
|
69.3
|
|
|
|
1,055,965
|
|
|
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,579,677
|
|
|
|
98.8
|
|
|
|
1,467,324
|
|
|
|
98.7
|
|
Royalties and franchise fees
|
|
|
19,417
|
|
|
|
1.2
|
|
|
|
19,494
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,599,094
|
|
|
|
100.0
|
%
|
|
$
|
1,486,818
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Wholesale
Net sales for 2010 of $470.9 million were
$59.5 million, or 14.5%, higher than net sales for 2009.
Net sales to domestic party goods retailers, including our
franchisee network, and to other domestic party goods
distributors totaled $281.2 million and were
$35.3 million, or 14.4%, higher than 2009 sales. The
increase in sales principally reflects the impact of our
acquisition of Designware division in March 2010 as well as a
return to near normal purchasing patterns and inventory levels
by retailers, following their reduction in purchasing during the
economic downturn in 2009. Net sales of metallic balloons were
$96.4 million, or 14.1%, higher than in 2009 and also
reflect the normalization of purchasing patterns by domestic
balloon distributors. International sales totaled
$93.3 million and were $12.3 million, or 15.2%, higher
than in 2009, primarily the result of the acquisition of the
Christys Group in September 2010. Changes in foreign
currency exchange rates resulted in a 2.1% increase in the
international sales over 2009.
Intercompany sales to our retail affiliates of
$298.4 million were $76.7 million, or 34.6%, higher
than in 2009 and represented 38.8% of total wholesale sales in
2010 compared to 35.0% in 2009. The increase in intercompany
sales principally reflects the impact of the acquisition of
Designware and the growth of our products as a percentage of the
total products sold in our retail stores, particularly at our
rebranded and re-merchandised FCPO stores. During 2010, our
wholesale sales to our retail stores represented 61.3% of the
retail segments total purchases, compared to 53.7% in
2009. The intercompany sales of our wholesale segment are
eliminated against the intercompany purchases of our retail
segment in the consolidated financial statements.
Retail
Retail sales for 2010 at our company-owned stores of
$1,108.8 million were $52.8 million, or 5.0%, higher
than retail sales for 2009. The retail sales of our
company-owned Party City stores (excluding FCPO conversions)
totaled $770.7 million and were $15.8 million, or
2.1%, higher than in 2009. Party City same-store sales increased
1.4% during 2010, driven by a 2.0% increase in transaction
count, partially offset by a 0.6% decrease in average sale price
per transaction. Party City same-store sales accelerated during
2010, with growth of 0.6%, 0.2%, 1.6% and 2.6% for the first,
second, third and fourth quarters, respectively, driven in part
by the successful shift in our principal advertising strategy
from free standing newspaper inserts to a national broadcasting
campaign. The increase in Party City store sales also reflects
the addition of 33 stores (excluding FCPO conversions),
including the acquisition of 20 stores from franchisees,
partially offset by the sale or closure of 16 stores in 2010.
Additionally, we converted 40 FCPO stores to the Party City
format, which generated sales of $28.6 million in 2010, a
$3.5 million or 13.8% increase over 2009. Prior to this
conversion to the Party City format, these 40 FCPO stores
generated comparable sales of $25.1 million in 2009.
Converted FCPO stores will be included in Party Citys
same-store sales beginning with the thirteenth month following
conversion. Net sales at our temporary Halloween City locations
totaled $101.4 million and were $33.4 million, or
49.1%, higher than in 2009, reflecting an increase in the number
of locations to 404 in 2010 from 247 in 2009, partially offset
by an 8.8% decrease in average sales per location compared to
2009. The decrease in average Halloween City sales per location
is primarily attributable to the expansion in 2010 into several
new territories with existing competition. Our
e-commerce
sales totaled $40.2 million in 2010 compared to
$13.4 million in 2009, reflecting the successful re-launch
of the PartyCity.com website. Sales at all other store formats,
including unconverted FCPO and outlet stores, totaled
$167.8 million and were $26.7 million or 13.7% lower
than in 2009. The decrease reflects the closure of six FCPO and
17 outlet stores during 2010 and the impact of liquidating
non-conforming FCPO inventories prior to the stores
remerchandising and rebranding.
Royalties
and franchise fees
Royalties and franchise fees for 2010 totaled $19.4 million
and were $0.1 million lower than in 2009 principally as a
result of a net decrease of 18 franchise stores that occurred
primarily during the fourth quarter of 2010.
37
Gross
profit
Our total margin on net sales for 2010 was 40.3%, or
160 basis points higher, than in 2009. The following table
sets forth our consolidated gross profit and gross margin on net
sales for 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
|
Thousands
|
|
|
Associated Sales
|
|
|
Thousands
|
|
|
Associated Sales
|
|
|
Net Wholesale
|
|
$
|
174,507
|
|
|
|
37.1
|
%
|
|
$
|
148,424
|
|
|
|
36.1
|
%
|
Retail
|
|
|
462,112
|
|
|
|
41.7
|
%
|
|
|
419,859
|
|
|
|
39.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
636,619
|
|
|
|
40.3
|
%
|
|
$
|
568,283
|
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross margin on net sales at wholesale for 2010 was 37.1%,
or 100 basis points higher than in 2009. The increase in
wholesale gross margin principally reflects changes in product
mix, including a greater percentage of higher margin decorated
tableware and accessories due, in part, to the acquisition of
Designware, the impact of product price increases and the
continued leveraging of our distribution infrastructure,
partially offset by increases in input costs.
Retail gross profit margin for 2010 was 41.7%, or 190 basis
points higher than in 2009, principally due to a greater
percentage of products sold at retail that were manufactured or
sourced by us, including Designware products, resulting in a
higher margin.
Operating
expenses
Selling expenses totaled $42.7 million and were
$2.9 million, or 7.4%, higher than in 2009. The increase in
2010 selling expense, as compared to 2009, principally reflects
increases in compensation and employee benefits and the
additional expenses of the Christys Group. Selling
expenses were 2.7% of total revenue in both 2010 and 2009.
Retail operating expenses of $296.9 million for 2010 were
$35.2 million, or 13.5%, higher than 2009, principally
reflecting additional costs associated with the growth in our
temporary Halloween and
e-commerce
businesses.
E-commerce
costs reflect higher distribution, website and customer service
costs. The increase in retail operating expenses also reflects
the addition of 18 stores in 2010. In addition, during 2010, we
implemented a national broadcast-based advertising program, the
costs of which were partially offset by a reduction in
advertising through free standing newspaper inserts. Retail
operating expenses were 26.8% of retail sales in 2010 and 24.8%
of retail sales in 2009. Franchise expenses for 2010 of
$12.3 million were $0.3 million, or 2.3%, higher than
in 2009. Franchise expenses were 63.2% of franchise-related
revenue in 2010 compared to 61.5% in 2009.
General and administrative expenses for 2010 totaled
$134.4 million and were $15.2 million, or 12.8%,
higher than in 2009. The increase in general and administrative
expenses reflects increased equity-based expenses, increased
support for our expanding temporary Halloween operations and the
additional expenses of the Christys Group in 2010. In
2010, equity-based expenses included $9.4 million of stock
compensation expense arising from the payment of the December
2010 dividend distribution to vested time-based option holders
and a $5.3 million non-cash charge related to certain
redeemable options and warrants held by employees that were
marked to market.
These increases in general and administrative expense were
partially offset by a lower provision for bad debts in 2010 as
compared to 2009 and the continued implementation of cost
reductions that began in 2009, including the consolidation of
FCPOs former corporate office operations in Naperville,
Illinois into those of Party City. As a percentage of total
revenues, general and administrative expenses were 8.4% for 2010
compared to 8.0% for 2009.
Art and development costs for 2010 totaled $14.9 million
and were $1.7 million higher than in 2009, principally
reflecting an increase in personnel and compensation and
employee benefits. As a percentage of total revenues, art and
development costs were 0.9% in 2010, comparable to 2009.
38
During 2010, we instituted a program to convert substantially
all of our FCPO stores to either Party City stores or to an
outlet format and recorded a $27.4 million non-cash charge
for the impairment of the Factory Card & Party Outlet
trade name.
Interest
expense, net
Interest expense of $40.9 million for 2010 was comparable
to 2009. Despite increases in our ABL and term loan interest
rates in August and December of 2010, respectively, and a
$326.6 million increase in our term debt following our
December 2010 dividend distribution, our average debt and
effective interest rate for 2010 were comparable to those of
2009.
Other
expense, net
Other expense, net, for 2010 totaled $4.2 million. Other
expense, net, includes costs of $2.4 million associated
with the refinancing of our revolving and term debt credit
facilities in 2010 and $1.6 million of acquisition-related
costs. These costs were partially offset by our share of income
from an unconsolidated balloon distribution joint venture
located in Mexico.
Income
tax expense
Income tax expense for 2010 and 2009 reflected consolidated
effective income tax rates of 40.0% and 37.5% respectively. The
increase in the 2010 effective income tax rate is primarily
attributable to certain adjustments related to deferred tax
accounts recorded in the current year related to activities
associated with previous acquisitions and non-deductible,
non-cash stock option and warrant related charges, partially
offset by an increased domestic manufacturing deduction, a lower
average state income tax rate, the expiration of certain
states statutes of limitations that resulted in the
recognition of previous unrecognized tax benefits and the
favorable settlement of the audit of our 2007 federal tax
return. We expect our effective tax rate for 2011 to be
approximately 36.5%.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues
Total revenues for 2009 were $1,486.8 million, or 4.7%,
lower than in 2008. The following table sets forth the
Companys total revenues for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Royalties and franchise fees
|
|
|
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 United
States economy. Net sales to domestic party goods
39
retailers, including our franchise network, and to other
domestic party goods distributors totaled $245.9 million and
were $16.4 million, or 6.3%, lower than 2008 sales, as the
negative impact of the economy was partially offset by a large
seasonal direct import program for one of our retailers. Net
sales of metallic balloons were $84.5 million, or 8.9%,
lower than in 2008, as wholesale distributors and retailers
rationalized stock inventory levels in light of the economic
downturn. International sales totaled $81.0 million and
were $2.5 million, or 3.0%, lower than in 2008.
Fluctuations in foreign currency account for an
$11.0 million decrease in international sales, more than
offsetting volume-related growth in local currency sales,
principally at European national accounts.
Intercompany sales to our retail affiliates of
$221.6 million were $6.7 million, or 3.1%, higher than
in 2008 and represented 35.0% of the total wholesale sales in
2009 compared to 32.9% in 2008. The increase in intercompany
sales principally reflects the growth of our manufactured and
sourced products as a percentage of the total products sold in
company-owned retail stores, particularly the FCPO stores
acquired in November 2007. During 2009, our wholesale sales to
our retail segment represented 53.7% of the retail
segments total purchases compared to 50.4% in 2008. The
intercompany sales of our wholesale segment are eliminated
against the intercompany purchases of our retail segment in the
consolidated financial statements.
Retail
Retail sales for 2009 at our company-owned stores of
$1,056.0 million were $43.2 million, or 3.9%, lower
than retail sales for 2008, reflecting the downturn in the
United States economy, the operation of fewer FCPO and
outlet stores during 2009 and the inclusion of a 53rd week
in our 2008 fiscal year. Retail sales of our company-owned Party
City stores totaled $754.9 million and were
$35.3 million, or 4.5%, lower than in 2008. Party City
same-store sales during 2009 decreased 3.3% compared to 2008 as
the result of a decrease in transaction count, as the average
dollar per transaction remained consistent between 2009 and
2008. Retail sales at our temporary Halloween locations 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
location and a 65.7% increase in location count compared to
2008. During 2009, we generated $13.4 million in
e-commerce
sales compared to $5.9 million in 2008. The increase in
e-commerce
sales was driven by the re-launch of the PartyCity.com website
in August 2009. Sales at all other store formats, including
unconverted FCPO and outlet stores, totaled $219.6 million and
were $43.9 million or 16.7% lower than in 2008.
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 and gross margin on net sales for 2009 and 2008;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
Dollars in
|
|
|
Percentage of
|
|
|
|
Thousands
|
|
|
Associated Net Sales
|
|
|
Thousands
|
|
|
Associated Net Sales
|
|
|
Net Wholesale
|
|
$
|
148,424
|
|
|
|
36.1
|
%
|
|
$
|
142,438
|
|
|
|
32.5
|
%
|
Retail
|
|
|
419,859
|
|
|
|
39.8
|
%
|
|
|
428,777
|
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
$
|
568,283
|
|
|
|
38.7
|
%
|
|
$
|
571,215
|
|
|
|
37.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross 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 cost reducing
initiatives including reductions in distribution costs, and
changes in product mix.
40
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
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 4.4%, 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 12.4%, lower than in 2008, also reflecting
a reduction in store count. Franchise expenses were 61.5% of
franchise-related revenue in 2009 compared to 62.2% in 2008.
General and administrative expenses for 2009 totaled
$119.2 million and were $1.1 million, or 0.9%, lower
than in 2008. The decrease in general and administrative
expenses reflects a management-directed cost reduction program,
which included reductions in work force, travel and other
expenses, the reduction of a prior year purchase accounting
reserve and the impact of changes in foreign currency exchange
rates. These decreases were partially offset by inflationary
increases, particularly in base compensation and employee
benefits, increased support for our expanding temporary
Halloween operations, an increase in consulting expense and an
additional provision for bad debts due to the bankruptcy of a
national account in Europe. As a percentage of total revenues,
general and administrative expenses were 8.0% for 2009 compared
to 7.7% for 2008.
Art and development costs of $13.2 million for 2009 were
comparable to 2008 expenses. As a percentage of total revenues,
art and development costs were 0.9% and 0.8% of total revenues
for 2009 and 2008, respectively.
Interest
expense, net
Interest expense of $41.5 million for 2009 was
$9.4 million lower than for 2008, reflecting the impact of
lower average debt balances and LIBOR rates.
Other
income, net
Other income, net, in 2009 primarily includes our share of
income from an unconsolidated balloon distribution joint venture
located in Mexico partially offset by foreign currency
transaction losses and other expenses.
Income
tax expense
Income tax expense for 2009 and 2008 reflected consolidated
effective income tax rates of 37.5% and 37.9%, respectively. The
decrease in the 2009 effective income tax rate is primarily
attributable to a lower average state income tax rate caused by
earnings mix shift among subsidiaries and the expiration of
state statutes of limitations for certain states that resulted
in the recognition of previous unrecognized tax benefits and the
favorable settlement of the audits of our 2006 and 2005 federal
tax returns. These tax rate reductions were partially offset by
a lower domestic manufacturing deduction, as a percentage of
pre-tax income.
Liquidity
and Capital Resources
Capital
Structure
On August 13, 2010, Amscan Holdings entered into a new
senior secured asset-based revolving credit facility (the
New ABL Facility), for an aggregate principal amount
of up to $325 million for working
41
capital, general corporate purposes and the issuance of letters
of credit. The New ABL Facility was principally used to
refinance the existing asset-based revolving loans.
On December 2, 2010, Amscan Holdings entered into a
$675 million senior secured term loan facility (the
New Term Loan Credit Agreement). Amscan Holdings
used the proceeds from this facility to refinance the then
existing $342 million term loan facility and to pay to us a
one-time cash dividend. We used the aggregate proceeds from this
dividend to pay a one-time cash dividend to common stockholders
and a cash payment in lieu of a dividend to certain option and
warrant holders aggregating approximately $311.2 million
and to pay related fees and expenses. The term loan under the
New Term Loan Credit Agreement was issued at a 1%, or
$6.8 million discount that is being amortized by the
effective interest method over the life of the loan.
New
ABL Facility
The New ABL Facility provides for (a) revolving loans in an
aggregate principal amount at any time outstanding not to exceed
$325 million, subject to a borrowing base described below,
(b) swing-line loans in an aggregate principal amount at
any time outstanding not to exceed 10% of the aggregate
commitments under the facility and (c) letters of credit,
in an aggregate face amount at any time outstanding not to
exceed $50 million, to support payment obligations incurred
in the ordinary course of business by Amscan Holdings and its
subsidiaries.
Under the New ABL Facility, the borrowing base at any time
equals (a) 85% of eligible trade receivables plus
(b) 85% of eligible inventory at its net orderly
liquidation value and (c) 90% of eligible credit card
receivables, less (d) certain reserves.
Amounts borrowed under the New ABL Facility bear interest at a
rate per annum equal to an applicable margin plus, at our
option, either (a) an alternate base rate determined by
reference to the highest of (1) the prime rate of Wells
Fargo, N.A., (2) the federal funds rate in effect on such
date plus
1/2
of 1.00% and (3) the LIBOR rate for a three-month interest
period plus 1.0% or (b) the LIBOR rate determined by
reference to the LIBOR cost of funds for U.S. dollar
deposits for the relevant interest period adjusted for certain
additional costs. The applicable margin percentage ranges from
1.25% to 1.75% for alternate base rate loans and from 2.25% to
2.75% for loans based on the LIBOR rate, in each case based on
average historical excess availability (as defined in the New
ABL Facility agreement). The applicable margin at
December 31, 2010 was 1.50% for alternate base rate loans
and 2.50% for loans based on the LIBOR rate.
In addition to paying interest on outstanding principal under
the New ABL Facility, Amscan Holdings is required to pay a
commitment fee of between 0.375% and 0.50% per annum in respect
of the unutilized commitments thereunder. Amscan Holdings must
also pay customary letter of credit fees and agency fees.
The New ABL Facility also provides that Amscan Holdings has the
right from time to time to request an amount of additional
commitments up to $125 million, of which the entire amount
remains available. The lenders under the New ABL Facility are
not under any obligation to provide any such additional
commitments, and any increase in commitments is subject to
several conditions precedent and limitations. If Amscan Holdings
were to request any additional commitments, and the existing
lenders or new lenders were to agree to provide such
commitments, the facility size could be increased to up to
$450 million, but Amscan Holdings ability to
borrow under this facility would still be limited by the amount
of the borrowing base.
In connection with the New ABL Facility, we incurred
$3.9 million in finance costs that have been capitalized
and will be amortized over the life of the loan.
All obligations under the New ABL Facility are jointly and
severally guaranteed by us and each existing and future domestic
subsidiary of Amscan Holdings. Each guarantor has secured its
obligations under the guaranty by a first priority lien on its
accounts receivable, inventory, cash and related proceeds and
assets and a second priority lien on substantially all of its
other assets.
42
The New ABL Facility contains negative covenants that, among
other things and subject to certain exceptions, restrict our
ability, and the ability of Amscan Holdings and any of its
restricted subsidiaries to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of Amscan Holdings, us or any
restricted subsidiary or make payments on, or redeem, repurchase
or retire any subordinated indebtedness;
|
|
|
|
make certain investments, loans, advances and acquisitions;
|
|
|
|
enter into sale and leaseback transactions;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
create liens;
|
|
|
|
transfer or sell assets;
|
|
|
|
guarantee debt;
|
|
|
|
create restrictions on the payment of dividends or other amounts
to us from our restricted subsidiaries;
|
|
|
|
consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries; and
|
|
|
|
engage in unrelated businesses.
|
In addition, Amscan Holdings must comply with a fixed charge
coverage ratio if our excess availability on any day is less
than (a) 15% of the lesser of the aggregate commitments
under the New ABL Facility or the then borrowing base or
(b) $25 million. The fixed charge coverage ratio is
the ratio of (i) Adjusted EBITDA minus the unfinanced
portion of consolidated capital expenditures (as defined in the
New ABL Facility) to (ii) fixed charges (as defined in our
New ABL Facility). Excess availability under the New ABL
Facility means the lesser of (a) the aggregate commitments
under the New ABL Facility and (b) the then borrowing base,
minus the outstanding credit extensions.
The New ABL Facility also contains certain customary affirmative
covenants and events of default.
Borrowings under the New ABL Facility at December 31, 2010
totaled $150.1 million at interest rates ranging from 2.77%
to 4.75%. Outstanding standby letters of credit totaled
$12.9 million and Amscan Holdings had $162.0 million
of excess availability under the terms of the New ABL Facility
at December 31, 2010.
New
Term Loan Credit Agreement
Amounts borrowed under the New Term Loan Credit Agreement bear
interest at a rate per annum equal to an applicable margin plus,
at Amscan Holdings option, either (a) an alternate
base rate determined by reference to the highest of (1) the
prime rate of Credit Suisse AG, (2) the federal funds rate
in effect on such date plus 1/2 of 1.00% and (3) the LIBOR
rate for a one-month interest period plus 1.0% or (b) a
LIBOR rate determined by reference to the cost of funds for
U.S. dollar deposits for the relevant interest period,
adjusted for certain additional costs. The applicable margin
percentage is 4.25% for alternate base rate loans and 5.25% for
loans based on the LIBOR rate.
In addition to paying interest on outstanding principal under
the New Term Loan Credit Agreement, Amscan Holdings must also
pay customary agency fees.
The New Term Loan Credit Agreement also provides that Amscan
Holdings has the right from time to time to request an amount of
additional term loans up to $175 million and to refinance,
replace or extend the maturity date of all or a portion of the
then existing term loans thereunder. The lenders under the New
Term Loan Credit Agreement are not under any obligation to
provide any such additional term loans, provide such refinancing
or replacement term loans or agree to extend the maturity date
of existing term loans held by
43
them, and transactions to effect any additional, refinancing,
replacement or extended term loans are subject to several
conditions precedent and limitations.
The New Term Loan Credit Agreement provides that the term loans
are subject to a 1.0% prepayment premium if voluntarily repaid
under certain circumstances before December 2, 2011.
Otherwise, Amscan Holdings may voluntarily prepay the term loans
at any time without premium or penalty, other than customary
breakage costs with respect to loans based on the LIBOR rate.
The term loans are subject to mandatory prepayment, subject to
certain exceptions, with (i) 100% of net proceeds arising
from all non-ordinary course asset sales or other dispositions
of property(including casualty events) by Amscan Holdings or by
its subsidiaries, subject to reinvestment rights and certain
other exceptions, (ii) 100% of the net cash proceeds of any
incurrence of debt other than debt permitted under the New Term
Loan Credit Agreement, (iii) commencing with the fiscal
year ended December 31, 2011, 50% (which percentage will be
reduced to 25% if Amscan Holdings total leverage ratio is
less than 3.50 to 1.00, but greater than 2.50 to 1.00, and 0% if
Amscan Holdings total leverage ratio is less than 2.50 to
1.00) of Amscan Holdings annual excess cash flow (as
defined in the New Term Loan Credit Agreement). The total
leverage ratio is the ratio of our consolidated total debt (as
defined in the New Term Loan Credit Agreement) to Adjusted
EBITDA.
The term loans under the New Term Loan Credit Agreement mature
on December 2, 2017 (or January 30, 2014, if Amscan
Holdings senior subordinated notes are not refinanced with
indebtedness permitted to be incurred under the New Term Loan
Credit Agreement that matures at least 91 days after the
maturity date of the term loans). Amscan Holdings is required to
repay installments on the term loans in quarterly principal
amounts of 0.25%, with the remaining amount payable on the
maturity date.
All obligations under the New Term Loan Credit Agreement are
jointly and severally guaranteed by us and each existing and
future domestic subsidiary of Amscan Holdings. Each guarantor
has secured its obligations under the guaranty by a first
priority lien on substantially all of its assets (other than
accounts receivable, inventory, cash and related proceeds and
assets) and a second priority lien on its accounts receivable,
inventory, cash and related proceeds and assets.
The New Term Loan Credit Agreement also contains certain
customary affirmative covenants and events of default. The New
Term Loan Credit Agreement contains negative covenants that,
among other things and subject to certain exceptions, restrict
our ability, and the ability of Amscan Holdings and any of its
restricted subsidiaries, to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of Amscan Holdings, us, or
any restricted subsidiary or make payments on, or redeem,
repurchase or retire any subordinated indebtedness;
|
|
|
|
make certain investments, loans, advances and acquisitions;
|
|
|
|
enter into sale and leaseback transactions;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
create liens;
|
|
|
|
transfer or sell assets;
|
|
|
|
guarantee debt;
|
|
|
|
create restrictions on the payment of dividends or other amounts
to us from our restricted subsidiaries;
|
|
|
|
consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries; and
|
|
|
|
engage in unrelated businesses.
|
In connection with the New Term Loan Credit Agreement, we
incurred $12.2 million in finance costs that have been
capitalized and will be amortized over the life of the loan.
44
At December 31, 2010, the outstanding principal amount of
term loans under the Term Loan Credit Agreement was
$666.6 million, which reflects an original issue discount
of $6.7 million, net of $0.1 million of accumulated
amortization, and the interest rate on borrowings ranged from
6.75% to 7.50%
Other
Credit Agreements
At December 31, 2010, Amscan Holdings has a
$0.4 million Canadian dollar denominated revolving credit
facility that bears interest at the Canadian prime rate plus
1.1% and expires in June 2011, and a £1.4 million
British Pound Sterling denominated revolving credit facility
that bears interest at the U.K. base rate plus 1.75% on the
first £1.0 million British Pound Sterling and 4.75%
over the U.K. base rate on the remaining £0.4 million
British pound sterling. The British pound Sterling revolving
credit facility expires on June 30, 2011. There were no
borrowings under the British Pound Sterling revolving credit
facility at December 31, 2010. At December 31, 2009,
borrowings outstanding under the British Pound Sterling
revolving credit facility were £0.4 million British
Pound Sterling. At December 31, 2010 and 2009, there were
no borrowings under the Canadian dollar denominated revolving
credit facility. Amscan Holdings expects to renew these
revolving credit facilities upon expiration.
Long-term borrowings at December 31, 2010 include a
mortgage note with the New York State Job Development Authority
of $4.5 million. The mortgage note was amended on
December 18, 2009, extending the fixed monthly payments of
principal and interest for a period of 60 months up to and
including December 31, 2014. The note bears interest at the
rate of 2.22% and is subject to review and adjustment
semi-annually based on the New York State Job Development
Authoritys confidential internal protocols. The mortgage
note is collateralized by our Chester, New York distribution
facility.
8.75% Senior
Subordinated Notes due 2014
In connection with its acquisition by the Sponsors on
April 30, 2004, Amscan Holdings issued and sold
$175.0 million in principal amount of 8.75% senior
subordinated notes due 2014. Interest on the notes is payable
semi-annually in arrears on May 1 and November 1 of each year.
The outstanding senior subordinated notes are guaranteed,
jointly and severally, on an unsecured subordinated basis by
each of Amscan Holdings existing and future domestic
subsidiaries.
The indenture governing the outstanding notes contains certain
covenants limiting, among other things and subject to certain
exceptions, Amscan Holdings ability and the ability of
Amscan Holdings restricted subsidiaries, to:
|
|
|
|
|
incur additional indebtedness or issue preferred stock;
|
|
|
|
pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of Amscan Holdings or any
restricted subsidiary or make payments on, or redeem, repurchase
or retire any subordinated indebtedness;
|
|
|
|
make certain investments, loans, advances and acquisitions;
|
|
|
|
enter into sale and leaseback transactions;
|
|
|
|
engage in transactions with affiliates;
|
|
|
|
create liens;
|
|
|
|
transfer or sell assets;
|
|
|
|
guarantee debt;
|
|
|
|
create restrictions on the payment of dividends or other amounts
to us from our restricted subsidiaries;
|
|
|
|
consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries; and
|
|
|
|
engage in unrelated businesses.
|
45
Amscan Holdings may redeem the outstanding senior subordinated
notes, in whole or in part, at the redemption prices (expressed
as percentages of principal amount of senior subordinated notes
to be redeemed) set forth below, plus accrued and unpaid
interest thereon, if redeemed during the twelve-month period
beginning on May 1 of each of the years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
2011
|
|
|
101.458
|
%
|
2012 and thereafter
|
|
|
100.000
|
%
|
If Amscan Holdings experiences certain kinds of change in
control, it must offer to purchase the outstanding senior
subordinated notes at 101% of their principal amount, plus
accrued and unpaid interest.
If Amscan Holdings or its restricted subsidiaries engage in
certain asset sales, it generally must either invest the net
cash proceeds from such sales in its business within a period of
time, prepay senior debt or make an offer to purchase a
principal amount of the outstanding senior subordinated notes
equal to the excess net cash proceeds, subject to certain
exceptions. The purchase price of the outstanding senior
subordinated notes will be 100% of their principal amount, plus
accrued and unpaid interest.
Amscan Holdings have entered into various capital leases for
machinery and equipment and automobiles with implicit interest
rates ranging from 5.69% to 17.40% which extend to 2015. Amscan
Holdings has numerous non-cancelable operating leases for its
retail store sites as well as several leases for offices,
distribution and manufacturing facilities, showrooms and
equipment. These leases expire on various dates through 2023 and
generally contain renewal options and require Amscan Holdings to
pay real estate taxes, utilities and related insurance costs.
Restructuring
costs
Restructuring costs associated with the Factory Card &
Party Outlet Acquisition of $9.1 million were accrued as
part of net assets acquired. Through December 31, 2009, we
incurred $6.7 million in restructuring costs, including
$3.8 million in 2009. Through December 31, 2010, we
incurred $7.6 million in restructuring costs including
$0.9 million incurred in the year ended December 31,
2010. We expect to incur $1.5 million in restructuring
costs in 2011.
During October 2009, we communicated our plan to close the FCPO
corporate office in Naperville, Illinois and to consolidate our
retail corporate office operations into those of Party City in
Rockaway, New Jersey. In connection with the closing, we
recorded severance costs of $1.8 million during 2009, all
of which were paid by December 2010. We continue to utilize the
Naperville facility as a distribution center for greeting cards
and other products.
Liquidity
We expect that cash generated from operating activities and
availability under our credit agreements will be our principal
sources of liquidity. Based on our current level of operations,
we believe these sources will be adequate to meet our liquidity
needs for at least the next twelve months. We cannot assure you,
however, that our business will generate sufficient cash flow
from operations or that future borrowings will be available to
us under our senior secured credit facilities in an amount
sufficient to enable us to repay our indebtedness, including the
notes, or to fund our other liquidity needs.
Cash
Flow Data Year Ended December 31, 2010 Compared
to Year Ended December 31, 2009
Net cash provided by operating activities totaled
$61.2 million during 2010, as compared to
$123.9 million during 2009. Net cash flow provided by
operating activities before changes in operating assets and
liabilities was $133.4 million during 2010 and
$124.2 million during 2009. Changes in operating assets and
liabilities during 2010 resulted in the use of cash of
$72.2 million and principally reflect an increase in
inventories to support the replenishment of inventories across
the channels we serve from the intentionally low levels reached
in 2009, growth in Halloween City locations and additional
inventory build related to the
46
Designware acquisition. Changes in operating assets and
liabilities resulted in the use of cash of $0.2 million
during 2009.
Net cash used in investing activities totaled
$102.8 million during 2010 and $54.4 million during
2009. Investing activities for 2010 included $30.4 million
paid in connection with the purchase of the Christys Group
and $21.5 million paid in connection with the purchase of
retail franchise stores. Capital expenditures totaled
$49.6 million in 2010 compared to $26.2 million in
2009. Retail capital expenditures totaled $37.2 million in
2010 and were principally for FCPO conversions, store
renovations and updated information systems, while wholesale
capital expenditures totaled $12.4 million.
Net cash provided from financing activities was
$46.5 million in 2010, compared to $70.2 million used
in financing activities in 2009. During 2010, net cash provided
by financing activities included $160.6 million from the
refinancing of our asset based revolving credit facility and
$675.0 million from the refinancing of our term loan credit
facility. Cash provided by the refinancing of the revolving
credit facility was principally used to pay off the
$137.6 million balance on the prior revolving credit
facility and the $19.2 million balance of the prior PCFG
term loan. The remaining cash from financing under the revolving
credit facility was principally used to pay down trade payables.
Cash provided by the refinancing of the term loan credit
facility was used to pay off the $341.6 million balance on
the prior term loan credit facility and to pay a
$301.8 million dividend to stockholders (excluding the
$9.4 million stock compensation expense). Additionally,
cash used in financing activities included scheduled payments on
our long-term obligations that totaled $2.6 million
compared to $11.0 million 2009.
Cash
Flow Data Year Ended December 31, 2009 Compared
to Year Ended December 31, 2008
Net cash provided by operating activities totaled
$123.9 million in 2009, as compared to $79.9 million
in 2008. Net cash provided by operating activities before
changes in operating assets and liabilities was
$124.2 million for 2009 and $102.6 million for 2008.
Changes in operating assets and liabilities resulted in the use
of cash of $0.2 million in 2009 and $22.7 million in
2008. The increase in cash provided by operating activities
during 2009 principally reflects an increase in income from
operations and decreases in interest expense and inventory
levels, partially offset by an increase in other assets.
Net cash used in investing activities totaled $54.4 million
in 2009 and $51.2 million in 2008. Investing activities for
2009 included $24.9 million paid in escrow in connection
with the acquisition of Designware. 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.
Net cash used in financing activities was $70.2 million in
2009 and $23.0 million in 2008. During 2009, the majority
of cash used in financing activities was used to reduce
borrowings under our revolving credit facility. Additionally,
cash used in financing activities included scheduled payments on
our long-term obligations that totaled $11.0 million in
2009 compared to $8.9 million during 2008. Scheduled
payments during 2009 included an additional $2.5 million
for payments on the PCFG term loan in connection with the
amended credit agreement.
47
Tabular
Disclosure of Contractual Obligations
Our contractual obligations at December 31, 2010 are
summarized by the year in which the payments are due in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Long-term debt obligations(a)
|
|
$
|
846,183
|
|
|
$
|
6,810
|
|
|
$
|
6,835
|
|
|
$
|
6,860
|
|
|
$
|
181,982
|
|
|
$
|
5,737
|
|
|
$
|
637,959
|
|
Capital lease obligations(a)
|
|
|
3,975
|
|
|
|
2,236
|
|
|
|
1,446
|
|
|
|
147
|
|
|
|
131
|
|
|
|
15
|
|
|
|
|
|
Operating lease obligations(b)
|
|
|
425,164
|
|
|
|
112,172
|
|
|
|
95,026
|
|
|
|
67,314
|
|
|
|
45,510
|
|
|
|
33,369
|
|
|
|
71,773
|
|
Merchandise purchase commitments(c)
|
|
|
81,600
|
|
|
|
26,700
|
|
|
|
27,200
|
|
|
|
27,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum product royalty obligations
|
|
|
19,765
|
|
|
|
8,271
|
|
|
|
7,320
|
|
|
|
1,724
|
|
|
|
800
|
|
|
|
550
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,376,687
|
|
|
$
|
156,189
|
|
|
$
|
137,827
|
|
|
$
|
103,745
|
|
|
$
|
228,423
|
|
|
$
|
39,671
|
|
|
$
|
710,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 8 to our audited consolidated financial statements
which are included elsewhere in this prospectus. |
|
(b) |
|
We are also an assignor with continuing lease liability for
sixteen stores sold to franchisees that expire through 2016. The
assigned lease obligations continue until the applicable leases
expire. The maximum amount of the assigned lease obligations may
vary, but is limited to the sum of the total amount due under
the lease. At December 31, 2010, the maximum amount of the
assigned lease obligations was approximately $7.4 million
and is not included in the table above. |
|
|
|
The operating lease obligations included above do not include
contingent rent based upon sales volume (which represented less
than 1% of minimum lease obligations in 2010), or other variable
costs such as maintenance, insurance and taxes. See Note 17
to our audited consolidated financial statements which are
included elsewhere in this prospectus. |
|
(c) |
|
We have certain purchase commitments with vendors requiring
minimum purchase commitments through 2013. |
At December 31, 2010 there were no non-cancelable purchase
orders related to capital expenditures.
At December 31, 2010, there were $150.1 million of
borrowings under our ABL Credit Agreement and standby letters of
credit totaling $12.9 million.
Not included in the above table are $0.7 million of net
potential cash obligations associated with unrecognized tax
benefits due to the high degree of uncertainty regarding the
timing of future cash outflows associated with such obligations.
See Note 16 to our audited consolidated financial
statements for further information related to unrecognized tax
benefits.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements.
Effects
of Inflation
Although we expect that our operating results will be influenced
by general economic conditions, we do not believe that inflation
has had a material effect on our results of operations during
the periods presented. However, there can be no assurance that
our business will not be affected by inflation in the future.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the appropriate application of certain
accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts
reported in the financial statements and related notes. Since
future events and their impact cannot be determined with
certainty, the
48
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 FOB 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
We enter into product royalty agreements that allow us to use
licensed designs on certain of its products. These contracts
require us 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. We match 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 we
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.
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
49
merchandise mix and changes in actual shortage trends. The
shrinkage rate from the most recent physical inventory, in
combination with historical experience, is the basis for
estimating shrinkage.
Long-Lived
and Intangible Assets
We review the recoverability of our long-lived assets, including
definite-lived intangible assets other than goodwill, whenever
facts and circumstances indicate that the carrying amount may
not be fully recoverable. For purposes of recognizing and
measuring impairment, we evaluate long-lived assets other than
goodwill based upon the lowest level of independent cash flows
ascertainable to evaluate impairment. If the sum of the
undiscounted future cash flows expected over the remaining asset
life is less than the carrying value of the assets, we may
recognize an impairment loss. The impairment related to
long-lived assets is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. When fair values are not readily available, we estimate
fair values using expected discounted future cash flows.
During 2010 and 2008, we instituted programs to convert our FCPO
stores and our company-owned and franchised Party America stores
to Party City stores and recorded fourth quarter non-cash
charges of $27.4 million and $17.4 million,
respectively, for the impairment of the FCPO and Party America
trade names.
In the evaluation of the fair value and future benefits of
finite long-lived assets attached to retail stores, we perform
our cash flow analysis on a
store-by-store
basis. Various factors including future sales growth and profit
margins are included in this analysis. To the extent these
future projections or strategies change, the conclusion
regarding impairment may differ from the current estimates.
Goodwill is reviewed for potential impairment, on an annual
basis or more frequently if circumstances indicate a possible
impairment, by comparing the fair value of a reporting unit with
its carrying amount, including goodwill. We estimate the fair
value of each reporting unit using expected discounted cash
flows. If the carrying amount of a reporting unit exceeds its
fair value, the excess, if any, of the fair value of the
reporting unit over amounts allocable to the units other
assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss will
be recognized in an amount equal to that excess. The fair value
of a reporting unit refers to the amount at which the unit as a
whole could be sold in a current transaction between willing
parties.
Insurance
Accruals
Our consolidated balance sheet includes significant liabilities
with respect to self-insured workers compensation, medical
and general liability claims. We estimate the required liability
for such claims based upon various assumptions, which include,
but are not limited to, our historical loss experience,
projected loss development factors, actual payroll and other
data. The required liability is also subject to adjustment in
the future based upon changes in claims experience, including
changes in the number of incidents (frequency) and changes in
the ultimate cost per incident (severity). Adjustments to
earnings resulting from changes in historical loss trends have
been insignificant. Further, we do not anticipate any
significant change in loss trends, settlements or other costs
that would cause a significant change in our earnings.
Income
Taxes
Temporary differences arising from differing treatment of income
and expense items for tax and financial reporting purposes
result in deferred tax assets and liabilities that are recorded
on the balance sheet. These balances, as well as income tax
expense, are determined through managements estimations,
interpretation of tax law for multiple jurisdictions and tax
planning. If our actual results differ from estimated results
due to changes in tax laws or tax planning, our effective tax
rate and tax balances could be affected. As such, these
estimates may require adjustment in the future as additional
facts become known or as circumstances change.
Our income tax returns have been regularly audited by the
Internal Revenue Service and are periodically audited by various
state and local jurisdictions. We reserve for uncertain tax
positions according to the
50
guidance of
ASC 740-10
Income Taxes. See further discussion in Note 16 to
our consolidated financial statements.
Stock-Based
Compensation
On January 1, 2006, we adopted Statement of Financial
Accounting Standards, Accounting Standards Codification or
ASC Subtopic 718 (SFAS No. 123(R))
Share-Based Payment, which is a revision of
SFAS No. 123 Accounting for Stock-Based
Compensation as amended. ASFAS No. 123(R) establishes
standards for the accounting for transactions where an entity
exchanges its equity for goods or services and transactions that
are based on the fair value of the entitys equity
instruments or that may be settled by the issuance of those
equity instruments. ASC Subtopic 718 focuses primarily on
accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Generally, the
fair value approach in ASC Subtopic 718 is similar to the fair
value approach described in SFAS No. 123(R).
