Attached files
file | filename |
---|---|
EX-32 - EX-32 - AMSCAN HOLDINGS INC | y92368exv32.htm |
EX-31.1 - EX-31.1 - AMSCAN HOLDINGS INC | y92368exv31w1.htm |
EX-31.2 - EX-31.2 - AMSCAN HOLDINGS INC | y92368exv31w2.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 June 30, 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 (State or Other Jurisdiction of Incorporation or Organization) |
13-3911462 (I.R.S. Employer Identification No.) |
|
80 Grasslands Road Elmsford, NY (Address of Principal Executive Offices) |
10523 (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 o No þ
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 (Do not check if a smaller reporting company) | Smaller reporting company o |
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 August 15, 2011, 1,000.00 shares of the Registrants common stock were outstanding.
AMSCAN HOLDINGS, INC.
FORM 10-Q
FORM 10-Q
June 30, 2011
TABLE OF CONTENTS
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)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | (Note 3) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,579 | $ | 20,454 | ||||
Accounts receivable, net of allowances |
117,484 | 107,331 | ||||||
Inventories, net of allowances |
452,653 | 424,317 | ||||||
Prepaid expenses and other current assets |
66,080 | 65,672 | ||||||
Total current assets |
651,796 | 617,774 | ||||||
Property, plant and equipment, net |
204,621 | 190,729 | ||||||
Goodwill |
661,163 | 630,492 | ||||||
Trade names |
133,134 | 129,954 | ||||||
Other intangible assets, net |
50,267 | 55,362 | ||||||
Other assets, net |
28,600 | 28,840 | ||||||
Total assets |
$ | 1,729,581 | $ | 1,653,151 | ||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Loans and notes payable |
$ | 182,285 | $ | 150,098 | ||||
Accounts payable |
133,265 | 108,172 | ||||||
Accrued expenses |
111,453 | 111,054 | ||||||
Income taxes payable |
36,678 | 34,325 | ||||||
Redeemable warrants |
| 15,086 | ||||||
Current portion of long-term obligations |
9,116 | 9,046 | ||||||
Total current liabilities |
472,797 | 427,781 | ||||||
Long-term obligations, excluding current portion |
836,852 | 841,112 | ||||||
Deferred income tax liabilities |
94,618 | 94,981 | ||||||
Deferred rent and other long-term liabilities |
17,865 | 14,766 | ||||||
Total liabilities |
1,422,132 | 1,378,640 | ||||||
Redeemable common securities (including 1,152.27 and 597.52 Class A common shares issued and
outstanding at June 30, 2011 and December 31, 2010, respectively) |
35,765 | 18,089 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Class A common stock, $0.01 par value, 40,000 shares authorized, 19,051.31 and
18,307.79 shares issued and outstanding at June 30, 2011 and December 31, 2010,
respectively |
| |||||||
Class B common stock, $0.01 par value, convertible into Class A common stock, 15,200
shares authorized, 11,918.71 shares issued and outstanding at June 30, 2011 and
December 31, 2010 |
| |||||||
Additional paid-in capital |
285,950 | 287,583 | ||||||
Retained deficit |
(15,589 | ) | (27,558 | ) | ||||
Accumulated other comprehensive loss |
(1,171 | ) | (5,915 | ) | ||||
Amscan Holdings Inc. stockholders equity |
269,190 | 254,110 | ||||||
Noncontrolling interests |
2,494 | 2,312 | ||||||
Total stockholders equity |
271,684 | 256,422 | ||||||
Total liabilities, redeemable common securities and stockholders equity |
$ | 1,729,581 | $ | 1,653,151 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Net sales |
$ | 411,502 | $ | 352,705 | ||||
Royalties and franchise fees |
4,550 | 4,453 | ||||||
Total revenues |
416,052 | 357,158 | ||||||
Expenses: |
||||||||
Cost of sales |
247,787 | 210,865 | ||||||
Wholesale selling expenses |
