Attached files
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EX-32 - EX-32 - AMSCAN HOLDINGS INC | y91343exv32.htm |
EX-31.1 - EX-31.1 - AMSCAN HOLDINGS INC | y91343exv31w1.htm |
EX-31.2 - EX-31.2 - AMSCAN HOLDINGS INC | y91343exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-21827
Amscan Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-3911462 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
80 Grasslands Road Elmsford, NY | 10523 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code:
(914) 345-2020
(914) 345-2020
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of May 16, 2011, 1,000.00 shares of the Registrants common stock were outstanding.
AMSCAN HOLDINGS, INC.
FORM 10-Q
FORM 10-Q
March 31, 2011
TABLE OF CONTENTS
Page | ||||||||
PART I |
||||||||
Item 1. Condensed Consolidated Financial Statements (Unaudited) |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
21 | ||||||||
25 | ||||||||
25 | ||||||||
26 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
References throughout this document to Amscan, AHI and the Company include Amscan
Holdings, Inc. and its wholly owned subsidiaries. In this document the words we, our, ours
and us refer only to the Company and its majority owned subsidiaries and not to any other person.
You may read and copy any materials we file with the Securities and Exchange Commission
(SEC) at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may
obtain information on the operations of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the
SEC
2
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(Amounts in thousands, except share and per share amounts)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | (Note 3) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,221 | $ | 20,454 | ||||
Accounts receivable, net of allowances |
113,889 | 107,331 | ||||||
Inventories, net of allowances |
437,059 | 424,317 | ||||||
Prepaid expenses and other current assets |
65,037 | 65,672 | ||||||
Total current assets |
634,206 | 617,774 | ||||||
Property, plant and equipment, net |
202,757 | 190,729 | ||||||
Goodwill |
660,366 | 630,492 | ||||||
Trade names |
129,954 | 129,954 | ||||||
Other intangible assets, net |
52,795 | 55,362 | ||||||
Other assets, net |
29,250 | 28,840 | ||||||
Total assets |
$ | 1,709,328 | $ | 1,653,151 | ||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Loans and notes payable |
$ | 227,632 | $ | 150,098 | ||||
Accounts payable |
91,848 | 108,172 | ||||||
Accrued expenses |
107,803 | 111,054 | ||||||
Income taxes payable |
29,550 | 34,325 | ||||||
Redeemable warrants |
| 15,086 | ||||||
Current portion of long-term obligations |
9,100 | 9,046 | ||||||
Total current liabilities |
465,933 | 427,781 | ||||||
Long-term obligations, excluding current portion |
839,051 | 841,112 | ||||||
Deferred income tax liabilities |
95,091 | 94,981 | ||||||
Deferred rent and other long-term liabilities |
17,623 | 14,766 | ||||||
Total liabilities |
1,417,698 | 1,378,640 | ||||||
Redeemable common securities (including 1,142.27 and 597.52 common shares
issued and outstanding at March 31, 2011 and December 31, 2010,
respectively) |
33,179 | 18,089 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,970.02 and
30,226.50 shares issued and outstanding at March 31, 2011 and December 31,
2010, respectively ) |
| | ||||||
Additional paid-in capital |
287,751 | 287,583 | ||||||
Retained deficit |
(30,119 | ) | (27,558 | ) | ||||
Accumulated other comprehensive loss |
(1,613 | ) | (5,915 | ) | ||||
Amscan Holdings Inc. stockholders equity |
256,019 | 254,110 | ||||||
Noncontrolling interests |
2,432 | 2,312 | ||||||
Total stockholders equity |
258,451 | 256,422 | ||||||
Total liabilities, redeemable common securities and stockholders equity |
$ | 1,709,328 | $ | 1,653,151 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Net sales |
$ | 352,501 | $ | 304,379 | ||||
Royalties and franchise fees |
3,681 | 3,844 | ||||||
Total revenues |
356,182 | 308,223 | ||||||
Expenses: |
||||||||
Cost of sales |
225,014 | 199,900 | ||||||
Wholesale selling expenses |
13,852 | 10,390 | ||||||
Retail operating expenses |
61,848 | 52,960 | ||||||
Franchise expenses |
3,365 | 3,124 | ||||||
General and administrative expenses |
31,545 | 29,925 | ||||||
Art and development costs |
3,950 | 3,636 | ||||||
Total expenses |
339,574 | 299,935 | ||||||
Income from operations |
16,608 | 8,288 | ||||||
Interest expense, net |
20,368 | 9,301 | ||||||
Other expense (income), net |
62 | (69 | ) | |||||
Loss before income taxes |
(3,822 | ) | (944 | ) | ||||
Income tax benefit |
(1,330 | ) | (575 | ) | ||||
Net loss |
(2,492 | ) | (369 | ) | ||||
Less: net income attributable to noncontrolling interest |
71 | 43 | ||||||
Net loss attributable to Amscan Holdings, Inc. |
$ | (2,563 | ) | $ | (412 | ) | ||
See accompanying notes to unaudited condensed consolidated financial statements.
4
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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three Months Ended March 31, 2011
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31, 2011
(Unaudited)
(Amounts in thousands)
Accumulated | Amscan | |||||||||||||||||||||||||||||||
Additional | Other | Holdings, Inc. | ||||||||||||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | Stockholders | Noncontrolling | Total | |||||||||||||||||||||||||
Shares | Stock | Capital | Deficit | Loss | Equity | Interests | Equity | |||||||||||||||||||||||||
Balance at December 31, 2010 |
30,226.50 | $ | | $ | 287,583 | $ | (27,558 | ) | $ | (5,915 | ) | $ | 254,110 | $ | 2,312 | $ | 256,422 | |||||||||||||||
Net loss |
(2,563 | ) | (2,563 | ) | 71 | (2,492 | ) | |||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
3,794 | 3,794 | 49 | 3,843 | ||||||||||||||||||||||||||||
Change in fair value of interest
rate swap contracts, net of income
taxes |
708 | 708 | 708 | |||||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income
taxes |
(200 | ) | (200 | ) | (200 | ) | ||||||||||||||||||||||||||
Comprehensive income |
1,739 | 120 | 1,859 | |||||||||||||||||||||||||||||
Exercise of redeemable warrants |
(3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||||
Exercise of non-redeemable warrant |
740.74 | | | | ||||||||||||||||||||||||||||
Exercise of non-redeemable common stock options |
2.78 | 28 | 28 | 28 | ||||||||||||||||||||||||||||
Equity based compensation expense |
143 | 143 | 143 | |||||||||||||||||||||||||||||
Distribution in lieu of dividend |
2 | 2 | 2 | |||||||||||||||||||||||||||||
Balance at March 31, 2011 |
30,970.02 | $ | | $ | 287,751 | $ | (30,119 | ) | $ | (1,613 | ) | $ | 256,019 | $ | 2,432 | $ | 258,451 | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
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AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows used in operating activities: |
||||||||
Net loss |
$ | (2,492 | ) | $ | (369 | ) | ||
Less: net income attributable to noncontrolling interest |
71 | 43 | ||||||
Net loss attributable to Amscan Holdings, Inc. |
(2,563 | ) | (412 | ) | ||||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Depreciation and amortization expense |
13,249 | 11,574 | ||||||
Amortization of deferred financing costs |
1,197 | 221 | ||||||
Provision for doubtful accounts |
361 | 304 | ||||||
Deferred income tax provision |
261 | 377 | ||||||
Deferred rent |
2,023 | 437 | ||||||
Undistributed income in unconsolidated joint venture |
(313 | ) | (288 | ) | ||||
Loss on disposal of equipment |
5 | 303 | ||||||
Equity based compensation |
143 | 93 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in accounts receivable |
1,660 | (4,469 | ) | |||||
Decrease in inventories |
2,721 | 2,752 | ||||||
Decrease (increase) in prepaid expenses and other current assets |
3,392 | (4,140 | ) | |||||
Decrease in accounts payable, accrued expenses and income taxes
payable |
(35,043 | ) | (24,293 | ) | ||||
Net cash used in operating activities |
(12,907 | ) | (17,541 | ) | ||||
Cash flows used in investing activities: |
||||||||
Cash paid in connection with acquisitions |