We adopted ASC Subtopic 718 using the prospective method. Since
our common stock is not publicly traded, the options granted in
2005 under SFAS No. 123 continue to be expensed under
the provisions of SFAS No. 123 using a minimum value
method. Options issued subsequent to January 1, 2006 are
expensed under the provisions of ASC Subtopic 718 (see
Note 15).
Recently
Issued Accounting Pronouncements
In July 2010, the FASB issued ASU
2010-20,
Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU
2010-20
requires increased disclosures about the credit quality of
financing receivables and allowances for credit losses,
including disclosure about credit quality indicators, past due
information and modifications of finance receivables. The
guidance is generally effective for reporting periods ending
after December 15, 2010. There was no material impact from
this update.
In December 2010, the FASB issued ASU
2010-29,
Business Combinations (Topic 805). This update
requires a public entity to disclose pro forma information for
business combinations that occurred in the current reporting
period and specifically requires the same information for the
comparative prior period. This guidance is generally effective
for annual reporting periods beginning on or after
December 15, 2010. We do not anticipate any material impact
from this update.
In January 2011, the FASB issued ASU
2011-01,
Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update
No. 2010-20.
ASU 2011-01
defers the portion of ASU
2010-20
related to troubled debt disclosures. This guidance is
anticipated to be effective for interim and annual periods
ending after June 15, 2011. We do not anticipate any
material impact from this update.
Quarterly
Results
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.
51
The following table sets forth our historical revenues, gross
profit, income from operations and net income (loss), by
quarter, for 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(Dollars in thousands)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
304,379
|
|
|
$
|
352,705
|
|
|
$
|
358,772
|
|
|
$
|
563,821
|
|
Royalties and franchise fees
|
|
|
3,844
|
|
|
|
4,453
|
|
|
|
4,035
|
|
|
|
7,085
|
|
Gross profit
|
|
|
104,479
|
|
|
|
141,840
|
|
|
|
132,437
|
|
|
|
257,863
|
|
Income from operations
|
|
|
8,288
|
|
|
|
35,367
|
|
|
|
17,963
|
|
|
|
65,818
|
(a)
|
Net (loss) income attributable to Party City Holdings Inc.
|
|
|
(412
|
)
|
|
|
16,460
|
|
|
|
4,603
|
|
|
|
28,668
|
(a)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
309,046
|
|
|
$
|
337,536
|
|
|
$
|
336,944
|
|
|
$
|
483,798
|
|
Royalties and franchise fees
|
|
|
3,694
|
|
|
|
4,536
|
|
|
|
4,164
|
|
|
|
7,100
|
|
Gross profit
|
|
|
103,629
|
|
|
|
128,425
|
|
|
|
121,453
|
|
|
|
214,776
|
|
Income from operations
|
|
|
12,201
|
|
|
|
27,818
|
|
|
|
14,937
|
|
|
|
86,917
|
|
Net income attributable to Party City Holdings Inc.
|
|
|
2,403
|
|
|
|
10,952
|
|
|
|
3,079
|
|
|
|
46,119
|
|
|
|
|
(a) |
|
During the fourth quarter of 2010, we recorded a pre-tax charge
of $27,400 to write off the FCPO trade name. |
Quantitative
and Qualitative Disclosures about Market Risk
Our earnings are affected by changes in interest rates as a
result of our variable rate indebtedness. However, we utilize
interest rate swap agreements to manage the market risk
associated with fluctuations in interest rates. If market
interest rates for our variable rate indebtedness averaged 2%
more than the interest rate actually paid for the years ended
December 31, 2010, 2009 and 2008, our interest expense,
after considering the effects of our interest rate swap
agreements, would have increased, and income before income taxes
would have decreased, by $7.1 million, $6.7 million,
and $7.3 million, respectively. These amounts are
determined by considering the impact of the hypothetical
interest rates on our borrowings and interest rate swap
agreements. This analysis does not consider the effects of the
reduced level of overall economic activity that could exist in
such an environment. Further, in the event of a change of such
magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the
uncertainty of the specific actions that we would take and their
possible effects, the sensitivity analysis assumes no changes in
our financial structure.
Our earnings are also affected by fluctuations in the value of
the U.S. dollar as compared to foreign currencies,
predominately in European countries, as a result of the sales of
our products in foreign markets. Although we periodically enter
into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we (1) may not be
able to achieve hedge effectiveness to qualify for
hedge-accounting treatment and, therefore, would record any gain
or loss on the fair value of the derivative in other expense
(income) and (2) may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the
value of the dollar relative to the currencies in which our
foreign sales are denominated would have resulted in a decrease
in gross profit of $6.7 million, $5.5 million, and
$5.6 million for the years ended December 31, 2010,
2009 and 2008, respectively. These calculations assume that each
exchange rate would change in the same direction relative to the
U.S. dollar. In addition to the direct effects of changes
in exchange rates, which could change the U.S. dollar value
of the resulting sales, changes in exchange rates may also
affect the volume of sales or the foreign currency sales price
as competitors products become more or less attractive.
Our sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in
sales levels or local currency prices.
52
BUSINESS
Our
Company
We are a global leader in decorated party supplies. We make it
easy and fun to enhance special occasions with the widest
assortment of innovative and exciting merchandise at a
compelling value. With the 2005 acquisition of Party City, we
created a vertically integrated business combining the leading
product design, manufacturing and distribution platform, Amscan,
with the largest U.S. retailer of party supplies. We have
the industrys broadest selection of decorated party
supplies, which we distribute to over 100 countries. Our party
superstore retail network consists of approximately 800
locations in the United States and is approximately
15 times larger than that of our next largest party
superstore competitor. Our vertically integrated business model
and scale differentiate us from other party supply companies and
allow us to capture the
manufacturing-to-retail
margin on a significant portion of the products sold in our
stores. We believe our widely recognized brands, broad product
offering, low-cost global sourcing model and category-defining
retail concept are significant competitive advantages. We
believe these characteristics, combined with our vertical
business model and scale, position us for continued organic and
acquisition-led growth in the United States and internationally.
Founded in 1947, we started as a wholesaler and have grown to
become the largest global designer, manufacturer and distributor
of decorated party supplies. Today, through our wholesale
activities, we offer the broadest selection of decorated party
supplies with approximately 37,000 SKUs that range from paper
and plastic tableware, decorations and metallic and latex
balloons to novelties, costumes, party kits, stationery and
gifts for everyday, themed and seasonal events. Our products are
available in over 40,000 retail outlets worldwide, including our
own retail network, independent party supply stores, dollar
stores, mass merchants, grocery retailers and gift shops. We
have a history of driving innovation in the category with an
in-house product development team that over the last three years
has introduced an average of 3,500 new products annually. Our
global network of owned and third-party manufacturers combined
with our
state-of-the-art
distribution systems position us to deliver high-quality,
cost-competitive products with turnaround times and fill rates
that we believe are among the best in the industry. We have
long-term relationships with many of our wholesale customers,
for whom we provide sales support through in-store signage,
planogram support and product training. We believe that through
our extensive offering of party supplies combined with
industry-leading innovation, customer service levels and value,
we will continue to win with our customers.
The acquisition of Party City represented an important step in
the evolution of our business. Over the last five years, we have
established the largest network of party supply stores in the
United States with over 1,200 locations consisting of
approximately 800 party superstores (including approximately 230
franchised stores), principally under the Party City banner, and
a temporary Halloween network of over 400 temporary locations
under the Halloween City banner. We are the only party supply
retailer with a national footprint. We also operate
PartyCity.com, our primary
e-commerce
site, which provides a convenient alternative shopping
experience, a broader merchandise selection and party-planning
ideas while also allowing us to reach markets where we do not
currently have a retail presence. As underscored by our
Nobody Has More Party for Less slogan, we believe we
offer a superior one-stop shopping experience with a broad
selection, high in-stock positions and compelling value, making
us the favored destination for all of our customers
party-supply needs. Over the last five years, we have steadily
increased the selection of Amscan merchandise offered in Party
City stores from approximately 25% to over 60%, allowing us to
capture the
manufacturing-to-retail
margin on a significant portion of our retail sales.
We believe our scale and scope, extending from design and
manufacturing to retail and
e-commerce,
provide numerous competitive advantages and opportunities for
growth. Through a combination of organic growth and strategic
acquisitions, we increased our consolidated revenues from
$1,015 million in 2006 to $1,599 million in 2010,
representing a compounded annual growth rate of 12.0%. Our
Adjusted EBITDA has grown from $122 million in 2006 to
$226 million in 2010, representing a compounded annual
growth rate of 16.7%. Adjusted EBITDA as a percentage of
revenues has increased 213 basis points from 12.0% in 2006
to 14.1% in 2010.
53
Evolution
of Our Business
Over the last 60 years, we have grown from a manufacturer
and distributor of selected paper goods to a global, vertically
integrated wholesaler and retailer of decorated party supplies.
This evolution was accomplished organically and through
strategic acquisitions that were successfully integrated over
the years. More recently, we implemented and completed several
strategic initiatives to further strengthen our business and
position us for continued growth. Below we summarize some of our
key acquisitions and strategic initiatives:
Enhancing
Our Wholesale Platform
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The acquisition of Anagram International in 1998 and the
subsequent acquisition of M&D Balloons in 2002 positioned
us as the largest manufacturer and distributor of metallic
balloons in the world.
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|
In 2001, we opened a new distribution center in Chester, New
York, which was significantly expanded in 2005, for an aggregate
investment of approximately $60 million. This
state-of-the-art,
approximately 900,000 square foot facility enables us to
deliver industry-leading service levels to our third-party
customers and network of company-owned stores.
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|
In 2003, we opened a Hong Kong office to support our Asian-based
sourcing and sales organization that has grown to over 40
employees.
|
Establishing
Retail Leadership and Our Vertically Integrated Model
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|
Through the acquisitions of Party City in 2005, Party America in
2006 and FCPO in 2007, we have become the largest party goods
specialty retailer in the United States.
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|
Subsequent to our acquisition of Party City and other party
store banners, we focused on rebranding acquired businesses and
remerchandising our stores. Following each acquisition, we
capitalized on our vertically integrated model by increasing the
percentage of Amscan products available for sale at our retail
stores, allowing us to capture the
manufacturing-to-retail
margin on a significant portion of our retail sales.
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|
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|
Between 2006 and 2009, we converted all of the Party America
company-operated stores to the Party City banner. In 2010 we
began converting the FCPO stores to the Party City format; we
converted 40 in 2010 and expect to have the remaining 93 FCPO
stores converted to the Party City banner by the end of 2013.
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|
In 2007, we acquired Gags & Games Inc., the parent
company of Halloween USA, which operated 94 locations, enabling
us to enter the growing temporary Halloween business. Since the
acquisition, we have grown to over 400 locations and changed the
banner to Halloween City.
|
Re-Launching
Our
E-commerce
Platform
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|
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|
|
In August 2009, we re-launched PartyCity.com with
e-commerce
capabilities, providing us with an additional
direct-to-consumer
sales channel. Since the re-launch, we have grown our
e-commerce
revenues to over $40 million in 2010 as we continue to
capitalize on our competitive advantages, which include a
nationwide store base, strong brand recognition and vertical
business model. The average basket size on our e-commerce site
is approximately three times larger than it is in our Party City
stores. We expect our
e-commerce
platform to continue to generate significant revenue growth as
we execute our planned initiatives to drive traffic and increase
customer interactions through social networking interfaces as
well as through the four million email addresses that we have
captured through our stores and website.
|
Broadening
Products and Channel Reach
|
|
|
|
|
Our March 2010 acquisition of the Designware party goods
division from American Greetings strengthened our juvenile
licensed character portfolio and enhanced our reach into the
grocery retailers and mass merchant channels. In connection with
this acquisition, American Greetings granted us rights to
manufacture and distribute Designware-branded and licensed
character-based products into select
|
54
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|
|
|
|
retail venues, including the party supply store channel. We also
agreed to supply substantially all of American Greetings
party supply requirements, allowing us to grow our distribution
with American Greetings, specifically in the mass market, drug
and grocery retail channels.
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Our September 2010 acquisition of the Christys Group, a
U.K.-based costume company, provided costume design and
additional sourcing capabilities as well as additional resources
in the U.K. and European markets. The Christys Group
accelerates our entry into the costume wholesale business and
enables us to further increase the percentage of our own
products sold at Party City, Halloween City and PartyCity.com.
|
Growing
International Presence
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|
|
In the past five years, we have grown our international
operations, which now represent 6.9% of total revenues. We
believe international sales are likely to grow to 10% to 15% of
our total revenues over the next three to five years through
organic and acquisition-generated growth.
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|
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|
Our January 2011 acquisition of Riethmuller, which included the
Malaysian operations of latex balloon manufacturer Everts
Balloon, expanded our reach in Europe while also enabling us to
directly supply a significant portion of our latex balloon
requirements previously sourced from third-party vendors.
|
As a result of these investments, we have created a
differentiated, vertically integrated business model. We believe
that our superior selection of party supplies, scale, innovation
and service positions us for future growth across all of our
channels.
Competitive
Strengths
We are well-positioned to continue to capitalize on the growing
trend to celebrate lifes memorable events as a result of
the following competitive strengths:
Leading Market Position with Industry Defining
Brands. Through our category-defining brands,
Amscan and Party City, we are the largest vertically integrated
provider of decorated party supplies in the world. Our history
of growth and established global relationships have been driven
by our broad selection of continuously updated and innovative
merchandise at a compelling value. Additionally, with
approximately 800 party superstores in 41 states, our
domestic footprint is approximately 15 times larger than that of
our next largest party superstore retail competitor. We believe
that our scale, brand recognition and value proposition
underscore our credibility as the destination of choice for
party supplies in any channel.
Unique Vertically Integrated Operating
Model. We manufacture, source and distribute
party supplies acting as a one-stop shop for party goods to both
wholesale customers and end consumers through our company-owned
retail network. Our vertically integrated model provides us with
a number of advantages by allowing us to:
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enhance our profitability as we realize the
manufacturing-to-retail
margin on a significant portion of our retail sales;
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leverage our global sourcing network and scale to reinforce our
position as the low-cost provider of quality party supplies;
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|
|
effectively respond to changes in consumer trends through our
in-house design and innovation team;
|
|
|
|
sustain high standards of product quality and safety;
|
|
|
|
maintain greater control of the design, production, cost and
introduction of new products across our multiple
channels; and
|
|
|
|
monitor sell-through at retail in real-time to limit markdowns
and excessive promotions.
|
55
Broad and Innovative Product Offering. We
offer the broadest and deepest product assortment in the party
supply industry with approximately 37,000 SKUs available in
wholesale and an average of 25,000 SKUs offered at any one time
in our Party City superstores. Our extensive selection supports
our leading position as the party supply destination as we offer
customers a single source for all of their party needs. The
majority of our products are designed and developed by a staff
of approximately 135 artists and product developers who keep the
product portfolio fresh and exciting. Our vertically integrated
model allows our product development team to test new products
and effectively respond to changes in consumer preferences. Over
the last three years, we have introduced an average of 3,500 new
products and 50 new party goods ensembles annually, and we
believe that this ability to consistently introduce innovative
items drives newness in our product offering and supports
increased sales across our channels.
Category Defining Retail Concept. With an
average of 25,000 SKUs at any one time, we believe our Party
City stores offer one of the most extensive selections in the
industry. We keep our assortment current by frequently
introducing new products, and we organize our stores by events
and themes to make it easy to shop while consistently presenting
customers with additional product ideas that will enhance their
events and our sales. We also maintain high in-stock positions
of core products and related items, so we are able to address
party needs of any size. With our extensive selection,
convenient locations, consistently high in-stock positions and
compelling value proposition, we believe customers associate
Party City with successful celebrations, and, as a result, our
stores will continue to be seen as the favored destination for
party supplies and innovative ideas for great parties.
Highly Efficient Global Sourcing and Distribution
Capabilities. Over the last 60 years, we
have developed a global network of owned and third-party
manufacturers that we believe optimizes speed to market, quality
and cost. In 2010, we manufactured approximately 40% of our
wholesale product sales, principally in the United States, with
the balance sourced from low-cost, third-party manufacturers
primarily in Asia. Our in-house manufacturing is focused on
high-volume party essentials that can be manufactured through
highly automated processes, such as paper and plastic tableware
products and metallic balloons. We believe our manufacturing
capabilities are cost-competitive and allow us to offer rapid
turnaround times on key product categories. With respect to our
third-party supply network, we have over
20-year
relationships with many of our vendors and often represent a
significant portion of their overall business. We also have
warehousing and distribution facilities around the world
including our
state-of-the-art
distribution center in Chester, New York, which has nearly
900,000 square feet under one roof. Our manufacturing,
sourcing and distribution capabilities offer our company-owned
stores, third-party retailers, distributors and our retail
consumers
best-in-class
levels of service, rapid fulfillment and competitive prices.
World-Class Management Team with a Proven Track
Record. Our senior management team averages
20 years of industry experience and possesses a unique
combination of management skills and experience in the party
goods sector. Our team has operated the business during various
economic cycles and through several business transformations.
Mr. Rittenberg, our Chief Executive Officer, and
Mr. Harrison, our Chief Operating Officer, have worked
together at the Company for 15 years and have grown our
business with an almost tenfold increase in revenues during that
period. Additionally, our team has a strong track record of
successful acquisitions and integrations, which continue to be
an important part of our overall strategy.
Growth
Strategy
We believe we have significant opportunities to enhance our
leadership position in the party goods industry and improve
profitability through the further implementation of our
operating strategy both organically and through strategic
acquisitions. Key elements of our growth strategy include:
Growing Market Share and Earnings. We believe
we have significant opportunities to continue to grow our
business by capitalizing on our leading scale, vertical
operating model and strong innovation capabilities as well as
strategic acquisitions. Over the past five years, we have
successfully grown our wholesale revenues at a 13.6% CAGR to
$769 million in 2010 (including sales to company-owned
Party
56
City superstores). We will continue to broaden our product
assortment by adding new party themed events and licenses. We
recently began manufacturing and selling licensed themed party
products for MLB, NBA and NHL teams and acquired Christys
Group, which significantly enhanced our in-house costume
capabilities. These and other opportunities will position us to
continue to increase our market share and grow the percentage of
our own products sold at retail, including our company-owned and
franchised stores. Since the acquisition of Party City in 2005,
we have increased the selection of Amscan merchandise offered in
Party City stores from approximately 25% to over 60%, with a
target of 70% to 75% over the long term. Our ability to create
new and enhance existing celebration opportunities will continue
to be a consistent driver of our growth.
Expand Our Retail Store Base. Our retail
network includes approximately 800 party superstores and over
400 temporary locations. We believe there is an opportunity to
open more than 400 additional Party City stores in North
America. Our primary focus over the past five years has been on
optimizing our superstore base by integrating and rebranding
acquired retail stores. In 2011, we plan to open 25 Party City
stores and close five locations. Starting in 2012, we plan to
open 25 to 35 Party City stores per year, representing annual
company-owned party superstore growth of approximately 5%. Based
on historical performance, we expect our new stores to have a
payback period of approximately three years and to generate
an average pre-tax
cash-on-cash
return on invested capital of approximately 50% in year four
(including the margin generated from our vertical model).
Drive Additional Growth and Productivity From Existing Retail
Stores. We plan to grow our comparable store
sales by continuing to improve our brand image and awareness and
by converting FCPO stores to the Party City banner. In late
2009, we modified our advertising strategy to minimize our
dependency on newspaper inserts and focus instead on a national
broadcasting campaign to further develop brand awareness and
expand our customer base. This shift, which emphasizes brand
building and our price-value proposition, has resonated well
with our customers. In addition, in 2010 we began converting our
FCPO stores to the Party City banner and expect to have the
remaining 93 FCPO stores converted to the Party City banner by
the end of 2013. We expect the converted stores to realize an
average sales improvement of approximately 10% in the first year
following the conversion relative to the unconverted FCPO stores.
Increase International Presence. International
sales grew 15.1% in 2010 and currently comprise 6.9% of our
total revenues. The market for party goods outside the United
States is less mature due to lower consumer awareness of party
products and less developed retail distribution channels. We
believe international growth will be driven, in part, through
increasing customization of our products to local tastes and
holidays and the expansion of our retail presence, particularly
through our store-within-a-store concept with selected
international retailers. Our recent acquisitions of
Christys Group and Riethmuller expanded our presence in
select markets, including the U.K., Germany and Poland. We
believe international sales are likely to grow to 10% to 15% of
our total revenues over the next three to five years through
organic and acquisition-led growth.
Grow Our
E-commerce
Platform. In August 2009, we re-launched our
primary
e-commerce
platform PartyCity.com, providing us with an additional
direct-to-consumer
sales channel. In 2010,
e-commerce
sales were over $40 million, representing approximately
3.6% of our total retail sales. We expect
e-commerce
will continue to experience significant growth as we increase
online content for products, party ideas and promotional
offerings, invest in additional online advertising to drive
traffic and target customers through the four million email
addresses that we have captured through our stores and website.
Our dedicated
e-commerce
distribution center, located in Naperville, Illinois, provides
sufficient capacity to support our growth plans.
Pursue Accretive Acquisitions. Over the past
15 years, we have successfully integrated nine
acquisitions, strengthening our manufacturing, distribution and
retail platforms. We have also acquired, and will continue to
acquire our franchised stores as such opportunities emerge. We
believe our significant experience in identifying attractive
acquisition targets, proven integration process and global
infrastructure create a strong platform for future acquisitions.
Through future acquisitions we can leverage
57
our existing marketing, distribution and production
capabilities, expand our presence in various retail distribution
channels, further broaden and deepen our product lines and
increase penetration in both domestic and international markets.
Industry
Overview
We operate in the broadly defined $10 billion retail party
goods industry (including decorative paper and plastic
tableware, decorations, accessories and balloons), which is
supported by a range of suppliers from commodity paper goods
producers to party goods specialty retailers. Sales of party
goods are fueled by everyday events such as birthdays, baby
showers, weddings and anniversaries, as well as seasonal events
such as holidays and other special occasions (Christmas, New
Years Eve, graduations, Easter, Super Bowl, Fourth of
July). As a result of numerous and diverse occasions, the
U.S. party goods market enjoys broad demographic appeal. We
also operate in the Halloween market, which represents a
$6 billion retail opportunity and includes costumes, candy
and makeup.
The retail landscape is comprised primarily of party
superstores, dollar stores, mass merchants, grocery retailers
and craft stores. The party superstore has emerged as the
preferred destination for party goods shoppers, similar to the
dominance of specialty retailers in other categories such as
office supplies, pet products and sporting goods. This is
typically due to the superstore chains ability to offer a
wider variety of merchandise at more compelling prices in a
convenient setting. Other retailers that cater to the party
goods market typically offer a limited assortment of party
supplies and seasonal items. Mass merchants tend to focus
primarily on juvenile and seasonal goods, greeting cards and
gift wrap; craft stores on decorations and seasonal merchandise;
and dollar stores on general and seasonal party goods items.
The consumable nature and low per-item prices in the party goods
market have historically driven demand among consumers seeking
to enhance the quality of their gatherings and celebrations.
Party goods are an economical means by which to make events and
occasions more festive and as a result have continued to sell
well during economic downturns. Manufacturers and retailers
continue to create and market party goods and gifts that
celebrate a greater number of events, holidays and occasions.
Additionally, the number and types of products offered for each
occasion continues to expand, encouraging add-on and impulse
purchases by consumers.
Business
Overview
We are the leading vertically integrated provider of decorated
party goods with a national footprint of party superstores
offering an unrivaled selection of party supplies. We have two
primary reporting segments: Wholesale and Retail. In 2010, we
generated 29.4% of our total revenues from our wholesale segment
and 70.6% from our retail segment (which includes 1.2% of total
revenues from franchising activities). Our wholesale revenues
are generated from the sales of party goods for all occasions,
including paper and plastic tableware, accessories and
novelties, metallic and latex balloons, stationery and gift
items. Our products are sold at wholesale to party goods
superstores, including our company-owned and franchised retail
stores, other party goods retailers, dollar stores, mass
merchants, independent card and gift stores, and other retailers
and distributors throughout the world. Our retail operations
generate revenue primarily through the sale of Amscan and other
party supplies through Party City, Halloween City and
PartyCity.com. Our franchising revenues are generated from an
initial one-time franchise fee, renewal fees and ongoing
franchise royalty payments based on retail sales from the
franchised stores.
Wholesale
Operations
Overview
We are the leading designer, manufacturer and distributor of
decorated party goods in the world, offering the industrys
most extensive selection with approximately 37,000 SKUs. 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
promote additional sales of related products for every occasion.
To enhance our customers celebrations of
58
lifes important events, we market party goods ensembles
for a wide variety of occasions, including seasonal and
religious holidays, special events and themed celebrations.
Our Amscan, Anagram and Designware branded products are offered
in over 40,000 retail outlets around the world, ranging from
party goods superstores, including our company-owned and
franchised retail stores, other party goods retailers, dollar
stores, mass merchants, independent card and gift stores. We
have long-term relationships with many of our wholesale
customers for whom we provide sales support through in-store
signage, planogram support and product training. Party goods
superstores, the Companys primary channel of distribution,
provide consumers with a one-stop source for all of their party
needs. Amscan, Anagram and Designware branded products represent
a significant portion of party goods carried by both
company-owned and third-party stores with the overall percentage
continuing to increase, reflecting the breadth of our product
line and, based on our scale, our ability to manufacture and
source quality products at competitive prices.
The table below shows the breakdown of our total wholesale sales
by channel for the year ended December 31, 2010.
|
|
|
|
|
Channel
|
|
Sales
|
|
|
($ in millions)
|
|
Party City owned stores
|
|
$
|
298
|
|
Party City franchised stores
|
|
|
133
|
|
Other retailers
|
|
|
149
|
|
Domestic and international balloon distributors
|
|
|
96
|
|
International
|
|
|
93
|
|
|
|
|
|
|
Total wholesale sales
|
|
$
|
769
|
|
|
|
|
|
|
International party supply markets are generally less mature
than the U.S. markets. However, we believe this will change over
time, and we are making significant investments to ensure we are
well positioned to benefit from growth in these markets.
Investments include our September 2010 acquisition of
Christys Group and the January 2011 acquisition of
Riethmuller, both of which will provide us with an expanded
international platform and lead to an increase of international
sales as a percentage of our total sales in subsequent periods.
Product
Lines
We have the industrys most extensive selection of party
supplies. The following table sets forth the principal products
distributed by the Company, by product category, and the
corresponding percentage of revenue that each category
represents:
Wholesale
Sales by Product for the Year Ended
December 31, 2010
|
|
|
|
|
|
|
Category
|
|
Items
|
|
% of Sales
|
|
Tableware
|
|
Plastic Plates, Paper Plates, Plastic Cups, Paper Cups, Paper
Napkins, Plastic Cutlery, Tablecovers
|
|
|
33
|
%
|
Favors, Stationery & Other
|
|
Party Favors, Gift Bags, Gift Wrap, Invitations, Bows, Stationery
|
|
|
27
|
%
|
Decorations
|
|
Latex balloons, Piñatas, Crepes, Flags & Banners,
Decorative Tissues, Stickers and Confetti, Scene Setters,
Garland, Centerpieces
|
|
|
16
|
%
|
Metallic Balloons
|
|
Bouquets, Standard 18 Inch Sing-A-Tune, SuperShapes, Weights
|
|
|
14
|
%
|
Costumes & Accessories
|
|
Costumes, Other Wearables, Wigs
|
|
|
10
|
%
|
59
Our products span a wide range of lifestyle events from
birthdays to theme parties and sporting events, as well as
holidays such as Halloween and New Years. Approximately
78% of our wholesale sales consist of items designed for
everyday occasions, with the remaining 22% comprised of items
used for holidays and seasonal celebrations throughout the year.
Our product offerings cover the following broad range of
occasions and life celebrations:
Current
Product Offering
|
|
|
Everyday
|
|
Seasonal
|
|
Birthdays
|
|
New Years
|
Anniversaries
|
|
Valentines Day
|
Bar Mitzvahs
|
|
St. Patricks Day
|
Bridal/Baby Showers
|
|
Easter
|
Christenings
|
|
Passover
|
Confirmations
|
|
Fourth of July
|
First Communions
|
|
Halloween
|
Graduations
|
|
Fall
|
Theme-oriented*
|
|
Thanksgiving
|
Weddings
|
|
Hanukkah
|
|
|
|
* |
|
Our theme-oriented ensembles enhance every celebration and
include Bachelorette, Card Party, Casino, Chinese New Year,
Cocktail Party, Disco, Fiesta, Fifties
Rock-and-Roll,
Hawaiian Luau, Hollywood, Mardi Gras, Masquerade, Patriotic,
Retirement, Sports, Summer Barbeque and Western. |
Product
Development and Design Capabilities
Our 135 person in-house design staff continuously develops
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 unique ensembles that
appeal to consumers. Our creative staff is constantly in the
market identifying trends and new product concepts. Over the
last three years, we have introduced an average of 3,500 new
products and 50 new party goods ensembles annually. In addition,
in 2011, our recently acquired Christys Group expects to
introduce 150 Halloween costumes and 250 related accessories.
Our proprietary designs and strength in developing new items at
attractive prices help differentiate our products from those of
our competitors.
Sales
and Marketing
Our principal wholesale sales and marketing efforts are
conducted through an employee sales force of approximately 100
professionals servicing approximately 15,000 retail accounts in
the United States. In addition to the employee sales team, a
select group of manufacturers representatives handles
specific account situations. International customers are
generally serviced by employees of our subsidiaries outside the
United States. We have our own sales force of over 40
professionals in the U.K., Mexico, Canada, Germany, France,
Spain and Hong Kong and operate through third-party distributors
elsewhere. Our Anagram subsidiary utilizes a group of
approximately 35 independent distributors in the United States
to bring our metallic balloons to the grocery, retail gift and
floral markets, as well as to our party superstore and specialty
retailer customers. Additionally, through our agreement with
American Greetings, we are able to leverage American
Greetings sales force to place our product into other
distribution channels, including mass market, drug and grocery
retailers.
To support our sales and marketing efforts, we produce five key
decorative party product catalogues annually (four catalogues
for seasonal products and one catalogue for everyday products),
with additional catalogues produced 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
60
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. To further promote
our products, we participate in a variety of industry trade
shows throughout the year.
We have long-term relationships with many of our wholesale
customers for whom we provide sales support through in-store
signage, planogram support and product training. We believe our
value-added services contribute to our reputation as the
one-stop shop for our customers.
Manufacturing
and Sourcing
We are one of the largest manufacturers of decorated party goods
products globally. Our in-house manufacturing capabilities
enable us to control costs, monitor product quality, better
manage inventory and provide more efficient order fulfillment.
Our domestic manufacturing facilities allow us to react rapidly
to changing consumer trends and fulfill our customers
needs for key products with fast turnaround times. We
manufacture approximately 40% of products we sell at wholesale.
Our facilities in Rhode Island, Kentucky, Minnesota,
New York, Mexico and Malaysia are highly automated and
produce paper and plastic plates and cups, paper napkins,
metallic and latex balloons and other party and novelty items at
a globally competitive cost.
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 select cases, we use available capacity to
manufacture products for third parties which allows us to
maintain a satisfactory level of equipment utilization.
The table below summarizes our manufacturing facilities.
|
|
|
|
|
|
|
|
|
Approximate
|
Location
|
|
Principal Products
|
|
Square Feet
|
|
East Providence, Rhode Island
|
|
Plastic plates, cups and bowls
|
|
229,230(1)
|
Louisville, Kentucky
|
|
Paper plates
|
|
189,175
|
Eden Prairie, Minnesota
|
|
Metallic balloons and accessories
|
|
115,600
|
Tijuana, Mexico
|
|
Piñatas and other party products
|
|
100,000
|
Melaka, Malaysia
|
|
Latex balloons
|
|
100,000
|
Harriman, New York
|
|
Paper napkins
|
|
74,400
|
Newburgh, New York
|
|
Paper napkins and paper cups
|
|
52,400
|
|
|
|
(1) |
|
This figure represents an industrial park, which includes a
48,455 square foot office and warehouse. |
Complementing our manufacturing facilities, we have a diverse
global network of third-party suppliers that supports our
strategy of consistently offering the broadest selection of high
quality, innovative and competitively priced product. We have
over 20-year
relationships with many of our vendors and often represent a
significant portion of their overall business. Third-party
manufacturers supplied approximately 60% of product sold at
wholesale in 2010. These manufacturers generally produce items
designed by and created for us, are located in Asia and are
managed by our sourcing office in Hong Kong. We actively work
with our third-party suppliers to ensure product cost quality
and safety.
The principal raw materials used in manufacturing our products
are paper, petroleum-based resin and cotton. While we currently
purchase such raw materials from a relatively small number of
sources, paper, resin and cotton are available from numerous
sources. Therefore, we believe our current suppliers could be
replaced without adversely affecting our manufacturing
operations in any material respect.
Product
Safety and Quality Assurance
We are subject to regulatory requirements in the United States
and internationally, and we believe that all products that we
manufacture comply with the requirements in the markets in which
they are sold. Third-party manufactured products are tested both
at the manufacturing site and upon arrival at our distribution
center. We
61
have a full-time staff of 63 professionals in the
United States, Asia and Europe dedicated to product safety
and quality assurance.
Distribution
and Systems
We ship our products directly to retailers and distributors
throughout the world from our distribution facilities, as well
as on an FOB basis directly from our domestic and international
factories. Our electronic order entry and information systems
allow us to manage our inventory with minimal obsolescence while
maintaining strong fill rates and quick order turnaround time.
Our main distribution facility for domestic party and gift
customers is located in Chester, New York with nearly
900,000 square feet under one roof. This
state-of-the-art
facility, built in 2001 and expanded in 2005, serves as the main
point of distribution for our Amscan-branded products and
utilizes paperless,
pick-by-light
systems, shipping an average of over 140,000 inners a day and
offering superior inventory management including fill rate in
excess of 95% and turnaround times as short as 48 hours.
Over the last 10 years, we have invested over
$60 million to customize and upgrade our Chester
distribution facility and believe it has sufficient capacity to
support our continued growth.
We utilize a by-pass system which allows us to ship products
directly from selected third-party suppliers to our
company-owned and franchised stores thus bypassing our
distribution facilities. In addition to lowering our
distribution costs, this by-pass system creates warehouse
capacity. We expect to grow the percentage of our products
shipped via by-pass which will lead to additional savings.
We sell metallic balloons domestically from our facilities in
Minnesota and New York.
The distribution center for our
e-commerce
platform is located in Naperville, Illinois. We also have other
distribution centers in the U.K., Germany, Mexico and Australia
and, beginning in 2011, Germany and Poland, to support our
international customers.
Retail
Operations
Overview
Opening its first
company-owned
store in 1986, Party City grew to become the largest operator of
owned and franchised party superstores in the United States. At
the time of our acquisition in 2005, Party City operated 502
stores, including 254 franchised locations. Since the
acquisition, we have expanded the Party City network to
approximately 800 superstore locations, including approximately
230 franchised stores. We also operated over 400 temporary
Halloween locations under the Halloween banner during fiscal
year 2010.
The 2005 combination of Party City and Amscan has led to the
creation of a vertically integrated business from which we
derive a number of competitive advantages. We offer customers a
differentiated shopping experience with extensive selection and
consistently high in-stock positions of quality products with a
compelling value proposition making us the premier destination
for party supplies. Through our vertical model, we also enhance
our total profitability by capturing the
manufacturing-to-retail
margin on a significant portion of our retail sales and by
leveraging our access to multiple channels to limit mark-downs
and excessive promotions. Moreover, we believe that our
direct-to-consumer
channels enable our product development teams to effectively
respond to trends and changes in consumer preferences, which
allows us to keep our assortment fresh and exciting.
Party City was founded on the idea that life should be
celebrated in monumental ways, with a passion for inspiring
celebrations from Super Bowl to New Years Eve
parties and all the celebrations and seasons in between. With
our brands slogan, Nobody Has More Party for
Less, Party City offers an assortment of party supplies,
decorations and costumes perfect for every type of party
occasion. With dynamic merchandising displays combined with
organized seasonal aisles and hundreds of party themes to match
any type of celebration, party planning has never been simpler
or more fun.
In recent years, Party City has made substantial investments to
enhance the customers in-store experience and become the
ultimate retail destination for party supplies. Stores now
showcase dynamic
62
balloon counters displaying hundreds of balloons to coordinate
with any occasion. Additionally, store-within-a-store concepts
for sports, candy and party favors are focal points in all new
stores. Aptly named Sports City, Candy
City and Favor City, these specialty areas
create a fun shopping environment, expand product offering and
allow us to better showcase the merchandise.
The following table summarizes our company-owned retail
footprint by format as well as our strategy going forward:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Stores as
|
|
|
# of Stores as of
|
|
|
Average Size of
|
|
|
|
Format
|
|
of December 31, 2008
|
|
|
March 31, 2011
|
|
|
Stores (sq. ft.)
|
|
|
Strategy/Focus
|
|
Party City
|
|
|
385
|
|
|
|
457
|
|
|
|
10,000-12,000
|
|
|
Grow the store base opening 25-35 new stores per year
|
Factory Card & Party Outlet (FCPO)
|
|
|
166
|
|
|
|
77
|
|
|
|
10,000-12,000
|
|
|
Convert the remaining FCPO stores to Party City banner by the
end of 2013
|
The Paper Factory and other outlets
|
|
|
92
|
|
|
|
51
|
|
|
|
3,500-5,000
|
|
|
Product liquidation channel
|
Halloween City
|
|
|
149*
|
|
|
|
404
|
*
|
|
|
5,000-20,000
|
|
|
Grow locations and improve profitability
|
|
|
|
* |
|
Represents Halloween City locations opened and operated during
the preceding Halloween season. These locations operate only
during the Halloween selling season typically from the day after
Labor Day through November 1 of each year. |
We believe that our stores are typically destination shopping
locations. We seek to maximize customer traffic and quickly
build the visibility of new stores by situating them in high
traffic areas. Our stores are predominantly located in strip
centers and are generally co-located with other destination
retailers. 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.
The following table shows the change in our company-owned Party
City store network:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stores open at beginning of period
|
|
|
439
|
|
|
|
382
|
|
|
|
385
|
|
|
|
392
|
|
Stores opened
|
|
|
2
|
|
|
|
13
|
|
|
|
6
|
|
|
|
9
|
|
FCPO stores converted to Party City
|
|
|
16
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Stores acquired from franchisees
|
|
|
3
|
|
|
|
20
|
|
|
|
3
|
|
|
|
5
|
|
Stores closed
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
Stores sold
|
|
|
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
|
|
457
|
|
|
|
439
|
|
|
|
382
|
|
|
|
385
|
|
We spent the last five years integrating our retail acquisitions
and rationalizing our store base. We believe there are more than
400 locations in North America that present opportunities for us
to expand our party superstore base. In 2011, we plan to open 20
Party City stores net of five closures, as well as convert 20
FCPO stores to the Party City banner. Starting in 2012, we plan
to open
25-35 Party
City stores per year and continue to convert FCPO stores to the
Party City banner. A new Party City location costs an average of
$765,000, which includes $90,000 in pre-openings expenses and
$350,000 of net startup inventory. A typical new store reaches
approximately 80% maturity in the first year of operation and
reaches maturity in its fourth year of operation. We target
locations where stores have the potential to generate annual
sales of at least
63
$2 million at maturity and achieve consolidated pre-tax
store contribution of approximately 18% to 20%. We expect our
new stores to have a payback period of approximately
three years and to generate an average pre-tax
cash-on-cash
return on invested capital of approximately 50% at maturity
(including margin generated from our vertical model).