14,467 | 10,845 | ||||||
Retail operating expenses |
72,368 | 64,416 | ||||||
Franchise expenses |
3,370 | 3,149 | ||||||
General and administrative expenses |
30,956 | 28,882 | ||||||
Art and development costs |
4,082 | 3,634 | ||||||
Total expenses |
373,030 | 321,791 | ||||||
Income from operations |
43,022 | 35,367 | ||||||
Interest expense, net |
20,312 | 9,126 | ||||||
Other expense, net |
185 | 122 | ||||||
Income before income taxes |
22,525 | 26,119 | ||||||
Income tax expense |
7,947 | 9,588 | ||||||
Net income |
14,578 | 16,531 | ||||||
Less: net income attributable to noncontrolling interest |
46 | 71 | ||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 14,532 | $ | 16,460 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Net sales |
$ | 764,003 | $ | 657,084 | ||||
Royalties and franchise fees |
8,231 | 8,297 | ||||||
Total revenues |
772,234 | 665,381 | ||||||
Expenses: |
||||||||
Cost of sales |
472,801 | 410,765 | ||||||
Wholesale selling expenses |
28,319 | 21,235 | ||||||
Retail operating expenses |
134,216 | 117,376 | ||||||
Franchise expenses |
6,736 | 6,273 | ||||||
General and administrative expenses |
62,500 | 58,807 | ||||||
Art and development costs |
8,032 | 7,269 | ||||||
Total expenses |
712,604 | 621,725 | ||||||
Income from operations |
59,630 | 43,656 | ||||||
Interest expense, net |
40,680 | 18,427 | ||||||
Other expense, net |
247 | 53 | ||||||
Income before income taxes |
18,703 | 25,176 | ||||||
Income tax expense |
6,617 | 9,013 | ||||||
Net income |
12,086 | 16,163 | ||||||
Less: net income attributable to noncontrolling interest |
117 | 114 | ||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 11,969 | $ | 16,049 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Six Months Ended June 30, 2011
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, 2011
(Unaudited)
(Amounts in thousands)
Accumulated | Amscan | |||||||||||||||||||||||||||||||
Class A and Class B | Additional | Other | Holdings, Inc. | |||||||||||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | Stockholders | Noncontrolling | ||||||||||||||||||||||||||
Shares | Stock | Capital | Deficit | Loss | Equity | Interests | Total Equity | |||||||||||||||||||||||||
Balance at December 31, 2010 |
30,226.50 | | 287,583 | (27,558 | ) | (5,915 | ) | 254,110 | 2,312 | 256,422 | ||||||||||||||||||||||
Net income |
11,969 | 11,969 | 117 | 12,086 | ||||||||||||||||||||||||||||
Net change in cumulative translation
adjustment |
3,550 | 3,550 | 65 | 3,615 | ||||||||||||||||||||||||||||
Change in fair value of interest
rate swap contracts, net of income
taxes |
1,414 | 1,414 | 1,414 | |||||||||||||||||||||||||||||
Change in fair value of foreign
exchange contracts, net of income
tax benefit |
(220 | ) | (220 | ) | (220 | ) | ||||||||||||||||||||||||||
Comprehensive income |
16,713 | 182 | 16,895 | |||||||||||||||||||||||||||||
Exercise of redeemable warrants |
(4 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||||||||
Exercise of redeemable common stock
options |
(157 | ) | (157 | ) | (157 | ) | ||||||||||||||||||||||||||
Exercise of non-redeemable warrants |
740.74 | | | |||||||||||||||||||||||||||||
Exercise of non-redeemable common
stock options |
2.78 | 28 | 28 | 28 | ||||||||||||||||||||||||||||
Equity based compensation expense |
693 | 693 | 693 | |||||||||||||||||||||||||||||
Revaluation of redeemable shares |
(2,193 | ) | (2,193 | ) | (2,193 | ) | ||||||||||||||||||||||||||
Balance at June 30, 2011 |
30,970.02 | 285,950 | (15,589 | ) | (1,171 | ) | 269,190 | 2,494 | 271,684 | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
Table of Contents
AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows provided by operating activities: |