(56,420 | ) | (3,585 | ) | ||||
Capital expenditures |
(10,977 | ) | (6,924 | ) | ||||
Proceeds from disposal of property and equipment |
1 | 54 | ||||||
Net cash used in investing activities |
(67,396 | ) | (10,455 | ) | ||||
Cash flows provided by financing activities: |
||||||||
Repayment of loans, notes payable and long-term obligations |
(2,506 | ) | (3,383 | ) | ||||
Borrowings under revolving credit facilities |
77,816 | 33,815 | ||||||
Distribution in lieu of dividend |
2 | | ||||||
Proceeds from exercise of stock options |
28 | | ||||||
Net cash provided by financing activities |
75,340 | 30,432 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
2,730 | (802 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(2,233 | ) | 1,634 | |||||
Cash and cash equivalents at beginning of period |
20,454 | 15,420 | ||||||
Cash and cash equivalents at end of period |
$ | 18,221 | $ | 17,054 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period |
||||||||
Interest |
$ | 14,032 | $ | 4,751 | ||||
Income taxes |
$ | 3,081 | $ | 3,516 |
See accompanying notes to unaudited condensed consolidated financial statements.
6
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 1 Description of Business
Amscan Holdings, Inc. (Amscan, AHI or the Company) designs, manufactures, contracts for
manufacture and distributes party goods, including paper and plastic tableware, metallic and latex balloons,
accessories, novelties, costumes, other garments, gifts and stationery throughout the world. In
addition, the Company operates specialty retail party supply stores in the United States
principally under the names Party City and Halloween City and franchises both individual stores and
franchise areas throughout the United States and Puerto Rico principally under the name Party City.
The Company is a wholly-owned subsidiary of Party City Holdings Inc. (PCHI), formerly known as
AAH Holdings Corporation.
Note 2 Acquisitions
On January 30, 2011, the Company acquired the common stock of Riethmuller GmbH
(Riethmuller) for $47,069, 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 results
of this newly acquired business are included in the consolidated financial statements since the
January 30, 2011 acquisition date and are reported in the operating results of the Companys
Wholesale segment.
The preliminary estimate of the excess of the purchase price over the tangible assets is
initially being assigned to goodwill. The following summarizes the estimated fair value of the
assets and liabilities acquired: accounts receivable of $8,581, inventory of $14,828, fixed assets
of $11,227, other current and non-current assets of $5,403, accounts payable and other current
liabilities of $9,440 and other non-current liabilities of $4,086. The remaining $20,556 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 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, including identifiable intangible assets acquired. Goodwill
arises because the purchase price reflects the strategic fit and expected synergies this business
will bring to the Companys operations.
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, the Company has exclusive rights to manufacture
and distribute products into various channels including the party store channel. In addition,
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 and a warrant to purchase approximately 2% of the Common Stock of PCHI valued at $21,000. The fair value of the warrant was determined based on the
agreement between the parties. The warrant was exercised in February 2011.
7
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
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
During the three months ended March 21, 2011,
the Company acquired 3 franchisee stores in California for total consideration of $9,200. The fair value of the assets acquired were
$1,300 of inventory and $300 of fixed assets. The remaining $7,600 has been recorded as goodwill.
Note 3 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of March 31, 2011
and for the three months ended March 31, 2011 and 2010, and the audited balance sheet as of
December 31, 2010, include the accounts of the Company and its majority-owned and controlled
entities. All material intercompany balances and transactions have been eliminated in
consolidation. The unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a fair presentation
have been included in the unaudited condensed consolidated financial statements. Operating results
for the three months ended March 31, 2011 are not necessarily indicative of the results to be
expected for the year ending December 31, 2011. Our business is subject to substantial seasonal
variations, as our retail segment has realized a significant portion of its net sales, cash flow
and net income in the fourth quarter of each year, principally due to its Halloween season sales in
October and, to a lesser extent, other holiday season sales at the end of the calendar year. We
expect that this general pattern will continue. Our results of operations may also be affected by
industry factors that may be specific to a particular period, such as movement in and the general
level of raw material costs. For further information, see the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2010, as filed with the Securities and Exchange Commission.
Note 4 Inventories
Inventories consisted of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 426,912 | $ | 416,831 | ||||
Raw Materials |
13,670 | 11,879 | ||||||
Work in Process |
7,048 | 6,112 | ||||||
447,630 | 434,822 | |||||||
Reserve for slow-moving and obsolete inventory |
(10,571 | ) | (10,505 | ) | ||||
$ | 437,059 | $ | 424,317 | |||||
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, which approximates the first-in,
first-out method. All other inventory cost is determined using the first-in, first-out method.
Note 5 Income Taxes
The income tax benefit for the quarters ended March 31, 2011 and 2010 were determined based
upon the Companys estimated consolidated effective income tax rates of 35.8% and 35.7% for the
years ending December 31, 2011 and 2010, respectively. The differences between the estimated
consolidated effective income tax rate and the U.S. federal statutory rate are primarily
attributable to state income taxes and available domestic manufacturing deductions.
In addition, the income tax benefit for the first quarter of 2011 reflects interest on
remaining unrecognized tax benefits, and for the first quarter of 2010 reflects the expiration of
state statutes of limitations resolving previously unrecognized tax benefits.
8
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 6 Restructuring
In connection with the November 2007 acquisition of Factory Card & Party Outlet (FCPO), $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 March 31, 2011, the Company incurred $7,656 in restructuring costs, including $51
incurred in the three months ended March 31, 2011. The Company expects to incur the
remaining balance of $1,445 in 2011.
Note 7 Comprehensive Income (Loss)
Comprehensive income (loss) attributable to Amscan Holdings, Inc. consisted of the following:
Three Months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (2,563 | ) | $ | (412 | ) | ||
Net change in cumulative translation adjustment |
3,794 | (1,032 | ) | |||||
Change in fair value of interest rate swap
contracts, net of income tax expense of $416 and
$290 |
708 | 494 | ||||||
Change in fair value of foreign exchange contracts,
net of income tax (benefit) expense of $(117) and
$313 |
$ | (200 | ) | $ | 532 | |||
Comprehensive income (loss) |
$ | 1,739 | $ | (418 | ) | |||
Note 8 Capital Stock
At March 31, 2011 and December 31, 2010, 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 30,970.02 and 30,226.50,
respectively, were issued and outstanding. Of these shares, 1,142.27 and 597.52 shares were
redeemable at March 31, 2011 and December 31, 2010, respectively, and are classified as redeemable
common securities on the balance sheet, as described below.