Merchandising
Our merchandising strategy is based on three core principles:
|
|
|
|
|
Broad Assortment of Merchandise We offer a
greater assortment of products than our national competitors
including mass merchants. Our products span a wide range of
lifestyle events from birthdays to themed parties and sporting
events, as well as holidays such as Halloween and New
Years. A typical retail store offers a wide selection of
Amscan and other merchandise consisting of an average of 25,000
SKUs at any one time to satisfy a broad range of styles and
tastes.
|
|
|
|
Deep Merchandise Selection We maintain high
in-stock positions of core products and related items, so we are
able to address party needs of any size. These high in-stock
positions are enabled by our vertical integration model, which
results in a high percentage of Amscan merchandise in our
company-owned stores and quick turnaround times.
|
|
|
|
Compelling Value Our pricing strategy is to
provide the best value to our customers. Our vertically
integrated business model enables us to provide our customers
with leading prices for most of our product categories. We
negotiate pricing with suppliers on behalf of all stores in our
network (company-owned and franchised) and believe that our
buying power enables us to receive favorable pricing terms and
enhances our ability to obtain high demand merchandise. We
reinforce our value message through our advertising and
marketing campaigns with the Nobody Has More Party for
Less slogan.
|
We generally organize the aisles in our stores into four-foot
sections based on themed products, which include basic products
like cups and plates and other coordinated accessories that
enhance sales and customers shopping experience. This
presentation makes it simple and easy for our customers to find
all their party needs in one convenient location and allows us
to achieve a higher average basket size compared to
non-specialty channels. We manage each category by product and
by SKU and use planograms to ensure a consistent merchandise
presentation across our store base. Our coordinated product
offering drives add-on purchases as customers are presented with
additional decorations, favors and accessories that match their
party theme. Our low individual price points encourage impulse
buys by customers resulting in higher unit sales.
We have many product categories that relate to birthdays, making
this event the largest non-seasonal occasion at approximately
20% of our total annual retail sales. We aim to be the
pre-eminent resource for the party goods associated with
birthday celebrations. Each birthday product category includes a
wide assortment of merchandise to fulfill customer needs,
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 in dollars. As a key component of our sales strategy,
our stores provide an extensive selection of Halloween products
throughout the year to position us as the premier Halloween
shopping destination. The stores also carry a broad array of
related decorations and accessories for the Halloween season. In
the year ended 2010, for our Party City branded stores,
Halloween business represented approximately 25% of our total
annual retail sales. To maximize our seasonal opportunity, the
Company also operates a chain of temporary Halloween locations
under the Halloween City banner during the months of September
and October of each year. During 2010, our Halloween City
locations generated revenues of approximately $101 million.
As a vertically integrated business, our wholesale operation is
the largest supplier to our retail party superstores, providing
61%, 54% and 50% of the merchandise purchased for the years
ended December 31, 2010, 2009 and 2008, respectively. The
increase was primarily driven by our expanded Amscan product
offerings, rebranding and remerchandising of the FCPO stores and
increased utilization of our by-pass
64
initiative. We expect this percentage to reach 70% to 75% over
the long term mainly driven by additional product capabilities
including products provided through the recently acquired
Christys Group.
We also offer products supplied by other vendors, which include
licensed products, candies, greeting cards and costumes. In
2010, no other supplier accounted for more than 10% of our
retail segments purchases.
E-commerce
In August 2009, we re-launched
e-commerce
capabilities through PartyCity.com, providing us with an
additional
direct-to-consumer
sales channel. Our website offers a convenient, user-friendly,
and secure online shopping option for new and existing
customers. In addition to the ability to order products, we
expect our website to provide a substantial amount of content
about our party products, party planning ideas and promotional
offers. Our website will also be one of our key marketing
vehicles, specifically as it relates to social marketing
initiatives.
Compared to our Party City superstores, PartyCity.com offers a
broader assortment of products with over 35,000 SKUs available
online versus an average of 25,000 SKUs at any one time in our
party superstores. By seamlessly linking our website to our
store network, we intend to offer our customers the option to
purchase products online which are not physically available at
the store.
We also operate PartyAmerica.com which has a commercial
arrangement with Amazon.com, Inc. to supply party goods.
In 2010, sales from
e-commerce
were over $40 million or approximately 3.6% of total retail
sales. We believe that our website is well positioned to
continue to capture market share of online purchases, which
represent one of the fastest growing distribution channels for
party related goods, as we capitalize on our competitive
advantages which include a nationwide store base, strong brand
recognition and vertical integration. The average basket size
through our
e-commerce
site is approximately three times as large as the average basket
size in our Party City stores. We plan to drive future traffic
to our website through continuation of our
pay-per-click
advertising strategy, implementation of a CRM initiative, which
we have just started testing, and through the four million email
addresses that we have captured through our stores and website.
Advertising
and Marketing
Our advertising focuses on promoting specific seasonal occasions
and general party themes, with a strong emphasis on our
price-value proposition Nobody Has More Party
for Less with the goal of increasing customer
traffic and further building our brand. In late 2009, we
modified our advertising strategy to minimize our dependency on
newspaper inserts and focus instead on a national broadcasting
campaign to further develop brand awareness and expand our
customer base. This shift, which emphasizes brand building and
our price-value proposition, has resonated well with our
customers. As a result, our use of newspaper inserts has
decreased from 71% of gross advertising spend in 2008 to 30% in
2010 while the use of national broadcasts has increased from 3%
to 43% over the same period. We expect to continue to increase
the use of national broadcasting to enhance our overall brand
awareness with consumers.
Franchise
Operations
As of March 31, 2011, we had 229 franchised stores
throughout the United States and Puerto Rico. Stores run by
franchisees utilize our format, design specifications, methods,
standards, operating procedures, systems and trademarks. Our
wholesale sales to our franchised stores generally mirror, with
respect to relative size,
65
mix and category, those to our company-owned stores. The
following table shows the change in our franchise-owned store
network:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stores open at beginning of period
|
|
|
232
|
|
|
|
250
|
|
|
|
273
|
|
|
|
283
|
|
Stores opened/acquired by existing franchisees
|
|
|
|
|
|
|
7
|
|
|
|
5
|
|
|
|
20
|
|
Stores sold to the Company
|
|
|
(3
|
)
|
|
|
(20
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Stores closed or converted to independent
|
|
|
|
|
|
|
(5
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
|
|
229
|
|
|
|
232
|
|
|
|
250
|
|
|
|
273
|
|
We are not currently marketing nor plan to market new franchise
territories.
We receive revenue from our franchisees, consisting of an
initial one-time fee and ongoing royalty fees generally ranging
from 4% to 6%. In exchange for these franchise fees, franchisees
receive brand value and company support with respect to
planograms, information technology, purchasing and marketing. In
addition, each franchisee has a mandated advertising budget,
which consists of a minimum initial store opening promotion and
ongoing local advertising and promotions. Further, franchisees
must pay an additional 1% to 2.25% of net sales to a group
advertising fund to cover common advertising materials. The
Company pays the franchisee a reverse royalty on
e-commerce
sales originating within the franchisees territory. The
franchisee territory and the amount of the reverse royalty are
based on several factors, including the profitability of our
e-commerce
operation and the territorial coverage of franchisee
advertising. We do not offer financing to our franchisees for
one-time fees or ongoing royalty fees. Our franchise agreements
provide us with a right of first refusal should any franchisee
look to dispose of its operation(s).
Current franchise agreements provide for an assigned area or
territory that typically equals a
three- or
four-mile
radius from the franchisees store location and the right
to use the Party
City®
and Party
America®
logos and trademarks. In addition, certain agreements with our
franchisees and other business partners contain geographic
limitations on opening new stores. 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.
Information
Systems
We continually evaluate and upgrade our information systems to
enhance the quantity, quality and timeliness of information
available to management and to improve the efficiency of our
manufacturing and distribution facilities as well as our service
at the store level. We have implemented merchandise
replenishment software to complement our distribution, planning
and allocation processes. The system enhances the store
replenishment function by improving in-stock positions,
leveraging our distribution infrastructure and allowing us to
become more effective in our use of store labor. We have
implemented a new Point of Sale system and upgraded
merchandising systems to standardize technology across all of
our retail superstores and, in 2010, we implemented similar
systems at our temporary Halloween City locations. In addition,
in 2010, our retail operations implemented a system conversion
to upgrade and enhance the current Oracle system in order to
maintain support, streamline divisional reporting and allow for
future growth.
Competition
In our wholesale segment, we compete primarily 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 no
competitors who design, manufacture, source 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
66
companies. 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 a strong
portfolio of character licenses for use in the design and
production of our metallic balloons and, as a result of the
acquisition of Designware, we have access to a strong portfolio
of character and other licenses for party goods.
In our retail segment, our stores compete primarily on the basis
of product mix and variety, store location and layout, customer
convenience and value. Although we compete with a variety of
smaller and larger retailers, including, but not limited to,
independent party goods supply stores, specialty stores, dollar
stores, warehouse/merchandise clubs, drug stores, mass merchants
and catalogue and Internet merchandisers, we believe that our
retail stores maintain a leading position in the party goods
business by offering a wider breadth of merchandise than most
competitors and a greater selection within merchandise classes,
at a compelling value. We are one of the only vertically
integrated suppliers of decorated party goods. While some of our
competitors in our markets have greater financial resources, we
believe that our significant buying power, which results from
the size of our retail store network and the breadth of our
assortment, is an important competitive advantage. Many of our
retail competitors are also customers of our wholesale business.
Employees
As of December 31, 2010, we had approximately
5,470 full-time employees and 7,950 part-time
employees, none of whom is covered by a collective bargaining
agreement. We consider our relationship with our employees to be
good.
Copyrights
and Trademarks
We hold copyright registrations on the designs we create and use
on our products and trademark registrations 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 and trademarks with the United States Patent
and Trademark Office to the extent we deem necessary. In
addition, we rely on unregistered trademarks and copyrights
under U.S. common law rights to distinguish
and/or
protect our products, services and branding. 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 numerous intellectual property
licenses from third parties, allowing us to use various
third-party cartoon and other characters and designs principally
on our metallic balloons. None of these licenses is individually
material to our aggregate business.
We permit our franchisees to use a number of our trademarks and
service marks, including Party
City®,
The Discount Party Super
Store®,
Halloween Costume
Warehouse®,
Party
America®,
The Paper
Factory®,
The Factory Card & Party
Outlet®
and Halloween
City®.
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.
67
Our wholesale and retail operations must also comply with
applicable regulations adopted by federal agencies, including
product safety regulations, and with licensing and other
regulations enforced by state and local health, sanitation,
safety, fire and other departments. Difficulties or failures in
obtaining the required licenses or approvals can delay and
sometimes prevent the opening of a new store or the shutting
down of an existing store.
Our operations 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 operations 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 operations
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.
Properties
We maintain the following facilities for our corporate and
retail headquarters and to conduct our principal design,
manufacturing and distribution operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or Leased
|
|
|
|
|
Approximate
|
|
(With
|
|
|
Principal
|
|
Square
|
|
Expiration
|
Location
|
|
Activity
|
|
Feet
|
|
Date)
|
|
Elmsford, New York
|
|
Executive and other corporate offices, show rooms, design and
art production for party products
|
|
119,469 square feet
|
|
Leased (expiration date: December 31, 2014)
|
Rockaway, New Jersey
|
|
Party City corporate offices
|
|
106,000 square feet
|
|
Leased (expiration date: July 31, 2017)
|
East Providence, Rhode Island
|
|
Manufacture and distribution of plastic plates, cups and bowls
|
|
229,230(1) 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
|
Tijuana, Mexico
|
|
Manufacture and distribution of party products
|
|
100,000 square feet
|
|
Leased (expiration date: August 15, 2015)
|
Melaka, Malaysia
|
|
Manufacture and distribution of latex balloons
|
|
100,000 square feet
|
|
Leased (expiration date: May 30, 2072)
|
Harriman, New York
|
|
Manufacture of paper napkins
|
|
74,400 square feet
|
|
Leased (expiration date: March 31, 2016)
|
Newburgh, New York
|
|
Manufacture of paper napkins and cups
|
|
52,400 square feet
|
|
Leased (expiration date: May 31, 2012)
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned or Leased
|
|
|
|
|
Approximate
|
|
(With
|
|
|
Principal
|
|
Square
|
|
Expiration
|
Location
|
|
Activity
|
|
Feet
|
|
Date)
|
|
Skoczow, Poland
|
|
Manufacture and distribution of party goods
|
|
44,400 square feet
|
|
Leased (expiration date: December 31, 2012)
|
Eden Prairie, Minnesota
|
|
Manufacture of retail, trade show and showroom fixtures
|
|
15,324 square feet
|
|
Leased (expiration date: July 31, 2012)
|
Chester, New York(2)
|
|
Distribution of party and gift products
|
|
896,000 square feet
|
|
Owned
|
Naperville, Illinois
|
|
Distribution of party goods for e-commerce sales
|
|
440,343 square feet
|
|
Leased (expiration date: December 31, 2018)
|
San Bernadino, California
|
|
Distribution of party goods for Halloween City
|
|
244,000 square feet
|
|
Leased (month to month)
|
Kircheim unter Teck, Germany
|
|
Distribution of party goods
|
|
215,000 square feet
|
|
Owned
|
Milton Keynes, Buckinghamshire, England
|
|
Distribution of party products throughout Europe
|
|
130,858 square feet
|
|
Leased (expiration date: June 30, 2017)
|
Edina, Minnesota
|
|
Distribution of metallic balloons and accessories
|
|
122,312 square feet
|
|
Leased (expiration date: December 31, 2015)
|
Blackstown, Australia
|
|
Distribution of party goods
|
|
27,631 square feet
|
|
Leased (expiration date: November 13, 2014)
|
Dorval, Canada
|
|
Distribution of party and gift products
|
|
19,330 square feet
|
|
Leased (expiration date: March 31, 2012)
|
Livonia, Michigan
|
|
Office and distribution of party goods for Halloween City
|
|
89,780 square feet
|
|
Leased (expiration date: May 31, 2014)
|
Atlanta, Georgia
|
|
Office and storage facilities
|
|
15,012 square feet
|
|
Leased (expiration date: April 30, 2013)
|
Pleasanton, California
|
|
Office for e-commerce sales
|
|
11,278 square feet
|
|
Leased (expiration date: June 18, 2015)
|
|
|
|
(1) |
|
This figure represents an industrial park, which includes a
48,455 square foot office and warehouse. |
|
(2) |
|
Property is subject to a lien mortgage note in the original
principal amount of $10.0 million with the New York State
Job Development Authority. The lien mortgage note was amended on
December 18, 2009. The amended mortgage note for
$5.6 million was extended for a period of 60 months
and requires fixed monthly payments of principal and interest.
At December 31, 2010, the lien mortgage note has a balance
of $4.5 million. |
In addition to the facilities listed above, we maintain smaller
distribution facilities in 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.
69
As of December 31, 2010, company-owned and franchised
retail stores were located in the following states and Puerto
Rico:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
Company-owned
|
|
|
Franchise
|
|
|
Chain-wide
|
|
|
Alabama
|
|
|
2
|
|
|
|
8
|
|
|
|
10
|
|
Arizona
|
|
|
1
|
|
|
|
20
|
|
|
|
21
|
|
Arkansas
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
California
|
|
|
86
|
|
|
|
18
|
|
|
|
104
|
|
Colorado
|
|
|
14
|
|
|
|
1
|
|
|
|
15
|
|
Connecticut
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Delaware
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Florida
|
|
|
54
|
|
|
|
10
|
|
|
|
64
|
|
Georgia
|
|
|
26
|
|
|
|
1
|
|
|
|
27
|
|
Hawaii
|
|
|
0
|
|
|
|
2
|
|
|
|
2
|
|
Illinois
|
|
|
61
|
|
|
|
0
|
|
|
|
61
|
|
Indiana
|
|
|
27
|
|
|
|
0
|
|
|
|
27
|
|
Iowa
|
|
|
9
|
|
|
|
1
|
|
|
|
10
|
|
Kansas
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Kentucky
|
|
|
7
|
|
|
|
0
|
|
|
|
7
|
|
Louisiana
|
|
|
3
|
|
|
|
8
|
|
|
|
11
|
|
Maryland
|
|
|
14
|
|
|
|
12
|
|
|
|
26
|
|
Michigan
|
|
|
31
|
|
|
|
0
|
|
|
|
31
|
|
Minnesota
|
|
|
0
|
|
|
|
21
|
|
|
|
21
|
|
Mississippi
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Missouri
|
|
|
19
|
|
|
|
3
|
|
|
|
22
|
|
Montana
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
Nebraska
|
|
|
5
|
|
|
|
0
|
|
|
|
5
|
|
Nevada
|
|
|
6
|
|
|
|
0
|
|
|
|
6
|
|
New Hampshire
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
New Jersey
|
|
|
26
|
|
|
|
2
|
|
|
|
28
|
|
New Mexico
|
|
|
0
|
|
|
|
3
|
|
|
|
3
|
|
New York
|
|
|
45
|
|
|
|
14
|
|
|
|
59
|
|
North Carolina
|
|
|
2
|
|
|
|
19
|
|
|
|
21
|
|
North Dakota
|
|
|
0
|
|
|
|
3
|
|
|
|
3
|
|
Ohio
|
|
|
31
|
|
|
|
0
|
|
|
|
31
|
|
Oklahoma
|
|
|
2
|
|
|
|
0
|
|
|
|
2
|
|
Oregon
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
Pennsylvania
|
|
|
17
|
|
|
|
14
|
|
|
|
31
|
|
Puerto Rico
|
|
|
0
|
|
|
|
5
|
|
|
|
5
|
|
South Carolina
|
|
|
2
|
|
|
|
6
|
|
|
|
8
|
|
Tennessee
|
|
|
7
|
|
|
|
10
|
|
|
|
17
|
|
Texas
|
|
|
41
|
|
|
|
21
|
|
|
|
62
|
|
Virginia
|
|
|
10
|
|
|
|
9
|
|
|
|
19
|
|
Washington
|
|
|
15
|
|
|
|
2
|
|
|
|
17
|
|
West Virginia
|
|
|
2
|
|
|
|
0
|
|
|
|
2
|
|
Wisconsin
|
|
|
18
|
|
|
|
0
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
596
|
|
|
|
232
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
In 2010, the Company operated 404 temporary Halloween locations
under the Halloween City banner. 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 lease the property for all of our company-owned stores. We do
not believe that any individual store property is material to
our financial condition or results of operations. Of the leases
for the company-owned stores, 98 expire in 2011, 121 expire in
2012, 119 expire in 2013, 84 expire in 2014, 40 expire in 2015
and the balance expire in 2016 or thereafter. We have options to
extend many of these leases for a minimum of five years.
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 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.
71
MANAGEMENT
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, 2011.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Gerald C. Rittenberg
|
|
|
59
|
|
|
Chief Executive Officer and Director
|
James M. Harrison
|
|
|
59
|
|
|
President, Chief Operating Officer and Director
|
Michael A. Correale
|
|
|
53
|
|
|
Chief Financial Officer
|
Gregg A. Melnick
|
|
|
41
|
|
|
President, Party City Retail Group
|
Robert J. Small
|
|
|
45
|
|
|
Chairman of the Board of Directors
|
Steven J. Collins
|
|
|
42
|
|
|
Director
|
Michael F. Cronin
|
|
|
57
|
|
|
Director
|
Kevin M. Hayes
|
|
|
42
|
|
|
Director
|
Jordan A. Kahn
|
|
|
69
|
|
|
Director
|
William Kussell
|
|
|
52
|
|
|
Director
|
Richard K. Lubin
|
|
|
64
|
|
|
Director
|
Carol M. Meyrowitz
|
|
|
57
|
|
|
Director
|
David M. Mussafer
|
|
|
47
|
|
|
Director
|
Our directors have been selected pursuant to the terms of a
Stockholders Agreement, described more fully below, and
the terms of our certificate of incorporation. That agreement
and those charter provisions will no longer be in force
following the completion of this offering.
Gerald C. Rittenberg became our Chief Executive Officer
in December 1997. From May 1997 until December 1997,
Mr. Rittenberg served as acting Chairman of the Board.
Prior to that time, Mr. Rittenberg served as our President
from October 1996. Mr. Rittenbergs extensive
experience in the decorated party goods industry, his
20-year
tenure, his role as our Chief Executive Officer and the
requirements of the Stockholders Agreement led to the
conclusion that he should serve as a director of our Company.
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.
Mr. Harrisons extensive experience in the decorated
party goods industry, his
14-year
tenure, his role as our President and Chief Operating Officer
and the requirements of the Stockholders Agreement led to
the conclusion that he should serve as a director of our Company.
Michael A. Correale became our Chief Financial Officer in
March 2002. Prior to that time, Mr. Correale served as our
Vice President Finance, from May 1997 to March 2002.
Gregg A. Melnick became President of Party City Retail
Group in March 2011. From May 2010 to February 2011,
Mr. Melnick was President of Party City Corporation.
Previously, he was Chief Operating Officer from October 2007 to
April 2010, and Chief Financial Officer from September 2004 to
September 2007.
Robert J. Small became one of our directors upon the
consummation of the acquisition of the Company by Berkshire
Partners and Weston Presidio (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. Mr. Smalls experience serving as a
director of both public and private companies and his
affiliation with Berkshire Partners, which has the right to
select three directors, led to the conclusion that he should
serve as a director of our Company.
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
72
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. Mr. Collins experience
serving as a director of public and private companies and his
affiliation with Advent International, whose Class B common
stock holdings entitle it to elect up to three directors, led to
the conclusion that he should serve as a director of our Company.
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. Mr. Cronins experience
serving as a director of public and private companies and his
affiliation with Weston Presidio, which has the right to select
three directors, led to the conclusion that he should serve as a
director of our Company.
Kevin M. Hayes became one of our directors upon the
consummation of the 2004 Transactions. Mr. Hayes is a
Partner of Weston Presidio and has served in that position since
2000. Mr. Hayes also serves as a director of several
privately held companies. Mr. Hayes experience
serving as a director of private companies and his affiliation
with Weston Presidio, which has the right to select three
directors, led to the conclusion that he should serve as a
director of our Company.
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. Mr. Kahns experience as the founder and
chief executive officer of a company that develops, manufactures
and sells consumer products worldwide led to the conclusion that
he should serve as a director of our Company.
William Kussell became a director in October
2010. Mr. Kussell is an Operating Partner at
Advent International, focusing on the North American Consumer
Retail Segment. Prior to joining Advent International, he was
President and Chief Brand Officer for Dunkin Donuts World Wide.
Mr. Kussells experience as the president of a retail
food company with a well-known brand and his association with
Advent International led to the conclusion that he should serve
as a director of our Company.
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 SSI Pooling
GP, Inc., the parent company of SkillSoft Limited.
Mr. Lubin has also served on the board of directors of
Electro-Motive Diesel, Holmes Products Corporation,
U.S. Can Corporation and numerous privately held companies.
Mr. Lubins experience serving as a director of both
public and private companies and his affiliation with Berkshire
Partners, which has the right to select three directors, led to
the conclusion that he should serve as a director of our Company.
Carol M. Meyrowitz became a director in August
2006. Ms. Meyrowitz is currently a Director and
President and Chief Executive Officer of The TJX Companies,
Inc., a retailer of home products and fashions, 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.
Ms. Meyrowitzs experience as the chief executive
officer of a well-known retailer of fashion and home products
led to the conclusion that she should serve as a director of our
Company.
David M. Mussafer has been a member of our Board since
August 2008. Mr. Mussafer, a Managing Partner of Advent
International, which he joined in 1990, previously served on the
board of directors of Dufry AG, Kirklands, Inc. and
lululemon athletica inc. Mr. Mussafer also serves as a
director of several privately held companies. Mr. Mussafer
received a B.S.M. from Tulane University and an M.B.A. from the
Wharton School of the University of Pennsylvania.
Mr. Mussafers experience serving as a director of
public and private companies and his affiliation with Advent
International, whose Class B common stock holdings entitle
it to elect up to three directors, led to the conclusion that he
should serve as a director of our Company.
73
In addition to the individual attributes of each of our
directors listed above, we highly value the collective
qualifications and experiences of our board members. We believe
the collective viewpoints and perspectives of our directors
results in a board that is dedicated to advancing the interests
of our stockholders.
Composition
of our Board of Directors
Upon the completion of this offering, the terms of office of
members of our board of directors will be divided into three
classes:
|
|
|
|
|
Class I directors, whose terms will expire at the annual
meeting of stockholders to be held in 2012;
|
|
|
|
Class II directors, whose terms will expire at the annual
meeting of stockholders to be held in 2013; and
|
|
|
|
Class III directors, whose terms will expire at the annual
meeting of stockholders to be held in 2014.
|
Our Class I directors will
be ,
our Class II directors will
be
and our Class III directors will
be .
At each annual meeting of stockholders, the successors to the
directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third
annual meeting following such election and until their
successors are elected. Any vacancies in our classified board of
directors will be filled by the remaining directors, and the
elected person will serve the remainder of the term of the class
to which he or she is appointed. Any additional directorships
resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors.
Prior to the completion of this offering, our board of directors
will make a determination about the independence of the existing
and new members of the board of directors by reference to the
standards of
the .
Immediately following the completion of this offering, we expect
that a majority of our board of directors will be independent.
Board
Structure and Committee Composition
Our board of directors has established, or will establish prior
to the completion of this offering, an audit committee, a
compensation committee and a nominating and corporate governance
committee. Each committee will operate under a charter that will
be approved by our board of directors. The composition of each
committee will be effective upon the closing of this offering.
Audit
Committee
The Audit Committees primary duties and responsibilities
will be to:
|
|
|
|
|
appoint, compensate, retain and oversee the work of any
registered public accounting firm engaged for the purpose of
preparing or issuing an audit report or performing other audit,
review or attest services and review and appraise the audit
efforts of our independent accountants;
|
|
|
|
establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or
auditing matters;
|
|
|
|
engage independent counsel and other advisers, as necessary;
|
|
|
|
determine funding of various services provided by accountants or
advisers retained by the committee;
|
|
|
|
serve as an independent and objective party to oversee our
internal controls and procedures system; and
|
|
|
|
provide an open avenue of communication among the independent
accountants, financial and senior management and the board of
directors.
|
Upon completion of this offering, the Audit Committee will
consist
of
and will have at
least
independent director(s) and at least one audit committee
financial expert. Prior to the completion of this offering, our
board of directors will adopt a written charter under which the
Audit Committee will
74
operate. A copy of the charter, which will satisfy the
applicable standards of the SEC and
the ,
will be available on our web site.
Compensation
Committee
The purpose of the Compensation Committee is to review and
approve the compensation of our executives. The Compensation
Committee approves compensation objectives and policies as well
as compensation plans and specific compensation levels for all
executive officers. Upon completion of this offering, the
Compensation Committee will consist of and will have at
least independent
director(s). Prior to the completion of this offering, our board
of directors will adopt a written charter under which the
Compensation Committee will operate. A copy of the charter,
which will satisfy the applicable standards of the SEC and
the ,
will be available on our web site.
Nominating
and Governance Committee
Upon completion of this offering, the Nominating and Governance
Committee of our board of directors will consist
of
and will have at
least
independent director(s). The Nominating and Governance Committee
will be responsible for recruiting and retention of qualified
persons to serve on our board of directors, including proposing
such individuals to the board of directors for nomination for
election as directors, for evaluating the performance, size and
composition of the board of directors and for oversight of our
compliance activities. Prior to the completion of this offering,
our board of directors will adopt a written charter under which
the Nominating and Governance Committee will operate. A copy of
the charter, which will satisfy the applicable standards of the
SEC and
the ,
will be available on our web site.
Code
of Ethics
We will adopt a code of business conduct, applicable to our
officers, directors and employees, in connection with this
offering, which will be filed as an exhibit to the registration
statement of which this prospectus forms a part.
75
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This compensation discussion and analysis section will provide
context for the information contained in the tables following
this discussion and is intended to provide information about our
compensation objectives and policies for Gerald C. Rittenberg,
our Chief Executive Officer, James M. Harrison, our President
and Chief Operating Officer, Michael A. Correale, our Chief
Financial Officer, and Gregg A. Melnick, our President-Party
City Retail Group (collectively, our named executive
officers).
Compensation
Committee
The Compensation Committee of the Board of Directors consists of
Richard K. Lubin, Chairman, Kevin M. Hayes, Jordan A. Kahn and
David M. Mussafer. The Compensation Committee is responsible for
setting and administering our executive compensation policies
and programs and determining the compensation of our executive
officers. The Compensation Committee also administers our Equity
Incentive Plan (as defined hereafter). The Compensation
Committee met periodically in 2010, and all members of the
Compensation Committee attended each meeting.
The Compensation Committee has the authority to retain outside
independent executive compensation consultants to assist in the
evaluation of executive officer compensation and in order to
ensure the objectivity and appropriateness of the actions of the
Compensation Committee. The Compensation Committee has the sole
authority to retain, at our expense, and terminate any such
consultant, including sole authority to approve such
consultants fees and other retention terms. However, all
decisions regarding compensation of executive officers are made
solely by the Compensation Committee. No independent executive
compensation consultants were retained by the Compensation
Committee during 2010.
Compensation
Philosophy
Our executive compensation program has been designed to
motivate, reward, attract and retain the management deemed
essential to ensure our success. The program seeks to align
executive compensation with our short- and long-term objectives,
business strategy and financial performance. We seek to create a
sustainable competitive advantage by achieving higher
productivity and lower costs than our competitors. Our
compensation objectives at all compensation levels are designed
to support this goal by:
|
|
|
|
|
linking pay to performance to create incentives to perform;
|
|
|
|
ensuring compensation levels and components are actively
managed; and
|
|
|
|
using equity compensation to align employees long-term
interests with those of our stockholders.
|
Compensation
Our Chief Executive Officer and our President and Chief
Operating Officer jointly evaluate the performance of all
executive and senior officers, other than themselves, against
their established goals and objectives and recommend
compensation packages to the Compensation Committee. The
Compensation Committee evaluates the performance of our Chief
Executive Officer and President and Chief Operating Officer. The
Compensation Committee meets annually, usually in February, to
evaluate the performance of the executive and senior officers,
and to establish their base salaries, annual cash incentive
award for the prior years performance and share-based
incentive compensation to be effective in the first quarter of
the current year. The Compensation Committee may meet at interim
dates during the year 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, President and Chief Operating Officer and the
Compensation Committee consider the scope and responsibility of
the officers position, our overall financial and operating
performance, the officers overall performance and future
76
potential, and the officers income potential resulting
from common stock acquired and stock options received in prior
years. Three of the four members of the Compensation Committee
are representatives of the private equity firms that
collectively own approximately 93% of our outstanding equity.
Thus, unlike the situation at many public companies,
compensation decisions at our company are made by individuals
who have a real and direct economic stake in the outcome of the
decisions. The Compensation Committee members apply their
considerable experiences in serving as directors of private
equity portfolio companies to devise compensation packages that
they believe will attract, retain and provide incentives to the
executive talent necessary to manage an entity in which their
firms have a substantial economic interest. Although the
Compensation Committee looks to other companies to get a sense
of the market for executive compensation in comparable
circumstances, it does not engage in formal benchmarking or
formulaic compensation. The members take the compensation
actions that a prudent owner of a business would take to make
sure that they have the right executive management to protect
their investment.
Our Chief Executive Officer and Chief Operating Officer set
salaries and bonus opportunities for employees below the levels
of executive and senior officers and make recommendations with
respect to equity incentive awards to employees at these levels.
Components
of Compensation
The Companys named executive and other officer
compensation includes both short-term and long-term components.
Short-term compensation consists of an officers annual
base salary and annual incentive cash bonus. Long-term
compensation may include grants of stock options, restricted
stock or other share-based incentives established by the
Company, as determined by the Compensation Committee.
Compensation is comprised of the following components:
Base
Salary
The base salaries for our officers were determined based on the
scope of their responsibilities, basing the determination in
large part on the collective experience that the Sponsor
representatives have with other companies in their respective
portfolios. Generally, we believe that executive base salaries
should be near the middle of the range of salaries that our
Committee members have observed for executives in similar
positions and with similar responsibilities. Base salaries are
reviewed annually and adjusted from time to time to reflect
individual responsibilities, performance and experience, as well
as market compensation levels. In the case of
Mr. Rittenberg and Mr. Harrison, annual salary
adjustments are determined in accordance with their respective
employment agreements. Mr. Correales annual salary
adjustment for 2010 was the result of an evaluation of his
overall performance during the last completed fiscal year by the
Compensation Committee, Chief Executive Officer, and President
and Chief Operating Officer.
Annual
Cash Bonus Plan
We have an annual cash incentive plan that is designed to serve
as an incentive to drive annual financial performance. As a
company with a substantial amount of indebtedness, we believe
that Adjusted EBITDA is an important measure of our financial
performance and ability to service our indebtedness and we use
it as the target metric for our annual cash incentive plan.
Adjusted EBITDA is a non-GAAP measure used internally and is
measured by taking net income (loss) from operations and adding
back interest charges, income taxes, depreciation and
amortization and adjustments for other non-cash or non-recurring
transactions. For 2010, seventy-five percent (75%) of an
executives annual bonus target under the plan depended on
the performance against our Adjusted EBITDA target and the
remaining twenty-five percent (25%) depended on the
executives performance against individual performance
goals. Each named executive was assigned a percentage of base
salary ranging from 50%, in the case of Messrs.
Melnick and Correale, to 100%, in the case of
Messrs. Rittenberg and Harrison that could be
earned if the target Adjusted EBITDA was achieved and the
executives individual performance goals were met. The
portion of the incentive award relating to our Adjusted EBITDA
can be paid at a maximum of 150% if we exceed the Adjusted
EBITDA target.
77
For 2010, the Compensation Committee determined that all of the
named executive officers achieved their individual performance
goals. The target Adjusted EBITDA was $206 million, and we
needed to achieve Adjusted EBITDA of $230 million for the
named executive officers to earn the maximum 150% of the
Adjusted EBITDA portion of the incentive award. For every 6%
that actual Adjusted EBITDA exceeds the target, the performance
portion of the bonus increases by 25%. We achieved Adjusted
EBITDA of $226 million. As a result, the Compensation
Committee paid all named executive officers incentive awards
that were 131% of the target awards (25% of which was achieved
as successful performance against individual goals and 106% of
which resulted from actual Adjusted EBITDA exceeding the target).
Stock-based
Incentive Program
We maintain the 2004 Equity Incentive Plan (the Equity
Incentive Plan) under which the Committee may grant
incentive awards in the form of options to purchase shares of
common stock and shares of restricted or unrestricted common
stock to directors, officers, employees and consultants
(Participants) of Party City and its affiliates. The
Compensation Committee uses the Equity Incentive Plan as an
important component of our overall compensation program because
it helps retain key employees, aligns their financial interests
with the interests of our equity owners, and rewards the
achievement of the our long-term strategic goals. Common stock
options provide our employees with the opportunity to purchase
and maintain an equity interest in the Company and to share in
the appreciation of the value of our stock.
We granted a substantial amount of equity at the time of the
2004 Acquisition and have refreshed those awards on several
occasions since 2004. The Committee uses both time-based awards
and performance-based awards to provide what it believes are the
appropriate incentives. Time-based stock options help to retain
executives, who must be employed by us at the time the award
vests. In addition, because we set the exercise price of stock
options at the fair value of the common stock at the time of
grant, our equity value must increase thereby
benefiting all stockholders before the awards have
any value. Performance-based awards are vested only if there is
a liquidity event and our private equity owners have achieved a
specified internal rate of return on their investment. We
believe that these awards put our executives in the shoes of the
equity owners and align their interest with those of our
stockholders.
Unless otherwise provided in the related award agreement or, if
applicable, the Stockholders Agreement, immediately prior
to certain change of control transactions described in the
Equity Incentive Plan, all outstanding Company stock options
will, subject to certain limitations, become fully exercisable
and vested, and any restrictions and deferral limitations
applicable to any restricted stock awards will lapse. We believe
that providing for acceleration upon a liquidity event such as a
change of control helps to align the interests of the executive
with those of the stockholders.
In March 2010, the Committee made a stock option award to Gregg
A. Melnick, upon and in recognition of his promotion to
President of Party City. The award consisted of time-based
options for 30 shares that vest in five equal annual
installments commencing on the first anniversary of the grant
date and performance-based options for 16 shares that have
performance terms that are triggered if there is a liquidity
event and our private equity owners receive a specified internal
rate of return. The Compensation Committee wanted
Mr. Melnick to have an equity stake in our company at a
level that is consistent with individuals who held similar
positions, which is how it determined the size of the award. The
allocation between time-based and performance-based options was
consistent with the allocations for other executives.
Special
stock option distribution
In December 2010, in connection with the refinancing of our term
loan agreement (see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources),
our Board of Directors declared a one-time cash dividend of
$9,400 per share of outstanding Common Stock. Because a dividend
of that magnitude would reduce the value of the Common Stock,
the Compensation Committee made dividend equivalent
distributions to the holders of vested options. The named
executives, to the extent they held vested options, received the
same payment per vested option as if they were
78
stockholders. These distributions are reflected in the All
Other Compensation column of the Summary Compensation
Table below. In addition, the Compensation Committee intends to
pay a dividend equivalent, without interest, on each other
option that was outstanding at the time the dividend was
declared. The Board of Directors and Compensation Committee
believe that this treatment of option holders is fair and
consistent with their status as equity participants in our
Company.
Other
Compensation
Each named executive is eligible to participate in our benefit
plans, such as medical, dental, group life, disability and
accidental death and dismemberment insurance. Under our
profit-sharing plans, our named executive officers and generally
all full-time domestic exempt and non-exempt employees who meet
certain
length-of-service
and age requirements, as defined in such plans, may contribute a
portion of their compensation to the plan on a pre-tax basis and
receive an employer 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 our other employees.
The Chief Executive Officer and the Chief Operating Officer
drive automobiles owned by the Company. The Chief Financial
Officer and the President-Party City Retail Group each receive
an allowance to cover the cost of his automobile. The annual
value of the automobile usage and the allowance are reported as
taxable income to the executive and are reflected in the
All Other Compensation column of the Summary
Compensation Table below. All employees, including the named
executives are reimbursed for the cost of business-related
travel.
The named executive officers did not receive any other
perquisites, personal benefits or property in 2010, 2009 or 2008.
Tax
Treatment
Because our Common Stock is not publicly traded, executive
compensation is not subject to the provisions of
Section 162(m) of the Internal Revenue Code, which limit
the deductibility of compensation paid to certain individuals to
$1.0 million, excluding qualifying performance-based
compensation. Following this offering, the Compensation
Committee will endeavor to structure compensation arrangements
so that the amounts paid will be deductible for federal income
tax purposes. However, the Compensation Committee believes that
our interests are best served if it retains the flexibility to
design and structure compensation arrangements that may not be
deductible for federal income tax purposes and intends to do so.