||||||||
Net income |
$ | 12,086 | $ | 16,163 | ||||
Less: net income attributable to noncontrolling interest |
117 | 114 | ||||||
Net income attributable to Amscan Holdings, Inc. |
11,969 | 16,049 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
27,239 | 23,706 | ||||||
Amortization of deferred financing costs |
2,394 | 1,060 | ||||||
Provision for doubtful accounts |
704 | 845 | ||||||
Deferred income tax benefit |
(255 | ) | 595 | |||||
Deferred rent |
4,550 | 811 | ||||||
Undistributed income in unconsolidated joint venture |
(596 | ) | (364 | ) | ||||
Loss on disposal of equipment |
81 | 237 | ||||||
Equity based compensation |
809 | 276 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||
Increase in accounts receivable |
(2,415 | ) | (5,203 | ) | ||||
Increase in inventories |
(12,654 | ) | (9,570 | ) | ||||
Increase in prepaid expenses and other current assets |
(1,879 | ) | (5,941 | ) | ||||
Increase (decrease) in accounts payable, accrued expenses and income taxes payable |
19,550 | (15,839 | ) | |||||
Net cash provided by operating activities |
49,497 | 6,662 | ||||||
Cash flows used in investing activities: |
||||||||
Cash paid in connection with acquisitions, net of cash acquired |
(60,500 | ) | (5,261 | ) | ||||
Capital expenditures |
(24,072 | ) | (23,170 | ) | ||||
Proceeds from disposal of property and equipment |
22 | 134 | ||||||
Net cash used in investing activities |
(84,550 | ) | (28,297 | ) | ||||
Cash flows provided by financing activities: |
||||||||
Repayment of loans, notes payable and long-term obligations |
(5,033 | ) | (29,242 | ) | ||||
Borrowings under revolving credit facilities |
32,187 | 53,284 | ||||||
Proceeds from exercise of stock options |
148 | | ||||||
Net cash provided by financing activities |
27,302 | 24,042 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
2,876 | (1,781 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(4,875 | ) | 626 | |||||
Cash and cash equivalents at beginning of period |
20,454 | 15,420 | ||||||
Cash and cash equivalents at end of period |
$ | 15,579 | $ | 16,046 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period |
||||||||
Interest |
$ | 33,529 | $ | 17,263 | ||||
Income taxes |
$ | 5,578 | $ | 32,877 |
See accompanying notes to unaudited condensed consolidated financial statements.
7
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share amounts)
(Unaudited)
(Amounts in thousands, except share amounts)
Note 1 Description of Business
Amscan Holdings, Inc. (Amscan Holdings, 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, franchises both individual stores and
franchise areas throughout the United States and Puerto Rico principally under the
name Party City and operates its e-commerce website, PartyCity.com. On a stand alone
basis, without the consolidation of its subsidiaries, Amscan Holdings, Inc. has no
significant assets or operations. 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 Riethmüller
GmbH (Riethmüller) for $47,069, in a transaction accounted for as a purchase
business combination. Riethmüller 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 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 $11,715, other current and non-current
assets of $770, and accounts payable and other current liabilities of $9,308. The
remaining $20,483 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. The acquisition expands the
Companys vertical business model into the latex balloon category, allowing the
Company to capture the manufacturing and wholesale margin on such sales, and gives
the Company an additional significant presence in Germany, Poland and Malaysia.