Certain employee stockholders owned 1,142.27 and 597.52 shares of PCHI common stock at March
31, 2011 and December 31, 2010, respectively. Under the terms of the PCHI stockholders agreement
dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common
stock held by former employees and, under certain circumstances, former employee stockholders can
require the Company to purchase all of the shares held by the former employee. The purchase price
as prescribed in the stockholders agreement is to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on cost, as defined therein. The
aggregate amount that may be payable by the Company to certain employee stockholders based on the
estimated fair market value of fully paid and vested common securities totaled $33,179 at March 31,
2011 and $18,089 at December 31, 2010, 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 recent acquisitions or independent
appraisals.
In addition, in 2004, the Companys CEO and President exchanged vested options in a
predecessor company for fully vested options to purchase common stock of the Company. Since these
options vested immediately and can be exercised upon the death or disability of the officer and put
back to the Company, they are reflected as redeemable common securities of $1,542 on the Companys
balance sheet.
9
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 9 Segment Information
Industry Segments
The Company has two identifiable business segments. The Wholesale segment includes the design,
manufacture, contract for manufacture and wholesale distribution of party goods, including paper
and plastic tableware, metallic and latex balloons, accessories, novelties, costumes, other garments, gifts
and stationery. The Retail segment includes the operation of company-owned retail party supply
superstores in the United States and the sale of franchises on an individual store and franchise
area basis throughout the United States and Puerto Rico.
The Companys industry segment data for the three months ended March 31, 2011 and March 31,
2010 is as follows:
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended March 31, 2011 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 199,576 | $ | 220,106 | $ | 419,682 | ||||||
Royalties and franchise fees |
| 3,681 | 3,681 | |||||||||
Total revenues |
199,576 | 223,787 | 423,363 | |||||||||
Eliminations |
(67,181 | ) | | (67,181 | ) | |||||||
Net Revenues |
$ | 132,395 | $ | 223,787 | $ | 356,182 | ||||||
Income (loss) from operations |
$ | 17,286 | $ | (678 | ) | $ | 16,608 | |||||
Interest expense, net |
20,368 | |||||||||||
Other expense, net |
62 | |||||||||||
Loss before income tax benefit |
$ | (3,822 | ) | |||||||||
Depreciation & Amortization |
$ | 5,134 | $ | 8,115 | $ | 13,249 | ||||||
Total assets |
$ | 1,036,646 | $ | 672,682 | $ | 1,709,328 | ||||||
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended March 31, 2010 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 160,959 | $ | 198,456 | $ | 359,415 | ||||||
Royalties and franchise fees |
| 3,844 | 3,844 | |||||||||
Total revenues |
160,959 | 202,300 | 363,259 | |||||||||
Eliminations |
(55,036 | ) | | (55,036 | ) | |||||||
Net Revenues |
$ | 105,923 | $ | 202,300 | $ | 308,223 | ||||||
Income (loss) from operations |
$ | 17,410 | $ | (9,122 | ) | $ | 8,288 | |||||
Interest expense, net |
9,301 | |||||||||||
Other income, net |
(69 | ) | ||||||||||
Loss before income tax benefit |
$ | (944 | ) | |||||||||
Depreciation & Amortization |
$ | 4,391 | $ | 7,183 | $ | 11,574 | ||||||
Total assets |
$ | 811,933 | $ | 691,219 | $ | 1,503,152 | ||||||
Geographic Segments
The Companys export sales, other than inter-company sales between geographic areas, are not
material. Inter-company sales between geographic areas primarily consist of sales of finished goods
for distribution in foreign markets, and are made at cost plus a share of operating profit. No
single foreign operation is significant to the Companys consolidated operations.
10
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 10 Legal Proceedings
The Company is a party to certain claims and litigation in the ordinary course of business.
The Company does not believe these proceedings will result, individually or in the aggregate, in a
material adverse effect on its financial condition or future results of operations.
Note 11 Stock Option Plan
The Company recorded $143 and $93 of stock-based compensation in general and administrative
expenses during the three months ended March 31, 2011 and 2010, respectively.
During February 2011, the Company granted 26 time options and 138 performance options to
employees under the terms of the PCHI 2004 Equity Incentive Plan. The options vest at a rate of
20% per year and are exercisable at $27,700 per share. The ability to exercise vested performance
options is contingent upon the occurrence of an initial public offering or a change in control, as
defined, and the achievement of specific investment returns to the Companys stockholders.
During the three months ended March 31, 2011, 2.78 options were exercised. There are options
to purchase 3,283.47 shares of common stock outstanding at March 31, 2011.
Note 12 Hedging Transactions, Derivative Financial Instruments and Fair Value
The Company is directly and indirectly affected by changes in certain market
conditions. These changes in market conditions may adversely impact the Companys financial
performance and are referred to as market risks. The Company, when deemed appropriate, uses
derivatives as a risk management tool to mitigate the potential impact of certain market
risks. The primary market risks managed through the use of derivative financial instruments
are interest rate risk and foreign currency exchange rate risk.
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. 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 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.
At March 31, 2011 and December 31, 2010, the Company had an interest rate swap agreement
with the notional amount of $135,374, and a net liability fair value of $1,120 and $2,244 at
March 31, 2011 and December 31, 2010, respectively. The swap agreements had unrealized net
losses of $706 and $1,414 at March 31, 2011 and December 31, 2010, respectively, which were
included in accumulated other comprehensive income (loss). 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.
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.
11
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
At March 31, 2011 and December 31, 2010 the Company had foreign currency exchange contracts
with notional amounts of $14,774 and $13,468, respectively and fair values of $(120) and $197,
respectively. The foreign currency exchange contracts are reflected in the consolidated balance
sheets at fair value. The fair value of the foreign currency exchange contracts is the estimated
amount that the counter-parties would receive or pay to terminate the foreign currency exchange
contracts at the reporting date, taking into account current foreign exchange spot rates. The
fair value adjustment at March 31, 2011 and December 31, 2010 resulted in an unrealized net gain
of $124 and an unrealized net loss of $(76), respectively, which are included in
accumulated other comprehensive income (loss). 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 income (loss) related to
these foreign exchange contracts will be reclassified into earnings by December 2011.
Fair Value Measurement
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 Subtopic 820 establishes a three-level fair value hierarchy that prioritizes the inputs
used to measure fair value. This hierarchy requires entities to maximize the use of observable
inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair
value are as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
The following tables show assets and liabilities as of March 31, 2011 and December 31, 2010,
that are measured at fair value on a recurring basis (in thousands):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other | Unobservable | ||||||||||||||
Identical Assets or | Observable | Inputs | Total as of | |||||||||||||
Liabilities (Level 1) | Inputs (Level 2) | (Level 3) | March 31, 2011 | |||||||||||||
Derivative assets |
| $ | 33 | | $ | 33 | ||||||||||
Derivative liabilities |
| (1,274 | ) | | (1,274 | ) |
Significant | ||||||||||||||||
Quoted Prices in | Other | |||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets or | Inputs | Inputs | Total as of | |||||||||||||
Liabilities (Level 1) | (Level 2) | (Level 3) | December 31, 2010 | |||||||||||||
Derivative assets |
| $ | 241 | | $ | 241 | ||||||||||
Derivative liabilities |
| (2,288 | ) | | (2,288 | ) |
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.