Summary
Compensation Table
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Option
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|
Non-Equity
|
|
All Other
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Name and
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|
|
|
Awards
|
|
Incentive Plan
|
|
Compensation
|
|
|
Principal Position
|
|
Year
|
|
Salary
|
|
(a)
|
|
Compensation
|
|
(b)
|
|
Total
|
|
Gerald C. Rittenberg
|
|
|
2010
|
|
|
$
|
1,102,500
|
|
|
$
|
|
|
|
$
|
1,448,900
|
|
|
$
|
2,611,042
|
|
|
$
|
5,162,442
|
|
Chief Executive
|
|
|
2009
|
|
|
|
1,050,000
|
|
|
|
|
|
|
|
1,017,000
|
|
|
|
371,400
|
|
|
|
2,438,400
|
|
Officer
|
|
|
2008
|
|
|
|
1,000,000
|
|
|
|
595,300
|
|
|
|
716,000
|
|
|
|
371,400
|
|
|
|
2,682,700
|
|
James M. Harrison
|
|
|
2010
|
|
|
$
|
937,125
|
|
|
$
|
|
|
|
$
|
1,231,600
|
|
|
$
|
1,787,814
|
|
|
$
|
3,956,539
|
|
President and
|
|
|
2009
|
|
|
|
892,500
|
|
|
|
|
|
|
|
864,500
|
|
|
|
270,600
|
|
|
|
2,027,600
|
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Chief Operating Officer
|
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2008
|
|
|
|
850,000
|
|
|
|
446,500
|
|
|
|
608,600
|
|
|
|
269,800
|
|
|
|
2,174,900
|
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Michael A. Correale
|
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2010
|
|
|
$
|
345,000
|
|
|
$
|
|
|
|
$
|
226,700
|
|
|
$
|
258,804
|
|
|
$
|
830,504
|
|
Chief Financial
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2009
|
|
|
|
333,125
|
|
|
|
|
|
|
|
129,100
|
|
|
|
40,400
|
|
|
|
502,625
|
|
Officer
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2008
|
|
|
|
325,000
|
|
|
|
|
|
|
|
93,100
|
|
|
|
37,400
|
|
|
|
455,500
|
|
Gregg A. Melnick
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2010
|
|
|
$
|
525,000
|
|
|
$
|
232,530
|
|
|
$
|
344,991
|
|
|
$
|
262,600
|
|
|
$
|
1,365,121
|
|
President, Party City Retail Group
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|
79
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(a) |
|
The dollar values shown reflect the aggregate grant date fair
value of equity awards granted within the year in accordance
with the Financial Accounting Standards Board (FASB)
Accounting Standards Codification Topic 718 for stock-based
compensation. These amounts reflect the total grant date expense
for these awards and do not correspond to the actual cash value
that will be recognized by each individual when received. The
assumptions used in determining the fair values are disclosed in
Note 15 to our audited consolidated financial statements
that appear elsewhere in this prospectus. |
|
(b) |
|
Includes for 2010 the special distribution of $9,400 per vested
time-based option, as described above, to the following named
executive officers: Mr. Rittenberg ($2,232,442);
Mr. Harrison ($1,517,714); Mr. Correale ($217,704);
and Mr. Melnick ($253,800) and an annual accrual for
deferred bonuses for Messrs. Rittenberg and Harrison of
$350,000 and $250,000, respectively, that are payable under
their employment agreements described below. In addition, each
of the named executive officers received a car allowance in the
following amounts: Mr. Rittenberg ($16,233);
Mr. Harrison ($7,800); Mr. Correale ($28,800); and
Mr. Melnick ($8,000). |
Grants of
Plan Based Awards
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All Other
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All Other
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Option
|
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Stock
|
|
Awards:
|
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|
Grant Date
|
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|
|
|
Estimated Future Payouts
|
|
Awards:
|
|
Number of
|
|
Exercise
|
|
Fair Value
|
|
|
|
|
Under Non-Equity Incentive
|
|
Number
|
|
Securities
|
|
Price of
|
|
of Stock
|
|
|
Grant
|
|
Plan Awards
|
|
of Shares
|
|
Underlying
|
|
Option
|
|
and Option
|
Name
|
|
Date
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
of Stocks
|
|
Options
|
|
Awards
|
|
Awards
|
|
Gerald C. Rittenberg
|
|
|
1/1/2010
|
|
|
|
|
|
|
|
1,102,500
|
|
|
|
1,448,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James M. Harrison
|
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1/1/2010
|
|
|
|
|
|
|
|
937,125
|
|
|
|
1,231,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gregg A. Melnick(1)
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3/10/2010
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
$
|
28,350
|
|
|
$
|
232,530
|
|
|
|
|
3/10/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
16
|
|
|
|
28,350
|
|
|
|
|
(2)
|
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|
|
1/1/2010
|
|
|
|
|
|
|
|
262,500
|
|
|
|
393,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Correale
|
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|
1/1/2010
|
|
|
|
|
|
|
|
172,500
|
|
|
|
226,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For more information on Mr. Melnicks grants, please see
Stock-based Incentive Program. |
|
(2) |
|
There is no value assigned to performance grants, as such grants
do not vest until the performance conditions are met. |
80
Outstanding
Equity Awards
The following table sets forth certain information with respect
to outstanding equity awards at December 31, 2010 with
respect to the named executive officers.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Equity Incentive Plan Awards
|
|
Exercise
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
Price ($/Share)
|
|
Date(1)
|
|
Gerald C. Rittenberg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
|
|
|
22,340
|
|
|
|
3/6/2018
|
|
|
|
|
42.40
|
|
|
|
|
|
|
|
|
|
|
|
127.20
|
|
|
|
12,000
|
|
|
|
4/1/2016
|
|
|
|
|
154.51
|
|
|
|
|
|
|
|
|
|
|
|
162.86
|
|
|
|
10,000
|
|
|
|
4/1/2015
|
|
|
|
|
40.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
4/30/2014
|
|
James M. Harrison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75.00
|
|
|
|
22,340
|
|
|
|
3/6/2018
|
|
|
|
|
38.16
|
|
|
|
|
|
|
|
|
|
|
|
114.48
|
|
|
|
12,000
|
|
|
|
4/1/2016
|
|
|
|
|
103.01
|
|
|
|
|
|
|
|
|
|
|
|
108.58
|
|
|
|
10,000
|
|
|
|
4/1/2015
|
|
|
|
|
20.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
4/30/2014
|
|
Michael A. Correale
|
|
|
12.72
|
|
|
|
|
|
|
|
|
|
|
|
25.44
|
|
|
|
12,000
|
|
|
|
4/1/2016
|
|
|
|
|
10.44
|
|
|
|
|
|
|
|
|
|
|
|
17.40
|
|
|
|
10,000
|
|
|
|
4/1/2015
|
|
Gregg A. Melnick
|
|
|
|
|
|
|
30.00
|
|
|
|
|
|
|
|
16.00
|
|
|
|
28,350
|
|
|
|
3/10/2020
|
|
|
|
|
2.00
|
|
|
|
3.00
|
|
|
|
|
|
|
|
10.00
|
|
|
|
22,340
|
|
|
|
2/25/2018
|
|
|
|
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
50.00
|
|
|
|
12,000
|
|
|
|
4/1/2016
|
|
|
|
|
(1) |
|
Option awards that expire on April 30, 2014 were fully
vested at issuance. Option awards that expire on April 1,
2015 vested 20% on April 30, 2005 and 20% per year
thereafter. Option awards that expire on April 1, 2016
vested 20% on December 23, 2006 and 20% per year
thereafter. All other option awards shown vest annually 20% per
year beginning on the first anniversary of the grant date. |
Options
Exercised
There were no options exercised by our named executives during
the year ended December 31, 2010.
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 a
termination or change in control. Under these agreements, if
either Mr. Rittenberg or Mr. Harrison is terminated or
leaves for good reason following a change in control he would
receive a minimum of 12 months of compensation and, at our
election, up to 36 months compensation if we extend the
term of their Restriction Period (as defined hereafter, see
Employment Arrangements).
Mr. Correale would receive 12 months of compensation.
The following table presents the potential post-employment
severance payments payable upon a termination in connection with
a change in control for Mr. Rittenberg, Mr. Harrison
and Mr. Correale and assumes that the triggering event took
place on December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
Death and
|
|
Change-in-
|
Name
|
|
Benefit
|
|
for Good Reason
|
|
Disability
|
|
Control(5)
|
|
Gerald C. Rittenberg
|
|
Severance(1)
|
|
$
|
3,307,500
|
|
|
$
|
|
|
|
$
|
3,307,500
|
|
|
|
Bonus(2)
|
|
|
1,448,900
|
|
|
|
1,448,900
|
|
|
|
1,448,900
|
|
|
|
Deferred Bonus(3)
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
James M. Harrison
|
|
Severance(1)
|
|
$
|
2,811,375
|
|
|
$
|
|
|
|
$
|
2,811,375
|
|
|
|
Bonus(2)
|
|
|
731,600
|
|
|
|
731,600
|
|
|
|
731,600
|
|
|
|
Deferred Bonus(3)
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
750,000
|
|
Michael A. Correale
|
|
Severance(4)
|
|
$
|
458,350
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
Represents payment under the employment contracts based on a
severance multiplier of 3.0 times the executive officers
base salary for the year of termination. The employee contracts
permit us in our sole |
81
|
|
|
|
|
discretion to select a multiplier of 1.0, 2.0 or 3.0 equal to
the number of years post-employment the executives
activities would be subject to restrictions. |
|
(2) |
|
Represents actual payments for bonus for the year of termination. |
|
(3) |
|
Represents accrued but unpaid deferred bonus earned by the
executive officer through the date of termination. |
|
(4) |
|
Represents payment under the severance agreement based on the
officers base salary and 50% bonus for the year of
termination. |
|
(5) |
|
If Mr. Rittenberg and Mr. Harrison are not offered
employment on substantially similar terms by us or one of our
affiliates following a change in control, they would be eligible
for severance payments as if terminated without cause. See
(1) above for the calculation of termination benefits. |
Employment
Arrangements
Employment Agreement with Gerald C.
Rittenberg. Gerald C. Rittenberg entered into an
employment agreement with us, dated January 1, 2008, (the
Rittenberg Employment Agreement), pursuant to which
Mr. Rittenberg will serve as our Chief Executive Officer
through December 31, 2012. During 2010, Mr. Rittenberg
received an annual base salary of $1.1 million, which
increases by 5% on each January 1st during his
employment period. Mr. Rittenberg will be eligible for an
annual bonus for each calendar year if certain operational and
financial targets are attained as determined by both our
Compensation Committee and Board of Directors in consultation
with Mr. Rittenberg. In addition to the annual bonus,
Mr. Rittenberg is entitled to receive a deferred bonus
accruing at a rate of $350,000 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, the 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); (3) the Deferred
Bonus (as calculated under the Rittenberg Employment Agreement)
and (4) 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 the termination of his employment for cause or his
resignation without good reason, 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,
82
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 (the
Harrison Employment Agreement), pursuant to which
Mr. Harrison agreed to serve as our President through
December 31, 2012. During 2010, Mr. Harrison received
an annual base salary of $0.9 million, which increases 5%
on each January 1st during his employment period. The
Harrison Employment Agreement also contains provisions for a
deferred bonus (accruing at an annual rate of $250,000 per
year), annual bonus payments, severance, other benefits and
provisions for non-competition and non-solicitation similar to
those in the Rittenberg Employment Agreement.
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 $2,500 for
regular and special meetings of the Board. We also reimburse our
independent directors for customary expenses for attending board
and committee meetings. In addition, Mr. Kahn and
Ms. Meyrowitz were each were granted 2.5 time-based stock
options and 2.5 performance-based stock options during the year
they joined the board of directors. During 2010,
Mr. Kussell joined the board of directors and was granted 2
time-based stock options. Directors who are also our employees
or are representatives of our Sponsors receive no additional
compensation for serving as a director.
The following table further summarizes the compensation paid to
the independent directors for the year ended December 31,
2010.
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Fees Earned or
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Option
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Name
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Paid in Cash
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Awards(a)
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Total
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Jordan A. Kahn
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$
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26,000
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$
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$
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26,000
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William Kussell
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19,500
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13,214
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33,500
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Carol M. Meyrowitz
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26,000
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26,000
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(a) |
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Amount shown represents the grant date fair market value
computed in accordance with ASC Topic 718 for the two
time-based
stock options Mr. Kussell received for joining the board of
directors. There were no other options held by Mr. Kussell at
December 31, 2010. |
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.
83
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect
to the beneficial ownership of our common stock, assuming the
Common Stock Conversion (but without giving effect to
the -for-one stock split), at
March 31, 2011 for:
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each person whom we know beneficially owns more than five
percent of our common stock;
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each of our directors;
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each of our named executive officers;
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all of our directors and executive officers as a group; and
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each other selling stockholder.
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The number of shares beneficially owned by each stockholder is
determined under rules issued by the SEC and includes voting or
investment power with respect to securities. Under these rules,
beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting power or
investment power. Each of the stockholders listed has sole
voting and investment power with respect to the shares
beneficially owned by the stockholder unless noted otherwise,
subject to community property laws where applicable.
Shares of common stock that may be acquired within 60 days
following March 31, 2011 pursuant to the exercise of
options are deemed to be outstanding for the purpose of
computing the percentage ownership of such holder but are not
deemed to be outstanding for computing the percentage ownership
of any other person shown in the table. Beneficial ownership
representing less than one percent is denoted with an
*.
Unless otherwise indicated, the address for each of the
stockholders in the table below is
c/o Party
City Holdings Inc., 80 Grasslands Road, Elmsford, New York 10523.
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Number of Shares of
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Number of Shares of
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Common Stock
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Number
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Common Stock
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Beneficially Owner Prior
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of
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Beneficially Owner
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to the Offering
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Shares
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After the Offering
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Name of Beneficial Owner
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Number
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Percentage
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Offered
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Number
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Percentage
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Funds managed by Advent International Corporation(1)
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11,918.71
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37.12
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%
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%
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Berkshire Partners LLC(2)
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11,609.45
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36.15
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%
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%
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Weston Presidio(3)
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5,605.16
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17.45
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%
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%
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Steven J. Collins(4)
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11,918.71
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37.12
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%
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%
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Michael A. Correale(5)
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36.66
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*
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%
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Michael F. Cronin(6)
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5,605.16
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17.45
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%
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%
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James M. Harrison(7)
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237.30
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*
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%
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Kevin M. Hayes(6)
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5,605.16
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17.45
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%
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%
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Jordan A. Kahn(9)
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59.33
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*
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%
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William Kussell
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*
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%
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Richard K. Lubin(10)
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11,609.45
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36.15
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%
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%
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Gregg A. Melnick(8)
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74.00
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*
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%
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Carol M. Meyrowitz(11)
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27.45
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*
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%
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David M. Mussafer(4)
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11,918.71
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37.12
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%
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%
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Gerald C. Rittenberg(12)
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398.69
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1.23
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%
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%
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Robert J. Small(10)
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11,609.45
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36.15
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%
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%
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All directors and executive officers as a group (13 persons)
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29,966.75
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92.00
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%
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%
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Selling Stockholders
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%
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%
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84
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(1) |
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The funds managed by Advent International Corporation own 100%
of
Advent-Amscan
Acquisition Limited Partnership, which in turn owns 37.12% of
Party City Holdings Inc., for a 37.12% indirect ownership for
the funds managed by Advent International Corporation. This
37.12% indirect ownership consists of 5,506 shares of
Class B Common Shares purchased by Advent International
Global Private Equity VI Limited Partnership, 3,042 shares
of Class B Common Shares purchased by Advent International
Global Private Equity VI-A Limited Partnership, 279 shares
of Class B Common Shares purchased by Advent International
Global Private Equity VI-B Limited Partnership, 284 shares
of Class B Common Shares purchased by Advent International
Global Private Equity VI-C Limited Partnership, 213 shares
of Class B Common Shares purchased by Advent International
Global Private Equity VI-D Limited Partnership, 685 shares
of Class B Common Shares purchased by Advent International
Global Private Equity VI-E Limited Partnership,
1,036 shares of Class B Common Shares purchased by
Advent International Global Private Equity VI-F Limited
Partnership, 653 shares of Class B Common Shares
purchased by Advent International Global Private Equity VI-G
Limited Partnership, 201 shares of Class B Common
Shares purchased by Advent Partners GPE VI 2008 Limited
Partnership, 19 shares of Class B Common Shares
purchased by Advent Partners GPE VI-A Limited Partnership.
Advent International Corporation is the manager of Advent
International LLC, which in turn is the general partner of GPE
VI GP Limited Partnership and GPE VI GP (Delaware) Limited
Partnership. GPE VI GP Limited Partnership is the general
partner of Advent International GPE VI Limited Partnership,
Advent International GPE VI-A Limited Partnership, Advent
International GPE VI-B Limited Partnership, Advent International
GPE VI-F Limited Partnership and Advent International GPE VI-G
Limited Partnership. GPE VI GP (Delaware) is the general partner
of Advent International GPF VI-C Limited Partnership, Advent
International GPE VI-D Limited Partnership and Advent
International GPE VI-E Limited Partnership. Advent International
Corporation is the manager of Advent International LLC, which in
turn is the general partner of Advent Partners GPE VI 2008
Limited Partnership and Advent Partners GPE VI-A Limited
Partnership. Limited partners of Advent Partners GPE VI 2008
Limited Partnership and Advent Partners GPE VI-A Limited
Partnership are individuals affiliated with Advent. Advent
International Corporation exercises voting and investment power
over the shares held by each of these entities and may be deemed
to have beneficial ownership of these shares. With respect to
the common shares of Party City Holdings Inc. held by the funds
managed by Advent International Corporation, a group of
individuals currently composed of Ernest G. Bachrach, Steven J.
Collins, David M. Mussafer and Steven M. Tadler exercises
voting and investment power over the shares beneficially owned
by Advent International Corporation. Each of Mr. Bachrach,
Mr. Collins, Mr. Mussafer and Mr. Tadler
disclaims beneficial ownership of the shares held by the funds
managed by Advent International Corporation, except to the
extent of their respective pecuniary interest therein. The
address of Advent International Corporation and each of the
funds listed above is
c/o Advent
International Corporation, 75 State Street, Boston, MA 02109. |
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(2) |
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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) 347.23 shares of
common stock owned by Berkshire Investors LLC. In addition,
Berkshire Fund IV, Limited Partnership and Berkshire
Investors LLC, through GB Holdings I LLC, own
399.134 shares of common stock and share voting and
investment power over those shares. Fifth Berkshire Associates
LLC, a Massachusetts limited liability company
(5BA), is the general partner of Berkshire
Fund V, Limited Partnership and the managing members of 5BA
are Bradley M. Bloom, Jane Brock-Wilson, Kevin T.
Callaghan, Carl Ferenbach, Ross M. Jones, Richard K. Lubin,
David R. Peeler and Robert J. Small (the Berkshire V
Principals). The Berkshire V Principals often make
acquisitions in, and dispose of, securities of an issuer on the
same terms and conditions and at the same time. Berkshire
Partners LLC (Berkshire Partners) is the investment
advisor to Berkshire Fund V, Limited Partnership. Sixth
Berkshire Associates LLC, a Massachusetts limited liability
company (6BA), is the general partner of Berkshire
Fund VI, Limited Partnership and the managing members of
6BA are Michael C. Ascione, Bradley M. Bloom, Jane Brock-Wilson,
Kevin T. Callaghan, Carl Ferenbach, Christopher J. Hadley,
Lawrence S. Hamelsky, Ross M. Jones, Richard K. Lubin, Joshua A.
Lutzker, David R. Peeler and Robert J. Small (the |
85
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Berkshire VI Principals). The Berkshire VI
Principals often make acquisitions in, and dispose of,
securities of an issuer on the same terms and conditions and at
the same time. Berkshire Partners is the investment advisor to
Berkshire Fund VI, Limited Partnership. The managing
members of Berkshire Investors LLC are Michael C. Ascione,
Bradley M. Bloom, Jane Brock-Wilson, Kevin T. Callaghan, Carl
Ferenbach, Christopher J. Hadley, Lawrence S. Hamelsky, Sharlyn
C. Heslam, Elizabeth L. Hoffman, Ross M. Jones, Richard K.
Lubin, Joshua A. Lutzker, David R. Peeler and Robert J. Small
(the Berkshire Investors Principals). The managing
members of Berkshire Investors III LLC are Michael C.
Ascione, Bradley M. Bloom, Jane Brock-Wilson, Kevin T.
Callaghan, Carl Ferenbach, Christopher J. Hadley, Lawrence S.
Hamelsky, Sharlyn C. Heslam, Elizabeth L. Hoffman, Ross M.
Jones, Richard K. Lubin, Joshua A. Lutzker, David R. Peeler
and Robert J. Small (the Berkshire Investors III
Principals). Mr. Lubin and Mr. Small are
directors of the Company. By virtue of their positions as
managing members of 5BA, 6BA, Berkshire Investors LLC, Berkshire
Investors III LLC, the Berkshire V Principals, the
Berkshire VI Principals, the Berkshire Investor Principals and
the Berkshire Investors III Principals, respectively, may
be deemed to possess indirect beneficial ownership of the shares
of common stock beneficially owned by Berkshire Fund V,
Limited Partnership, Berkshire Fund VI, Limited
Partnership, Berkshire Investors LLC and Berkshire
Investors III LLC, respectively. However, none of the
managing members, acting alone, has voting or investment power
with respect to shares beneficially owned by Berkshire
Fund V, Limited Partnership, Berkshire Fund VI,
Limited Partnership, Berkshire Investors LLC and Berkshire
Investors III LLC , and, as a result, each managing member,
including Mr. Lubin and Mr. Small, disclaims
beneficial ownership of the shares held by Berkshire
Fund V, Limited Partnership, Berkshire Fund VI,
Limited Partnership, Berkshire Investors LLC and Berkshire
Investors III LLC and this statement should not be deemed
to be an admission that they are members of any
group within the meaning of Section 13(d)(3) of
the Exchange Act and the rules and regulations thereunder. The
address of all the managing members mentioned above is the John
Hancock Tower, 200 Clarendon Street, Boston, Massachusetts
02116-5021. |
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(3) |
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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. |
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(4) |
|
Mr. Collins and Mr. Mussafer are members of a group of
persons who exercise voting and investment power over the shares
beneficially owned by the funds managed Advent International
Corporation and may be deemed to beneficially own the shares
held by the Advent Funds, except to the extent of their
respective pecuniary interest therein. Mr. Collins and
Mr. Mussafer each disclaim beneficial ownership of the
shares held by the Funds managed by Advent International. Their
addresses are
c/o Advent
International Corporation, 75 State Street, Boston,
Massachusetts 02109. |
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(5) |
|
Includes 23.16 shares which could be acquired by
Mr. Correale within 60 days upon exercise of options. |
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(6) |
|
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. Mr. Cronin is a Managing Partner of
Weston Presidio, and Mr. Hayes is a Partner of Weston
Presidio. Mr. Cronin and Mr. Hayes each disclaims
beneficial ownership of the shares held by Weston Presidio,
except to the extent of his pecuniary interest therein. Their
addresses are 200 Clarendon Street, 50th Floor, Boston,
Massachusetts 02116. |
|
(7) |
|
Includes 161.46 shares which could be acquired by
Mr. Harrison within 60 days upon exercise of options.
Also includes 75.84 shares held by a family trust for which
Mr. Harrisons wife serves as the trustee. |
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(8) |
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Includes 34.00 shares which could be acquired by
Mr. Melnick within 60 days upon exercise of options. |
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(9) |
|
Includes 2.5 shares which could be acquired by
Mr. Kahn within 60 days upon exercise of options. |
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(10) |
|
Mr. Lubin and Mr. Small are managing members of
Berkshire Investors LLC, Berkshire Investors III LLC, Fifth
Berkshire Associates LLC (the general partner of Berkshire
Fund V, Limited Partnership) and of Sixth Berkshire
Associates LLC (the general partner of Berkshire Fund VI,
Limited Partnership). In their capacity as managing members of
the aforementioned entities, Mr. Lubin and Mr. Small
may be |
86
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deemed to have shared investment and voting power over shares
beneficially owned by Berkshire Investors LLC, Berkshire
Investors III LLC, Berkshire Fund V, Limited
Partnership and Berkshire Fund VI, Limited Partnership.
Mr. Lubin and Mr. Small each disclaims beneficial
ownership of the shares held by these entities. Their address is
the John Hancock Tower, 200 Clarendon Street, Boston,
Massachusetts
02116-5021. |
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(11) |
|
Includes 1.62 shares which could be acquired by
Ms. Meyrowitz within 60 days upon exercise of options.
Also includes 25.83 shares held indirectly through a trust. |
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(12) |
|
Includes 237.49 shares which could be acquired by
Mr. Rittenberg within 60 days upon exercise of
options. Also includes 52.2 shares held indirectly in a limited
liability company. |
87
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related
Party Transaction Policy
In connection with this offering, we will adopt a policy
providing for the review, approval, or ratification of certain
related party transactions. All related party
transactions must be approved or ratified by our audit
committee or, upon determination by the audit committee, by a
majority vote of all disinterested members of our board of
directions. Our policy will apply to any transaction,
arrangement or relationship, or any series of similar
transactions, arrangements or relationships that meet the
following criteria:
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the amount involved exceeds $120,000;
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we or any of our subsidiaries is or will be a
participant; and
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our executive officers, directors or 5% stockholders, or any
immediate family member of any of our executive officers,
directors or 5% stockholders, has or will have a direct or
indirect material interest in the transaction, arrangement or
relationship (including any indebtedness or guarantee of
indebtedness).
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Certain types of transactions, such as transactions involving
rates determined by competitive bids, certain transactions in
the ordinary course, and transactions in which the related
partys interest arises solely from ownership of a class of
our securities or a less than ten percent equity or limited
partnership interest in other entities, are deemed to be
pre-approved even if such transactions would be deemed to be
related party transactions pursuant to the criteria
described above.
Under the terms of our policy, when considering whether to
approve a proposed related party transaction, factors to be
considered include, among other things, the size of the
transaction, the amount payable to a related person, the nature
of the related partys interest in the transaction and
whether such transaction is on terms at least as favorable to us
as the terms generally available to an unaffiliated third party
under the same or similar circumstances.
Agreements
with Management
We and certain members of senior management have entered into
employment agreements. The terms and conditions of certain of
these employment agreements are more fully described in
Executive Compensation Employment
Arrangements.
Management
Agreement
In connection with the acquisition by Berkshire Partners and
Weston Presidio, Amscan Holdings entered into a management
agreement with Berkshire Partners and Weston Presidio, pursuant
to which they are paid an annual management fee of
$1.25 million. At March 31, 2011, Berkshire Partners
had received management fees of $208,333 and Weston Presidio had
received management fees of $104,167. Berkshire Partners
received management fees of $833,233 in each of 2010, 2009 and
2008, respectively, and Weston Presidio received management fees
of $416,768 in each of 2010, 2009 and 2008, respectively. A
portion of these amounts were paid to Advent as discussed below.
As long as Berkshire Partners and Weston Presidio receive annual
management fees, they will advise us in connection with
financing, acquisition and disposition transactions (however
structured) involving us or any of our direct or indirect
subsidiaries, and Amscan Holdings will pay a fee for services
rendered in connection with each such transaction equal to up to
one percent (1%) of the gross transaction, to be allocated
between Berkshire Partners (or its designee) and Weston Presidio
(or its designee) in the same proportions as their respective
holdings of common stock by their affiliates, as of the date of
such subsequent transaction.
On August 19, 2008, Berkshire Partners and Weston Presidio
entered into a Management Fee Agreement with Advent pursuant to
which Advent would provide consulting and management advisory
services, of the type contemplated by the Management Agreement,
to the Company and Amscan Holdings and would receive, in return,
a portion of the management fees and any transaction fees due to
Berkshire Partners and Weston
88
Presidio under the Management Agreement. Advent received
management fees of $518,495 in each of 2010 and 2009,
respectively, and $233,606 in 2008.
We expect these arrangements will be terminated upon completion
of this offering.
Stockholders
Agreement
We are currently a party to a stockholders agreement with
Berkshire Partners and Weston Presidio (the Principal
Investors), other investors and certain of our employees
listed as parties thereto (the Stockholders
Agreement). 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 our common stock by the Principal
Investors, (ii) prior to an initial public offering
of our stock (as defined in the Stockholders Agreement), certain
of our rights to purchase, and certain rights of the
non-principal investors to require us 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 our
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 our common stock. The Stockholders Agreement
also contains provisions granting the Principal Investors and
the non-principal investors certain rights in connection with
the private sale or public registration of our common stock and
provides for indemnification and certain other rights,
restrictions and obligations in connection with such
registration. In addition, the funds managed by Advent, as the
holders of all outstanding shares of Class B common stock,
have similar rights under our existing certificate of
incorporation.
The provisions of the Stockholders Agreement pertaining to
restrictions on transfers, call and put rights by us on equity
interests held by certain employees, take along rights, come
along rights, corporate governance, rights of participation,
financial and business information rights, confidentiality and
approval rights shall all terminate upon the completion of this
offering pursuant to the termination provision of the
Stockholders Agreement.
We intend, in connection with the completion of this offering,
to enter into an amended and restated stockholders agreement,
the terms of which have not yet been agreed to by the Company
and the Sponsors.
Registration
and Information Rights Agreement
We are currently a party to a registration and information
rights agreement with the funds managed by Advent (the
Registration and Information Rights Agreement),
which provides similar rights as the Stockholders Agreement
pertaining to the private sale or public registration of our
common stock. Similar to the Stockholders Agreement, the
Registration and Information Rights Agreement provides for
indemnification and certain other rights, restrictions and
obligations in connection with such registration. We expect that
this agreement will be terminated in connection with the
offering, and that Advent will become party to the amended and
restated stockholders agreement that will be entered into and
become effective upon completion of this offering.
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DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material terms of our
amended and restated certificate of incorporation, which we
refer to as our certificate of incorporation, and bylaws, as
each is anticipated to be in effect upon the closing of this
offering.
General
Upon completion of this offering, we have authority to issue up
to:
(i) shares
of common stock, par value $0.01 per share; and
(ii) shares
of preferred stock, par value $0.01 per share.
Common
Stock
Holders of our common stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. An election of
directors by our stockholders shall be determined by a plurality
of the votes cast by the stockholders entitled to vote on the
election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of
directors, subject to any preferential dividend rights of any
series of preferred stock that is outstanding at the time of the
dividend.
In the event of our liquidation or dissolution, the holders of
common stock are entitled to receive proportionately our net
assets available for distribution to stockholders after payment
of all debts and other liabilities, subject to the prior rights
of any outstanding preferred stock.
The rights, preferences and privileges of holders of common
stock are subject to the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the
future.
Preferred
Stock
Under our certificate of incorporation, our board of directors
has the authority, without further action by our stockholders,
except as described below, to issue up
to shares
of preferred stock in one or more series and to fix the voting
powers, designations, preferences and the relative
participating, optional or other special rights and
qualifications, limitations and restrictions of each series,
including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of
shares constituting any series. Upon completion of the offering,
no shares of our authorized preferred stock will be outstanding.
Because the board of directors has the power to establish the
preferences and rights of the shares of any additional series of
preferred stock, it may afford holders of any preferred stock
preferences, powers and rights, including voting and dividend
rights, senior to the rights of the holders of the common stock,
which could adversely affect the holders of the common stock and
could discourage a takeover of us even if a change of control of
our company would be beneficial to the interests of our
stockholders.
Anti-takeover
Effects of the Delaware General Corporation Law and our
Certificate of Incorporation and Bylaws
Our certificate of incorporation and our bylaws contain
provisions that may delay, defer or discourage another party
from acquiring control of us. We expect that these provisions,
which are summarized below, will discourage coercive takeover
practices or inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us
to first negotiate with the board of directors, which we believe
may result in an improvement of the terms of any such
acquisition in favor of our stockholders. However, they also
give the board of directors the power to discourage acquisitions
that some stockholders may favor.
Classified
Board of Directors
Our board of directors is divided intro three classes,
class I, class II and class III, with members of
each class serving staggered three-year terms. Our certificate
of incorporation provides that the authorized number of
directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. Our certificate of
incorporation and our bylaws also provide that a director may be
removed only for cause by the affirmative vote of the holders of
at
90
least
662/3%
of our voting stock, and that any vacancy on our board of
directors, including a vacancy resulting from an enlargement of
our board of directors, may be filled only by vote of a majority
of our directors then in office. Our classified board of
directors could have the effect of delaying or discouraging an
acquisition of us or a change in our management.
Action
by Written Consent
The Delaware General Corporation Law (DGCL) provides
that, unless otherwise stated in a corporations
certificate of incorporation, the stockholders may act by
written consent without a meeting. Our certificate of
incorporation provides that after the Sponsors collectively own
less than 50% of our outstanding common stock, any action
required or permitted to be taken by our stockholders at an
annual meeting or special meeting of the stockholders may only
be taken at an annual or special meeting before which it is
properly brought, and not by written consent without a meeting.
As a result, Berkshire Partners, Weston Presidio, and the funds
managed by Advent will be able to act by written consent so long
as they collectively own at least 50% of our outstanding common
stock.
Special
Meeting of Stockholders and Advance Notice Requirements for
Stockholder Proposals
Our certificate of incorporation and bylaws provide that, except
as otherwise required by law, special meetings of the
stockholders can only be called by (a) our chairman or vice
chairman of the board of directors, (b) our president or
(c) a majority of the board of directors through a special
resolution.
In addition, our bylaws require advance notice procedures for
stockholder proposals to be brought before an annual meeting of
the stockholders, including the nomination of directors.
Stockholders at an annual meeting may only consider the
proposals specified in the notice of meeting or brought before
the meeting by or at the direction of the board of directors, or
by a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has delivered a
timely written notice in proper form to our secretary, of the
stockholders intention to bring such business before the
meeting.
These provisions could have the effect of delaying until the
next stockholder meeting any stockholder actions, even if they
are favored by the holders of a majority of our outstanding
voting securities.
Amendment
to Certificate of Incorporation and Bylaws
The DGCL provides generally that the affirmative vote of a
majority of the outstanding stock entitled to vote on amendments
to a corporations certificate of incorporation or bylaws
is required to approve such amendment, unless a
corporations certificate of incorporation or bylaws, as
the case may be, requires a greater percentage. Our bylaws may
be amended or repealed by a majority vote of our board of
directors or, in addition to any other vote otherwise required
by law, the affirmative vote of at least two-thirds of the
voting power of our outstanding shares of common stock.
Additionally, the affirmative vote of at least two-thirds of the
voting power of the outstanding shares of capital stock entitled
to vote on the adoption, alteration, amendment or repeal of our
certificate of incorporation, voting as a single class, is
required to amend or repeal or to adopt any provision
inconsistent with the Classified Board of Directors,
Action by Written Consent, Special Meetings of
Stockholders, Amendments to Certificate of
Incorporation and Bylaws and Business
Combinations provisions described in our certificate of
incorporation. These provisions may have the effect of
deferring, delaying or discouraging the removal of any
anti-takeover defenses provided for in our certificate of
incorporation and our bylaws.
Corporate
Opportunity
Our certificate of incorporation provides that we renounce any
interest or expectancy in, or in being offered an opportunity to
participate in, any business opportunity that may be from time
to time be presented to the Sponsors or any of their officers,
directors, agents, stockholders, members, partners, affiliates
and subsidiaries (other than us and our subsidiaries) and that
may be a business opportunity for such Sponsors, even if the
opportunity is one that we might reasonably have pursued or had
the ability or desire to pursue if granted the opportunity to do
so. No such person will be liable to us for breach of any
fiduciary or other duty, as a director or officer or otherwise,
by reason of the fact that such person, acting in good faith,
pursues or acquires any such business opportunity, directs any
such business opportunity to another person or fails to
91
present any such business opportunity, or information regarding
any such business opportunity, to us unless, in the case of any
such person who is our director or officer, any such business
opportunity is expressly offered to such director or officer
solely in his or her capacity as our director or officer. None
of the Sponsors or their representatives has any duty to refrain
from engaging directly or indirectly in the same or similar
business activities or lines of business as us or any of our
subsidiaries.
Exclusive
Jurisdiction of Certain Actions
Our certificate of incorporation requires, to the fullest extent
permitted by law that derivative actions brought in the name of
the company, actions against directors, officers and employees
for breach of fiduciary duty and other similar actions may be
brought only in the Court of Chancery in the State of Delaware.
Although we believe this provision benefits the company by
providing increased consistency in the application of Delaware
law in the types of lawsuits to which it applies, the provision
may have the effect of discouraging lawsuits against our
directors and officers.
Business
Combinations
We have opted out of Section 203 of the DGCL. However, our
certificate of incorporation contains similar provisions
providing that we may not engage in certain business
combinations with any interested stockholder
for a three-year period following the time that the stockholder
became an interested stockholder, unless:
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prior to such time, our board of directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding
at the time the transaction commenced, excluding certain
shares; or
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at or subsequent to that time, the business combination is
approved by our board of directors and by the affirmative vote
of holders of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
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Generally, a business combination includes a merger,
asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to
certain exceptions, an interested stockholder is a
person who, together with that persons affiliates and
associates, owns, or within the previous three years owned, 15%
or more of our voting stock.
Under certain circumstances, this provision will make it more
difficult for a person who would be an interested
stockholder to effect various business combinations with a
corporation for a three-year period. This provision may
encourage companies interested in acquiring our company to
negotiate in advance with our board of directors because the
stockholder approval requirement would be avoided if our board
of directors approves either the business combination or the
transaction which results in the stockholder becoming an
interested stockholder. These provisions also may have the
effect of preventing changes in our board of directors and may
make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
Our certificate of incorporation provides that the funds managed
Advent, Berkshire Partners and Weston Presidio, any affiliated
investment entity, and any of their respective direct or
indirect transferees of at least %
of our outstanding common stock and any group as to which such
persons are party to, do not constitute interested
stockholders for purposes of this provision.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock
is .
Listing
We intend to apply to list our shares of common stock
on under the symbol
PRTY.
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DESCRIPTION
OF CERTAIN DEBT
Senior
Secured Asset-Based Revolving Credit Facility
General
On August 13, 2010, Amscan Holdings entered into a
$325 million senior secured asset-based revolving credit
facility with Wells Fargo Bank, N.A. (successor by merger to
Wells Fargo Retail Finance, LLC), as administrative and
collateral agent, and other lenders. The senior secured
asset-based revolving credit facility was used to refinance
Amscan Holdings then existing senior secured asset-based
revolving credit facility and the revolving credit facility and
term loan facility of Party City Franchise Group
(PCFG), which at closing became a borrower under the
senior secured asset-based revolving credit facility and a
guarantor under the terms of Amscan Holdings senior
subordinated notes and then existing senior secured term loan
facility. The senior secured asset-based revolving credit
facility may be used for working capital, general corporate
purposes and the issuance of letters of credit to support
payment obligations incurred in the ordinary course of business
by Amscan Holdings and its subsidiaries.
The senior secured asset-based revolving credit facility
currently provides for (a) revolving loans in an aggregate
principal amount not to exceed $325 million, subject to a
borrowing base described below, (b) swing-line loans in an
aggregate principal amount at any time outstanding not to exceed
10% of the aggregate commitments under the senior secured
asset-based revolving credit facility and (c) letters of
credit in an aggregate face amount at any time outstanding not
to exceed $50 million.
Under the senior secured asset-based revolving credit facility,
the borrowing base at any time equals (a) 85% of eligible
trade receivables plus (b) 85% of eligible inventory at its
net orderly liquidation value plus (c) 90% of eligible
credit card receivables, less (d) certain reserves.
As of December 31, 2010, the borrowing base was
$325.0 million, of which Amscan Holdings had
$150.1 million of outstanding borrowings,
$12.9 million of outstanding letters of credit and
$162.0 million of excess availability.
The senior secured asset-based revolving credit facility also
provides that Amscan Holdings has the right from time to time to
request an amount of additional commitments up to
$125 million, of which the entire amount remains available.
The lenders under the senior secured asset-based revolving
credit facility are not under any obligation to provide any such
additional commitments, and any increase in commitments is
subject to several conditions precedent and limitations. If
Amscan Holdings were to request any additional commitments, and
the existing lenders or new lenders were to agree to provide
such commitments, the facility size could be increased to up to
$450 million, but Amscan Holdings ability to borrow
under this facility would still be limited by the amount of the
borrowing base.
On December 2, 2010, Amscan Holdings entered into an
amendment to the senior secured asset-based revolving credit
facility to permit the Transactions (as defined below) and amend
the maturity date under the senior secured asset-based revolving
credit facility to provide for a maturity date of
August 13, 2015 or, if still outstanding, the date that is
120 days prior to the scheduled maturity of Amscan
Holdings senior subordinated notes or any indebtedness
that refinances Amscan Holdings senior subordinated notes.
Interest
Rate and Fees
Amounts borrowed under the senior secured asset-based revolving
credit facility bear interest at a rate per annum equal to an
applicable margin plus, at our option, either (a) an
alternate base rate determined by reference to the highest of
(1) the prime rate of Wells Fargo, N.A., (2) the
federal funds rate in effect on such date plus 1/2 of 1.00% and
(3) the LIBOR rate for a three-month interest period plus
1% or (b) the LIBOR rate determined by reference to the
LIBOR cost of funds for U.S. dollar deposits for the
relevant interest period adjusted for certain additional costs.
The applicable margin percentage ranges from 1.25% to 1.75% for
alternate base rate loans and from 2.25% to 2.75% for loans
based on the LIBOR rate, in each case based on average
historical excess availability (as defined in the senior secured
asset-based revolving credit facility).
93
In addition to paying interest on outstanding principal under
the senior secured asset-based revolving credit facility, Amscan
Holdings is required to pay a commitment fee of between 0.375%
and 0.50% per annum in respect of the unutilized commitments
thereunder. Amscan Holdings must also pay customary letter of
credit fees and agency fees.