On September 30, 2010, the Company acquired Christys By Design Limited and
three affiliated companies (the Christys Group) from Christy Holdings Limited, a
U.K. based company. The Christys Group designs and distributes costumes and other
garments and accessories through its operations in Asia and the U.K. The fair value
of the total consideration paid for the Christys Group was $34,342, including $3,974
paid during the six months ended June 30, 2011. 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, trade names
of $3,180, fixed assets of $582, and accounts payable and accrued expenses of
$13,636. The remaining $26,104 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 Christys Group acquisition
provided the Company the opportunity to manufacture
8
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Halloween costumes for sale to its U.S. retail segment, allowing the Company to
capture the manufacturing and wholesale margins on such sales. The acquisition also
allowed the Company to leverage its existing U.K. distribution capacity to expand the
Christys Group business in Europe. The Company elected to treat the U.K. entities
acquired as foreign branches for U.S. 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 U.S. 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 the Company 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.
During the six months ended June 30, 2011, the Company acquired three
franchisee stores located in California and one store located in Iowa for total
consideration of $9,457. The fair value of the assets acquired were $1,519 of
inventory and $338 of fixed assets. The remaining $7,600 has been recorded as
goodwill.
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. Goodwill arises because the
purchase price reflects the value of the geographic location of each acquired store,
as well as their maturity and historical profitability. 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 3 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as
of June 30, 2011 and for the three and six months ended June 30, 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.
9
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our 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 consolidated
financial statements of the Company combined the Fiscal Quarters of our retail
operations with the calendar quarters of our wholesale operations as the differences
are not significant.
The Company has determined the difference between the retail operations Fiscal
Year and Fiscal Quarters and the calendar year and quarters to be insignificant.
Operating results for the three and six months ended June 30, 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.
Note 4 Inventories
Inventories consisted of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 441,687 | $ | 416,831 | ||||
Raw materials |
14,712 | 11,879 | ||||||
Work in process |
5,714 | 6,112 | ||||||
462,113 | 434,822 | |||||||
Reserve for slow-moving and obsolete inventory |
(9,460 | ) | (10,505 | ) | ||||
$ | 452,653 | $ | 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 expense for the three and six months ended June 30, 2011 and
2010 were determined based upon the Companys estimated consolidated effective income
tax rates of 36.3% 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 expense for the three and six months ended June
30, 2011 reflects the settlement of the audit of the Companys 2008 and 2009 federal
tax returns and the settlement of the audit of several 2007 and 2008 state income tax
returns. Also, the income tax expense for the three and six months ended June 30,
2010 reflects the settlement of the Companys 2007 federal tax return.
10
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 June 30, 2011, the Company incurred $8,034
in restructuring costs, including $375 and $428 incurred in the three and six months
ended June 30, 2011, respectively. The Company expects to incur an additional $208 of
restructuring costs in 2011 and the remaining balance of $859 in 2012.
Note 7 Comprehensive Income
Comprehensive income attributable to Amscan Holdings, Inc. consisted of the
following:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 14,532 | $ | 16,460 | $ | 11,969 | $ | 16,049 | ||||||||
Net change in cumulative translation adjustment |
(244 | ) | (1,075 | ) | 3,550 | (2,107 | ) | |||||||||
Change in fair value of interest rate swap
contracts, net of income tax expense
(benefit) of $415, $(54), $830, and $235 |
706 | (92 | ) | 1,414 | 402 | |||||||||||
Change in fair value of foreign exchange contracts,
net of income tax (benefit) expense of $(12), $29,
$(129), and $342 |
(20 | ) | 49 | (220 | ) | 581 | ||||||||||
Comprehensive income |
$ | 14,974 | $ | 15,342 | $ | 16,713 | $ | 14,925 | ||||||||
Note 8 Capital Stock
At June 30, 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, 40,000.00 shares of Class A Common Stock, $0.01
par value, of which 20,203.58 and 18,905.31 shares were issued and outstanding,
respectively, and 15,200.00 shares of Class B Common Stock, $0.01 par value, of which
11,918.71 shares were issued and outstanding. At June 30, 2011 and December 31, 2010,
15,200 shares of Class A Common Stock, $0.01 par value were reserved for issuance
upon the conversion of Class B Common Stock, $0.01 par value.