12
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
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 March 31, 2011 and December 31, 2010 because of the short-term maturity
of those instruments or their variable rates of interest.
The carrying amount and fair value (based on market prices) of the Companys Term Loan and
$175,000 Senior Subordinated Notes are as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Term Loan |
$ | 665,205 | $ | 671,857 | $ | 666,644 | $ | 674,060 | ||||||||
$175,000 Senior Subordinated Notes |
175,000 | 176,750 | 175,000 | 176,750 |
The carrying amounts for other long-term debt approximate fair value at March 31, 2011 and
December 31, 2010, based on the discounted future cash flow of each instrument at rates currently
offered for similar debt instruments of comparable maturity.
The following table summarizes the Companys outstanding derivative instruments on a gross
basis as recorded on its consolidated balance sheets as of March 31, 2011 and December 31, 2010.
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||
Notional Amounts | March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||||||||||||||
Balance | Balance | Balance | Balance | |||||||||||||||||||||||||||||||||||||
March 31, | December 31, | Sheet | Fair | Sheet | Fair | Sheet | Fair | Sheet | Fair | |||||||||||||||||||||||||||||||
Derivative Instrument | 2011 | 2010 | Line | Value | Line | Value | Line | Value | Line | Value | ||||||||||||||||||||||||||||||
Interest Rate Hedge |
$ | 135,374 | $ | 135,374 | $ | | $ | | (b) AE | $ | (1,120 | ) | (b) AE | $ | (2,244 | ) | ||||||||||||||||||||||||
Foreign Exchange Contracts |
14,774 | 13,468 | (a) PP | 33 | (a) PP | 241 | (b) AE | (154 | ) | (b) AE | (44 | ) | ||||||||||||||||||||||||||||
Total Hedges |
$ | 150,148 | $ | 148,842 | $ | 33 | $ | 241 | $ | (1,274 | ) | $ | (2,288 | ) | ||||||||||||||||||||||||||
(a) | PP = Prepaid expenses and other current assets | |
(b) | AE = Accrued expenses |
Note 13 Recently Issued Accounting Pronouncements
In January 2011, the Financial Accounting Standards Board 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.
13
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
Note 14 Condensed Consolidating Financial Information
Borrowings under the Term Loan Credit Agreement, the ABL Credit Agreement and the Companys
8.75% $175,000 senior subordinated notes due April 30, 2014 are guaranteed jointly and severally,
fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the
Guarantors):
| Amscan Inc. | ||
| Am-Source, LLC | ||
| Anagram 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. |
Non-guarantor subsidiaries (Non-guarantors) include the following:
| Amscan (Asia-Pacific) Pty. Ltd. | ||
| Amscan de Mexico, S.A. de C.V. | ||
| Amscan Distributors (Canada) Ltd. | ||
| Anagram Espana, S.A. | ||
| Anagram France S.C.S. | ||
| Amscan Holdings Limited | ||
| Anagram International (Japan) Co., Ltd. | ||
| Amscan Partyartikel GmbH | ||
| Christys Asia, Ltd. | ||
| Christys By Design, Ltd. | ||
| Christys Dress Up, Ltd. | ||
| Christys Garments & Accessories Ltd. | ||
| JCS Hong Kong Ltd. | ||
| Riethmuller GmbH |
The following information presents condensed consolidating balance sheets at March 31, 2011
and December 31, 2010, the condensed consolidating statements of operations for the three
months ended March 31, 2011 and 2010, and the related condensed consolidating statements of cash
flows for the three months ended March 31, 2011 and 2010, for the combined Guarantors and the
combined Non-guarantors, together with the elimination entries necessary to consolidate the
entities comprising the combined companies.
14
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2011
(Amounts in thousands)
March 31, 2011
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 9,608 | $ | 8,613 | $ | | $ | 18,221 | ||||||||
Accounts receivable, net of allowances |
75,137 | 38,752 | | 113,889 | ||||||||||||
Inventories, net of allowances |
399,394 | 38,744 | (1,079 | ) | 437,059 | |||||||||||
Prepaid expenses and other current assets |
58,881 | 6,156 | | 65,037 | ||||||||||||
Total current assets |
543,020 | 92,265 | (1,079 | ) | 634,206 | |||||||||||
Property, plant and equipment, net |
188,554 | 14,203 | | 202,757 | ||||||||||||
Goodwill |
608,302 | 52,064 | | 660,366 | ||||||||||||
Trade names |
129,954 | | | 129,954 | ||||||||||||
Other intangible assets, net |
52,795 | | | 52,795 | ||||||||||||
Investment in and advances to unconsolidated subsidiaries |
113,253 | | (113,253 | ) | | |||||||||||
Due from affiliates |
73,843 | 59,788 | (133,631 | ) | | |||||||||||
Other assets, net |
28,349 | 901 | | 29,250 | ||||||||||||
Total assets |
$ | 1,738,070 | $ | 219,221 | $ | (247,963 | ) | $ | 1,709,328 | |||||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
227,632 | | | 227,632 | ||||||||||||
Accounts payable |
80,469 | 11,379 | | 91,848 | ||||||||||||
Accrued expenses |
92,208 | 15,595 | | 107,803 | ||||||||||||
Income taxes payable |
29,932 | (333 | ) | (49 | ) | 29,550 | ||||||||||
Due to affiliates |
58,282 | 75,349 | (133,631 | ) | | |||||||||||
Current portion of long-term obligations |
9,059 | 41 | | 9,100 | ||||||||||||
Total current liabilities |
497,582 | 102,031 | (133,680 | ) | 465,933 | |||||||||||
Long-term obligations, excluding current portion |
838,972 | 79 | | 839,051 | ||||||||||||
Deferred income tax liabilities |
94,370 | 721 | | 95,091 | ||||||||||||
Other |
16,918 | 705 | | 17,623 | ||||||||||||
Total liabilities |
1,447,842 | 103,536 | (133,680 | ) | 1,417,698 | |||||||||||
Redeemable common securities |
33,179 | | | 33,179 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common Stock |
| 336 | (336 | ) | | |||||||||||
Additional paid-in capital |
287,751 | 78,094 | (78,094 | ) | 287,751 | |||||||||||
Retained earnings |
(29,089 | ) | 36,065 | (37,095 | ) | (30,119 | ) | |||||||||
Accumulated other comprehensive income (loss) |
(1,613 | ) | (1,242 | ) | 1,242 | (1,613 | ) | |||||||||
Amscan Holdings Inc. stockholders equity |
257,049 | 113,253 | (114,283 | ) | 256,019 | |||||||||||