Guarantees
and Security
All obligations under the senior secured asset-based revolving
credit facility are guaranteed, jointly and severally, by us and
each of the existing and future domestic subsidiaries of Amscan
Holdings. Each guarantor has secured its obligations under the
guaranty by a first priority lien on its accounts receivable,
inventory, cash and related proceeds and assets and a second
priority lien on substantially all of its other assets.
Covenants
and Other Matters
The senior secured asset-based revolving credit facility
contains negative covenants that, among other things and subject
to certain exceptions, restrict our ability, and the ability of
Amscan Holdings and its restricted subsidiaries, to:
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incur additional indebtedness;
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pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of the Company, Amscan
Holdings, or any of its restricted subsidiaries or make payments
on, or redeem, repurchase or retire any subordinated
indebtedness;
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make certain investments, loans, advances and acquisitions;
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enter into sale and leaseback transactions;
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engage in transactions with affiliates;
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create liens;
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transfer or sell assets;
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guarantee debt;
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create restrictions on the payment of dividends or other amounts
to us from our restricted subsidiaries;
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consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries; and
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engage in unrelated businesses.
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In addition, Amscan Holdings must comply with a fixed charge
coverage ratio if excess availability under the senior secured
asset-based revolving credit facility on any day is less than
(a) 15% of the lesser of the aggregate commitments or the
then borrowing base or (b) $25 million. The fixed
charge coverage ratio is the ratio of (i) Adjusted EBITDA
minus the unfinanced portion of consolidated capital
expenditures (as defined in our senior secured asset-based
revolving credit facility) to (ii) fixed charges (as
defined in our senior secured asset-based revolving credit
facility). Excess availability under the senior secured
asset-based revolving credit facility is defined as the lesser
of (a) the aggregate commitments under the senior secured
asset-based revolving credit facility and (b) the then
borrowing base, minus the outstanding credit extensions.
The senior secured asset-based revolving credit facility also
contains certain customary affirmative covenants and events of
default.
Senior
Secured Term Loan Facility
General
On December 2, 2010, Amscan Holdings entered into a
$675 million senior secured term loan facility with Credit
Suisse AG, as administrative and collateral agent, and other
lenders.
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At December 31, 2010, the outstanding principal amount of
term loans under the senior secured term loan facility was
$666.6 million, which reflects an original issue discount
of $6.7 million net of $0.1 million of accumulated
amortization.
The senior secured term loan facility also provides that Amscan
Holdings has the right from time to time to request an amount of
additional term loans up to $175 million and to refinance,
replace or extend the maturity date of all or a portion of the
then existing term loans under the senior secured term loan
facility. The lenders under the senior secured term loan
facility are not under any obligation to provide any such
additional term loans, provide such refinancing or replacement
term loans, or agree to extend the maturity date of existing
term loans held by them, and transactions to effect any
additional, refinancing, replacement or extended term loans are
subject to several conditions precedent and limitations.
Amortization
and Maturity
The term loans under the senior secured term loan facility
mature on December 2, 2017 (or January 30, 2014, if
Amscan Holdings senior subordinated notes are not
refinanced with indebtedness permitted to be incurred under the
senior secured term loan facility that matures at least
91 days after the maturity date of the term loans). The
term loans amortize each year in an amount equal to 1% per annum
in equal quarterly installments, with the balance payable on the
maturity date thereof.
Interest
Rate and Fees
Amounts borrowed under the senior secured term loan facility
bear interest at a rate per annum equal to an applicable margin
plus, at Amscan Holdings option, either (a) an
alternate base rate determined by reference to the highest of
(1) the prime rate of Credit Suisse AG, (2) the
federal funds rate in effect on such date plus 1/2 of 1.00% and
(3) the LIBOR rate for a one-month interest period plus 1%
or (b) a LIBOR rate determined by reference to the cost of
funds for U.S. dollar deposits for the relevant interest
period adjusted for certain additional costs, but not less than
1.50%. The applicable margin percentage is 4.25% for alternate
base rate loans and 5.25% for loans based on the LIBOR rate.
In addition to paying interest on outstanding principal under
the senior secured term loan facility, Amscan Holdings must also
pay customary agency fees.
Prepayments
The senior secured term loan facility requires Amscan Holdings
to prepay outstanding term loans, subject to certain exceptions,
with (a) 100% of the net cash proceeds of any incurrence of
debt other than debt permitted under the senior secured term
loan facility, (b) commencing with the fiscal year ended
December 31, 2011, 50% (which percentage will be reduced to
25% and 0% if the Amscan Holdings total leverage ratio is
less than a specified ratio set forth in the senior secured term
loan facility) of our annual excess cash flow (as defined in the
senior secured term loan facility), and (c) 100% of the net
cash proceeds of all non-ordinary course asset sales or other
dispositions of property (including casualty events) by Amscan
Holdings or by its subsidiaries, subject to reinvestment rights
and certain other exceptions. The total leverage ratio is the
ratio of our consolidated total debt (as defined in our senior
secured term loan facility) to Adjusted EBITDA.
The term loans under the senior secured term loan facility are
subject to a 1.00% prepayment premium if voluntarily repaid
under certain circumstances before December 2, 2011.
Otherwise, Amscan Holdings may voluntarily prepay outstanding
loans under the senior secured term loan facility at any time,
subject to customary breakage costs with respect to LIBOR loans.
Under the senior secured term loan facility, excess cash flow
payments serve to reduce future scheduled quarterly principal
payments. Amscan Holdings is not required to calculate excess
cash flow or make any related prepayment until the end of fiscal
2011.
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Guarantees
and Security
All obligations under the senior secured term loan facility are
guaranteed, jointly and severally, by us and each of the
existing and future domestic subsidiaries of Amscan Holdings.
Each guarantor has secured its obligations under the guaranty by
a first priority lien on substantially all of its assets (other
than its accounts receivable, inventory, cash and related
proceeds and assets) and a second priority lien on its accounts
receivable, inventory, cash and related proceeds and assets.
Covenants
and Other Matters
The senior secured term loan facility contains negative
covenants that, among other things and subject to certain
exceptions, restrict our ability, and the ability of Amscan
Holdings and any of its restricted subsidiaries, to:
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incur additional indebtedness;
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pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of Amscan Holdings, us, or
any restricted subsidiary or make payments on, or redeem,
repurchase or retire any subordinated indebtedness;
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make certain investments, loans, advances and acquisitions;
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enter into sale and leaseback transactions;
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engage in transactions with affiliates;
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create liens;
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transfer or sell assets;
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guarantee debt;
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create restrictions on the payment of dividends or other amounts
to us from our restricted subsidiaries;
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consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries; and
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engage in unrelated businesses.
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Notes
General
On April 30, 2004, Amscan Holdings issued $175 million
in principal amount of 8.75% senior subordinated notes due
May 1, 2014. Interest on the outstanding senior
subordinated notes is payable semi-annually in arrears on each
May 1 and November 1, commencing on November 1, 2004.
The outstanding senior subordinated notes are guaranteed,
jointly and severally, on an unsecured subordinated basis by
each of the existing and future domestic subsidiaries of Amscan
Holdings.
Covenants
The indenture governing the outstanding notes contains certain
covenants limiting, among other things and subject to certain
exceptions, the ability of Amscan Holdings and its restricted
subsidiaries to:
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incur additional indebtedness or issue preferred stock;
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pay dividends or distributions on capital stock or redeem,
repurchase or retire capital stock of Amscan Holdings or any
restricted subsidiary or make payments on, or redeem, repurchase
or retire any subordinated indebtedness;
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make certain investments, loans, advances and acquisitions;
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enter into sale and leaseback transactions;
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engage in transactions with affiliates;
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create liens;
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transfer or sell assets;
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guarantee debt;
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create restrictions on the payment of dividends or other amounts
to Amscan Holdings from its restricted subsidiaries;
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consolidate, merge or transfer all or substantially all of
Amscan Holdings assets and the assets of its
subsidiaries; and
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engage in unrelated businesses.
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Prepayments
On and after May 1, 2009, Amscan Holdings may redeem its
outstanding senior subordinated notes, in whole or in part, at
the redemption prices (expressed as percentages of principal
amount of senior subordinated notes to be redeemed) set forth
below, plus accrued and unpaid interest thereon, if redeemed
during the twelve-month period beginning on May 1 of each of the
years indicated below:
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Year
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Percentage
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2010
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102.917
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%
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2011
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101.458
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2012 and thereafter
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100.000
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%
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If Amscan Holdings experiences certain kinds of change in
control, Amscan Holdings must offer to purchase its outstanding
senior subordinated notes at 101% of their principal amount,
plus accrued and unpaid interest.
Asset
Sales
If Amscan Holdings or its restricted subsidiaries engage in
certain asset sales, Amscan Holdings generally must either
invest the net cash proceeds from such sales in its business
within a period of time, prepay senior debt or make an offer to
purchase a principal amount of its outstanding senior
subordinated notes equal to the excess net cash proceeds,
subject to certain exceptions. The purchase price of the
outstanding senior subordinated notes will be 100% of their
principal amount, plus accrued and unpaid interest.
Other
Indebtedness
At December 31, 2010, Amscan Holdings has a
$0.4 million Canadian dollar denominated revolving credit
facility that bears interest at the Canadian prime rate plus
1.1% and expires in June 2011, and a £1.4 million
British Pound Sterling denominated revolving credit facility
that bears interest at the U.K. base rate plus 1.75% on the
first £1.0 million British Pound Sterling and 4.75%
over the U.K. base rate on the remaining £0.4 million
British Pound Sterling. The British Pound Sterling revolving
credit facility expires on June 30, 2011. There were no
borrowings under the Canadian dollar denominated revolving
credit facility or the British Pound Sterling revolving credit
facility as of March 31, 2011. Amscan Holdings expects to
renew these revolving credit facilities upon expiration.
Long-term borrowings at March 31, 2011 include a mortgage
note issued by Amscan Holdings in favor of the New York State
Job Development Authority of $4.5 million. The mortgage
note was amended on December 18, 2009, extending the fixed
monthly payments of principal and interest for a period of
60 months up to and including December 31, 2014. The
note bears interest at the rate of 2.22%, and is subject to
review and adjustment semi-annually based on the New York State
Job Development Authoritys confidential internal
protocols. The mortgage note is collateralized by a distribution
facility located in Chester, New York.
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SHARES ELIGIBLE
FOR FUTURE SALE
Before this offering, there has not been a public market for our
common stock. As described below, only a limited number of
shares currently outstanding will be available for sale
immediately after this offering due to contractual and legal
restrictions on resale. Nevertheless, future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options, in the public market after
the restrictions lapse, or the possibility of such sales, could
cause the prevailing market price of our common stock to fall or
impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have
outstanding shares
of our common stock, assuming no exercise by the underwriters of
their option to purchase additional shares and no exercise of
options outstanding as of March 31, 2011. Of these shares,
all shares
of our common stock sold in this offering will be freely
tradable in the public market without restriction or further
registration under the Securities Act, except for any of these
shares that are held by our affiliates, as that term is defined
in Rule 144 under the Securities Act. Shares purchased by
our affiliates may not be resold except pursuant to an effective
registration statement or an exemption from registration,
including the safe harbor under Rule 144 described below.
After this
offering, shares
of our common stock held by existing stockholders will be
restricted securities, as that term is defined in
Rule 144. These restricted securities may be sold in the
public market only pursuant to an effective registration
statement or an exemption from registration under the Securities
Act. The exemptions under Rule 144 and Rule 701 are
summarized below. Subject to the Stockholders Agreement and the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701, these restricted securities will be available
for sale in the public market as follows:
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Number of Shares
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Date of Availability for Sale
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On the date of this prospectus
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180 days after the date of this prospectus and various
times thereafter
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Lock-Up
Agreements
In connection with this offering, officers, directors, employees
and certain stockholders, including the selling stockholders,
who together hold an aggregate
of shares
of our common stock after the completion of this offering, have
agreed, subject to limited exceptions, not to directly or
indirectly sell or dispose of any shares of common stock (except
for shares to be sold by the selling stockholders in this
offering) or any securities convertible into or exchangeable or
exercisable for shares of common stock for a period of
180 days after the date of this prospectus without the
prior written consent of Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
For additional information, see Underwriting.
Rule 144
In general, under Rule 144, immediately upon the completion
of this offering, a person who is not our affiliate and has not
been our affiliate at any time during the preceding three months
will be entitled to sell any shares of our common stock that
such person has held for at least six months, including the
holding period of any prior owner other than one of our
affiliates, so long as we are current with our filings with the
SEC. If such person has held the shares for at least one year,
such person may effect sales of our common stock even if current
public information about us is not available.
Our affiliates who have beneficially owned shares of our common
stock for at least six months, including the holding period of
any prior owner other than another of our affiliates, would be
entitled to sell within any three-month period those shares and
any other shares they have acquired that are not restricted
securities, provided that the aggregate number of shares sold
does not exceed the greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering; and
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the average weekly trading volume in our common stock
on during the four calendar weeks
preceding the date of filing of a Notice of Proposed Sale of
Securities Pursuant to Rule 144 with respect to the sale.
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98
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 701
In general, under Rule 701, any of our employees,
consultants or advisors, other than our affiliates, who
purchased shares from us in connection with a qualified
compensatory stock plan or other written agreement is eligible
to resell these shares 90 days after the date of this
prospectus in reliance on Rule 144, but without compliance
with the various restrictions, including the availability of
public information about us, holding period and volume
limitations, contained in Rule 144.
Stock
Plans
As of March 31, 2011, we had outstanding options to
purchase shares of our common
stock, of which options to
purchase shares were vested.
Following this offering, we intend to file one or more
registration statements on
Form S-8
under the Securities Act to register all of the shares of our
common stock subject to outstanding options and options and
other awards issuable pursuant to our stock plans. See
Executive Compensation Stock-based Incentive
Program for additional information about these plans.
Accordingly, shares of our common stock registered under the
registration statements will be available for sale in the open
market, subject to Rule 144 volume limitations applicable
to affiliates, and subject to any vesting restrictions and
lock-up
agreements applicable to these shares.
Registration
Rights
Subject to the
lock-up
agreement described above, certain holders of our common stock
may demand that we register their shares under the Securities
Act or, if we file another registration statement under the
Securities Act, may elect to include their shares of common
stock in such registration. If these shares are registered, they
will be freely tradable without restriction under the Securities
Act.
99
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS OF COMMON STOCK
The following is a summary of the material U.S. federal
income and estate tax considerations relating to the purchase,
ownership and disposition of our common stock by
Non-U.S. Holders
(defined below). This summary does not purport to be a complete
analysis of all the potential tax considerations relevant to
Non-U.S. Holders
of our common stock. This summary is based upon the Internal
Revenue Code, the Treasury regulations promulgated or proposed
thereunder and administrative and judicial interpretations
thereof, all as of the date hereof and all of which are subject
to change at any time, possibly on a retroactive basis.
This summary assumes that shares of our common stock are held as
capital assets within the meaning of
Section 1221 of the Internal Revenue Code. This summary
does not purport to deal with all aspects of U.S. federal
income and estate taxation that might be relevant to particular
Non-U.S. Holders
in light of their particular investment circumstances or status,
nor does it address specific tax considerations that may be
relevant to particular persons (including, for example,
financial institutions, broker-dealers, insurance companies,
partnerships or other pass-through entities, certain
U.S. expatriates, tax-exempt organizations, pension plans,
controlled foreign corporations, passive
foreign investment companies, corporations that accumulate
earnings to avoid U.S. federal income tax, persons in
special situations, such as those who have elected to mark
securities to market or those who hold common stock as part of a
straddle, hedge, conversion transaction, synthetic security or
other integrated investment, persons that have a
functional currency other than the U.S. dollar,
or holders subject to the alternative minimum tax). In addition,
except as explicitly addressed herein with respect to estate
tax, this summary does not address estate and gift tax
considerations or considerations under the tax laws of any
state, local or
non-U.S. jurisdiction.
For purposes of this summary, a
Non-U.S. Holder
means a beneficial owner of common stock that for
U.S. federal income tax purposes is not classified as a
partnership and is not:
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an individual who is a citizen or resident of the United States;
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a corporation or any other organization taxable as a corporation
for U.S. federal income tax purposes, created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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an estate, the income of which is included in gross income for
U.S. federal income tax purposes regardless of its
source; or
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a trust if (1) a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons have the authority to control all of
the trusts substantial decisions or (2) the trust has
a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
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If an entity that is classified as a partnership for
U.S. federal income tax purposes holds our common stock,
the tax treatment of persons treated as its partners for
U.S. federal income tax purposes will generally depend upon
the status of the partner and the activities of the partnership.
Partnerships and other entities that are classified as
partnerships for U.S. federal income tax purposes and
persons holding our common stock through a partnership or other
entity classified as a partnership for U.S. federal income
tax purposes are urged to consult their own tax advisors.
There can be no assurance that the Internal Revenue Service
(IRS) will not challenge one or more of the tax
consequences described herein, and we have not obtained, nor do
we intend to obtain a ruling from the IRS with respect to the
U.S. federal income or estate tax consequences to a
Non-U.S. Holder
of the purchase, ownership or disposition of our common stock.
THIS SUMMARY IS FOR GENERAL INFORMATION ONLY AND IS NOT
INTENDED TO BE TAX ADVICE.
NON-U.S. HOLDERS
ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE
U.S. FEDERAL INCOME AND ESTATE TAXATION, STATE, LOCAL AND
NON-U.S. TAXATION
AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF OUR COMMON STOCK.
100
Distributions
on Our Common Stock
As discussed under Dividend Policy above, we do not
currently expect to pay dividends. In the event that we do make
a distribution of cash or property with respect to our common
stock, any such distributions generally will constitute
dividends for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. If a
distribution exceeds our current and accumulated earnings and
profits, the excess will constitute a return of capital and will
first reduce the holders adjusted tax basis in our common
stock, but not below zero. Any remaining excess will be treated
as capital gain, subject to the tax treatment described below in
Gain on Sale, Exchange or Other Taxable Disposition of Our
Common Stock. Any such distribution would also be subject
to the discussion below under the section titled
Additional Withholding Requirements.
Dividends paid to a
Non-U.S. Holder
generally will be subject to a 30% U.S. federal withholding
tax unless such
Non-U.S. Holder
provides us or our agent, as the case may be, with the
appropriate IRS
Form W-8,
such as:
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IRS
Form W-8BEN
(or successor form) certifying, under penalties of perjury, a
reduction in withholding under an applicable income tax
treaty, or
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IRS
Form W-8ECI
(or successor form) certifying that a dividend paid on common
stock is not subject to withholding tax because it is
effectively connected with a trade or business in the United
States of the
Non-U.S. Holder
(in which case such dividend generally will be subject to
regular graduated U.S. tax rates as described below).
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The certification requirement described above also may require a
Non-U.S. Holder
that provides an IRS form or that claims treaty benefits to
provide its U.S. taxpayer identification number. Special
certification and other requirements apply in the case of
certain
Non-U.S. Holders
that are intermediaries or pass-through entities for
U.S. federal income tax purposes.
Each
Non-U.S. Holder
is urged to consult its own tax advisor about the specific
methods for satisfying these requirements. A claim for exemption
will not be valid if the person receiving the applicable form
has actual knowledge or reason to know that the statements on
the form are false.
If dividends are effectively connected with a trade or business
in the United States of a
Non-U.S. Holder
(and, if required by an applicable income tax treaty,
attributable to a U.S. permanent establishment), the
Non-U.S. Holder,
although exempt from the withholding tax described above
(provided that the certifications described above are
satisfied), generally will be subject to U.S. federal
income tax on such dividends on a net income basis in the same
manner as if it were a resident of the United States. In
addition, if a
Non-U.S. Holder
is treated as a corporation for U.S. federal income tax
purposes, the
Non-U.S. Holder
may be subject to an additional branch profits tax
equal to 30% (unless reduced by an applicable income treaty) of
its earnings and profits in respect of such effectively
connected dividend income.
Non-U.S. Holders
that do not timely provide us or our agent with the required
certification but which are eligible for a reduced rate of
U.S. federal withholding tax pursuant to an income tax
treaty, may obtain a refund or credit of any excess amount
withheld by timely filing an appropriate claim for refund with
the IRS.
Gain on
Sale, Exchange or Other Taxable Disposition of Our Common
Stock
Subject to the discussion below under the section titled
Additional Withholding Requirements, in general, a
Non-U.S. Holder
will not be subject to U.S. federal income tax or
withholding tax on gain realized upon such holders sale,
exchange or other taxable disposition of shares of our common
stock unless (i) such
Non-U.S. Holder
is an individual who is present in the United States for
183 days or more in the taxable year of disposition, and
certain other conditions are met, (ii) we are or have been
a United States real property holding corporation,
as defined in the Internal Revenue Code (a USRPHC),
at any time within the shorter of the five-year period preceding
the disposition and the
Non-U.S. Holders
holding period in the shares of our common stock, and certain
other requirements are met, or (iii) such gain is
effectively connected with the conduct by such
101
Non-U.S. Holder
of a trade or business in the United States (and, if required by
an applicable income tax treaty, is attributable to a permanent
establishment maintained by such
Non-U.S. Holder
in the United States).
If the first exception applies, the
Non-U.S. Holder
generally will be subject to U.S. federal income tax at a
rate of 30% (or at a reduced rate under an applicable income tax
treaty) on the amount by which such
Non-U.S. Holders
capital gains allocable to U.S. sources exceed capital
losses allocable to U.S. sources during the taxable year of
the disposition. If the third exception applies, the
Non-U.S. Holder
generally will be subject to U.S. federal income tax with
respect to such gain on a net income basis in the same manner as
if it were a resident of the United States and a
Non-U.S. Holder
that is a corporation for U.S. federal income tax purposes
may also be subject to a branch profits tax with respect to any
earnings and profits attributable to such gain at a rate of 30%
(or at a reduced rate under an applicable income tax treaty).
Generally, a corporation is a USRPHC only if the fair market
value of its U.S. real property interests (as defined in
the Internal Revenue Code) equals or exceeds 50% of the sum of
the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or
business. Although there can be no assurance in this regard, we
believe that we are not, and do not anticipate becoming, a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property interests relative to the fair market value of other
business assets, there can be no assurance that we will not
become a USRPHC in the future. Even if we became a USRPHC, a
Non-U.S. Holder
would not be subject to U.S. federal income tax on a sale,
exchange or other taxable disposition of our common stock by
reason of our status as USRPHC so long as our common stock is
regularly traded on an established securities market at any time
during the calendar year in which the disposition occurs and
such
Non-U.S. Holder
does not own and is not deemed to own (directly, indirectly or
constructively) more than 5% of our common stock at any time
during the shorter of the five year period ending on the date of
disposition and the holders holding period. However, no
assurance can be provided that our common stock will be
regularly traded on an established securities market for
purposes of the rules described above. Prospective investors are
encouraged to consult their own tax advisors regarding the
possible consequences to them if we are, or were to become, a
USRPHC.
Additional
Withholding Requirements
Recently enacted legislation generally will impose a
U.S. federal withholding tax of 30% on dividends and the
gross proceeds from a sale or other disposition of our common
stock paid after December 31, 2012 to (i) a
foreign financial institution (as defined under
these rules), unless the institution meets certain requirements,
including entering into an agreement with the United States
government to collect and report information regarding United
States account holders of the institution (which includes
certain equity and debt holders of the institution, as well as
certain account holders that are foreign entities with
U.S. owners), or (ii) a non-financial foreign
entity that is the beneficial owner of the payment (or
that holds the stock on behalf of another non-financial foreign
entity that is the beneficial owner) unless the entity (or the
beneficial owner) meets certain requirements, including
certifying that it does not have any substantial United
States owner (as defined under these rules) or providing
the name, address and taxpayer identification number of each
substantial United States owner. The scope of these rules
remains unclear and potentially subject to material changes
resulting from any future guidance. Prospective investors should
consult their own tax advisors regarding the possible impact of
this legislation on their investment in our common stock.
Backup
Withholding and Information Reporting
We must report annually to the IRS and to each
Non-U.S. Holder
the gross amount of the distributions on our common stock paid
to the holder and the tax withheld, if any, with respect to the
distributions.
Non-U.S. Holders
may have to comply with specific certification procedures to
establish that the holder is not a United States person (as
defined in the Internal Revenue Code) in order to avoid backup
withholding at the applicable rate, currently 28% and scheduled
to increase to 31% for taxable years 2013 and thereafter, with
respect to dividends on our common stock. Dividends paid to
Non-U.S. Holders
subject to the U.S. withholding tax, as described above
under the section titled Distributions on Our Common
Stock, generally will be exempt from U.S. backup
withholding.
102
Information reporting and backup withholding will generally
apply to the proceeds of a disposition of our common stock by a
Non-U.S. Holder
effected by or through the U.S. office of any broker,
U.S. or foreign, unless the holder certifies its status as
a
Non-U.S. Holder
and satisfies certain other requirements, or otherwise
establishes an exemption. Generally, information reporting and
backup withholding will not apply to a payment of disposition
proceeds to a
Non-U.S. Holder
where the transaction is effected outside the United States
through a
non-U.S. office
of a broker. However, for information reporting purposes,
dispositions effected through a
non-U.S. office
of a broker with substantial U.S. ownership or operations
generally will be treated in a manner similar to dispositions
effected through a U.S. office of a broker. Prospective
investors should consult their own tax advisors regarding the
application of the information reporting and backup withholding
rules to them.
Copies of information returns may be made available to the tax
authorities of the country in which the
Non-U.S. Holder
resides or, in which the
Non-U.S. Holder
is incorporated, under the provisions of a specific treaty or
agreement.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
Non-U.S. Holder
can be refunded or credited against the
Non-U.S. Holders
U.S. federal income tax liability, if any, provided that an
appropriate claim is timely filed with the IRS.
Federal
Estate Tax
Common stock owned (or treated as owned) by an individual who is
not a citizen or a resident of the United States (as defined for
U.S. federal estate tax purposes) at the time of death will
be included in the individuals gross estate for
U.S. federal estate tax purposes, unless an applicable
estate or other tax treaty provides otherwise, and therefore,
may be subject to U.S. federal estate tax.
103
UNDERWRITING
We, the selling stockholders and the underwriters named below
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are representatives of the
underwriters.
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Underwriters
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Number of Shares
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Goldman, Sachs & Co.
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Merrill Lynch, Pierce, Fenner & Smith
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Incorporated
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Barclays Capital Inc.
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Deutsche Bank Securities Inc.
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Credit Suisse Securities (USA) LLC
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Morgan Stanley & Co. Incorporated
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Wells Fargo Securities, LLC
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Robert W. Baird & Co. Incorporated
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William Blair & Company, L.L.C.
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RBC Capital Markets, LLC
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Stifel, Nicolaus & Company, Incorporated
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Total
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The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from the Company and the selling stockholders. They may exercise
that option for 30 days. If any shares are purchased
pursuant to this option, the underwriters will severally
purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters
option to
purchase
additional shares.
Paid
by the Company
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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Paid
by the Selling Stockholders
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
104
We and our officers, directors, and certain holders of our
common stock, including the selling stockholders, have agreed
with the underwriters, subject to certain exceptions, not to
dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing
through the date 180 days after the date of this
prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing
employee benefit plans. See Shares Eligible for Future
Sale for a discussion of certain transfer restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period the Company issues an earnings release or
announces material news or a material event; or (2) prior
to the expiration of the
180-day
restricted period, the Company announces that it will release
earnings results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among the Company and the representatives. Among the factors to
be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will
be the Companys historical performance, estimates of the
business potential and earnings prospects of the Company, an
assessment of the Companys management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We intend to list the common stock on
the
under the symbol PRTY.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares from the Company and the selling stockholders
in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase additional
shares pursuant to the option granted to them. Naked
short sales are any sales in excess of such option. The
underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions
consist of various bids for or purchases of common stock made by
the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the Companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
the , in the
over-the-counter
market or otherwise.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the Companys common stock. In addition, neither we nor any
of the underwriters make any representation that the
105
representatives will engage in these transactions or that these
transactions, once commenced, will not be discontinued without
notice.
In connection with the offering, certain of the underwriters or
securities dealers may distribute prospectuses by electronic
means, such as
e-mail. In
addition, certain of the underwriters or securities dealers may
facilitate Internet distribution for this offering to certain of
its Internet subscription customers. Certain of the underwriters
may allocate a limited number of shares for sale to online
brokerage customers. An electronic prospectus is available on
the Internet websites maintained by certain of the underwriters.
Other than the prospectus in electronic format, the information
on the underwriters websites are not part of this
prospectus.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We estimate that our share of the total expenses of the
offering, excluding underwriting discounts and commissions, will
be approximately $ . The selling
stockholders estimate that their share of the total expenses of
the offering will be approximately
$ .
We and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
liabilities under the Securities Act.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, investment
research, principal investment, hedging, financing and brokerage
activities. Certain of the underwriters and their respective
affiliates have, from time to time, performed, and may in the
future perform, various financial advisory and investment
banking services for the issuer, for which they received or will
receive customary fees and expenses. For instance, affiliates of
certain of the underwriters are lenders, and in some cases
agents or managers for the lenders under our credit facilities.
Goldman, Sachs & Co. indirectly owns through certain funds
managed by the Sponsors a small ownership interest in the shares
of our common stock. Goldman, Sachs & Co. and its
affiliates will not, however, be receiving more than 5% of the
net offering proceeds from the offering.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers, and such investment and
securities activities may involve securities
and/or
instruments of the issuer. The underwriters and their respective
affiliates may also make investment recommendations
and/or
publish or express independent research views in respect of such
securities or instruments and may at any time hold, or recommend
to clients that they acquire, long
and/or short
positions in such securities and instruments.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in
106
accordance with the Prospectus Directive, except that it may,
with effect from and including the Relevant Implementation Date,
make an offer of shares to the public in that Relevant Member
State at any time:
(1) to any legal entity which is a qualified investor as
defined in the Prospectus Directive;
|
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(2)
|
to fewer than 100 or, if the Relevant Member State has
implemented the relevant provision of the 2010 PD Amending
Directive, 150 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted
under the Prospectus Directive, subject to obtaining the prior
consent of the relevant underwriter or underwriters nominated by
the Issuer for any such offer; or
|
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(3)
|
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3(2) of
the Prospectus Directive;
|
provided that no such offer of shares shall require the Issuer
or any underwriter to publish a prospectus pursuant to
Article 3 of the Prospectus Directive or supplement a
prospectus pursuant to Article 16 of the Prospectus
Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC (and amendments thereto, including the 2010 PD
Amending Directive, to the extent implemented in the Relevant
Member State), and includes any relevant implementing measure in
the Relevant Member State and the expression 2010 PD Amending
Directive means Directive 2010/73/EU.
Each underwriter has represented and agreed that:
(1) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to the Issuer; and
(2) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
Hong
Kong
The shares may not be offered or sold by means of any document
other than (1) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (2) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or
107
indirectly, to persons in Singapore other than (1) to an
institutional investor under Section 274 of the Securities
and Futures Act, Chapter 289 of Singapore (the
SFA), (2) to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(3) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
Japan
The shares have not been and will not be registered under the
Financial Instruments and Exchange Law of Japan (the Financial
Instruments and Exchange Law) and each underwriter has agreed
that it will not offer or sell any shares, directly or
indirectly, in Japan or to, or for the benefit of, any resident
of Japan (which term as used herein means any person resident in
Japan, including any corporation or other entity organized under
the laws of Japan), or to others for re-offering or resale,
directly or indirectly, in Japan or to a resident of Japan,
except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Financial
Instruments and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Switzerland
The shares may not be publicly offered in Switzerland and will
not be listed on the SIX Swiss Exchange (SIX) or on
any other stock exchange or regulated trading facility in
Switzerland. This prospectus has been prepared without regard to
the disclosure standards for issuance prospectuses under art.
652a or art. 1156 of the Swiss Code of Obligations or the
disclosure standards for listing prospectuses under art. 27 ff.
of the SIX Listing Rules or the listing rules of any other stock
exchange or regulated trading facility in Switzerland. Neither
this prospectus nor any other offering or marketing material
relating to the shares or the offering may be publicly
distributed or otherwise made publicly available in Switzerland.
Neither this prospectus nor any other offering or marketing
material relating to the offering, the Issuer, the shares have
been or will be filed with or approved by any Swiss regulatory
authority. In particular, this document will not be filed with,
and the offer of shares will not be supervised by, the Swiss
Financial Market Supervisory Authority FINMA
(FINMA), and the offer of shares has not been and
will not be authorized under the Swiss Federal Act on Collective
Investment Schemes (CISA). The investor protection
afforded to acquirers of interests in collective investment
schemes under the CISA does not extend to acquirers of shares.
Dubai
International Financial Centre
This prospectus relates to an Exempt Offer in accordance with
the Offered Securities Rules of the Dubai Financial Services
Authority (DFSA). This prospectus is intended for
distribution only to persons of a type specified in the Offered
Securities Rules of the DFSA. It must not be delivered to, or
relied on by, any other person. The DFSA has no responsibility
for reviewing or verifying any documents in connection with
Exempt Offers. The DFSA has not approved this prospectus nor
taken steps to verify the information set forth herein and has
no responsibility for the prospectus. The shares to which this
prospectus relates may be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
prospectus you should consult an authorized financial advisor.
108
VALIDITY
OF COMMON STOCK
Ropes & Gray LLP, Boston, Massachusetts, will pass for
us on the validity of the shares of common stock offered by this
prospectus. The underwriters are being represented by
Latham & Watkins LLP, New York, New York.
Ropes & Gray LLP and some attorneys of
Ropes & Gray LLP are members of an investment entity
that is an investor in certain investment funds sponsored by
Berkshire Partners and Weston Presidio and a direct investor in
Party City Holdings Inc. This investment entity directly and
indirectly owns less than 1% of the outstanding equity of Party
City Holdings Inc.
EXPERTS
Ernst & Young LLP, independent registered public accounting
firm, has audited our consolidated financial statements and
schedule at December 31, 2010 and 2009, and for each of the
three years in the period ended December 31, 2010, as set
forth in their report. The financial statements and schedule in
the prospectus and elsewhere in the registration statement are
included in reliance on Ernst & Young LLPs
report, given on their authority as experts in accounting and
auditing.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to
us and our common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you
to the copy of the contract or document that has been filed.
Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the
filed exhibit.
You may read and copy the registration statement of which this
prospectus is a part at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C. 20549. You may
obtain information regarding the operation of the public
reference room by calling
1-800-SEC-0330.
The SEC also maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC. Our website addresses are www.amscan.com and
www.partycity.com. Our subsidiary, Amscan Holdings Inc.,
currently is a voluntary filer and makes available free of
charge, through www.amscan.com, its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after such material is electronically
filed with or furnished to the SEC. The information contained
on, or accessible through, these websites is not part of this
prospectus, and is therefore not incorporated by reference.
109
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F-2
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F-3
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F-4
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F-5
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|
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F-6
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F-7
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|
Financial Statement Schedule for the Years Ended
December 31, 2010, 2009 and 2008:
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F-46
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All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission (SEC) are not required under the related
instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Party City Holdings Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Party City Holdings Inc. and subsidiaries as of
December 31, 2010 and 2009, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2010. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Party City Holdings Inc. and subsidiaries
at December 31, 2010 and 2009, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
New York, New York
April 21, 2011, except as to Note 2
as to which the date is XXX XX, 2011
The foregoing report is in the form that will be signed upon the
completion of the recapitalization and computation of earnings
per share described in Note 2 to the financial statements.