The holders of common stock are entitled to vote as a single class on all
matters upon which shareholders have a right to vote, subject to the requirements of
applicable laws. Each share of Class A and Class B Common Stock entitles its holder
to one vote and both classes participate equally in any dividend or distribution of
earnings of the Company. For so long as at least 50% of the shares of Class B Common
Stock issued at the effective time of the Second Amended and Restated Certificate of
Incorporation remain outstanding, the holders of a majority of outstanding shares of
Class B Common Stock must affirmatively vote or consent to sell, merge, consolidate,
reorganize, liquidate or otherwise dispose of all or substantially all of the assets
of the Company and, among other things and in certain instances, to incur
indebtedness, to pay dividends or distributions and to effectuate a public offering
of the Companys Class A Common Stock.
Each share of Class B Common Stock is convertible into a share of Class A
Common Stock on a one-for-one basis (i) upon transfer to a person or entity which is
not a Permitted Transferee (as defined in our Second Amended and Restated Certificate
of Incorporation), (ii) upon a Qualified Initial Public Offering (as defined in our
Second Amended and Restated Certificate of Incorporation) and (iii) at such time
as less than 20% of the 11,918.71 shares of Class B Common Stock are controlled or
owned by Permitted Transferees.
11
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain employee stockholders owned 1,152.27 and 597.52 shares of the Companys
Class A common stock at June 30, 2011 and December 31, 2010, respectively. Under the
terms of the Companys 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 $34,107 at June 30, 2011 and $16,547 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 $1,658 and $1,542 on the Companys balance sheets as
of June 30, 2011 and December 31, 2010, respectively.
The changes in redeemable securities during the six months ended June 30, 2011 are as follows:
Common Shares | Rollover options | Total | ||||||||||
Balance December 31, 2010 |
$ | 16,547 | $ | 1,542 | $ | 18,089 | ||||||
Employee warrant exercise |
15,090 | 15,090 | ||||||||||
Employee option exercise |
277 | 277 | ||||||||||
Common stock revaluation |
2,193 | 116 | 2,309 | |||||||||
Balance June 30, 2011 |
$ | 34,107 | $ | 1,658 | $ | 35,765 | ||||||
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, the sale of franchises on an individual store and franchise area
basis throughout the United States and Puerto Rico and e-commerce operations through
our PartyCity.com website.
12
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys industry segment data for the three months ended June 30, 2011 and
2010 is as follows:
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended June 30, 2011 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 213,971 | $ | 269,638 | $ | 483,609 | ||||||
Royalties and franchise fees |
| 4,550 | 4,550 | |||||||||
Total revenues |
213,971 | 274,188 | 488,159 | |||||||||
Eliminations |
(72,107 | ) | | (72,107 | ) | |||||||
Net revenues |
$ | 141,864 | $ | 274,188 | $ | 416,052 | ||||||
Income from operations |
$ | 25,300 | $ | 17,722 | $ | 43,022 | ||||||
Interest expense, net |
20,312 | |||||||||||
Other expense, net |
185 | |||||||||||
Income before income tax benefit |
$ | 22,525 | ||||||||||
Depreciation and amortization |
$ | 5,283 | $ | 8,707 | $ | 13,990 | ||||||
Total assets |
$ | 1,039,170 | $ | 690,411 | $ | 1,729,581 |
Wholesale | Retail | Consolidated | ||||||||||
Three Months Ended June 30, 2010 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 183,465 | $ | 239,938 | $ | 423,403 | ||||||
Royalties and franchise fees |
| 4,453 | 4,453 | |||||||||
Total revenues |
183,465 | 244,391 | 427,856 | |||||||||
Eliminations |