Noncontrolling interests |
| 2,432 | | 2,432 | ||||||||||||
Total stockholders equity |
257,049 | 115,685 | (114,283 | ) | 258,451 | |||||||||||
Total liabilities, redeemable common securities and
stockholders equity |
$ | 1,738,070 | $ | 219,221 | $ | (247,963 | ) | $ | 1,709,328 | |||||||
15
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2010
(Amounts in thousands)
December 31, 2010
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 14,198 | $ | 6,256 | $ | | $ | 20,454 | ||||||||
Accounts receivable , net |
76,699 | 30,632 | | 107,331 | ||||||||||||
Inventories, net |
405,452 | 19,883 | (1,018 | ) | 424,317 | |||||||||||
Prepaid expenses and other current assets |
61,211 | 4,461 | | 65,672 | ||||||||||||
Total current assets |
557,560 | 61,232 | (1,018 | ) | 617,774 | |||||||||||
Property, plant and equipment, net |
187,574 | 3,155 | | 190,729 | ||||||||||||
Goodwill |
600,014 | 30,478 | | 630,492 | ||||||||||||
Trade names |
129,954 | | | 129,954 | ||||||||||||
Other intangible assets, net |
55,362 | | | 55,362 | ||||||||||||
Investment in and advances to
unconsolidated subsidiaries |
64,485 | | (64,485 | ) | | |||||||||||
Due from affiliates |
22,148 | 12,998 | (35,146 | ) | | |||||||||||
Other assets, net |
28,057 | 783 | | 28,840 | ||||||||||||
Total assets |
1,645,154 | $ | 108,646 | $ | (100,649 | ) | $ | 1,653,151 | ||||||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
150,098 | | | 150,098 | ||||||||||||
Accounts payable |
97,510 | 10,662 | | 108,172 | ||||||||||||
Accrued expenses |
102,749 | 8,305 | | 111,054 | ||||||||||||
Income taxes payable |
35,706 | (1,355 | ) | (26 | ) | 34,325 | ||||||||||
Due to affiliates |
11,593 | 23,553 | (35,146 | ) | | |||||||||||
Redeemable warrants |
15,086 | | | 15,086 | ||||||||||||
Current portion of long-term obligations |
9,005 | 41 | | 9,046 | ||||||||||||
Total current liabilities |
421,747 | 41,206 | (35,172 | ) | 427,781 | |||||||||||
Long-term obligations, excluding current portion |
841,023 | 89 | | 841,112 | ||||||||||||
Deferred income tax liabilities |
94,427 | 554 | | 94,981 | ||||||||||||
Other |
14,766 | | | 14,766 | ||||||||||||
Total liabilities |
1,371,963 | 41,849 | (35,172 | ) | 1,378,640 | |||||||||||
Redeemable common securities |
18,089 | | | 18,089 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Common Stock |
| 336 | (336 | ) | | |||||||||||
Additional paid-in capital |
287,583 | 31,025 | (31,025 | ) | 287,583 | |||||||||||
Retained (deficit)earnings |
(26,566 | ) | 37,535 | (38,527 | ) | (27,558 | ) | |||||||||
Accumulated other comprehensive (loss) income |
(5,915 | ) | (4,411 | ) | 4,411 | (5,915 | ) | |||||||||
Amscan Holdings, Inc. stockholders equity |
255,102 | 64,485 | (65,477 | ) | 254,110 | |||||||||||
Noncontrolling interests |
| 2,312 | | 2,312 | ||||||||||||
Total stockholders equity |
255,102 | 66,797 | (65,477 | ) | 256,422 | |||||||||||
Total liabilities, redeemable common
securities and
stockholders equity |
$ | 1,645,154 | $ | 108,646 | $ | (100,649 | ) | $ | 1,653,151 | |||||||
16
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2011
(Amounts in thousands)
Three Months Ended March 31, 2011
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 316,743 | $ | 41,308 | $ | (5,550 | ) | $ | 352,501 | |||||||
Royalties and franchise fees |
3,681 | | | 3,681 | ||||||||||||
Total revenues |
320,424 | 41,308 | (5,550 | ) | 356,182 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
198,141 | 32,362 | (5,489 | ) | 225,014 | |||||||||||
Selling expenses |
8,313 | 5,539 | | 13,852 | ||||||||||||
Retail operating expenses |
61,848 | | | 61,848 | ||||||||||||
Franchise expenses |
3,365 | | | 3,365 | ||||||||||||
General and administrative expenses |
27,046 | 4,829 | (330 | ) | 31,545 | |||||||||||
Art and development costs |
3,889 | 61 | | 3,950 | ||||||||||||
Total expenses |
302,602 | 42,791 | (5,819 | ) | 339,574 | |||||||||||
Income (loss) from operations |
17,822 | (1,483 | ) | 269 | 16,608 | |||||||||||
Interest expense, net |
20,129 | 239 | | 20,368 | ||||||||||||
Other income (expense), net |
1,840 | (638 | ) | (1,140 | ) | 62 | ||||||||||
Loss before income taxes |
(4,147 | ) | (1,084 | ) | 1,409 | (3,822 | ) | |||||||||
Income tax (benefit) expense |
(1,622 | ) | 315 | (23 | ) | (1,330 | ) | |||||||||
Net loss |
(2,525 | ) | (1,399 | ) | 1,432 | (2,492 | ) | |||||||||
Less net income attributable to noncontrolling interests |
| 71 | | 71 | ||||||||||||
Net loss attributable to Amscan Holdings, Inc. |
$ | (2,525 | ) | $ | (1,470 | ) | $ | 1,432 | $ | (2,563 | ) | |||||
17
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2010
(Amounts in thousands)
Three Months Ended March 31, 2010
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 266,083 | $ | 53,608 | $ | (15,312 | ) | $ | 304,379 | |||||||
Royalties and franchise fees |
3,844 | | | 3,844 | ||||||||||||
Total revenues |
269,927 | 53,608 | (15,312 | ) | 308,223 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
175,250 | 38,027 | (13,377 | ) | 199,900 | |||||||||||
Selling expenses |
7,757 | 2,633 | | 10,390 | ||||||||||||
Retail operating expenses |
45,884 | 8,301 | (1,225 | ) | 52,960 | |||||||||||
Franchise expenses |
3,124 | | | 3,124 | ||||||||||||
General and administrative expenses |
27,110 | 3,145 | (330 | ) | 29,925 | |||||||||||
Art and development costs |
3,660 | (24 | ) | | 3,636 | |||||||||||
Total expenses |
262,785 | 52,082 | (14,932 | ) | 299,935 | |||||||||||
(Loss) Income loss from operations |
7,142 | 1,526 | (380 | ) | 8,288 | |||||||||||
Interest expense, net |
8,653 | 648 | | 9,301 | ||||||||||||
Other (income) expense, net |
(1,394 | ) | 322 | 1,003 | (69 | ) | ||||||||||
(Loss) income before income taxes |
(117 | ) | 556 | (1,383 | ) | (944 | ) | |||||||||
Income tax benefit |
(408 | ) | 95 | (262 | ) | (575 | ) | |||||||||
Net income (loss) |
$ | 291 | $ | 461 | $ | (1,121 | ) | $ | (369 | ) | ||||||
Less Net income attributed to noncontrolling interest |
| 43 | | 43 | ||||||||||||
Net income (loss) attributable to Amscan Holdings,
Inc. |