New York, New York
April 21, 2011
F-2
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|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,454
|
|
|
$
|
15,420
|
|
Accounts receivable, net of allowances
|
|
|
107,331
|
|
|
|
82,781
|
|
Inventories, net of allowances
|
|
|
424,317
|
|
|
|
335,950
|
|
Prepaid expenses and other current assets
|
|
|
65,672
|
|
|
|
58,719
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
617,774
|
|
|
|
492,870
|
|
Property, plant and equipment, net
|
|
|
190,729
|
|
|
|
174,994
|
|
Goodwill
|
|
|
630,492
|
|
|
|
559,261
|
|
Trade names
|
|
|
129,954
|
|
|
|
157,283
|
|
Other intangible assets, net
|
|
|
55,362
|
|
|
|
54,669
|
|
Other assets, net
|
|
|
28,840
|
|
|
|
41,424
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,653,151
|
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE COMMON SECURITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Loans and notes payable
|
|
$
|
150,098
|
|
|
$
|
77,635
|
|
Accounts payable
|
|
|
108,172
|
|
|
|
76,901
|
|
Accrued expenses
|
|
|
111,054
|
|
|
|
93,680
|
|
Income taxes payable
|
|
|
34,325
|
|
|
|
32,061
|
|
Redeemable warrants
|
|
|
15,086
|
|
|
|
15,444
|
|
Current portion of long-term obligations
|
|
|
9,046
|
|
|
|
34,906
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
427,781
|
|
|
|
330,627
|
|
Long-term obligations, excluding current portion
|
|
|
841,112
|
|
|
|
538,892
|
|
Deferred income tax liabilities
|
|
|
94,981
|
|
|
|
101,570
|
|
Deferred rent and other long-term liabilities
|
|
|
14,766
|
|
|
|
11,901
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,378,640
|
|
|
|
982,990
|
|
Redeemable common securities (including 597.52 and 592.84 common
shares issued and outstanding at December 31, 2010 and
December 31, 2009 )
|
|
|
18,089
|
|
|
|
18,389
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
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|
|
|
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Common Stock ($0.01 par value; 40,000.00 shares
authorized; 30,226.50 shares issued and outstanding at
December 31, 2010 and December 31, 2009, )
|
|
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|
|
|
|
|
|
Additional paid-in capital
|
|
|
287,583
|
|
|
|
335,823
|
|
Retained (deficit) earnings
|
|
|
(27,558
|
)
|
|
|
149,557
|
|
Accumulated other comprehensive loss
|
|
|
(5,915
|
)
|
|
|
(8,395
|
)
|
|
|
|
|
|
|
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|
Party City Holdings Inc. stockholders equity
|
|
|
254,110
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|
|
|
476,985
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Noncontrolling interests
|
|
|
2,312
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
256,422
|
|
|
|
479,122
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable common securities and
stockholders equity
|
|
$
|
1,653,151
|
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
|
|
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|
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|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,579,677
|
|
|
$
|
1,467,324
|
|
|
$
|
1,537,641
|
|
Royalties and franchise fees
|
|
|
19,417
|
|
|
|
19,494
|
|
|
|
22,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,599,094
|
|
|
|
1,486,818
|
|
|
|
1,559,661
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
943,058
|
|
|
|
899,041
|
|
|
|
966,426
|
|
Selling expenses
|
|
|
42,725
|
|
|
|
39,786
|
|
|
|
41,894
|
|
Retail operating expenses
|
|
|
296,891
|
|
|
|
261,691
|
|
|
|
273,627
|
|
Franchise expenses
|
|
|
12,269
|
|
|
|
11,991
|
|
|
|
13,686
|
|
General and administrative expenses
|
|
|
134,392
|
|
|
|
119,193
|
|
|
|
120,272
|
|
Art and development costs
|
|
|
14,923
|
|
|
|
13,243
|
|
|
|
12,462
|
|
Impairment of trade name
|
|
|
27,400
|
|
|
|
|
|
|
|
17,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,471,658
|
|
|
|
1,344,945
|
|
|
|
1,445,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
127,436
|
|
|
|
141,873
|
|
|
|
113,918
|
|
Interest expense, net
|
|
|
40,850
|
|
|
|
41,481
|
|
|
|
50,915
|
|
Other expense (income), net
|
|
|
4,208
|
|
|
|
(32
|
)
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
82,378
|
|
|
|
100,424
|
|
|
|
63,821
|
|
Income tax expense
|
|
|
32,945
|
|
|
|
37,673
|
|
|
|
24,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
49,433
|
|
|
|
62,751
|
|
|
|
39,633
|
|
Less: net income (loss) attributable to noncontrolling interest
|
|
|
114
|
|
|
|
198
|
|
|
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
49,319
|
|
|
$
|
62,553
|
|
|
$
|
40,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Party City
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
Holdings Inc.
|
|
|
Non-
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
(Deficit)
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2007
|
|
|
29,543.16
|
|
|
$
|
|
|
|
$
|
326,741
|
|
|
$
|
46,494
|
|
|
$
|
2,351
|
|
|
$
|
375,586
|
|
|
$
|
2,488
|
|
|
$
|
378,074
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,510
|
|
|
|
|
|
|
|
40,510
|
|
|
|
(877
|
)
|
|
|
39,633
|
|
Net change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,338
|
)
|
|
|
(11,338
|
)
|
|
|
(231
|
)
|
|
|
(11,569
|
)
|
Change in fair value of interest rate swap contracts, net of
income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,855
|
)
|
|
|
(4,855
|
)
|
|
|
|
|
|
|
(4,855
|
)
|
Change in fair value of foreign exchange contracts, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
|
|
1,990
|
|
|
|
|
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,307
|
|
|
|
(1,108
|
)
|
|
|
25,199
|
|
Purchase and revaluation of redeemable common securities
|
|
|
308.64
|
|
|
|
|
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
|
|
2,155
|
|
|
|
|
|
|
|
2,155
|
|
Tax benefit on exercised options
|
|
|
397.30
|
|
|
|
|
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
|
|
|
|
|
|
1,823
|
|
Equity based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,357
|
|
|
|
|
|
|
|
|
|
|
|
4,357
|
|
|
|
|
|
|
|
4,357
|
|
Acquisition of PCFG minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
|
|
509
|
|
Other
|
|
|
(22.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
30,226.50
|
|
|
$
|
|
|
|
$
|
335,076
|
|
|
$
|
87,004
|
|
|
$
|
(11,852
|
)
|
|
$
|
410,228
|
|
|
|
1,889
|
|
|
$
|
412,117
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,553
|
|
|
|
|
|
|
|
62,553
|
|
|
|
198
|
|
|
|
62,751
|
|
Net change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,007
|
|
|
|
4,007
|
|
|
|
50
|
|
|
|
4,057
|
|
Change in fair value of interest rate swap contracts, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317
|
|
|
|
1,317
|
|
|
|
|
|
|
|
1,317
|
|
Change in fair value of foreign exchange contracts, net of
income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867
|
)
|
|
|
(1,867
|
)
|
|
|
|
|
|
|
(1,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,010
|
|
|
|
248
|
|
|
|
66,258
|
|
Purchase of redeemable common securities
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
(129
|
)
|
Equity based compensation expense
|
|
|
|
|
|
|
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
876
|
|
|
|
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
30,226.50
|
|
|
$
|
|
|
|
$
|
335,823
|
|
|
$
|
149,557
|
|
|
$
|
(8,395
|
)
|
|
$
|
476,985
|
|
|
$
|
2,137
|
|
|
$
|
479,122
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,319
|
|
|
|
|
|
|
|
49,319
|
|
|
|
114
|
|
|
|
49,433
|
|
Net change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(376
|
)
|
|
|
(376
|
)
|
|
|
61
|
|
|
|
(315
|
)
|
Change in fair value of interest rate swap contracts, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,563
|
|
|
|
2,563
|
|
|
|
|
|
|
|
2,563
|
|
Change in fair value of foreign exchange contracts, net of
income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
293
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,799
|
|
|
|
175
|
|
|
|
51,974
|
|
Revaluation of redeemable common securities
|
|
|
|
|
|
|
|
|
|
|
(5,305
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,305
|
)
|
|
|
|
|
|
|
(5,305
|
)
|
Issuance of non-redeemable warrants
|
|
|
|
|
|
|
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
21,000
|
|
|
|
|
|
|
|
21,000
|
|
Dividend distribution
|
|
|
|
|
|
|
|
|
|
|
(64,658
|
)
|
|
|
(226,434
|
)
|
|
|
|
|
|
|
(291,092
|
)
|
|
|
|
|
|
|
(291,092
|
)
|
Equity based compensation expense
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
30,226.50
|
|
|
$
|
|
|
|
$
|
287,583
|
|
|
$
|
(27,558
|
)
|
|
$
|
(5,915
|
)
|
|
$
|
254,110
|
|
|
$
|
2,312
|
|
|
$
|
256,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,433
|
|
|
$
|
62,751
|
|
|
$
|
39,633
|
|
Less: net income (loss) attributable to noncontrolling interest
|
|
|
114
|
|
|
|
198
|
|
|
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
|
49,319
|
|
|
|
62,553
|
|
|
|
40,510
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
49,418
|
|
|
|
44,382
|
|
|
|
47,278
|
|
Amortization of deferred financing costs
|
|
|
2,475
|
|
|
|
2,163
|
|
|
|
2,221
|
|
Provision for doubtful accounts
|
|
|
637
|
|
|
|
3,982
|
|
|
|
1,092
|
|
Deferred income tax (benefit) expense
|
|
|
(8,942
|
)
|
|
|
8,803
|
|
|
|
(7,885
|
)
|
Deferred rent
|
|
|
4,500
|
|
|
|
1,763
|
|
|
|
1,202
|
|
Undistributed income in unconsolidated joint venture
|
|
|
(678
|
)
|
|
|
(632
|
)
|
|
|
(538
|
)
|
Impairment of trade names
|
|
|
27,400
|
|
|
|
|
|
|
|
17,376
|
|
Impairment of fixed assets
|
|
|
597
|
|
|
|
156
|
|
|
|
|
|
Loss (gain) on disposal of equipment
|
|
|
191
|
|
|
|
122
|
|
|
|
(1,195
|
)
|
Equity based compensation
|
|
|
6,018
|
|
|
|
876
|
|
|
|
4,357
|
|
Tax benefit on exercised options
|
|
|
|
|
|
|
|
|
|
|
(1,823
|
)
|
Debt retirement costs
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(6,507
|
)
|
|
|
6,337
|
|
|
|
8,237
|
|
(Increase) decrease in inventories
|
|
|
(85,767
|
)
|
|
|
30,933
|
|
|
|
(52,347
|
)
|
(Increase) decrease in prepaid expenses and other current assets
|
|
|
(22,993
|
)
|
|
|
(21,173
|
)
|
|
|
31,240
|
|
Increase (decrease) in accounts payable, accrued expenses and
income taxes payable
|
|
|
43,052
|
|
|
|
(16,323
|
)
|
|
|
(9,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
61,168
|
|
|
|
123,942
|
|
|
|
79,929
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions
|
|
|
(53,348
|
)
|
|
|
(3,378
|
)
|
|
|
(1,616
|
)
|
Cash held in escrow in connection with acquisitions
|
|
|
|
|
|
|
(24,881
|
)
|
|
|
|
|
Capital expenditures
|
|
|
(49,623
|
)
|
|
|
(26,195
|
)
|
|
|
(53,001
|
)
|
Proceeds from disposal of property and equipment
|
|
|
205
|
|
|
|
96
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(102,766
|
)
|
|
|
(54,358
|
)
|
|
|
(51,199
|
)
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of loans, notes payable and long-term obligations
|
|
|
(393,289
|
)
|
|
|
(70,247
|
)
|
|
|
(26,842
|
)
|
Proceeds from loans, notes payable and long-term obligations,
net of debt issuance costs
|
|
|
742,153
|
|
|
|
|
|
|
|
|
|
Tax benefit on exercised options
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Sale of additional interest to minority shareholder
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
Payments related to redeemable common stock and rollover options
|
|
|
(572
|
)
|
|
|
|
|
|
|
(514
|
)
|
Dividend distribution
|
|
|
(301,829
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and exercise of options,
net of retirements
|
|
|
52
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
46,515
|
|
|
|
(70,157
|
)
|
|
|
(23,033
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
117
|
|
|
|
2,935
|
|
|
|
(9,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,034
|
|
|
|
2,362
|
|
|
|
(4,216
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
15,420
|
|
|
|
13,058
|
|
|
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
20,454
|
|
|
$
|
15,420
|
|
|
$
|
13,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
38,363
|
|
|
$
|
40,207
|
|
|
$
|
52,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax
|
|
$
|
39,743
|
|
|
$
|
22,297
|
|
|
$
|
14,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information on non-cash activities:
Capital lease obligations of $619, $59, and $700 were incurred
during the years ended December 31, 2010, 2009 and 2008,
respectively.
See accompanying notes to consolidated financial statements.
F-6
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
(Dollars
in thousands, except per share amounts)
|
|
Note 1
|
Organization
and Description of Business
|
Party City Holdings Inc. (Party City Holdings or the
Company), formerly known as AAH Holdings
Corporation, designs, manufactures, contracts for manufacture
and distributes party goods, including paper and plastic
tableware, metallic balloons, accessories, novelties, costumes,
other garments, gifts and stationery throughout the world. In
addition, the Company operates specialty retail party goods and
social expressions supply stores in the United States
principally under the names Party City, Halloween City, Factory
Card & Party Outlet and The Paper Factory and
franchises both individual stores and franchise areas throughout
the United States and Puerto Rico principally under the name
Party City. On a stand alone basis, without the consolidation of
its subsidiaries, Party City Holdings Inc. has no significant
assets or operations.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Consolidated
Financial Statements
The consolidated financial statements of the Company include the
accounts of Party City Holdings Inc. and all majority-owned
subsidiaries and controlled entities. All significant
intercompany balances and transactions have been eliminated.
Retail operations define a fiscal year (Fiscal Year)
as the 52-week period or 53-week period ended on the Saturday
nearest December 31st of each year, and define their
fiscal quarters (Fiscal Quarter) as the four interim
13-week periods following the end of the previous Fiscal Year,
except in the case of a 53-week Fiscal Year when the fourth
Fiscal Quarter is extended to 14 weeks.
The Company has determined the difference between the retail
operations Fiscal Year and Fiscal Quarters and the
calendar year and quarters to be insignificant.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Management periodically evaluates estimates used in the
preparation of the consolidated financial statements for
continued reasonableness. Appropriate adjustments, if any, to
the estimates used are made prospectively based on such periodic
evaluations.
Reclassification
of prior year amounts
Prior year balance sheet amounts that had been reflected in
prepaid expenses and other current assets have been reclassified
to goodwill to reflect certain adjustments related to purchase
accounting.
Cash
Equivalents
Highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. The
Company determines the cost of inventory at its retail stores
using the weighted average method. All other inventory cost is
determined using the
first-in,
first-out method.
F-7
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Long-Lived
and Intangible Assets
Property, plant and equipment are stated at cost. Depreciation
is calculated principally on the straight-line method over the
estimated useful lives of the assets. Equipment under capital
leases are stated at the present value of the minimum lease
payments at the inception of the lease. Equipment under capital
leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the
estimated useful life of the asset. Leasehold improvements are
depreciated over the useful life of the asset, or the term of
the lease, whichever is shorter.
Goodwill represents the excess of the purchase price of acquired
companies over the estimated fair value of the net assets
acquired. Goodwill and other intangibles with indefinite lives
are not amortized but are reviewed for impairment annually or
more frequently if certain indicators arise. The Company
evaluates the goodwill associated with its acquisitions and
other intangibles with indefinite lives as of the first day of
its fourth quarter based on current and projected performance.
The Company estimates fair value of each reporting unit using
expected discounted cash flows (see Note 6).
The Company evaluates finite-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets
(SFAS No. 144). Finite-lived assets are
evaluated for recoverability whenever events or changes in
circumstances indicate that an asset may have been impaired. In
evaluating an asset for recoverability, the Company estimates
the future cash flows expected to result from the use of the
asset and eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss,
equal to the excess of the carrying amount over the fair market
value of the asset, is recognized.
During 2010, the Company tested the effect of converting
approximately 20 of its FCPO stores to the Party City name. The
test was especially important during Halloween, and based on the
results, proved successful. As a result of this outcome the
Company concluded during the fourth quarter that it will begin
to convert the remaining FCPO non-outlet stores, over time, to
the Party City name. The Company performed an impairment test
and determined that the FCPO trade name of $27,400 became fully
impaired during the fourth quarter 2010, and impaired the entire
amount of the trade name. The fair value calculation utilized
Level 3 fair value inputs, as defined in Note 20.
Deferred
Financing Costs
Deferred financing costs are amortized to interest expense using
the effective interest method over the lives of the related debt.
F-8
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments
The Company maintains a 49.9% interest in Convergram Mexico, a
joint venture distributing metallic balloons principally in
Mexico and Latin America. The Company accounts for its
investment in the joint venture using the equity method. The
Companys investment in the joint venture is included in
other assets on the consolidated balance sheet and the results
of the joint ventures operations are included in other
expense (income) on the consolidated statement of income (see
Note 13).
Insurance
Accruals
The Company maintains certain self-insured workers
compensation and general liability insurance plans. The Company
estimates the required liability for claims under such plans
based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss
development factors, actual payroll and other data. The required
liability is also subject to adjustment in the future based upon
changes in claims experience, including changes in the number of
incidents (frequency) and changes in the ultimate cost per
incident (severity).
Revenue
Recognition
The Companys terms of sale to retailers and other
distributors are generally F.O.B. shipping point and,
accordingly, title and the risks and rewards of ownership are
generally transferred to the customer, and revenue is
recognized, when goods are shipped. The Company estimates
reductions to revenues for volume-based rebate programs at the
time sales are recognized.
Revenue from retail operations is recognized at the point of
sale. The Company estimates future retail sales returns and
records a provision in the period that the related sales are
recorded based on historical information. Retail sales are
reported net of taxes collected.
Shipping
and Handling
Outbound shipping costs billed to customers are included in net
sales. The costs of shipping and handling incurred by the
Company are included in cost of sales.
Store
Closure Costs
The Company records estimated store closure costs, estimated
lease commitment costs, net of estimated sublease income, and
other miscellaneous store closing costs when the liability is
incurred.
Product
Royalty Agreements
The Company enters into product royalty agreements that allow
the Company to use licensed designs on certain of its products.
These contracts require the Company to pay royalties, generally
based on the sales of such product, and may require guaranteed
minimum royalties, a portion of which may be paid in advance.
The Company matches royalty expense with revenue by recording
royalties at the time of sale, at the greater of the contractual
rate or an effective rate calculated based on the guaranteed
minimum royalty and the Companys estimate of sales during
the contract period. If a portion of the guaranteed minimum
royalty is determined to be unrecoverable, the unrecoverable
portion is charged to expense at that time. Guaranteed minimum
royalties paid in advance are recorded in the consolidated
balance sheets as other assets.
Catalogue
Costs
The Company expenses costs associated with the production of
catalogues when incurred.
F-9
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Advertising expenses are expensed as incurred. Retail
advertising expenses for 2010, 2009, and 2008 were $53,256,
$43,896, and $50,642, respectively.
Art
and Development Costs
Art and development costs are primarily internal costs that are
not easily associated with specific designs, some of which may
not reach commercial production. Accordingly, the Company
expenses these costs as incurred.
Derivative
Financial Instruments
The Company accounts for derivative financial instruments
pursuant to Accounting Standards Codification (ASC)
Subtopic 815, Accounting for Derivative Instruments and
Hedging Activities. ASC Subtopic 815, as amended and
interpreted, requires that all derivative financial instruments
be recognized on the balance sheet at fair value and establishes
criteria for both the designation and effectiveness of hedging
activities. The Company uses derivatives in the management of
interest rate and foreign currency exposure. ASC Subtopic 815,
requires the Company to formally document the assets,
liabilities or other transactions the Company designates as
hedged items, the risk being hedged and the relationship between
the hedged items and the hedging instruments. The Company must
measure the effectiveness of the hedging relationship at the
inception of the hedge and on an on-going basis.
If derivative financial instruments qualify as fair value
hedges, the gain or loss on the instrument and the offsetting
loss or gain on the hedged item attributable to the hedged risk
are recognized in current earnings during the period of the
change in fair values. For derivative financial instruments that
qualify as cash flow hedges (i.e., hedging the exposure
to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the
gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a cash
flow hedge, if any, is determined based on the dollar-offset
method (i.e., the gain or loss on the derivative
financial instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item) and is
recognized in current earnings during the period of change. As
long as hedge effectiveness is maintained, interest rate swap
arrangements and foreign currency exchange agreements qualify
for hedge accounting as cash flow hedges (see Note 21.)
Income
Taxes
The Company accounts for income taxes in accordance with the
provisions of ASC Subtopic 740, Accounting for Income
Taxes. Under the asset and liability method of ASC
Subtopic 740, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax
bases of assets and liabilities and operating loss and tax
credit carryforwards applying enacted statutory tax rates in
effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation
allowance when, in the judgment of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
Stock-Based
Compensation
The Company adopted ASC Subtopic 718 Share-Based
Payment, which is a revision of SFAS No. 123
Accounting for Stock-Based Compensation as amended.
ASC Subtopic 718 establishes standards for the accounting for
transactions where an entity exchanges its equity for goods or
services and transactions that are based on the fair value of
the entitys equity instruments or that may be settled by
the issuance of those equity instruments. ASC Subtopic 718
focuses primarily on accounting for transactions in which an
entity obtains
F-10
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employee services in share-based payment transactions.
Generally, the fair value approach in ASC Subtopic 718 is
similar to the fair value approach described in
SFAS No. 123.
The Company adopted ASC Subtopic 718 using the prospective
method. Since the Companys common stock was not publicly
traded, the options granted prior to January 1, 2006 were
expensed under the provisions of SFAS No. 123 using a
minimum value method. Options issued subsequent to
January 1, 2006 are expensed under the provisions of ASC
Subtopic 718 (see Note 15).
Earnings
Per Share
Basic earnings per share are computed by dividing net income
available for common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings
per share are calculated based on the weighted average number of
outstanding common shares plus the dilutive effect of stock
options as if they were exercised.
A reconciliation between basic and diluted income per share is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income available for common stockholders
|
|
$
|
49,319
|
|
|
$
|
62,553
|
|
|
$
|
40,510
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus impact of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All earnings per share amounts and number of shares outstanding
have been retroactively adjusted to give effect to a
XX-for-1
split of the Companys common stock that was affected XXX
XX, 2011.
Accumulated
Other Comprehensive Loss
Accumulated other comprehensive loss at December 31, 2010
and 2009 consisted of the Companys foreign currency
translation adjustment and the fair value of interest rate swap
and foreign exchange contracts, net of income taxes, that
qualify as hedges (see Notes 20 and 21).
Foreign
Currency Transactions and Translation
The functional currencies of the Companys foreign
operations are the local currencies in which they operate.
Realized foreign currency exchange gains or losses resulting
from the settlement of receivables or payables in currencies
other than the functional currencies are credited or charged to
operations. Unrealized gains or losses on foreign currency
transactions are insignificant. The balance sheets of foreign
subsidiaries are translated into U.S. dollars at the
exchange rates in effect on the balance sheet date. The results
of operations of foreign subsidiaries are translated into
U.S. dollars at the average exchange rates effective for
the periods presented. The differences from historical exchange
rates are recorded as comprehensive income (loss) and are
included as a component of accumulated other comprehensive
income (loss).
F-11
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently
Issued Accounting Pronouncements
In July 2010, the FASB issued ASU
2010-20,
Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU
2010-20
requires increased disclosures about the credit quality of
financing receivables and allowances for credit losses,
including disclosure about credit quality indicators, past due
information and modifications of finance receivables. The
guidance is generally effective for reporting periods ending
after December 15, 2010. There was no material impact from
this Update.
In December 2010, the FASB issued ASU
2010-29,
Business Combinations (Topic 805). This Update
requires a public entity to disclose pro forma information for
business combinations that occurred in the current reporting
period and specifically requires the same information for the
comparative prior period. This guidance is generally effective
for annual reporting periods beginning on or after
December 15, 2010. We do not anticipate any material impact
from this Update.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Finished goods
|
|
$
|
416,831
|
|
|
$
|
325,421
|
|
Raw materials
|
|
|
11,879
|
|
|
|
12,650
|
|
Work in process
|
|
|
6,112
|
|
|
|
6,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,822
|
|
|
|
344,502
|
|
Less: reserve for slow moving and obsolete inventory
|
|
|
(10,505
|
)
|
|
|
(8,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
424,317
|
|
|
$
|
335,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Property,
Plant and Equipment, Net
|
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Useful Lives
|
|
|
Machinery and equipment
|
|
$
|
128,655
|
|
|
$
|
117,780
|
|
|
|
3-15 years
|
|
Buildings
|
|
|
47,909
|
|
|
|
47,840
|
|
|
|
40 years
|
|
Data processing
|
|
|
67,631
|
|
|
|
50,691
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
72,114
|
|
|
|
64,617
|
|
|
|
1-20 years
|
|
Furniture and fixtures
|
|
|
115,043
|
|
|
|
93,870
|
|
|
|
5-10 years
|
|
Land
|
|
|
6,059
|
|
|
|
6,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,411
|
|
|
|
380,807
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(246,682
|
)
|
|
|
(205,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
190,729
|
|
|
$
|
174,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property, plant
and equipment was $39,073, $37,823, and $38,696 for the years
ended December 31, 2010, 2009 and 2008, respectively.
The Company is obligated under various capital leases for
certain machinery and equipment which expire on various dates
through 2015 (see Note 8). The amount of machinery and
equipment and related accumulated
F-12
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortization recorded under capital leases and included within
property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment under capital leases
|
|
$
|
10,030
|
|
|
$
|
9,444
|
|
Less: accumulated amortization
|
|
|
(6,269
|
)
|
|
|
(4,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,761
|
|
|
$
|
5,232
|
|
|
|
|
|
|
|
|
|
|
Amortization of assets held under capitalized leases is included
in depreciation and amortization expense.
|
|
Note 5
|
Acquisitions
and Transactions
|
Wholesale
Acquisitions
On September 30, 2010, the Company acquired Christys
By Design Limited and three affiliated companies (the
Christys Group) from Christy Holdings Limited,
a UK based company. The Christys Group designs and
distributes costumes and other garments and accessories through
its operations in Asia and the UK. The fair value of the total
consideration paid at date of acquisition was $30,368. The
results of this newly acquired business are included in the
consolidated financial statements since the September 30,
2010 acquisition date and are reported in the operating results
of the Companys Wholesale segment.
The Christys Group acquisition has been accounted for as a
purchase business combination. The preliminary estimate of the
excess of the purchase price over the tangible assets and
identified intangible assets acquired was assigned to goodwill.
The following summarizes the estimated fair value of the assets
and liabilities acquired: accounts receivable of $17,656,
inventory of $457, fixed assets of $582, and accounts payable
and accrued expenses of $13,636. The remaining $25,309 has been
initially recorded as goodwill. The allocation of the purchase
price is based on our preliminary estimates of the fair value of
the tangible and identifiable intangible assets acquired and
liabilities assumed. The Company is still in the process of
accumulating information to complete the determination of the
fair value of certain acquired assets. Goodwill arises because
the purchase price reflects the strategic fit and expected
synergies this business will bring to the Companys
operations. The Company elected to treat the UK entities
acquired as foreign branches for US tax purposes. As a result,
the entire excess of the purchase price over the fair value of
the tangible assets and liabilities acquired is deductible for
US tax purposes over 15 years.
On December 21, 2009, the Company entered into an Asset
Purchase Agreement with American Greetings Corporation
(American Greetings) under which it acquired certain
assets, equipment and processes used in the manufacture and
distribution of party goods effective on March 1, 2010 (the
Designware Acquisition). In connection with the
Designware Acquisition, the companies also entered into a Supply
and Distribution Agreement and a Licensing Agreement
(collectively, the Agreements). Under the terms of
the Agreements, effective March 1, 2010, the Company has
exclusive rights to manufacture and distribute products into
various channels including the party store channel. American
Greetings will continue to distribute party goods to various
channels including to its mass market, drug, grocery, and
specialty retail customers. American Greetings will purchase
substantially all of its party goods requirements from the
Company and the Company will license from American Greetings the
Designware brand and other character licenses. The
results of this business are included in the consolidated
financial statements since the March 1, 2010 acquisition
date and are reported in the operating results of the
Companys Wholesale segment.
The acquisition-date fair value of the total consideration
transferred was $45,881, including cash of $24,881 which was
held in escrow at December 31, 2009 and reported in other
assets in the consolidated balance sheet at that date, and a
warrant to purchase approximately 2% of the Common Stock of
Party City
F-13
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Holdings valued at $21,000. The fair value of the warrant was
determined based on the agreement between the parties.
The Designware Acquisition has been accounted for as a purchase
business combination. The excess of the purchase price over the
tangible assets and identified intangible assets acquired was
assigned to goodwill. The following summarizes the estimated
fair value of the assets acquired: inventory of $4,000, fixed
assets of $3,445 and intangible license rights of $10,973, which
are being amortized over the remaining license periods averaging
2.5 years. The remaining $27,463 represents goodwill.
Goodwill arises because the purchase price reflects the
strategic fit and expected synergies this business will bring to
the Companys operations. The entire excess of the purchase
price over the fair value of the tangible assets acquired is
deductible for tax purposes over 15 years.
Franchise
Store Acquisitions
During 2010 the Company acquired 20 franchisee stores located
throughout several states for total consideration of $24,300.
Total consideration consisted of $21,500 in cash and the
exchange of five corporate stores located in Pennsylvania.
Excluding the assets exchanged of $2,800, the fair value of the
assets and liabilities acquired for cash were $2,500 of
inventory and $1,600 of fixed assets. The remaining $17,400 has
been recorded as goodwill. The entire excess of the purchase
price over the fair value of the tangible assets acquired is
deductible for tax purposes over 15 years
|
|
Note 6
|
Other
Intangible Assets, net
|
The Company had the following balances of other identifiable
intangible assets as a result of various acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Lives
|
|
|
Retail franchise licenses
|
|
$
|
63,630
|
|
|
$
|
24,754
|
|
|
$
|
38,876
|
|
|
|
20 years
|
|
Customer lists and relationships
|
|
|
14,500
|
|
|
|
6,444
|
|
|
|
8,056
|
|
|
|
15 years
|
|
Copyrights, designs, and other
|
|
|
13,710
|
|
|
|
13,096
|
|
|
|
614
|
|
|
|
2-3 years
|
|
Leasehold and other intangibles
|
|
|
2,087
|
|
|
|
1,593
|
|
|
|
494
|
|
|
|
1-15 years
|
|
Acquired design licenses
|
|
|
10,973
|
|
|
|
3,651
|
|
|
|
7,322
|
|
|
|
1-7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104,900
|
|
|
$
|
49,538
|
|
|
$
|
55,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Useful Lives
|
|
|
Retail franchise licenses
|
|
$
|
63,630
|
|
|
$
|
19,431
|
|
|
$
|
44,199
|
|
|
|
20 years
|
|
Customer lists and relationships
|
|
|
14,500
|
|
|
|
5,477
|
|
|
|
9,023
|
|
|
|
15 years
|
|
Copyrights, designs, and other
|
|
|
13,632
|
|
|
|
12,989
|
|
|
|
643
|
|
|
|
2-3 years
|
|
Leasehold and other intangibles
|
|
|
2,087
|
|
|
|
1,283
|
|
|
|
804
|
|
|
|
1-15 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,849
|
|
|
$
|
39,180
|
|
|
$
|
54,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense for finite-lived intangible assets for
the years ended December 31, 2010, 2009, and 2008 was
$10,345, $6,559, and $8,582, respectively. Estimated
amortization expense for each of the next five years will be
approximately $10,184, $9,121, $7,089, $6,621, and $2,691,
respectively.
F-14
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7
|
Loans and
Notes Payable
|
On August 13, 2010, the Company entered into an amended and
extended ABL revolving credit facility (the New ABL
Facility), for an aggregate principal amount of up to
$325,000 for working capital, general corporate purposes and the
issuance of letters of credit. The New ABL Facility was used to
refinance the Companys prior ABL revolving credit facility
(the Prior ABL Facility) and its Party City
Franchise Group (PCFG) revolving credit facility and
term loan agreement (the PCFG Credit Facility). At
closing, PCFG, a previously unrestricted subsidiary of the
Company, became a borrower under the New ABL Facility and a
restricted subsidiary under the terms of the Companys New
Term Loan Credit Agreement, its 8.75% $175,000 senior
subordinated notes and the New ABL Facility.
Below is a discussion of the Companys ABL credit
agreements. See Note 8 for a discussion of the
Companys long-term obligations
New
ABL Facility
The New ABL Facility provides for (a) revolving loans
during the five-year period ending August 12, 2015 in an
aggregate principal amount at any time outstanding not to exceed
$325,000, subject to a borrowing base described below,
(b) swing-line loans in an aggregate principal amount at
any time outstanding not to exceed 10% of the aggregate
commitments under the facility and (c) letters of credit,
in an aggregate face amount at any time outstanding not to
exceed $50,000, to support payment obligations incurred in the
ordinary course of business by the Company and its subsidiaries.
Under the New ABL Facility, the borrowing base at any time
equals (a) 85% of eligible trade receivables plus
(b) 85% of eligible inventory at its net orderly
liquidation value and (c) 90% of eligible credit card
receivables, less (d) certain reserves.
The New ABL Facility provides for two pricing options:
(i) an alternate base interest rate (ABR) equal
to the greater of (a) the prime rate, (b) the federal
funds rate plus
1/2
of 1% or (c) the LIBOR rate plus 1%, in each case, on the
date of such borrowing or (ii) a LIBOR based interest rate
determined by reference to the LIBOR cost of funds for
U.S. dollar deposits for the relevant interest period
adjusted for certain additional costs and, in each case, plus an
applicable margin. The applicable margin ranges from 1.25% to
1.75% with respect to ABR borrowings and from 2.25% to 2.75%
with respect to LIBOR borrowings.
In addition to paying interest on outstanding principal under
the New ABL Facility, the Company is required to pay a
commitment fee of between 0.375% and 0.50% per annum in respect
of the unutilized commitments thereunder. The Company must also
pay customary letter of credit fees and agency fees.
In connection with the New ABL Facility, the Company incurred
$3,862 in finance costs that have been capitalized and will be
amortized over the life of the loan.
The obligations of the Company under the New ABL Facility are
jointly and severally guaranteed by Party City Holdings and each
domestic subsidiary of the Company. Each guarantor has secured
its obligations under the guaranty by a first priority lien on
its accounts receivable and inventories and a second priority
lien on substantially all of its other assets.
The New ABL Facility contains negative covenants that are
substantially similar to the Term Loan Credit Agreement (see
Note 8) and require the Company to comply with certain
financial covenants if its excess availability is less than 15%
of the lower of the aggregate commitment or the borrowing base
for three consecutive days.
The New ABL Facility also contains certain customary affirmative
covenants and events of default.
F-15
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Borrowings under the New ABL Facility totaled $150,098 at
interest rates ranging from 2.77% to 4.75% at December 31,
2010. Outstanding standby letters of credit totaled $12,927 and
the Company had $161,976 of available borrowing capacity under
the terms of the New ABL Facility at December 31, 2010.
Prior
ABL Facility
On May 25, 2007, the Company entered into (i) a term
loan credit agreement (the Prior Term Loan Credit
Agreement) to borrow $375,000 and (ii) the Prior ABL
Facility to borrow up to $250,000, as amended, for working
capital and general corporate purposes and the issuance of
letters of credit.
Under the terms of the Prior ABL Credit Agreement, the borrowing
base at any time equaled (a) 85% of eligible trade
receivables, plus (b) the lesser of (i) 75% of
eligible inventory and eligible in-transit inventory, valued at
the lower of cost or market value, or (ii) 85% of net
orderly liquidation value of eligible inventory and eligible in
transit inventory (subject, in the case of eligible in-transit
inventory, to a cap of $10,000) , plus (c) 85% of eligible
credit card receivables, less (d) certain reserves.
The Prior ABL Credit Agreement provided for two pricing options:
(i) an alternate base rate (ABR) equal to the
greater of (a) Credit Suisses prime rate in effect on
such day and (b) the federal funds effective rate in effect
on such day plus
1/2
of 1% or (ii) a LIBOR rate determined by reference to the
cost of funds for U.S. dollar deposits for the interest
period relevant to such borrowing adjusted for certain
additional costs, in each case plus an applicable margin. The
applicable margin was up to 0.50% with respect to ABR borrowings
and from 1.00% to 1.50% with respect to LIBOR borrowings.
In addition to paying interest on outstanding principal under
the ABL Credit Agreement, the Company was required to pay a
commitment fee of between 0.30% and 0.25% per annum in respect
of the unutilized commitments thereunder. The Company also paid
customary letter of credit fees and agency fees.
At December 31, 2009, borrowings under the Prior ABL Credit
Agreement were $76,990.
PCFG
Credit Facility
On November 2, 2007, PCFG entered into the PCFG Credit
Facility under which it borrowed $30,000 in term loans (the
PCFG Term Loan) (see Note 8) and obtained
a committed revolving credit facility in an aggregate principal
amount of up to $10,000, for working capital and general
corporate purposes and the issuance of letters of credit (the
PCFG Revolver). PCFG and Party City Franchise Group
Holdings, LLC (PCFG Holdings), the sole member of
PCFG were designated by the Board of Directors of the Company as
Unrestricted Subsidiaries pursuant to the Prior ABL
Credit Agreement and the indenture governing its
8.75% Senior Subordinated Notes and neither PCFG nor PCFG
Holdings guaranteed any of the Companys other credit
facilities or indenture.
At December 31, 2009, borrowings under the PCFG Revolver
were $645. There were no outstanding letters of credit at
December 31, 2009.
Other
Credit Agreements
In addition to the New ABL Facility, at December 31, 2010,
the Company has a Canadian dollar denominated revolving credit
facility in the amount of CDN$400 which bears interest at the
Canadian prime rate plus 1.1% and expires in June 2011, and a
£1,400 denominated revolving credit facility which bears
interest at the UK base rate plus 1.75% on the first £1,000
and 4.75% over the UK base rate on the remaining £400. The
UK credit facility expires on June 30, 2011. We expect to
renew these revolving credit facilities upon expiration.
There were no borrowings under the Canadian dollar denominated
revolving credit facility at December 31, 2010 and 2009.
There were no borrowings under the British Pound Sterling
revolving credit
F-16
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
facility at December 31, 2010. At December 31, 2009,
there were outstanding borrowings of £357 under the
revolving credit facility.
|
|
Note 8
|
Long-Term
Obligations
|
Long-term obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
First lien term loan due 2017(a)
|
|
$
|
666,644
|
|
|
$
|
|
|
Term loan(b)
|
|
|
|
|
|
|
364,688
|
|
PCFG term loan(c)
|
|
|
|
|
|
|
23,000
|
|
Mortgage obligation(d)
|
|
|
4,539
|
|
|
|
5,600
|
|
Capital lease obligations(e)
|
|
|
3,975
|
|
|
|
5,510
|
|
8.75% senior subordinated notes(f)
|
|
|
175,000
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
$
|
850,158
|
|
|
$
|
573,798
|
|
Less: current portion
|
|
|
(9,046
|
)
|
|
|
(34,906
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, excluding current portion
|
|
$
|
841,112
|
|
|
$
|
538,892
|
|
|
|
|
|
|
|
|
|
|
New
Term Loan Credit Agreement
(a) On December 2, 2010, the Company entered into a
$675,000 Term Loan Agreement (the New Term Loan Credit
Agreement). The Company used the proceeds from the new
term loan to terminate the previously existing $342,000 term
loan guaranty credit agreement and pay a distribution of
$311,199 to its stock, warrant and vested option holders (see
Note 9). The new term loan was issued at a 1% discount that
is being amortized by the effective interest method over the
term of the loan.
The New Term Loan Credit Agreement provides for two pricing
options: (i) an alternate base rate (ABR) for
any day, a rate per annum equal to the greater of
(a) Credit Suisses prime rate in effect on such day,
(b) the federal funds effective rate in effect on such day
plus
1/2
of 1% and (c) the adjusted LIBOR rate plus 1% or
(ii) the LIBOR rate, adjusted for certain additional costs,
with a LIBOR floor of 1.5%, in each case plus an applicable
margin. The applicable margin is 4.25% with respect to ABR
borrowings and 5.25% with respect to LIBOR borrowings.
The New Term Loan Credit Agreement provides that the term loans
may be prepaid any time prior to their maturity. The term loans
are subject to mandatory prepayment out of (i) 100% of net
proceeds arising from asset sales, insurance and condemnation
proceeds, subject to reinvestment provisions, (ii) 50% of
net proceeds arising from certain equity issuances by the
Company or its subsidiaries (which percentage will be reduced to
25% or 0% if the Companys total leverage ratio is less
than specified ratios), (iii) net proceeds arising from any
debt issued by the Company or its subsidiaries and (iv) 50%
(which percentage will be reduced to 25% or 0% if the
Companys total leverage ratio is less than specified
ratios) of the Companys Excess Cash Flow, as defined, if
any.
The Company is required to repay installments on the term loans
in quarterly principal amounts of 0.25% of their funded total
principal amount through September 30, 2017, with the
remaining amount payable on the maturity date of
December 2, 2017.
The obligations of the Company under the New Term Loan Credit
Agreement are jointly and severally guaranteed by Party City
Holdings and each domestic subsidiary of the Company. Each
guarantor has secured its obligations under the guaranty by a
first priority lien on substantially all of its assets, with the
exception of accounts receivable and inventories, which are
under a second priority lien.
F-17
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company may, by written notice to the Administrative Agent
from time to time, request additional incremental term loans, in
an aggregate amount not to exceed $175,000 from one or more
lenders (which may include any existing Lender) willing to
provide such additional incremental term loans in their own
discretion.
The New Term Loan Credit Agreement contains a number of
covenants that, among other things, restrict, subject to certain
exceptions, the ability of the Company and its Subsidiaries to
incur additional indebtedness; create, incur or suffer to exist
liens on any of their property or assets; make investments or
enter into joint venture arrangements, repurchase capital stock
of the Company; engage in mergers, consolidations and sales of
all or substantially all their assets; sell assets; make capital
expenditures; enter into agreements restricting dividends and
advances by the Companys subsidiaries; and engage in
transactions with affiliates.
The New Term Loan Credit Agreement also contains certain
customary affirmative covenants and events of default.
In connection with the New Term Loan Credit Agreement, the
Company incurred $12,193 in finance costs that have been
capitalized and will be amortized over the life of the loan.
At December 31, 2010, the balance of the Term Loan was
$666,644, which includes an original issue discount of $6,668,
net of $81 of accumulated amortization. At December 31,
2010, the interest rate on term loan borrowings ranged from
6.75% to 7.50%
Prior
Term Loan Credit Agreements
(b) On May 25, 2007, the Company entered into
(i) a $375,000 Term Loan Credit Agreement, and (ii) an
ABL Credit Agreement (see Note 7), and used the proceeds to
refinance certain existing indebtedness and to pay transactions
costs.
The Prior Term Loan Credit Agreement provided for two pricing
options: (i) an ABR equal to the greater of (a) Credit
Suisses prime rate in effect on such day and (b) the
federal funds effective rate in effect on such day plus
1/2
of 1% or (ii) a LIBOR rate determined by reference to the
cost of funds for U.S. dollar deposits for the interest
period relevant to such borrowing adjusted for certain
additional costs, in each case plus an applicable margin. The
applicable margin is 1.25% with respect to ABR borrowings and
2.25% with respect to LIBOR borrowings.
The Company was required to repay installments on the term loans
in quarterly principal amounts of 0.25% of their funded total
principal amount, beginning September 30, 2007 and ending
March 31, 2013, with the remaining amount payable on the
maturity date of May 25, 2013.
The Prior Term Loan Credit Agreement contained covenants similar
to those in the New Term Loan Credit Agreement
At December 31, 2009, the balance of the Prior Term Loan
was $364,688.
Other
Long Term Debt Agreements
(c) On November 2, 2007, PCFG entered into the PCFG
Credit Facility. Pursuant to the PCFG Credit Agreement, PCFG
borrowed $30,000 in term loans (the PCFG Term Loan)
and obtained a committed revolving credit facility in an
aggregate principal amount of up to $10,000, as amended, for
working capital and general corporate purposes and the issuance
of letters of credit (PCFG Revolver) (See
Note 7).
PCFG and PCFG Holdings, the sole member of PCFG, had been
designated by the Board of Directors of the Company as
Unrestricted Subsidiaries pursuant to the
Companys Prior ABL Credit Agreement and the indenture
governing its 8.75% Senior Subordinated Notes and neither
PCFG nor PCFG Holdings guaranteed any of the Companys
other credit facilities or indenture.