(70,698 | ) | | (70,698 | ) | |||||||
Net revenues |
$ | 112,767 | $ | 244,391 | $ | 357,158 | ||||||
Income from operations |
$ | 21,177 | $ | 14,190 | $ | 35,367 | ||||||
Interest expense, net |
9,126 | |||||||||||
Other expense, net |
122 | |||||||||||
Income before income tax benefit |
$ | 26,119 | ||||||||||
Depreciation and amortization |
$ | 5,125 | $ | 7,007 | $ | 12,132 | ||||||
Total assets |
$ | 810,928 | $ | 713,674 | $ | 1,524,602 |
13
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys industry segment data for the six months ended June 30, 2011 and
2010 is as follows:
Wholesale | Retail | Consolidated | ||||||||||
Six Months Ended June 30, 2011 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 413,547 | $ | 489,744 | $ | 903,291 | ||||||
Royalties and franchise fees |
| 8,231 | 8,231 | |||||||||
Total revenues |
413,547 | 497,975 | 911,522 | |||||||||
Eliminations |
(139,288 | ) | | (139,288 | ) | |||||||
Net revenues |
$ | 274,259 | $ | 497,975 | $ | 772,234 | ||||||
Income from operations |
$ | 42,586 | $ | 17,044 | $ | 59,630 | ||||||
Interest expense, net |
40,680 | |||||||||||
Other expense, net |
247 | |||||||||||
Income before income tax benefit |
$ | 18,703 | ||||||||||
Depreciation and amortization |
$ | 10,417 | $ | 16,822 | $ | 27,239 | ||||||
Total assets |
$ | 1,039,170 | $ | 690,411 | $ | 1,729,581 |
Wholesale | Retail | Consolidated | ||||||||||
Six Months Ended June 30, 2010 |
||||||||||||
Revenues: |
||||||||||||
Net sales |
$ | 344,424 | $ | 438,394 | $ | 782,818 | ||||||
Royalties and franchise fees |
| 8,297 | 8,297 | |||||||||
Total revenues |
344,424 | 446,691 | 791,115 | |||||||||
Eliminations |
(125,734 | ) | | (125,734 | ) | |||||||
Net revenues |
$ | 218,690 | $ | 446,691 | $ | 665,381 | ||||||
Income from operations |
$ | 38,589 | $ | 5,068 | $ | 43,655 | ||||||
Interest expense, net |
18,427 | |||||||||||
Other expense, net |
53 | |||||||||||
Income before income tax benefit |
$ | 25,175 | ||||||||||
Depreciation and amortization |
$ | 9,516 | $ | 14,190 | $ | 23,706 | ||||||
Total assets |
$ | 810,928 | $ | 713,674 | $ | 1,524,602 |
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.
14
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $666 and $183 of stock-based compensation in general
and administrative expenses during the three months ended June 30, 2011 and 2010 and
$809 and $276 during the six months ended June 30, 2011 and 2010, respectively.
Stock based compensation expense for the three and six months ended June 30, 2011
included a charge of $116 arising from the revaluation of redeemable common stock
options held by the CEO and President.
During February 2011, the Company granted 26 time options and 138
performance options to employees under the terms of the Companys 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 June 2011, the Company granted 175 time options and 350 performance
options to the Companys CEO and President under the terms of the Companys 2004
Equity Incentive Plan. The options vested one third upon grant and one third per year
thereafter, and are exercisable at $29,600 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 six months ended June 30, 2011, 12.78 options were exercised. There
are options to purchase 3,798.27 shares of common stock outstanding at June 30, 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 December 31, 2010, the Company had an interest rate swap with the
notional amount of $135,374 and a net liability fair value of $2,244. The swap
agreement had an unrealized net loss of $1,414 at December 31, 2010 which was
included in accumulated other comprehensive income (loss). No component of the
agreement was excluded in the measurement of hedge effectiveness. As the hedge was
100% effective, there was no current impact on earnings due to hedge ineffectiveness.
The interest rate swap agreement matured on June 22, 2011.