$ | 291 | $ | 418 | $ | (1,121 | ) | $ | (412 | ) | ||||||
18
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2011
(Amounts in thousands)
Three Months Ended March 31, 2011
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows used in operating activities: |
||||||||||||||||
Net loss |
(2,525 | ) | (1,399 | ) | 1,432 | (2,492 | ) | |||||||||
Less: net income attributable to noncontrolling interest |
| 71 | | 71 | ||||||||||||
Net loss attributable to Amscan Holdings, Inc. |
$ | (2,525 | ) | $ | (1,470 | ) | $ | 1,432 | $ | (2,563 | ) | |||||
Adjustments to reconcile net loss to net cash used in
operating activities: |
||||||||||||||||
Depreciation and amortization expense |
12,691 | 558 | | 13,249 | ||||||||||||
Amortization of deferred financing costs |
1,197 | | | 1,197 | ||||||||||||
Provision for doubtful accounts |
312 | 49 | | 361 | ||||||||||||
Deferred income tax expense |
261 | | | 261 | ||||||||||||
Deferred rent |
2,023 | | | 2,023 | ||||||||||||
Undistributed income in unconsolidated joint venture |
(313 | ) | | | (313 | ) | ||||||||||
Loss on disposal of equipment |
5 | | | 5 | ||||||||||||
Equity based compensation |
143 | | | 143 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Decrease in accounts receivable |
1,249 | 411 | | 1,660 | ||||||||||||
Decrease (increase) in inventories |
6,693 | (4,033 | ) | 61 | 2,721 | |||||||||||
(Increase) decrease in prepaid expenses and other current assets |
(198 | ) | 3,590 | | 3,392 | |||||||||||
(Decrease) increase in accounts payable, accrued expenses and income taxes payable |
(34,500 | ) | 950 | (1,493 | ) | (35,043 | ) | |||||||||
Net cash (used in) provided by operating activities |
(12,962 | ) | 55 | | (12,907 | ) | ||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions |
(56,420 | ) | | | (56,420 | ) | ||||||||||
Capital expenditures |
(10,701 | ) | (276 | ) | | (10,977 | ) | |||||||||
Proceeds from disposal of property and equipment |
1 | | | 1 | ||||||||||||
Net cash used in investing activities |
(67,120 | ) | (276 | ) | | (67,396 | ) | |||||||||
Cash flows provided by financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(2,497 | ) | (9 | ) | | (2,506 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
77,534 | 282 | | 77,816 | ||||||||||||
Distribution in lieu of dividend |
2 | 2 | ||||||||||||||
Proceeds from the exercise of stock options |
28 | | | 28 | ||||||||||||
Net cash provided by financing activities |
75,067 | 273 | | 75,340 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
425 | 2,305 | | 2,730 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
(4,590 | ) | 2,357 | | (2,233 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
14,198 | 6,256 | | 20,454 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 9,608 | $ | 8,613 | $ | | $ | 18,221 | ||||||||
19
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AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2010
(Amounts in thousands)
Three Months Ended March 31, 2010
(Amounts in thousands)
AHI and | ||||||||||||||||
Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows used in operating activities: |
||||||||||||||||
Net (loss) income |
$ | 291 | $ | 461 | $ | (1,121 | ) | $ | (369 | ) | ||||||
Less: net income attributable to noncontrolling interest |
| 43 | | 43 | ||||||||||||
Net (loss) income attributable to Amscan Holdings, Inc. |
291 | 418 | (1,121 | ) | (412 | ) | ||||||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||||||||||
Depreciation and amortization expense |
10,547 | 1,027 | | 11,574 | ||||||||||||
Amortization of deferred financing costs |
154 | 67 | | 221 | ||||||||||||
Provision for doubtful accounts |
248 | 56 | | 304 | ||||||||||||
Deferred income tax expense |
377 | | | 377 | ||||||||||||
Deferred rent |
346 | 91 | | 437 | ||||||||||||
Undistributed gain in unconsolidated joint venture |
(288 | ) | | | (288 | ) | ||||||||||
Loss on disposal of equipment |
106 | 197 | | 303 | ||||||||||||
Equity based compensation |
93 | | | 93 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
(Increase) decrease in accounts receivable |
(4,712 | ) | 243 | | (4,469 | ) | ||||||||||
Decrease (increase) in inventories |
2,264 | (223 | ) | 711 | 2,752 | |||||||||||
Increase in prepaid expenses and other current assets |
(2,983 | ) | (928 | ) | (229 | ) | (4,140 | ) | ||||||||
Decrease in accounts payable, accrued expenses and income taxes payable |
(24,366 | ) | (566 | ) | 639 | (24,293 | ) | |||||||||
Net cash (used in) provided by operating activities |
(17,923 | ) | 382 | | (17,541 | ) | ||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions |
(3,585 | ) | | | (3,585 | ) | ||||||||||
Capital expenditures |
(6,577 | ) | (347 | ) | | (6,924 | ) | |||||||||
Proceeds from disposal of property and equipment |
54 | | | 54 | ||||||||||||
Net cash used in investing activities |
(10,108 | ) | (347 | ) | | (10,455 | ) | |||||||||
Cash flows provided by (used in) financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(1,745 | ) | (1,638 | ) | | (3,383 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
33,815 | | | 33,815 | ||||||||||||
Net cash provided by (used in) financing activities |
32,070 | (1,638 | ) | | 30,432 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
14 | (816 | ) | | (802 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
4,053 | (2,419 | ) | | 1,634 | |||||||||||
Cash and cash equivalents at beginning of period |
8,240 | 7,180 | | 15,420 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 12,293 | $ | 4,761 | $ | | $ | 17,054 | ||||||||
20
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
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 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. As at March 31st, 2011, we
operated 585 company-owned stores and had 229 franchises across the United States and Puerto
Rico.
Results of Operations
Three Months Ended March 31, 2011 Compared To Three Months Ended March 31, 2010
The following tables set forth the Companys operating results and operating results as
a percentage of total revenues for the three months ended March 31, 2011 and 2010.