F-18
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2009, the balance of the PCFG Term Loan was
$23,000. The PCFG Term Loan was repaid in August 2010, in
connection with the New ABL Facility (see Note 7).
(d) In conjunction with the construction of a new
distribution facility, the Company borrowed $10,000 from the New
York State Job Development Authority on December 21, 2001,
pursuant to the terms of a second lien mortgage note. On
December 18, 2009 the mortgage note was amended, extending
the fixed monthly payments of principal and interest for a
period of 60 months up to and including December 31,
2014. The interest rate under the amended mortgage note remains
variable and subject to review and adjustment semi-annually
based on the New York State Job Development Authoritys
confidential internal protocols. At December 31, 2010, the
amended mortgage note bears at an interest rate of 2.22%. At
December 31, 2009, the mortgage note bore interest at a
rate of 2.45%. The principal amounts outstanding under the
mortgage note as of December 31, 2010 and 2009, were $4,539
and $5,600, respectively. At December 31, 2010, the
distribution facility had a carrying value of $39,795.
(e) The Company has entered into various capital leases for
machinery and equipment and automobiles with implicit interest
rates ranging from 5.69% to 17.40% which extend to 2015.
(f) The $175,000 senior subordinated notes due 2014 bear
interest at a rate of 8.75% per annum. Interest is payable
semi-annually on May 1 and November 1 of each year. The senior
subordinated notes are redeemable at the option of the Company,
in whole or in part, at any time on or after May 1, 2009,
at redemption prices ranging from 104.375% to 100%, plus accrued
and unpaid interest to the date of redemption. If a Change of
Control, as defined in the note indenture, were to occur, the
Company would be obligated to make an offer to purchase the
senior subordinated notes, in whole or in part, at a price equal
to 101% of the aggregate principal amount of the senior
subordinated notes, plus accrued and unpaid interest, if any, to
the date of purchase.
If a Change of Control were to occur, the Company may not have
the financial resources to repay all of its obligations under
the New Term Loan Credit Agreement, the note indenture and the
other indebtedness that would become payable upon the occurrence
of such Change of Control.
At December 31, 2010, maturities of long-term obligations
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
|
Capital Lease
|
|
|
|
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Totals
|
|
|
2011
|
|
$
|
6,810
|
|
|
$
|
2,236
|
|
|
$
|
9,046
|
|
2012
|
|
|
6,835
|
|
|
|
1,446
|
|
|
|
8,281
|
|
2013
|
|
|
6,860
|
|
|
|
147
|
|
|
|
7,007
|
|
2014
|
|
|
181,982
|
|
|
|
131
|
|
|
|
182,113
|
|
2015
|
|
|
5,737
|
|
|
|
15
|
|
|
|
5,752
|
|
Thereafter
|
|
|
637,959
|
|
|
|
|
|
|
|
637,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
846,183
|
|
|
$
|
3,975
|
|
|
$
|
850,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, the Companys
authorized capital stock consisted of 10,000.00 shares of
preferred stock, $0.01 par value, of which no shares were
issued or outstanding and 40,000.00 shares of common stock,
$0.01 par value, of which 30,824.02 and
30,819.35 shares were issued and outstanding, respectively.
Of these shares 597.52 and 592.85 shares were redeemable at
December 31, 2010 and 2009, respectively, and classified as
redeemable common securities on the balance sheet,
as described below.
Under the terms of the Party City Holdings Inc.
stockholders agreement dated April 30, 2004, as
amended, the Company has an option to purchase all of the shares
of common stock held by these employees
F-19
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and, upon their death or disability, these employee stockholders
can require the Company to purchase all of their shares. The
purchase price as prescribed in the stockholders
agreements is to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on
cost, as defined therein. The aggregate amount that may be
payable by the Company to all employee stockholders, based on
the estimated fair value of fully paid and vested common
securities, totaled $16,547 and $16,807 at December 31,
2010 and 2009, respectively, and is classified as redeemable
common securities on the consolidated balance sheet, with a
corresponding adjustment to stockholders equity. As there
is no active market for the Companys common stock, the
Company estimates the fair value of its common stock based on a
valuation model confirmed periodically by its recent
acquisitions or independent appraisals.
As explained in Note 15, in 2004, the CEO and the President
exchanged vested predecessor company stock options for vested
Party City Holdings stock options (Rollover Options)
to purchase 98.182 shares. In 2008, 37 Rollover Options
were exercised. The remaining Rollover Options are valued at
$1,542 and $1,582 at December 31, 2010 and 2009,
respectively, and are classified as redeemable common securities
on the consolidated balance sheet. These options are
Level 2 in the fair value hierarchy.
Total redeemable common securities on the balance sheet were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Redeemable common shares
|
|
$
|
16,547
|
|
|
$
|
16,807
|
|
2004 Rollover Options
|
|
|
1,542
|
|
|
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,089
|
|
|
$
|
18,389
|
|
|
|
|
|
|
|
|
|
|
On December 30, 2008, the Company exchanged 544.75 warrants
to purchase Party City Holdings common stock at $.01 per share,
valued at $28,350 per share, plus $500 in cash, to acquire the
minority interest in PCFG common stock. As a result of this
transaction, the Company charged $558 to goodwill. The warrants,
which have a term of 10 years, were exercisable into Party
City Holdings common stock under certain conditions, with the
right to require the Company to purchase the shares upon the
death or disability of the employees and were classified on the
balance sheet as a current liability under the provisions of
ASC 480-10
Distinguishing Liabilities from Equity Under those rules,
any change in value of the warrants must be marked to
market to reflect the change in liability, with an
offsetting charge to compensation. These warrants are
Level 2 in the fair value hierarchy. As the result of an
independent appraisal performed in December 2010, these warrants
were marked to market resulting in a charge to
compensation expense of $4,763. For tax purposes, the warrants
are not considered compensation and therefore this charge is
never deductible for tax purposes. In February 2011, the
warrants were exercised with the corresponding share issuance
recorded as redeemable common stock.
In December 2010, in connection with the refinancing of the
Companys term loan agreement (see Note 8), the
Companys Board of Directors declared a one-time cash
dividend of $9,400 per shares of outstanding Common Stock
totaling $289,746 and similar distributions to the holders of
vested common stock warrants of $12,083 and vested time options
of $9,370. The distribution to vested time option holders
resulted in a charge to stock compensation expense in 2010. In
addition, holders of unvested time and performance options at
the declaration date may also receive a distribution of $9,400
per share, if and when the time and performance options vest. At
December 31, 2010, the aggregate potential distribution
associated with unvested time and performance options is $18,492.
|
|
Note 10
|
Provision
for Doubtful Accounts
|
The provision for doubtful accounts is included in general and
administrative expenses. For the years ended December 31,
2010, 2009 and 2008, the provision for doubtful accounts was
$637, $3,982, and $1,092, respectively.
F-20
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11
|
Non-recurring
Expenses and Write-off of Deferred Financing Costs
|
In connection with the refinancing of the Companys debt
obligations in 2010, the Company wrote off $2,448 of deferred
financing costs associated with the repayment of debt.
Additionally, the Company expensed acquisition related costs of
$1,607 primarily associated with the Designware and
Christys Group acquisitions.
|
|
Note 12
|
Restructuring
Charges
|
In connection with the Party America Acquisition in 2006, $4,100
was accrued related to plans to restructure Party Americas
administrative operations and involuntarily terminate a limited
number of Party America personnel. All related costs have been
incurred, with the last $2,100 incurred during 2008.
In connection with the FCPO Acquisition in 2007, $9,101 was
accrued related to plans to restructure FCPOs
merchandising assortment and administrative operations and
involuntarily terminate a limited number of FCPO personnel.
Through December 31, 2010, the Company incurred $7,605 in
restructuring costs including $902 incurred in 2010. The Company
expects to incur $1,496 in 2011.
During October of 2009, the Company communicated its plan to
close the FCPO corporate office in Naperville, Illinois and to
consolidate its retail corporate office operations with those of
Party City, in Rockaway, New Jersey. In connection with the
closing, the Company recorded additional planned severances
costs of $1,800 during 2009 all of which have been paid by
December 2010. The Company will continue to utilize the
Naperville facility as a distribution center for greeting cards
and other products.
Restructuring costs associated with the 2007 acquisition of PCFG
of $1,000 were accrued related to plans to restructure
PCFGs merchandising assortment and administrative
operations and involuntarily terminate a limited number of PCFG
personnel. PCFG incurred $100 and $900 in restructuring costs in
2009 and 2008, respectively.
|
|
Note 13
|
Other
Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Other expense (income) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed income in unconsolidated joint venture
|
|
$
|
(678
|
)
|
|
$
|
(632
|
)
|
|
$
|
(538
|
)
|
Change in fair market value of the interest rate cap
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
Foreign currency loss (gain)
|
|
|
354
|
|
|
|
670
|
|
|
|
(476
|
)
|
Write-off of deferred finance charges in connection with the
extinguishment of debt
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
Other acquisition costs
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
Royalty amendment fee
|
|
|
|
|
|
|
|
|
|
|
400
|
|
Other, net
|
|
|
477
|
|
|
|
(70
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net
|
|
$
|
4,208
|
|
|
$
|
(32
|
)
|
|
$
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14
|
Employee
Benefit Plans
|
Certain subsidiaries of the Company maintain profit sharing
plans for eligible employees providing for annual discretionary
contributions to a trust. Eligible employees are full time
domestic employees who have completed a certain length of
service, as defined, and attained a certain age, as defined. In
addition, the plans require the subsidiaries to match from 25%
to 100% of voluntary employee contributions to the plans, not to
exceed a maximum amount of the employees annual salary,
ranging from 4% to 6%. Profit sharing expense for the years
ended December 31, 2010, 2009, and 2008 totaled $4,470,
$4,201, and $3,518, respectively.
F-21
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15
|
Equity
Incentive Plan
|
On May 1, 2004, the Company adopted the 2004 Equity
Incentive Plan (the Plan) under which the Company
may grant incentive awards in the form of restricted and
unrestricted common stock options to purchase shares of the
Companys common stock (Company Stock Options)
to certain directors, officers, employees and consultants of the
Company and its affiliates. A committee of the Companys
board of directors (the Committee), or the board
itself in the absence of a Committee, is authorized to make
grants and various other decisions under the Plan. Unless
otherwise determined by the Committee, any participant granted
an award under the Plan must become a party to, and agree to be
bound by, the Companys stockholders agreement.
Company Stock Options reserved under the Plan total 3,260.93 and
may include incentive and nonqualified stock options. Company
Stock Options are nontransferable (except under certain limited
circumstances) and, unless otherwise determined by the
Committee, vest over five years and have a term of ten years
from the date of grant.
The Company has three types of options rollover
options, time-based options, and performance-based options, each
of which is described below.
Rollover
Options
In 2004, the Companys CEO and its President exchanged
vested options in the predecessor company for 98.18 vested
options to purchase common shares at $2,500 per share (the
Rollover Options). These options had an intrinsic
value of $737 and a fair value of $880. Under
ASC 805-30-30-11
Goodwill or Gain from Bargain Purchase, Including
Consideration Transferred, vested options granted by the
acquiring company in exchange for outstanding options of the
target company should be considered part of the purchase
transaction.. The fair value is accounted for as part of the
purchase price of the target company.
Since these options were vested immediately and can be exercised
upon death or disability of the executives and put back to the
Company, they are reflected as redeemable common securities on
the Companys consolidated balance sheet.
However, these options have an additional condition, whereby
they may be put back to the Company at fair market value upon
retirement. Because the terms of the Rollover Options could
extend beyond the retirement dates of these two executives, it
is possible that they could exercise these options within six
months of the specified retirement date and then put the
immature shares back to the Company at retirement less than six
months later. GAAP requires variable accounting for awards with
puts that can be exercised within six months of the issuance of
the shares.
Therefore, regardless of the probability of this occurrence,
changes in market value of the shares are expensed as additional
stock compensation because the put, even if not probable, is
within the control of the employee.
During 2008, a reduction in redeemable common stock caused by
the exercise of 37 of these options, net of the increase in
valuation of the remaining 61.18 options, resulted in a net
credit to pre tax income of $210. During 2010, an increase in
the valuation of the 61.18 options resulted in a charge to
pre-tax income of $572. There was no charge to earnings for
these options in 2009 because the valuation did not change from
2008.
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
F-22
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cancellation of 3%, and an expected life of four years. The
estimated fair value of the options granted in 2005 is amortized
on a straight line basis to compensation expense, net of taxes,
over the vesting period of four years. The Company recorded
compensation expense of approximately $140 and $201 in general
and administrative expenses during the years ended
December 31, 2009 and 2008, respectively. There is no
remaining stock compensation in future years related to these
options.
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R) Share-Based Payment, which is a
revision of SFAS No. 123 Accounting for
Stock-Based Compensation as amended.
SFAS No. 123(R) establishes standards for the
accounting for transactions where an entity exchanges its equity
for goods or services and transactions that are based on the
fair value of the entitys equity instruments or that may
be settled by the issuance of those equity instruments.
SFAS No. 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. Generally, the fair value
approach in SFAS No. 123(R) is similar to the fair
value approach described in SFAS No. 123.
The Company adopted SFAS No. 123(R) using the
prospective method. Since the Companys common stock is not
publicly traded, the options granted in 2005 under
SFAS No. 123 continue to be expensed under the
provisions of SFAS No. 123 using a minimum value
method. Options issued subsequent to January 1, 2006 are
expensed under the provisions of SFAS No. 123(R).
Since April 2004, the Company granted the following TBOs to key
eligible employees and outside directors:
|
|
|
|
|
Options Granted
|
|
Exercise Price per Share
|
|
|
722.00
|
|
$
|
10,000
|
|
489.50
|
|
|
12,000
|
|
187.00
|
|
|
14,250
|
|
20.00
|
|
|
17,500
|
|
122.00
|
|
|
20,750
|
|
5.00
|
|
|
22,340
|
|
95.00
|
|
|
28,350
|
|
57.00
|
|
|
27,700
|
|
In addition, in connection with the acquisition of Party
America, certain Party America employees elected to roll their
options to purchase Party America common stock into fully vested
TBOs. As a result, the Company issued 19.02 fully vested TBOs
exercisable at strike prices of $6,267 and $10,321 per share and
with a fair market value of $170. The fair value of these
options was recorded as part of the Party America purchase price.
The Company recorded compensation expense of $723, $736, and
$677 during the years ended December 31, 2010, 2009, and
2008 related to the options granted since 2006 under
SFAS No. 123(R), in general and administrative
expenses. The fair value of each grant is estimated on the grant
date using a Black-Scholes option valuation model based on the
assumptions in the following table.
|
|
|
|
|
Expected dividend rate
|
|
|
|
|
Risk free interest rate
|
|
|
1.76% to 5.08%
|
|
Price volatility
|
|
|
15.00
|
|
Weighted average expected life
|
|
|
7.5
|
|
Forfeiture rate
|
|
|
7.75
|
|
The weighted average expected life (estimated period of time
outstanding) was estimated using the Companys best
estimate for determining the expected term. Expected volatility
was based on implied
F-23
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
historical volatility of an applicable Dow Jones Industrial
Average sector index for a period equal to the stock
options expected life. The remaining stock compensation
expense to be recorded in future years for these options is
$1,339.
In addition, as noted in an earlier footnote, the Company made a
distribution to holders of all vested time options granted
before December, 2010, of $9,370, which was charged to
compensation expense. The remaining stock compensation expense
that would be recorded in future years if and when these time
options vest is $1,601.
Performance-based
options
In April 2005, the Company granted 760 performance based options
(PBOs) to key employees and its outside directors,
exercisable at a strike price of $10,000. Under the PBO feature,
the ability to exercise vested option awards is contingent upon
the occurrence of an initial public offering of the
Companys common stock or a change in control of the
Company and the achievement of specified investment returns to
the Companys shareholders. Since a change in control
condition cannot be assessed as probable before it occurs, in
accordance with
EITF 96-5,
Recognition of Liabilities for Contractual Termination
Benefits or Changing Benefit Plan Assumptions in Anticipation of
a Business Combination no compensation expense is recorded
in connection with the issuance of PBOs until an initial public
offering of the Companys common stock is completed or a
change in control occurs and the achievement of specified
investment returns to the Companys shareholders. At that
time, holders of performance-based options granted before
December 2010 would receive a distribution of $9,400 per vested
option, which would be included in the recognition of
compensation expense if and when that occurs.
Since April 2005, the Company granted the following PBOs to key
eligible employees and outside directors:
|
|
|
|
|
Options Granted
|
|
Exercise Price per Share
|
|
|
760.00
|
|
$
|
10,000
|
|
893.50
|
|
|
12,000
|
|
314.00
|
|
|
14,250
|
|
30.00
|
|
|
17,500
|
|
147.00
|
|
|
20,750
|
|
185.00
|
|
|
22,340
|
|
116.00
|
|
|
28,350
|
|
99.00
|
|
|
27,700
|
|
During the third quarter of 2008, a new investor acquired 38% of
the outstanding stock held by existing shareholders as well as
37 rollover options, 258 time-based options, and 333
performance-based options held by option holders, at a price of
$28,350 per share.
Although this transaction did not result in a change in control,
the Companys majority shareholders decided to waive the
requirements of change in control, and permitted the time-vested
portion of the performance-based options to be exercisable.
Additionally, for both performance-based and time-based options,
employees were permitted to have their net shares exercised
settled for cash.
This waiver did not change the terms of the option plans for any
remaining options still outstanding, or obligate the Company to
permit any future waiver of the change in control requirement.
For the performance-based options that were exercised as a
result of the transaction noted above, the waiver of the change
in control requirement resulted in a vesting of these options.
Therefore, the performance condition for those exercised options
was met immediately upon exercise. Therefore, the effect of the
vesting
F-24
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and settlement was accounted for as stock compensation. The fair
value of the performance-based options at exercise required to
be charged to income is $5,639, of which $2,002 was charged to
income in prior years.
The following table summarizes the changes in outstanding
options under the Equity Incentive Plan for the years ended
December 31, 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Fair
|
|
|
|
|
|
|
Average
|
|
|
Market
|
|
|
|
|
|
|
Exercise
|
|
|
Value of Options at
|
|
|
|
Options
|
|
|
Price
|
|
|
Grant Date
|
|
|
Outstanding at December 31, 2007
|
|
|
3,399.14
|
|
|
$
|
11,700
|
|
|
|
|
|
Granted
|
|
|
305.90
|
|
|
|
24,617
|
|
|
$
|
5,736
|
|
Exercised
|
|
|
(627.90
|
)
|
|
|
14,283
|
|
|
|
|
|
Canceled
|
|
|
(144.54
|
)
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
2,932.60
|
|
|
|
13,242
|
|
|
|
|
|
Granted
|
|
|
40.00
|
|
|
|
28,350
|
|
|
|
5,712
|
|
Exercised
|
|
|
(7.70
|
)
|
|
|
11,573
|
|
|
|
|
|
Canceled
|
|
|
(31.87
|
)
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
2,933.03
|
|
|
|
13,462
|
|
|
|
|
|
Granted
|
|
|
327.00
|
|
|
|
28,035
|
|
|
|
7,399
|
|
Exercised
|
|
|
(4.68
|
)
|
|
|
11,090
|
|
|
|
|
|
Canceled
|
|
|
(133.10
|
)
|
|
|
21,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
3,122.25
|
|
|
|
14,350
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
996.79
|
|
|
|
11,139
|
|
|
|
|
|
A summary of domestic and foreign income before income taxes and
minority interest follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
77,537
|
|
|
$
|
92,364
|
|
|
$
|
54,701
|
|
Foreign
|
|
|
4,841
|
|
|
|
8,060
|
|
|
|
9,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,378
|
|
|
$
|
100,424
|
|
|
$
|
63,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
34,752
|
|
|
$
|
22,643
|
|
|
$
|
24,515
|
|
State
|
|
|
5,281
|
|
|
|
3,930
|
|
|
|
4,817
|
|
Foreign
|
|
|
1,854
|
|
|
|
2,297
|
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
41,887
|
|
|
|
28,870
|
|
|
|
32,073
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(7,187
|
)
|
|
|
7,705
|
|
|
|
(6,627
|
)
|
State
|
|
|
(1,739
|
)
|
|
|
1,150
|
|
|
|
(1,139
|
)
|
Foreign
|
|
|
(16
|
)
|
|
|
(52
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision
|
|
|
(8,942
|
)
|
|
|
8,803
|
|
|
|
(7,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
32,945
|
|
|
$
|
37,673
|
|
|
$
|
24,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory valuation
|
|
$
|
17,246
|
|
|
$
|
16,186
|
|
Allowance for doubtful accounts
|
|
|
1,129
|
|
|
|
941
|
|
Accrued liabilities
|
|
|
11,637
|
|
|
|
10,733
|
|
Contribution carryforward
|
|
|
107
|
|
|
|
56
|
|
Tax loss carryforward
|
|
|
405
|
|
|
|
1,761
|
|
Tax credit carryforward
|
|
|
576
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax assets (included in prepaid expenses
and other current assets)
|
|
$
|
31,100
|
|
|
$
|
30,253
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities, net:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
12,194
|
|
|
$
|
11,631
|
|
Intangible assets
|
|
|
59,031
|
|
|
|
69,774
|
|
Amortization of goodwill and other assets
|
|
|
22,599
|
|
|
|
19,457
|
|
Other
|
|
|
1,157
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities, net
|
|
$
|
94,981
|
|
|
$
|
101,570
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had a net operating loss
carryforward remaining from FCPO of approximately $1,217,
expiring in 2026. In addition, the Company had alternative
minimum tax credit carryforwards of $576, which do not expire.
The difference between the Companys effective income tax
rate and the federal statutory income tax rate is reconciled
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Provision at federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal income tax benefit
|
|
|
2.8
|
|
|
|
3.1
|
|
|
|
4.2
|
|
Warrant compensation charge not deductible
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Domestic manufacturing deductions
|
|
|
(3.0
|
)
|
|
|
(0.8
|
)
|
|
|
(1.3
|
)
|
Adjustments related to previous acquisitions
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
40.0
|
%
|
|
|
37.5
|
%
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, the Company recorded certain adjustments related to
deferred tax accounts recorded during the current year related
to activities associated with previous acquisitions which
resulted in domestic tax expense of $2,905.
Other differences between the effective income tax rate and the
federal statutory income tax rate are composed of favorable
permanent differences related to inventory contributions and
favorable foreign rate differences, offset by the non-deductible
portion of meals and entertainment expenses.
The Company treats the Christys Group UK subsidiaries for
U.S. tax purposes as if they were foreign branches of the
US entities so their earnings are not considered permanently
reinvested. The Company has determined that the earnings of its
subsidiary, Amscan Distributors (Canada) Ltd. should not be
considered
F-26
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
permanently reinvested, and accordingly has provided
U.S. and additional foreign taxes on those undistributed
earnings. Since Canadian and U.S. tax rates are similar,
the effect of this decision was to decrease the Companys
2010 tax provision by only $10.
At December 31, 2010 and 2009, the Companys share of
the cumulative undistributed earnings of its other foreign
subsidiaries was approximately $26,185 and $25,138,
respectively. No provision has been made for U.S. or
additional foreign taxes on the undistributed earnings of these
foreign subsidiaries, because such earnings are expected to be
reinvested indefinitely in the subsidiaries operations. It
is not practical to estimate the amount of additional tax that
might be payable on these foreign earnings in the event of
distribution or sale; however, under existing law, foreign tax
credits would be available to substantially reduce incremental
U.S. taxes payable on amounts repatriated.
The Company and its subsidiaries file a U.S. federal income
tax return, and over 100 state, city, and foreign tax
returns.
The following table summarizes the activity related to our gross
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of January 1,
|
|
$
|
992
|
|
|
$
|
2,024
|
|
|
$
|
2,485
|
|
Increases related to current year tax positions
|
|
|
73
|
|
|
|
81
|
|
|
|
172
|
|
Increases related to prior year tax positions
|
|
|
505
|
|
|
|
|
|
|
|
|
|
Decrease related to settlements
|
|
|
(334
|
)
|
|
|
(822
|
)
|
|
|
|
|
Decreases related to lapsing of statutes of limitations
|
|
|
(405
|
)
|
|
|
(291
|
)
|
|
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
$
|
831
|
|
|
$
|
992
|
|
|
$
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total net unrecognized tax benefits that, if recognized,
would impact our effective tax rate were $654, $1,032 and $1,787
as of December 31, 2010, 2009 and 2008, respectively.
Liabilities for unrecognized tax benefits are reflected in other
long-term liabilities in the consolidated balance sheet.
Included in the balance of unrecognized tax benefits at
December 31, 2009, is $341 related to tax positions for
which it is possible that the total amounts could significantly
change during the next twelve months.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits in income tax expense. The Company has
accrued $90 and $146 for the potential payment of interest and
penalties at December 31, 2010 and 2009, respectively. The
Company credited $56 in interest to income tax expense in 2010
and $119 in 2009.
For federal income tax purposes, the years 2008 through 2010 are
open to examination at December 31, 2010. For
non-U.S. income
tax purposes, tax years from 2006 through 2010 remain open.
Lastly, the Company is open to state and local income tax
examinations for the tax years 2006 through 2010.
|
|
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.
F-27
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2010, future minimum lease payments under
all operating leases consisted of the following:
|
|
|
|
|
|
|
Future Minimum
|
|
|
|
Operating Lease
|
|
|
|
Payments
|
|
|
2011
|
|
$
|
112,172
|
|
2012
|
|
|
95,026
|
|
2013
|
|
|
67,314
|
|
2014
|
|
|
45,510
|
|
2015
|
|
|
33,369
|
|
Thereafter
|
|
|
71,773
|
|
|
|
|
|
|
|
|
$
|
425,164
|
|
|
|
|
|
|
We are also an assignor with contingent lease liability for
seven stores sold to franchisees. The potential contingent lease
obligations continue until the applicable leases expire in 2014.
The maximum amount of the contingent lease obligations may vary,
but is limited to the sum of the total amount due under the
leases. At December 31, 2010, the maximum amount of the
contingent lease obligations was approximately $7,356 and is not
included in the table above as such amount is contingent upon
certain events occurring, which management has not assessed as
probable or estimable at this time.
The operating leases included in the above table also do not
include contingent rent based upon sales volume or other
variable costs such as maintenance, insurance and taxes.
Rent expense for the years ended December 31, 2010, 2009
and 2008, was $144,006, $136,785, and $142,471, respectively,
and include immaterial amounts of rent expense related to
contingent rent.
Product
Royalty Agreements
The Company has entered into product royalty agreements with
various licensors of copyrighted and trademarked characters and
designs that are used on the Companys products which
require royalty payments based on sales of the Companys
products, and, in some cases, include annual minimum royalties.
At December 31, 2010, the Companys commitment to pay
future minimum product royalties was as follows:
|
|
|
|
|
|
|
Future Minimum
|
|
|
|
Royalty Payments
|
|
|
2011
|
|
$
|
8,271
|
|
2012
|
|
|
7,320
|
|
2013
|
|
|
1,724
|
|
2014
|
|
|
800
|
|
2015
|
|
|
550
|
|
Thereafter
|
|
|
1,100
|
|
|
|
|
|
|
|
|
$
|
19,765
|
|
|
|
|
|
|
Product royalty expense for the years ended December 31,
2010, 2009 and 2008, was $14,693, $8,615, and $8,455,
respectively.
F-28
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has entered into product purchase commitments with
certain vendors. At December 31, 2010, the Companys
future product commitments were as follows:
|
|
|
|
|
|
|
Product Purchase
|
|
|
|
Commitments
|
|
|
2011
|
|
$
|
26,700
|
|
2012
|
|
|
27,200
|
|
2013
|
|
|
27,700
|
|
|
|
|
|
|
|
|
$
|
81,600
|
|
|
|
|
|
|
Legal
Proceedings
The Company is a party to certain claims and litigation in the
ordinary course of business. The Company does not believe any of
these proceedings will result, individually or in the aggregate,
in a material adverse effect upon its financial condition or
future results of operations.
Related
Party Transactions
Pursuant to the terms of a management agreement, Berkshire
Partners LLC and Weston Presidio were paid annual management
fees of $833 and $417, respectively, for each of the years ended
December 31, 2010, 2009 and 2008. Management fees payable
to Berkshire Partners LLC and Weston Presidio totaled $139 and
$69, respectively, at December 31, 2010, and 2009 and are
included in accrued expenses on the consolidated balance sheet.
Although the indenture governing the 8.75% senior
subordinated notes will permit the annual payments under the
management agreement, such payments will be restricted during an
event of default under the notes and will be subordinated in
right of payment to all obligations due with respect to the
notes in the event of a bankruptcy or similar proceeding of
Amscan.
|
|
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.
F-29
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys industry segment data for the years ended
December 31, 2010, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
769,247
|
|
|
$
|
1,108,785
|
|
|
$
|
1,878,032
|
|
Royalties and franchise fees
|
|
|
|
|
|
|
19,417
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
769,247
|
|
|
|
1,128,202
|
|
|
|
1,897,449
|
|
Eliminations
|
|
|
(298,355
|
)
|
|
|
|
|
|
|
(298,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
470,892
|
|
|
$
|
1,128,202
|
|
|
$
|
1,599,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
85,636
|
|
|
$
|
41,800
|
|
|
$
|
127,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
40,850
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
82,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
18,979
|
|
|
$
|
30,439
|
|
|
$
|
49,418
|
|
Total assets
|
|
$
|
948,850
|
|
|
$
|
704,301
|
|
|
$
|
1,653,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
633,006
|
|
|
$
|
1,055,965
|
|
|
$
|
1,688,971
|
|
Royalties and franchise fees
|
|
|
|
|
|
|
19,494
|
|
|
|
19,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
633,006
|
|
|
|
1,075,459
|
|
|
|
1,708,465
|
|
Eliminations
|
|
|
(221,647
|
)
|
|
|
|
|
|
|
(221,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
411,359
|
|
|
$
|
1,075,459
|
|
|
$
|
1,486,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
65,007
|
|
|
$
|
76,866
|
|
|
$
|
141,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
41,481
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
100,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
14,652
|
|
|
$
|
29,730
|
|
|
$
|
44,382
|
|
Total assets
|
|
$
|
747,262
|
|
|
$
|
733,239
|
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
653,403
|
|
|
$
|
1,099,136
|
|
|
$
|
1,752,539
|
|
Royalties and franchise fees
|
|
|
|
|
|
|
22,020
|
|
|
|
22,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
653,403
|
|
|
|
1,121,156
|
|
|
|
1,774,559
|
|
Eliminations
|
|
|
(214,898
|
)
|
|
|
|
|
|
|
(214,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
438,505
|
|
|
$
|
1,121,156
|
|
|
$
|
1,559,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
58,290
|
|
|
$
|
55,628
|
|
|
$
|
113,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
50,915
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
63,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
14,926
|
|
|
$
|
32,352
|
|
|
$
|
47,278
|
|
Total assets
|
|
$
|
702,938
|
|
|
$
|
805,039
|
|
|
$
|
1,507,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Segments
The Companys export sales, other than those intercompany
sales reported below as sales between geographic areas, are not
material. Intercompany sales between geographic areas consist of
sales of finished goods for distribution in foreign markets. No
single foreign operation is significant to the Companys
consolidated operations. Intercompany sales between geographic
areas are made at cost plus a share of operating profit.
The Companys geographic area data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,469,533
|
|
|
$
|
110,144
|
|
|
$
|
|
|
|
$
|
1,579,677
|
|
Net sales between geographic areas
|
|
|
23,570
|
|
|
|
|
|
|
|
(23,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,493,103
|
|
|
|
110,144
|
|
|
|
(23,570
|
)
|
|
|
1,579,677
|
|
Royalties and franchise fees
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,512,520
|
|
|
$
|
110,144
|
|
|
$
|
(23,570
|
)
|
|
$
|
1,599,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
120,058
|
|
|
$
|
6,129
|
|
|
$
|
1,249
|
|
|
$
|
127,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,850
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
48,427
|
|
|
$
|
991
|
|
|
|
|
|
|
$
|
49,418
|
|
Total assets
|
|
$
|
1,645,154
|
|
|
$
|
108,646
|
|
|
$
|
(100,649
|
)
|
|
$
|
1,653,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,371,611
|
|
|
$
|
95,713
|
|
|
$
|
|
|
|
$
|
1,467,324
|
|
Net sales between geographic areas
|
|
|
24,247
|
|
|
|
|
|
|
|
(24,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,395,858
|
|
|
|
95,713
|
|
|
|
(24,247
|
)
|
|
|
1,467,324
|
|
Royalties and franchise fees
|
|
|
19,494
|
|
|
|
|
|
|
|
|
|
|
|
19,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,415,352
|
|
|
$
|
95,713
|
|
|
$
|
(24,247
|
)
|
|
$
|
1,486,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
132,115
|
|
|
$
|
8,686
|
|
|
$
|
1,072
|
|
|
$
|
141,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,481
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
43,496
|
|
|
$
|
886
|
|
|
|
|
|
|
$
|
44,382
|
|
Total assets
|
|
$
|
1,478,493
|
|
|
$
|
82,890
|
|
|
$
|
(80,882
|
)
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,454,145
|
|
|
$
|
83,496
|
|
|
$
|
|
|
|
$
|
1,537,641
|
|
Net sales between geographic areas
|
|
|
23,194
|
|
|
|
|
|
|
|
(23,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,477,339
|
|
|
|
83,496
|
|
|
|
(23,194
|
)
|
|
|
1,537,641
|
|
Royalties and franchise fees
|
|
|
22,020
|
|
|
|
|
|
|
|
|
|
|
|
22,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,499,359
|
|
|
$
|
83,496
|
|
|
$
|
(23,194
|
)
|
|
$
|
1,559,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
104,217
|
|
|
$
|
8,536
|
|
|
$
|
1,165
|
|
|
$
|
113,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,915
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
46,328
|
|
|
$
|
950
|
|
|
|
|
|
|
$
|
47,278
|
|
Total assets
|
|
$
|
1,508,310
|
|
|
$
|
49,319
|
|
|
$
|
(49,652
|
)
|
|
$
|
1,507,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 19
|
Quarterly
Results (Unaudited)
|
Despite a concentration of holidays in the fourth quarter of the
year, as a result of our expansive product lines, wholesale
customer base and increased promotional activities, the impact
of seasonality on the quarterly results of our wholesale
operations in recent years has been limited. Promotional
activities, including special dating terms, particularly with
respect to Halloween and Christmas products sold at wholesale
during the third quarter, and the introduction of our new
everyday products and designs during the fourth quarter
generally result in higher accounts receivables and inventory
balances. Our retail operations are subject to substantial
seasonal variations. Historically, our retail operations have
realized a significant portion of their net sales, net
F-32
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income and cash flow in the fourth quarter of the year,
principally due to the sales in October for the Halloween season
and, to a lesser extent, due to sales for end of year holidays.
The following table sets forth our historical revenues, gross
profit, income from operations and net income, by quarter, for
the years ended December 31, 2010, 2009, and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
304,379
|
|
|
$
|
352,705
|
|
|
$
|
358,772
|
|
|
$
|
563,821
|
|
Royalties and franchise fees
|
|
|
3,844
|
|
|
|
4,453
|
|
|
|
4,035
|
|
|
|
7,085
|
|
Gross profit
|
|
|
104,479
|
|
|
|
141,840
|
|
|
|
132,437
|
|
|
|
257,863
|
|
Income from operations
|
|
|
8,288
|
|
|
|
35,367
|
|
|
|
17,963
|
|
|
|
65,818
|
(a)
|
Net (loss) income attributable to Party City Holdings Inc.
|
|
|
(412
|
)
|
|
|
16,460
|
|
|
|
4,603
|
|
|
|
28,668
|
(a)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
309,046
|
|
|
$
|
337,536
|
|
|
$
|
336,944
|
|
|
$
|
483,798
|
|
Royalties and franchise fees
|
|
|
3,694
|
|
|
|
4,536
|
|
|
|
4,164
|
|
|
|
7,100
|
|
Gross profit
|
|
|
103,629
|
|
|
|
128,425
|
|
|
|
121,453
|
|
|
|
214,776
|
|
Income from operations
|
|
|
12,201
|
|
|
|
27,818
|
|
|
|
14,937
|
|
|
|
86,917
|
|
Net income attributable to Party City 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 Party City Holdings Inc.
|
|
|
(2,537
|
)
|
|
|
14,669
|
|
|
|
4,563
|
|
|
|
23,815
|
(a)
|
|
|
|
(a) |
|
During 2010 and 2008, the Company instituted programs to convert
its FCPO stores and its company-owned and franchised Party
America stores to Party City stores and recorded fourth quarter
charges of $27,400, and $17,376, respectively, for the
impairment of the Factory Card & Party Outlet and
Party America trade names. |
|
|
Note 20
|
Fair
Value Measurements
|
The provisions of Accounting Standards Codification or ASC,
Subtopic 820 defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants at the measurement date. ASC 820 established a
three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. This hierarchy requires entities to
maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure
fair value are as follows:
Level 1 Quoted prices in active markets for
identical assets or liabilities.
F-33
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 2 Observable inputs other than quoted
prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3 Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The following table shows assets and liabilities as of
December 31, 2010 that are measured at fair value on a
recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total as of
|
|
|
|
|
|
|
Identical Assets or
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
|
|
|
Liabilities (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
$
|
241
|
|
|
|
|
|
|
$
|
241
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
(2,288
|
)
|
|
|
|
|
|
|
(2,288
|
)
|
|
|
|
|
The following table shows assets and liabilities as of
December 31, 2009 that are measured at fair value on a
recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total as of
|
|
|
|
|
|
|
Identical Assets or
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
|
|
|
Liabilities (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2009
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
$
|
(6,582
|
)
|
|
|
|
|
|
$
|
(6,582
|
)
|
|
|
|
|
In addition to assets and liabilities that are recorded at fair
value on a recurring basis, the Company is required to record
other assets and liabilities at fair value on a nonrecurring
basis, generally as a result of impairment charges.
The carrying amounts for cash and cash equivalents, accounts
receivables, prepaid expenses and other current assets, accounts
payable, accrued expenses and other current liabilities
approximate fair value at December 31, 2010 and
December 31, 2009 because of the short-term maturity of
those instruments or their variable rates of interest.
The carrying amount and fair value (based on market prices) of
the Companys term loans and $175,000 Senior Subordinated
Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Term Loans
|
|
$
|
666,644
|
|
|
$
|
674,060
|
|
|
$
|
364,688
|
|
|
$
|
331,866
|
|
$175,000 Senior Subordinated Notes
|
|
|
175,000
|
|
|
|
176,750
|
|
|
|
175,000
|
|
|
|
166,250
|
|
The carrying amounts for other long-term debt approximate fair
value at December 31, 2010 and 2009, based on the
discounted future cash flow of each instrument at rates
currently offered for similar debt instruments of comparable
maturity.
F-34
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 21
|
Derivative
Financial Instruments
|
Interest
Rate Risk Management
As part of the Companys risk management strategy, the
Company periodically uses interest rate swap agreements to hedge
the variability of cash flows on floating rate debt obligations
(see Notes 7 and 8). Accordingly, interest rate swap
agreements are reflected in the consolidated balance sheets at
fair value and the related gains and losses on these contracts
are deferred in stockholders equity and recognized in
interest expense over the same period in which the related
interest payments being hedged are recognized in income. The
fair value of an interest rate swap agreement is the estimated
amount that the counterparty would receive or pay to terminate
the swap agreement at the reporting date, taking into account
current interest rates and the current creditworthiness of the
swap counterparty.
To effectively fix the interest rate on a portion of its term
loans (see Note 8), the Company entered into an interest
rate swap agreement with a financial institution in 2006, for an
aggregate notional amount of $57,000, which expired in February
2009.
In 2008, the Company entered into a second interest rate swap
agreement with a financial institution for an initial aggregate
notional amount of $118,505, which increased to a maximum of
$163,441 during its term and expired in March 2011.
The swap agreements had unrealized net losses of $1,414 and
$3,977 at December 31, 2010 and 2009, respectively, which
were included in accumulated other comprehensive loss (see
Note 22). No components of these agreements are excluded in
the measurement of hedge effectiveness. As these hedges are 100%
effective, there is no current impact on earnings due to hedge
ineffectiveness. The Company anticipates that substantially all
gains and losses in accumulated other comprehensive loss related
to these swap agreements will be reclassified into earnings by
December 2011. The fair value of interest rate contracts at
December 31, 2010 and 2009 of $(2,244) and $(6,313) are
reported in current liabilities in the consolidated balance
sheet.