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 352,501 | 99.0 | % | $ | 304,379 | 98.8 | % | ||||||||
Royalties and franchise fees |
3,681 | 1.0 | 3,844 | 1.2 | ||||||||||||
Total revenues |
356,182 | 100.0 | 308,223 | 100.0 | ||||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
225,014 | 63.2 | 199,900 | 64.9 | ||||||||||||
Wholesale selling expenses |
13,852 | 3.9 | 10,390 | 3.4 | ||||||||||||
Retail operating expenses |
61,848 | 17.4 | 52,960 | 17.2 | ||||||||||||
Franchise expenses |
3,365 | 0.9 | 3,124 | 1.0 | ||||||||||||
General and administrative expenses |
31,545 | 8.9 | 29,925 | 9.7 | ||||||||||||
Art and development costs |
3,950 | 1.1 | 3,636 | 1.1 | ||||||||||||
Total expenses |
339,574 | 95.3 | 299,935 | 97.3 | ||||||||||||
Income from operations |
16,608 | 4.7 | 8,288 | 2.7 | ||||||||||||
Interest expense, net |
20,368 | 5.7 | 9,301 | 3.0 | ||||||||||||
Other expense (income), net |
62 | 0.0 | (69 | ) | 0.0 | |||||||||||
Loss before income taxes |
(3,822 | ) | (1.1 | ) | (944 | ) | (0.3 | ) | ||||||||
Income tax benefit |
(1,330 | ) | (0.4 | ) | (575 | ) | (0.2 | |||||||||
Net loss |
(2,492 | ) | (0.7 | ) | (369 | ) | (0.1 | ) | ||||||||
Less net income attributable to noncontrolling interests |
71 | 0.0 | 43 | (0.0 | ) | |||||||||||
Net loss attributable to Amscan Holdings, Inc. |
$ | (2,563 | ) | (0.7 | )% | $ | (412 | ) | (0.1 | )% | ||||||
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Revenues
Total revenues for the first quarter of 2011 were $356.2 million, or 15.6% higher than for the first quarter of 2010, reflecting growth in both reporting segments. The following table sets forth the Companys total revenues for the quarters ended March 31, 2011 and 2010, respectively. |
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Total Revenue | Thousands | Total Revenue | |||||||||||||
Revenues |
||||||||||||||||
Sales |
||||||||||||||||
Wholesale |
$ | 199,576 | 56.1 | % | $ | 160,959 | 52.2 | % | ||||||||
Eliminations |
(67,181 | ) | (18.9 | )% | (55,036 | ) | (7.9 | )% | ||||||||
Net wholesale |
132,395 | 37.2 | % | 105,923 | 34.4 | % | ||||||||||
Retail |
220,106 | 61.8 | % | 198,456 | 64.4 | % | ||||||||||
Total net sales |
352,501 | 99.0 | % | 304,379 | 98.8 | % | ||||||||||
Franchise related |
3,681 | 1.0 | % | 3,844 | 1.2 | % | ||||||||||
Total revenues |
$ | 356,182 | 100.0 | % | $ | 308,223 | 100.0 | % | ||||||||
Wholesale
Net sales for the first quarter of 2011 of $132.4 million were $26.5 million or 25.0%
higher than net sales for the corresponding quarter of 2010. Net sales to domestic party
goods retailers, including our franchisee network, and to other domestic party goods
distributors during the first quarter of 2011 totaled $66.2 million and were $4.4 million or
7.1% higher than 2010 sales. The increase in sales reflects the benefit of three months of
Designware product sales in the first quarter of 2011 compared to less than one full month
in 2010, following the March 2010 acquisition. In addition, sales of other juvenile and
solid tableware products were higher than in the first quarter of 2010 due, in part, to
increased marketing. Net sales of metallic balloons of $26.8 million were $2.4 million or
10.0% higher than in the first quarter of 2010, principally driven by an increase in sales
of our value price balloon line to the dollar store channel and the acceleration of a scheduled product line reset at a large distributor. International sales totaled $39.4
million and were $19.7 million higher than in the first quarter of 2010, primarily as a
result of the acquisition of the Christys Group in September 2010 and Riethmuller in late
January 2011 and an increase in sales in the UK related to the Royal Wedding. Changes in
foreign currency exchange rates resulted in a 5.4% increase in international sales over
2010.
Intercompany sales to our retail affiliates of $67.2 million were $12.1 million or
22.1% higher than in the first quarter of 2010 and represented 33.7% of total wholesale
sales in 2011 compared to 34.2% in 2010. 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 the first quarter of 2011, our wholesale sales to
our retail stores represented 66.8% of the retail stores total purchases, compared to 66.4%
in 2010. 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 the first quarter of 2011 of $220.1 million were $21.7 million or
10.9% higher than retail sales in the first quarter of 2010. The retail sales at our Party
City stores (including converted FCPO stores) totaled $180.1 million and were $18.1 million
or 11.2%, higher than in 2010. Party City same-store sales increased 4.5% during 2011,
driven by a 3.2% increase in average transaction size and a 1.3% increase in transaction
count. The increase in sales is partially attributable to 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 net addition
of 22 stores during the twelve months ended March 31, 2011, including the net acquisition of
16 stores from franchisees. Additionally, during the first quarter of 2011, we converted 16
additional FCPO stores to the Party City format. During the first quarter of 2011, sales at
stores converted from the FCPO format to Party City during the twelve months ended March 31,
2011, were 16% higher than sales at these same stores during the first quarter of 2010. Converted FCPO stores will be
included in Party Citys same-store sales beginning with the thirteenth month following
conversion. Our e-commerce sales totaled $12.2 million in the first quarter of 2011 and were $6.4 million or 110.3% higher
than in the first quarter of 2010, reflecting the successful re-launch of the PartyCity.com
website in August 2009. Sales at all other store formats, including unconverted FCPO and
outlet stores, totaled $27.8 million and were $2.9 million or 9.4% lower than in 2010. The
decrease reflects the net closure of 18
22
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stores during the twelve months ended
March 31, 2011, 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 the first quarter of 2011 were $3.7 million compared
to $3.8 million for the first quarter of 2010. The decrease in franchise related revenue
reflects a decrease in franchise stores during the twelve months ended March 31, 2011, as a
result of our net acquisition of 16 franchise stores.
Gross Profit
Our total margin on net sales for the first quarter of 2011 was 36.2%, or 190 basis
points higher than in 2010. The following table sets forth the Companys gross profit on
net sales for the three months ended March 31, 2011 and 2010.
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Total Revenue | Thousands | Total Revenue | |||||||||||||
Wholesale |
$ | 44,171 | 33.4 | % | $ | 37,875 | 35.8 | % | ||||||||
Retail |
83,315 | 37.9 | % | 66,604 | 33.6 | % | ||||||||||
Total |
$ | 127,486 | 36.2 | % | $ | 104,479 | 34.3 | % | ||||||||
The gross profit margin on net sales at wholesale for the first quarter of 2011
was 33.4% or 240 basis points lower than in the first quarter of 2010. The decrease in
wholesale gross profit margin reflects the lower historical gross profit margin achieved by
the Companys recent international acquisitions, the Christys Group and Riethmuller.
Wholesale gross profit margin, excluding the impact of the Christys and Riethmuller
acquisitions, was 35.9% in the first quarter of 2011 compared to 35.8% in the first quarter of 2010.
Retail gross profit margin for the first quarter of 2011 was 37.9% or 430 basis points
higher than in 2010, principally due to a greater percentage of products sold at retail that
were manufactured or sourced by us, including Designware products, and the realization of
higher deferred manufacturing and distribution margin in the first quarter of 2011 compared
to the first quarter of 2010.
Operating expenses
Wholesale selling expenses of $13.9 million for the quarter-ended March 31, 2011 were $3.5
million higher than for the first quarter of 2010. The increase in 2011 wholesale selling
expense, as compared to 2010, principally reflects the additional expenses of the Christys
Group and Riethmuller as well as inflationary increases in compensation and employee
benefits. Wholesale selling expenses were 6.9% of total wholesale sales in the first quarter
of 2011 compared to 6.5% for the comparable quarter of 2010.
Retail operating expenses for the quarter ended March 31, 2010 totaled $61.8 million or
$8.8 million higher than in the first quarter of 2010, principally reflecting additional
costs associated with the growth in our retail store base (a net increase of four stores)
and our e-commerce business. E-commerce costs reflect higher distribution, website and
customer service costs. The increase in retail operating expenses also reflects inflationary
increases in retail expenses. As a percent of retail sales, retail operating expenses were
28.1% for the first quarter of 2011, as compared to 26.7% for the first quarter of 2010.
Franchise expenses for the first quarter of 2011 of $3.4 million were $0.3 million or 7.7%
higher than in 2010.
As a percentage of total revenues, general and administrative expenses decreased to
8.9% for the first quarter of 2011, compared to 9.7% for the first quarter of 2010. General
and administrative expenses for the quarter totaled $31.5 million or $1.6 million higher
than in the first quarter of 2010, as the additional expenses of the Christys Group and
Riethmuller and inflationary compensation and employee benefit cost increases in 2011 were
substantially offset by the elimination of additional costs incurred in the first quarter of
2010 relating to the restructure of the FCPO corporate office in Naperville, Illinois and
additional legal and professional costs.
Art and development costs of $4.0 million for the quarter ended March 31, 2011 were
$0.3 million or 8.6% higher than in the first quarter of 2010, principally reflecting
increases in personnel, compensation and employee benefits. As a percentage of total
revenues, art and development costs were 1.1% in both the first quarter of 2011 and 2010.
Interest expense, net
Interest expense of $20.4 million for the quarter ended March 31, 2011 was $11.1
million higher than for the first quarter of 2010, reflecting the increase in our ABL and
term loan interest rates and a $326.6 million increase in our term loan debt following the
ABL and term loan refinancings in August and December of 2010, respectively.
23
Table of Contents
Other expense (income), net
Other expense (income), net, was $0.1 million for the first quarter of 2011 compared to
$(0.1) million for the first quarter of 2010. Other expense (income), net, principally
consists of our share of (income) loss from an unconsolidated balloon distribution joint
venture in Mexico, foreign currency (gains) losses and acquisition related expenses.
Income tax benefit
The income tax benefit for the quarters ended March 31, 2011 and 2010 were determined
based upon the Companys estimated consolidated effective income tax rates of 35.8% and
35.7% for the years ending December 31, 2011 and 2010, respectively. The differences
between the estimated consolidated effective income tax rate and the U.S. federal statutory
rate are primarily attributable to state income taxes and available domestic manufacturing
deductions.
In addition, the income tax benefit for the first quarter of 2011 reflects interest on
remaining unrecognized tax benefits and for the first quarter of 2010 reflects the
expiration of state statutes of limitations resolving previously unrecognized tax benefits.
Liquidity and Capital Resources
Net cash used in operating activities totaled $13.1 million during the first quarter of
2011, as compared to $17.5 million during the comparable quarter of 2010. Net cash flow
provided by operating activities before changes in operating assets and liabilities was
$14.2 million during the first quarter of 2011 and $12.6 million during the comparable
quarter of 2010. Changes in operating assets and liabilities during the first quarter of
2011 and 2010 resulted in the use of cash of $27.3 million and $30.1 million, respectively,
and principally reflect the pay down of Halloween and other fourth quarter seasonal trade
accounts payables.
Net cash used in investing activities totaled $67.2 million during the first quarter of
2011, as compared to $10.5 million during the comparable quarter of 2010. Investing
activities during the first quarter of 2011 included $47.1 million paid in connection with
the purchase of Riethmuller and $9.2 million paid in connection with the purchase of retail
franchise stores. Capital expenditures totaled $11.0 million during the first quarter of
2011 compared to $6.9 million in 2010. Retail capital expenditures totaled $8.0 million in
2011 and were principally for store renovations and updated information systems, while
wholesale capital expenditures, principally for printing plates and dies and distribution
equipment, totaled $3.0 million.
Net cash provided from financing activities was $75.3 million during the first quarter
of 2011, compared to $30.4 million in 2010 and principally reflects borrowings under our
revolving credit facility, net of scheduled term debt repayment. Borrowings under the
revolving credit facility during the first quarter of 2011 and 2010 were used to pay down
Halloween and other fourth quarter seasonal trade accounts payables and, during the first
quarter of 2011, to finance the Riethmuller and franchise store acquisitions.
Required repayments under our term debt for the remainder of 2011 will be $5.1 million.
At March 31, 2011, we had $82.1 million of excess availability under the AHI revolving
credit agreement.
We expect that cash generated from operating activities and availability under our
primary credit facility 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.
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 on its financial condition or future results
of operations.
Seasonality
Wholesale Operations
Despite a concentration of holidays in the fourth quarter of the year, as a result of
our expansive product lines and customer base and increased promotional activities, the
impact of seasonality on our quarterly results of wholesale operations has been limited.
Retail Operations
Our retail operations are subject to significant seasonal variations. Historically,
this segment has realized a significant portion of its revenues, cash flow and net income in
the fourth quarter of the year, principally due to its sales in October for the Halloween
season and, to a lesser extent, due to our year-end holiday sales. We believe this general
pattern will continue in the future. Our
24
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results of operations and cash flows may also
fluctuate significantly as a result of a variety of other factors, including the timing of
new store openings and store closings and the timing of potential acquisitions and
dispositions of stores.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements including
statements about the adequacy of our liquidity and the seasonality of our retail operations.
Forward-looking statements give our current expectations or forecasts of future events.
Forward-looking statements generally can be identified by the use of forward-looking
terminology such as may, will, expect, intend, estimate, anticipate, believe,
project or continue or the negative thereof and similar words. From time to time, we
also may provide oral or written forward-looking statements in other materials we release to
the public. Any or all of our forward-looking statements in this quarterly report and in any
public statements we make may turn out to be wrong. They can be affected by inaccurate
assumptions we might make or by known or unknown risks or uncertainties. Consequently, no
forward-looking statement can be guaranteed. Actual results may vary materially. Investors
are cautioned not to place undue reliance on any forward-looking statements. Important
factors that could cause actual results to differ materially from the forward-looking
statements include, but are not limited to: our inability to satisfy our debt obligations,
the reduction of volume of purchases by one or more of our large customers, our inability to
collect receivables from our customers, the termination of our licenses, our inability to
identify and capitalize on changing design trends and customer preferences, changes in the
competitive environment, increases in the costs of raw materials and the possible risks and
uncertainties that have been noted in reports filed by us with the Securities and Exchange
Commission, including our annual report on Form 10-K for the year ended December 31, 2010.
Item 3. 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 have utilized 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
three months ended March 31, 2011 and 2010, our interest expense, after considering the
effects of our interest rate swap agreements, would have increased by $3.6 million and $1.5
million, respectively. The loss before income taxes for the quarters ended March 31, 2011
and 2010 would also have increased by the same amounts. 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, predominantly the British Pound Sterling and the Euro, 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 U.S. dollar
relative to the currencies in which our foreign sales are denominated would have resulted in
a decrease in operating income of $3.1 million and $1.3 million for the three months ended
March 31, 2011 and 2010, 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.
PART II
Item 6. Exhibits
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
32
|
Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC. |
||||
Date: May 16, 2011 | By: | /s/ Michael A. Correale | ||
Michael A. Correale | ||||
Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer) |
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