Foreign
Exchange Risk Management
A portion of the Companys cash flows is derived from
transactions denominated in foreign currencies. The United
States dollar value of transactions denominated in foreign
currencies fluctuates as the United States dollar strengthens or
weakens relative to these foreign currencies. In order to reduce
the uncertainty of foreign exchange rate movements on
transactions denominated in foreign currencies, including the
British Pound Sterling and the Euro, the Company enters into
foreign exchange contracts with major international financial
institutions. These forward contracts, which typically mature
within one year, are designed to hedge anticipated foreign
currency transactions, primarily inter-company inventory
purchases and trade receivables. No components of the contracts
are excluded in the measurement of hedge effectiveness. The
critical terms of the foreign exchange contracts are the same as
the underlying forecasted transactions; therefore, changes in
the fair value of foreign exchange contracts should be highly
effective in offsetting changes in the expected cash flows from
the forecasted transactions.
At December 31, 2010 and 2009, the Company had foreign
currency exchange contracts with notional amounts of $13,468,
and $19,200, respectively. The foreign currency exchange
contracts are reflected in the consolidated balance sheets at
fair value. The fair value of the foreign currency exchange
contracts is the estimated amount that the counterparties would
receive or pay to terminate the foreign currency exchange
contracts at the reporting date, taking into account current
foreign exchange spot rates. The fair value adjustment at
December 31, 2010 and 2009 resulted in an unrealized net
gain (loss) of $124, and $(169), respectively, which are
included in accumulated other comprehensive loss (see
Note 22). No components of these agreements are excluded in
the measurement of hedge effectiveness. As these hedges are 100%
effective, there is no current impact on earnings due to hedge
ineffectiveness. The Company anticipates that substantially all
gains and losses in accumulated other comprehensive loss related
to these foreign exchange
F-35
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contracts will be reclassified into earnings by December 2011.
The fair value of foreign exchange contracts for the years ended
December 31, 2010 and 2009 of $197 and $(269) are reported
in accrued expenses and other current assets in the consolidated
balance sheets, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amounts
|
|
|
Derivative Assets
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
|
|
|
|
|
|
|
Line
|
|
Value
|
|
|
Line
|
|
|
Value
|
|
|
Line
|
|
Value
|
|
|
Line
|
|
Value
|
|
Derivative
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Instrument
|
|
2010
|
|
|
2009
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
2010
|
|
|
2009
|
|
|
Interest Rate Hedge
|
|
$
|
135,374
|
|
|
$
|
163,441
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
(b) AE
|
|
$
|
(2,244
|
)
|
|
(b) AE
|
|
$
|
(6,313
|
)
|
Foreign Exchange Contracts
|
|
|
13,468
|
|
|
|
19,200
|
|
|
(a) PP
|
|
|
241
|
|
|
|
|
|
|
$
|
|
|
|
(a) AE
|
|
|
(44
|
)
|
|
(a) AE
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hedges
|
|
$
|
148,842
|
|
|
$
|
182,641
|
|
|
|
|
$
|
241
|
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
(2,288
|
)
|
|
|
|
$
|
(6,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
PP = Prepaid expenses and other current assets |
|
(b) |
|
AE = Accrued expenses |
|
|
Note 22
|
Comprehensive
Income
|
Comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
49,319
|
|
|
$
|
62,553
|
|
|
$
|
40,510
|
|
Net change in cumulative translation adjustment
|
|
|
(376
|
)
|
|
|
4,007
|
|
|
|
(11,338
|
)
|
Change in fair value of interest rate swap contracts, net of
income taxes of $1,505, $773, and $(2,851)
|
|
|
2,563
|
|
|
|
1,317
|
|
|
|
(4,855
|
)
|
Change in fair value of foreign exchange contracts, net of
income tax (benefit) expense of $172, $(1,097), and $1,169
|
|
|
293
|
|
|
|
(1,867
|
)
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Party City Holdings
Inc.
|
|
$
|
51,799
|
|
|
$
|
66,010
|
|
|
$
|
26,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cumulative translation adjustment
|
|
$
|
(4,625
|
)
|
|
$
|
(4,249
|
)
|
Interest rate swap contracts, net of income tax benefit of
$(830) and $(2,336)
|
|
|
(1,414
|
)
|
|
|
(3,977
|
)
|
Foreign exchange contracts, net of income tax expense (benefit)
of $73 and $(100)
|
|
|
124
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
(5,915
|
)
|
|
$
|
(8,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 23
|
Subsequent
Events
|
On January 30, 2011, the Company acquired the common stock
of Riethmuller GmbH (Riethmuller) for $46,810, in a
transaction accounted for as a purchase business combination.
Riethmuller is a German distributor of party goods and carnival
items with latex balloon manufacturing operations in Malaysia
and the ability to manufacture certain party goods in Poland.
The acquisition expands the Companys vertical business
model into the latex balloon category and gives the Company an
additional significant presence in Germany, Poland and Malaysia.
The Company is still in the process of accumulating information
to complete the determination of the fair value of certain
acquired assets.
F-36
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 24
|
Condensed
Consolidating Financial Information
|
Borrowings under the New Term Loan Credit Agreement, the New ABL
Credit Agreement and the Companys $175,000
8.75% senior subordinated notes are guaranteed jointly and
severally, fully and unconditionally, by the following domestic
subsidiaries of the Company (the Guarantors):
|
|
|
|
|
Amscan Inc.
|
|
|
|
Am-Source, LLC
|
|
|
|
Anagram Eden Prairie Property Holdings LLC
|
|
|
|
Anagram International, Inc.
|
|
|
|
Anagram International Holdings, Inc.
|
|
|
|
Anagram International, LLC
|
|
|
|
Gags & Games, Inc.
|
|
|
|
JCS Packaging Inc.
|
|
|
|
M&D Industries, Inc.
|
|
|
|
Party City Corporation
|
|
|
|
PA Acquisition Corporation
|
|
|
|
SSY Realty Corp.
|
|
|
|
Party City Franchise Group Holdings, LLC (PCFG)
|
|
|
|
Trisar, Inc.
|
Non-guarantor subsidiaries (Non-guarantors) include
the following:
|
|
|
|
|
Amscan Distributors (Canada) Ltd.
|
|
|
|
Amscan Holdings Limited
|
|
|
|
Amscan (Asia-Pacific) Pty. Ltd.
|
|
|
|
Amscan de Mexico, S.A. de C.V.
|
|
|
|
Anagram International (Japan) Co., Ltd.
|
|
|
|
Christys Asia, Ltd.
|
|
|
|
Christys By Design, Ltd.
|
|
|
|
Christys Dress Up, Ltd.
|
|
|
|
Christys Garments & Accessories Ltd.
|
|
|
|
JCS Hong Kong Ltd.
|
The following unaudited information presents condensed
consolidating balance sheets at December 31, 2010 and
December 31, 2009, Condensed Consolidating Statements of
Operations for the years ended December 31, 2010, 2009 and
2008, and the related Condensed Consolidating Statements of cash
flows for the years ended December 31, 2010, 2009 and 2008,
for the Combined Guarantors and the Combined Non-Guarantors,
together with the elimination entries necessary to consolidate
the entities comprising the combined companies.
Certain amounts in the condensed consolidating balance sheet at
December 31, 2009 have been reclassified between the
combined Non-Guarantors and the Eliminations. These
reclassifications have no effect on the balance sheet amounts
for the Combined Guarantors or the consolidated amounts.
As a result of the repayment of PCFGs debt during the
third quarter of 2010, PCFG became a Guarantor and is included
under AHI and Combined Guarantors in the Consolidating Financial
Statements for the year ended December 31, 2010. For the
prior periods presented PCFG was reflected under Combined
Non-Guarantors.
F-37
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
BALANCE SHEET
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,198
|
|
|
$
|
6,256
|
|
|
$
|
|
|
|
$
|
20,454
|
|
Accounts receivable , net
|
|
|
76,699
|
|
|
|
30,632
|
|
|
|
|
|
|
|
107,331
|
|
Inventories, net
|
|
|
405,452
|
|
|
|
19,883
|
|
|
|
(1,018
|
)
|
|
|
424,317
|
|
Prepaid expenses and other current assets
|
|
|
61,211
|
|
|
|
4,461
|
|
|
|
|
|
|
|
65,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
557,560
|
|
|
|
61,232
|
|
|
|
(1,018
|
)
|
|
|
617,774
|
|
Property, plant and equipment, net
|
|
|
187,574
|
|
|
|
3,155
|
|
|
|
|
|
|
|
190,729
|
|
Goodwill
|
|
|
600,014
|
|
|
|
30,478
|
|
|
|
|
|
|
|
630,492
|
|
Trade names
|
|
|
129,954
|
|
|
|
|
|
|
|
|
|
|
|
129,954
|
|
Other intangible assets, net
|
|
|
55,362
|
|
|
|
|
|
|
|
|
|
|
|
55,362
|
|
Investment in and advances to unconsolidated subsidiaries
|
|
|
64,485
|
|
|
|
|
|
|
|
(64,485
|
)
|
|
|
|
|
Due from affiliates
|
|
|
22,148
|
|
|
|
12,998
|
|
|
|
(35,146
|
)
|
|
|
|
|
Other assets, net
|
|
|
28,057
|
|
|
|
783
|
|
|
|
|
|
|
|
28,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,645,154
|
|
|
$
|
108,646
|
|
|
$
|
(100,649
|
)
|
|
|
1,653,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE COMMON SECURITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and notes payable
|
|
|
150,098
|
|
|
|
|
|
|
|
|
|
|
|
150,098
|
|
Accounts payable
|
|
|
97,510
|
|
|
|
10,662
|
|
|
|
|
|
|
|
108,172
|
|
Accrued expenses
|
|
|
102,749
|
|
|
|
8,305
|
|
|
|
|
|
|
|
111,054
|
|
Income taxes payable
|
|
|
35,706
|
|
|
|
(1,355
|
)
|
|
|
(26
|
)
|
|
|
34,325
|
|
Due to affiliates
|
|
|
11,593
|
|
|
|
23,553
|
|
|
|
(35,146
|
)
|
|
|
|
|
Redeemable warrants
|
|
|
15,086
|
|
|
|
|
|
|
|
|
|
|
|
15,086
|
|
Current portion of long-term obligations
|
|
|
9,005
|
|
|
|
41
|
|
|
|
|
|
|
|
9,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
421,747
|
|
|
|
41,206
|
|
|
|
(35,172
|
)
|
|
|
427,781
|
|
Long-term obligations, excluding current portion
|
|
|
841,023
|
|
|
|
89
|
|
|
|
|
|
|
|
841,112
|
|
Deferred income tax liabilities
|
|
|
94,427
|
|
|
|
554
|
|
|
|
|
|
|
|
94,981
|
|
Other
|
|
|
14,766
|
|
|
|
|
|
|
|
|
|
|
|
14,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,371,963
|
|
|
|
41,849
|
|
|
|
(35,172
|
)
|
|
|
1,378,640
|
|
Redeemable common securities
|
|
|
18,089
|
|
|
|
|
|
|
|
|
|
|
|
18,089
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
336
|
|
|
|
(336
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
287,583
|
|
|
|
31,025
|
|
|
|
(31,025
|
)
|
|
|
287,583
|
|
Retained (deficit)earnings
|
|
|
(26,566
|
)
|
|
|
37,535
|
|
|
|
(38,527
|
)
|
|
|
(27,558
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(5,915
|
)
|
|
|
(4,411
|
)
|
|
|
4,411
|
|
|
|
(5,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Party City Holdings Inc. stockholders equity
|
|
|
255,102
|
|
|
|
64,485
|
|
|
|
(65,477
|
)
|
|
|
254,110
|
|
Noncontrolling interests
|
|
|
|
|
|
|
2,312
|
|
|
|
|
|
|
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
255,102
|
|
|
|
66,797
|
|
|
|
(65,477
|
)
|
|
|
256,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable common securities and
stockholders equity
|
|
$
|
1,645,154
|
|
|
$
|
108,646
|
|
|
$
|
(100,649
|
)
|
|
$
|
1,653,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
BALANCE SHEET
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
8,240
|
|
|
|
7,180
|
|
|
|
|
|
|
|
15,420
|
|
Accounts receivable, net of allowances
|
|
|
60,655
|
|
|
|
22,126
|
|
|
|
|
|
|
|
82,781
|
|
Inventories, net of allowances
|
|
|
295,004
|
|
|
|
41,893
|
|
|
|
(947
|
)
|
|
|
335,950
|
|
Prepaid expenses and other current assets
|
|
|
52,706
|
|
|
|
6,013
|
|
|
|
|
|
|
|
58,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
416,605
|
|
|
|
77,212
|
|
|
|
(947
|
)
|
|
|
492,870
|
|
Property, plant and equipment, net
|
|
|
163,999
|
|
|
|
10,995
|
|
|
|
|
|
|
|
174,994
|
|
Goodwill
|
|
|
521,222
|
|
|
|
38,039
|
|
|
|
|
|
|
|
559,261
|
|
Trade names
|
|
|
157,283
|
|
|
|
|
|
|
|
|
|
|
|
157,283
|
|
Other intangible assets, net
|
|
|
29,948
|
|
|
|
24,721
|
|
|
|
|
|
|
|
54,669
|
|
Other assets, net
|
|
|
160,401
|
|
|
|
7,033
|
|
|
|
(126,010
|
)
|
|
|
41,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,449,458
|
|
|
$
|
158,000
|
|
|
$
|
(126,957
|
)
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE COMMON SECURITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and notes payable
|
|
$
|
76,990
|
|
|
$
|
645
|
|
|
$
|
|
|
|
$
|
77,635
|
|
Accounts payable
|
|
|
67,235
|
|
|
|
9,666
|
|
|
|
|
|
|
|
76,901
|
|
Accrued expenses
|
|
|
83,430
|
|
|
|
10,250
|
|
|
|
|
|
|
|
93,680
|
|
Income taxes payable
|
|
|
32,969
|
|
|
|
(817
|
)
|
|
|
(91
|
)
|
|
|
32,061
|
|
Redeemable warrants
|
|
|
15,444
|
|
|
|
|
|
|
|
|
|
|
|
15,444
|
|
Current portion of long-term obligations
|
|
|
28,406
|
|
|
|
6,500
|
|
|
|
|
|
|
|
34,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
304,474
|
|
|
|
26,244
|
|
|
|
(91
|
)
|
|
|
330,627
|
|
Long-term obligations, excluding current portion
|
|
|
522,392
|
|
|
|
16,500
|
|
|
|
|
|
|
|
538,892
|
|
Deferred income tax liabilities
|
|
|
101,000
|
|
|
|
570
|
|
|
|
|
|
|
|
101,570
|
|
Other
|
|
|
20,288
|
|
|
|
71,569
|
|
|
|
(79,956
|
)
|
|
|
11,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
948,154
|
|
|
|
114,883
|
|
|
|
(80,047
|
)
|
|
|
982,990
|
|
Redeemable common securities
|
|
|
18,389
|
|
|
|
|
|
|
|
|
|
|
|
18,389
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
339
|
|
|
|
(339
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
335,731
|
|
|
|
46,167
|
|
|
|
(46,075
|
)
|
|
|
335,823
|
|
Retained earnings
|
|
|
155,579
|
|
|
|
(5,476
|
)
|
|
|
(546
|
)
|
|
|
149,557
|
|
Accumulated other comprehensive loss
|
|
|
(8,395
|
)
|
|
|
(50
|
)
|
|
|
50
|
|
|
|
(8,395
|
)
|
Party City Holdings Inc. stockholders equity
|
|
|
482,915
|
|
|
|
40,980
|
|
|
|
(46,910
|
)
|
|
|
476,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
|
|
|
|
2,137
|
|
|
|
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
482,915
|
|
|
|
43,117
|
|
|
|
(46,910
|
)
|
|
|
479,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable common securities and
stockholders equity
|
|
$
|
1,449,458
|
|
|
$
|
158,000
|
|
|
$
|
(126,957
|
)
|
|
$
|
1,480,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF INCOME
For The Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,493,103
|
|
|
$
|
110,144
|
|
|
$
|
(23,570
|
)
|
|
$
|
1,579,677
|
|
Royalties and franchise fees
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
19,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,512,520
|
|
|
|
110,144
|
|
|
|
(23,570
|
)
|
|
|
1,599,094
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
884,957
|
|
|
|
81,600
|
|
|
|
(23,499
|
)
|
|
|
943,058
|
|
Selling expenses
|
|
|
31,379
|
|
|
|
11,346
|
|
|
|
|
|
|
|
42,725
|
|
Retail operating expenses
|
|
|
296,891
|
|
|
|
|
|
|
|
|
|
|
|
296,891
|
|
Franchise expenses
|
|
|
12,269
|
|
|
|
|
|
|
|
|
|
|
|
12,269
|
|
General and administrative expenses
|
|
|
124,542
|
|
|
|
11,170
|
|
|
|
(1,320
|
)
|
|
|
134,392
|
|
Art and development costs
|
|
|
15,024
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
14,923
|
|
Impairment of trade name
|
|
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,392,462
|
|
|
|
104,015
|
|
|
|
(24,819
|
)
|
|
|
1,471,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
120,058
|
|
|
|
6,129
|
|
|
|
1,249
|
|
|
|
127,436
|
|
Interest expense, net
|
|
|
40,791
|
|
|
|
59
|
|
|
|
|
|
|
|
40,850
|
|
Other (income) expense, net
|
|
|
(1,312
|
)
|
|
|
1,159
|
|
|
|
4,361
|
|
|
|
4,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80,579
|
|
|
|
4,911
|
|
|
|
(3,112
|
)
|
|
|
82,378
|
|
Income tax expense
|
|
|
31,215
|
|
|
|
1,756
|
|
|
|
(26
|
)
|
|
|
32,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,364
|
|
|
$
|
3,155
|
|
|
$
|
(3,086
|
)
|
|
$
|
49,433
|
|
Less net income attributable to noncontrolling interests
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
49,364
|
|
|
$
|
3,041
|
|
|
$
|
(3,086
|
)
|
|
$
|
49,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF INCOME
For The Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Party City Holdings Inc.
|
|
$
|
64,255
|
|
|
$
|
3,575
|
|
|
$
|
(5,277
|
)
|
|
$
|
62,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF INCOME
For Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Party City Holdings Inc.
|
|
$
|
44,439
|
|
|
$
|
2,109
|
|
|
$
|
(6,038
|
)
|
|
$
|
40,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF CASH FLOWS
For The Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
49,364
|
|
|
|
3,155
|
|
|
|
(3,086
|
)
|
|
|
49,433
|
|
Less: net income attributable to noncontrolling interest
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
49,364
|
|
|
$
|
3,041
|
|
|
$
|
(3,086
|
)
|
|
$
|
49,319
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
48,427
|
|
|
|
991
|
|
|
|
|
|
|
|
49,418
|
|
Amortization of deferred financing costs
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
|
2,475
|
|
Provision for doubtful accounts
|
|
|
695
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
637
|
|
Deferred income tax expense
|
|
|
(8,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,942
|
)
|
Deferred rent
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Undistributed gain in unconsolidated joint venture
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
Impairment of trade name
|
|
|
27,400
|
|
|
|
|
|
|
|
|
|
|
|
27,400
|
|
Impairment of fixed assets
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
597
|
|
Loss (gain) on disposal of equipment
|
|
|
206
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
191
|
|
Equity based compensation
|
|
|
6,018
|
|
|
|
|
|
|
|
|
|
|
|
6,018
|
|
Write-off of deferred financing costs
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
2,448
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(14,428
|
)
|
|
|
7,921
|
|
|
|
|
|
|
|
(6,507
|
)
|
Increase in inventories
|
|
|
(84,538
|
)
|
|
|
(1,300
|
)
|
|
|
71
|
|
|
|
(85,767
|
)
|
Increase in prepaid expenses and other current assets
|
|
|
(21,711
|
)
|
|
|
(1,282
|
)
|
|
|
|
|
|
|
(22,993
|
)
|
Increase (decrease) in accounts payable, accrued expenses and
income taxes payable
|
|
|
44,254
|
|
|
|
(4,217
|
)
|
|
|
3,015
|
|
|
|
43,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
56,087
|
|
|
|
5,081
|
|
|
|
|
|
|
|
61,168
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions
|
|
|
(53,350
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(53,348
|
)
|
Capital expenditures
|
|
|
(48,558
|
)
|
|
|
(1,065
|
)
|
|
|
|
|
|
|
(49,623
|
)
|
Proceeds from disposal of property and equipment
|
|
|
159
|
|
|
|
46
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(101,749
|
)
|
|
|
(1,017
|
)
|
|
|
|
|
|
|
(102,766
|
)
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of loans, notes payable and long-term obligations
|
|
|
(393,259
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
(393,289
|
)
|
Proceeds from loans, notes payable and long-term obligations
|
|
|
742,112
|
|
|
|
41
|
|
|
|
|
|
|
|
742,153
|
|
Dividend distribution
|
|
|
(301,829
|
)
|
|
|
|
|
|
|
|
|
|
|
(301,829
|
)
|
Payments related to redeemable common stock and rollover options
|
|
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
|
(572
|
)
|
Proceeds from issuance of common stock and exercise of options,
net of retirements
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
46,504
|
|
|
|
11
|
|
|
|
|
|
|
|
46,515
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(243
|
)
|
|
|
360
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
599
|
|
|
|
4,435
|
|
|
|
|
|
|
|
5,034
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,599
|
|
|
|
1,821
|
|
|
|
|
|
|
|
15,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,198
|
|
|
$
|
6,256
|
|
|
$
|
|
|
|
$
|
20,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF CASH FLOWS
For The Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64,255
|
|
|
|
3,773
|
|
|
$
|
(5,277
|
)
|
|
$
|
62,751
|
|
Less: net income attributable to noncontrolling interest
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
64,255
|
|
|
$
|
3,575
|
|
|
$
|
(5,277
|
)
|
|
$
|
62,553
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
39,885
|
|
|
|
4,497
|
|
|
|
|
|
|
|
44,382
|
|
Amortization of deferred financing costs
|
|
|
1,888
|
|
|
|
275
|
|
|
|
|
|
|
|
2,163
|
|
Provision for doubtful accounts
|
|
|
2,444
|
|
|
|
1,538
|
|
|
|
|
|
|
|
3,982
|
|
Deferred income tax expense
|
|
|
8,803
|
|
|
|
|
|
|
|
|
|
|
|
8,803
|
|
Deferred rent
|
|
|
977
|
|
|
|
786
|
|
|
|
|
|
|
|
1,763
|
|
Undistributed gain in unconsolidated joint venture
|
|
|
(632
|
)
|
|
|
|
|
|
|
|
|
|
|
(632
|
)
|
Loss on disposal of equipment
|
|
|
61
|
|
|
|
217
|
|
|
|
|
|
|
|
278
|
|
Equity based compensation
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
876
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
11,498
|
|
|
|
(5,161
|
)
|
|
|
|
|
|
|
6,337
|
|
Decrease (increase) in inventories
|
|
|
35,824
|
|
|
|
(5,139
|
)
|
|
|
248
|
|
|
|
30,933
|
|
Increase in prepaid expenses and other assets
|
|
|
(20,408
|
)
|
|
|
(765
|
)
|
|
|
|
|
|
|
(21,173
|
)
|
(Decrease) increase in accounts payable, accrued expenses and
income taxes payable
|
|
|
(30,528
|
)
|
|
|
9,176
|
|
|
|
5,029
|
|
|
|
(16,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
114,943
|
|
|
|
8,999
|
|
|
|
|
|
|
|
123,942
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions
|
|
|
(726
|
)
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
(3,378
|
)
|
Cash in escrow in connection with acquisitions
|
|
|
(24,881
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,881
|
)
|
Capital expenditures
|
|
|
(23,860
|
)
|
|
|
(2,335
|
)
|
|
|
|
|
|
|
(26,195
|
)
|
Proceeds from disposal of property and equipment
|
|
|
77
|
|
|
|
19
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(49,390
|
)
|
|
|
(4,968
|
)
|
|
|
|
|
|
|
(54,358
|
)
|
Cash flows used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of loans, notes payable and long-term obligations
|
|
|
(66,392
|
)
|
|
|
(3,855
|
)
|
|
|
|
|
|
|
(70,247
|
)
|
Proceeds from issuance of common stock and exercise of options,
net of retirements
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(66,302
|
)
|
|
|
(3,855
|
)
|
|
|
|
|
|
|
(70,157
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
488
|
|
|
|
2,447
|
|
|
|
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(261
|
)
|
|
|
2,623
|
|
|
|
|
|
|
|
2,362
|
|
Cash and cash equivalents at beginning of period
|
|
|
8,501
|
|
|
|
4,557
|
|
|
|
|
|
|
|
13,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
8,240
|
|
|
$
|
7,180
|
|
|
$
|
|
|
|
$
|
15,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
PARTY
CITY HOLDINGS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONSOLIDATING
STATEMENT OF CASH FLOWS
For Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
44,439
|
|
|
$
|
1,232
|
|
|
$
|
(6,038
|
)
|
|
$
|
39,633
|
|
Less: net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
(877
|
)
|
|
|
|
|
|
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Party City Holdings Inc.
|
|
$
|
44,439
|
|
|
$
|
2,109
|
|
|
$
|
(6,038
|
)
|
|
$
|
40,510
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
42,406
|
|
|
|
4,872
|
|
|
|
|
|
|
|
47,278
|
|
Amortization of deferred financing costs
|
|
|
1,956
|
|
|
|
265
|
|
|
|
|
|
|
|
2,221
|
|
Provision for doubtful accounts
|
|
|
945
|
|
|
|
147
|
|
|
|
|
|
|
|
1,092
|
|
Deferred income tax benefit
|
|
|
(7,885
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,885
|
)
|
Deferred rent
|
|
|
1,202
|
|
|
|
|
|
|
|
|
|
|
|
1,202
|
|
Undistributed gain in unconsolidated joint venture
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
|
(538
|
)
|
Impairment of trade name
|
|
|
17,376
|
|
|
|
|
|
|
|
|
|
|
|
17,376
|
|
(Gain) loss on disposal of equipment
|
|
|
(1,198
|
)
|
|
|
3
|
|
|
|
|
|
|
|
(1,195
|
)
|
Equity based compensation
|
|
|
4,311
|
|
|
|
46
|
|
|
|
|
|
|
|
4,357
|
|
Tax benefit on exercised options
|
|
|
(1,823
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,823
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable
|
|
|
6,526
|
|
|
|
1,711
|
|
|
|
|
|
|
|
8,237
|
|
Increase in inventories
|
|
|
(51,358
|
)
|
|
|
(1,144
|
)
|
|
|
155
|
|
|
|
(52,347
|
)
|
Decrease in prepaid expenses and other current assets
|
|
|
29,595
|
|
|
|
1,645
|
|
|
|
|
|
|
|
31,240
|
|
(Decrease) increase in accounts payable, accrued expenses and
income taxes payable
|
|
|
(22,075
|
)
|
|
|
6,396
|
|
|
|
5,883
|
|
|
|
(9,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
63,879
|
|
|
|
16,050
|
|
|
|
|
|
|
|
79,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with acquisitions
|
|
|
(1,143
|
)
|
|
|
(473
|
)
|
|
|
|
|
|
|
(1,616
|
)
|
Capital expenditures
|
|
|
(44,457
|
)
|
|
|
(8,544
|
)
|
|
|
|
|
|
|
(53,001
|
)
|
Proceeds from disposal of property and equipment
|
|
|
3,390
|
|
|
|
28
|
|
|
|
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(42,210
|
)
|
|
|
(8,989
|
)
|
|
|
|
|
|
|
(51,199
|
)
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of loans, notes payable and long-term obligations
|
|
|
(24,250
|
)
|
|
|
(2,592
|
)
|
|
|
|
|
|
|
(26,842
|
)
|
Tax benefit on exercised options
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Sale of additional interest to minority shareholder
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
Purchase and retirement of redeemable common stock
|
|
|
(514
|
)
|
|
|
|
|
|
|
|
|
|
|
(514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(20,441
|
)
|
|
|
(2,592
|
)
|
|
|
|
|
|
|
(23,033
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,075
|
)
|
|
|
(8,838
|
)
|
|
|
|
|
|
|
(9,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
153
|
|
|
|
(4,369
|
)
|
|
|
|
|
|
|
(4,216
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
8,391
|
|
|
|
8,883
|
|
|
|
|
|
|
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
8,544
|
|
|
$
|
4,514
|
|
|
$
|
|
|
|
$
|
13,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
SCHEDULE II
PARTY
CITY HOLDINGS INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Write-Offs
|
|
|
Additions
|
|
|
Balance
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
$
|
2,637
|
|
|
$
|
1,546
|
|
|
$
|
1,092
|
|
|
$
|
2,183
|
|
For the year ended December 31, 2009
|
|
|
2,183
|
|
|
|
3,168
|
|
|
|
3,982
|
|
|
|
2,997
|
|
For the year ended December 31, 2010
|
|
|
2,997
|
|
|
|
920
|
|
|
|
637
|
|
|
|
2,714
|
|
Inventory Reserves::
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
10,416
|
|
|
|
5,128
|
|
|
|
3,030
|
|
|
|
8,318
|
|
For the year ended December 31, 2009
|
|
|
8,318
|
|
|
|
2,755
|
|
|
|
2,989
|
|
|
|
8,552
|
|
For the year ended December 31, 2010
|
|
|
8,552
|
|
|
|
2,734
|
|
|
|
4,687
|
|
|
|
10,505
|
|
F-46
Party City Holdings
Inc.
Shares
Common Stock
Goldman, Sachs &
Co.
BofA Merrill Lynch
Barclays Capital
Deutsche Bank
Securities
Credit Suisse
Morgan Stanley
Wells Fargo
Securities
Baird
William Blair &
Company
RBC Capital Markets
Stifel Nicolaus
Weisel
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table indicates the expenses to be incurred in
connection with the offering described in this registration
statement, other than underwriting discounts and commissions,
all of which will be paid by the registrant. All amounts are
estimated except the SEC registration fee and FINRA fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
40,635
|
|
FINRA filing fee
|
|
|
35,500
|
|
Stock exchange listing fee
|
|
|
*
|
|
Accountants fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Transfer Agents fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total Expenses
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be filed by amendment |
|
|
ITEM 14.
|
Indemnification
of Directors and Officers.
|
Section 102(b)(7) of the DGCL enables a corporation in its
original certificates of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for
violations of the directors fiduciary duty, except
(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for
liability of directors for unlawful payment of dividends or
unlawful stock purchase or redemptions pursuant to
Section 174 of the DGCL or (iv) for any transaction
from which a director derived an improper personal benefit. Our
certificate of incorporation includes a provision that
eliminates the personal liability of directors for monetary
damages for actions taken as a director to the fullest extent
authorized by the DGCL.
Section 145(a) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a director
or officer of another entity, against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such
persons conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that such person did
not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that such
persons conduct was lawful.
Section 145(b) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that
the person is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a
director or officer of another entity, against expenses
(including attorneys fees) actually and reasonably
incurred by such person in connection with the defense or
settlement of such action or suit if the person acted in good
faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent
that
II-1
the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Our certificate of incorporation generally provides that we will
indemnify our directors and officers to the fullest extent
permitted by law. Our certificate of incorporation also provides
that the indemnification and advancement of expenses provided
by, or granted pursuant to the certificate of incorporation are
not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or otherwise.
Section 145(f) of the DGCL further provides that a right to
indemnification or to advancement of expenses arising under a
provision of the certificate of incorporation shall not be
eliminated or impaired by an amendment to such provision after
the occurrence of the act or omission which is the subject of
the civil, criminal, administrative or investigation action,
suit or proceeding for which indemnification or advancement of
expenses is sought.
We currently have indemnification agreements in place with our
directors. In connection with this offering we will enter into
new indemnification agreements with our directors and executive
officers. Such agreements generally provide for indemnification
by reason of being our director or officer, as the case may be.
These agreements are in addition to the indemnification provided
by our amended and restated charter and bylaws.
We also will obtain officers and directors liability
insurance which insures against liabilities that officers and
directors of the registrant may, in such capacities, incur.
Section 145(g) of the DGCL provides that a corporation
shall have power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the
corporation, or is or was serving at the request of the
corporation as a director or officer of another entity, against
any liability asserted against such person and incurred by such
person in any such capacity, or arising out of such
persons status as such, whether or not the corporation
would have the power to indemnify such person against such
liability under that section.
Pursuant to an agreement to be entered into with certain of the
selling stockholders, the company will agree to indemnify such
stockholders from certain liabilities incurred in connection
with this registration statement.
The underwriting agreement we will enter into in connection with
the offering of common stock described in this registration
statement provides for indemnification by the underwriters of
the registrant and its executive officers and directors, by the
registrant of the underwriters and by the selling stockholders
of the underwriters, for certain liabilities, including
liabilities arising under the Securities Act.
Also see Item 17. Undertakings.
|
|
ITEM 15.
|
Recent
Sales of Unregistered Securities.
|
The following sets forth information regarding all unregistered
securities sold during the last three fiscal years:
From January 1, 2008 to the present, the registrant has
issued aggregate of 640.28 shares of Class A common
stock upon the exercise of employee stock options for cash.
These shares of Class A common stock were issued to
employees or former employees of the registrant who had received
the stock options for compensatory purposes. Issuances of shares
of Class A common stock upon the exercise of options under
the 2004 Equity Incentive Plan were made in reliance on the
registration exemption provided by Rule 701 promulgated
under Securities Act.
In early 2011, the registrant issued 1,285.49 shares of
common stock to three parties pursuant to the exercise of
warrants with a per share exercise price of $0.01 for an
aggregate purchase price of $12.85. The sales were made in
reliance on Section 4(2) of the Securities Act and were
made without general solicitation or advertising.
There were no underwritten offerings employed in connection with
any of the transactions set forth above.
II-2
|
|
ITEM 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
2
|
.1
|
|
Party City Acquisition Merger Agreement, dated as of
September 26, 2005 (incorporated by reference to
Exhibit 2.1 to Amscan Holdings Current Report on
Form 8-K
dated September 27, 2005)
|
|
3
|
.1*
|
|
Amended and Restated Certificate of Incorporation (to be filed
upon completion of this offering)
|
|
3
|
.2*
|
|
Amended and Restated Bylaws (to be effective upon completion of
this offering)
|
|
3
|
.3
|
|
Second Amended and Restated Certificate of Incorporation of
Party City Holdings Inc., dated August 19, 2008, as amended
on April 19, 2011
|
|
3
|
.4
|
|
By-Laws of Party City Holdings Inc.
|
|
4
|
.1*
|
|
Specimen common stock certificate
|
|
4
|
.2
|
|
Indenture, dated as of April 30, 2004, by and among Amscan
Holdings, Inc. (Amscan Holdings), 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 Amscan Holdings
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004 (Commission File
No. 000-21827))
|
|
4
|
.3
|
|
First Supplemental Indenture, dated as of June 21, 2004 by
and among Amscan Holdings, 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 Amscan Holdings Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004 (Commission File
No. 000-21827))
|
|
5
|
.1*
|
|
Opinion of Ropes & Gray LLP
|
|
10
|
.1
|
|
2004 Equity Incentive Plan of AAH Holdings Corporation
(incorporated by reference to Exhibit 10(6) to Amscan
Holdings Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004 (Commission File
No. 000-21827))
|
|
10
|
.2
|
|
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 Amscan
Holdings Registration Statement on
Form S-1
(Registration
No. 333-14107))
|
|
10
|
.3*
|
|
Form of Indemnification Agreement
|
|
10
|
.4
|
|
Employment Agreement between Amscan Holdings Inc. and Gerald C.
Rittenberg, dated January 1, 2008
|
|
10
|
.5
|
|
Employment Agreement between Amscan Holdings Inc. and James M.
Harrison, dated January 1, 2008
|
|
10
|
.6
|
|
Amended and Restated Stockholders Agreement of AAH Holdings
Corporation, dated as of August 19, 2008
|
|
10
|
.7
|
|
Severance Agreement between Amscan Inc. and Michael Correale,
dated as of April 28, 1997
|
|
10
|
.8
|
|
Amended and Restated Management Agreement between Berkshire
Partners LLC, Weston Presidio Service Company LLC and Amscan
Holdings, Inc., dated as of November 10, 2006
|
|
10
|
.9*
|
|
ABL Credit Agreement, dated as of August 13, 2010, among
the Company, Amscan Holdings, the Subsidiaries of Amscan
Holdings from time to time party thereto, the financial
institutions party thereto, as Lenders, Wells Fargo Retail
Finance, LLC, as Administrative Agent and Collateral Agent,
Wells Fargo Capital Finance, LLC and Banc of America Securities
LLC, as Joint Bookrunners and Joint Lead Arrangers, Bank of
America, N.A., as Syndication Agent, and SunTrust Bank, T.D.
Bank, N.A. and RBS Business Capital, as Co-Documentation Agents
|
|
10
|
.10*
|
|
Term Loan Credit Agreement, dated as of December 2, 2010,
among the Company, Amscan Holdings, the subsidiaries of Amscan
Holdings from time to time party thereto, the financial
institutions party thereto, as Lenders, and Credit Suisse AG, as
Administrative Agent and Collateral Agent, Credit Suisse
Securities (USA) LLC and Goldman Sachs Lending Partners LLC, as
Joint Lead Arrangers, Credit Suisse Securities (USA) LLC,
Goldman Sachs Lending Partners LLC, Barclays Capital, Deutsche
Bank Securities Inc. and Wells Fargo Securities, LLC as Joint
Bookrunners, Goldman Sachs Lending Partners LLC and Wells Fargo
Securities, LLC, as
Co-Syndication
Agents, Barclays Capital and Deutsche Bank Securities Inc., as
Co-Documentation Agents
|
II-3
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.11*
|
|
Amendment No. 1 to ABL Credit Agreement, dated as of
December 2, 2010, by and among Wells Fargo Bank, National
Association Successor by merger to Wells Fargo Retail Finance,
LLC, as Administrative Agent, the Lenders, the Borrowers party
thereto, the Company, Amscan Holdings and the other Guarantors
party thereto
|
|
10
|
.12*
|
|
Supply and Distribution Agreement, dated as of December 21,
2009, by and between Amscan Inc. and American Greetings
Corporation
|
|
14
|
.1*
|
|
Code of Business Conduct
|
|
21
|
.1*
|
|
List of Subsidiaries of the Company
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm
|
|
23
|
.2*
|
|
Consent of Ropes & Gray LLP (included in
Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
|
|
* |
|
To be filed by amendment |
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Elmsford, New York, on the
22nd day
of April, 2011.
Party City Holdings Inc.
Name: Michael Correale
Title: CFO
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints James M.
Harrison and Michael A. Correale, and each of them acting
individually, as his or her true and lawful attorneys-in-fact
and agents, with full power of each to act alone, with full
powers of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to
sign the Registration Statement filed herewith and any and all
amendments to said Registration Statement (including
post-effective amendments and any related registration
statements thereto filed pursuant to Rule 462 and
otherwise), and file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully for all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his, her or their substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gerald
C. Rittenberg
Gerald
C. Rittenberg
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Michael
A. Correale
Michael
A. Correale
|
|
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Robert
J. Small
Robert
J. Small
|
|
Chairman of the Board of Directors
|
|
April 22, 2011
|
|
|
|
|
|
/s/ James
M. Harrison
James
M. Harrison
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Steven
J. Collins
Steven
J. Collins
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Michael
F. Cronin
Michael
F. Cronin
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Kevin
M. Hayes
Kevin
M. Hayes
|
|
Director
|
|
April 22, 2011
|
II-5
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jordan
A. Kahn
Jordan
A. Kahn
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ William
Kussell
William
Kussell
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Richard
K. Lubin
Richard
K. Lubin
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ Carol
M. Meyrowitz
Carol
M. Meyrowitz
|
|
Director
|
|
April 22, 2011
|
|
|
|
|
|
/s/ David
M. Mussafer
David
M. Mussafer
|
|
Director
|
|
April 22, 2011
|
II-6