15
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 June 30, 2011 and December 31, 2010 the Company had foreign currency
exchange contracts with notional amounts of $9,882 and $13,468, respectively and net
(liability) asset fair values of $(152) 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 June 30, 2011 and December 31, 2010
resulted in an unrealized net loss of $(96) and an unrealized net gain of $124,
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 June 30, 2011 and
December 31, 2010, which 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) | June 30, 2011 | |||||||||||||
Derivative assets |
| $ | 19 | | $ | 19 | ||||||||||
Derivative liabilities |
| (171 | ) | | (171 | ) |
16
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 June 30, 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 term
loans and the senior subordinated notes are as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Term Loans |
$ | 663,770 | $ | 670,408 | $ | 666,644 | $ | 674,060 | ||||||||
Senior Subordinated Notes |
175,000 | 176,750 | 175,000 | 176,750 |
The carrying amounts for other long-term debt approximate fair value at
June 30, 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 June 30, 2011
and December 31, 2010.
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||
Notional Amounts | Balance | Balance | Balance | Balance | ||||||||||||||||||||||||||||||||||||
June 30, | 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 | $ | | $ | | $ | | (b) AE | $ | (2,244 | ) | ||||||||||||||||||||||||||
Foreign Exchange Contracts |
9,882 | 13,468 | (a) PP | 19 | (a) PP | 241 | (b) AE | (171 | ) | (b) AE | (44 | ) | ||||||||||||||||||||||||||||
Total Hedges |
$ | 9,882 | $ | 148,842 | $ | 19 | $ | 241 | $ | (171 | ) | $ | (2,288 | ) | ||||||||||||||||||||||||||
(a) | PP = Prepaid expenses and other current assets | |
(b) | AE = Accrued expenses |
17
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13 Subsequent Events
On July 29, 2011, the Company acquired the common stock of Party Packagers
for $31,783 in a transaction accounted for as a purchase business combination. Founded in 1976, Party
Packagers is a Canadian retailer of party goods and outdoor toys operating 26 superstores. The acquisition
gives the Company a significant retail presence in Canada. The Company is in the
process of accumulating information to complete the determination of the fair value
of certain acquired assets and liabilities, including identifiable intangible assets
acquired.
Note 14 Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued ASU 2011-05,
Comprehensive Income (Topic 220), Presentation of Comprehensive Income. The new US
GAAP guidance gives two choices of how to present items of net income, items of other
comprehensive income (OCI) and total comprehensive income: one continuous statement
of comprehensive income or two separate consecutive statements can be presented. OCI
is no longer allowed to be presented in the statement of stockholders equity. The
guidance also requires the reclassification adjustments for each component of OCI to
be displayed in both net income and OCI. For public companies, these amendments are
effective for fiscal year and interim periods beginning after December 15, 2011 and
should be applied retrospectively. For nonpublic companies, these amendments are
effective for fiscal year and interim periods beginning after December 15, 2012 and
interim and annual periods thereafter. Since the update only requires a change in
presentation, we do not expect that the adoption of this will have a material impact
on our results of operations, cash flows or financial condition.
In May 2011, the Financial Accounting Standards Board issued ASU 2011-04, Fair
Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and International Financial Reporting
Standards, or IFRS. The ASU amends the fair value measurement and disclosure
guidance in ASC 820, Fair Value Measurement, to converge US GAAP and IFRS
requirements for measuring amounts at fair value as well as disclosures about these
measurements. Many of the amendments clarify existing concepts and are generally not
expected to result in significant changes to application of fair value principles.
In certain instances, however, the FASB changed a principle to achieve convergence,
and while limited, these amendments have the potential to significantly change
practice. These amendments are effective during interim and annual periods beginning
after December 15, 2011. Although we continue to review this update, we do not
believe it will have a material impact on our financial statements or the notes
thereto.
In April 2011, the Financial Accounting Standards Board issued ASU 2011-02,
Receivables (Topic 310), A Creditors Determination of Whether a Restructuring is a
Troubled Debt Restructuring. The FASB believes there has been diversity in practice
related to identifying and disclosing troubled debt restructurings, and this
diversity has been amplified over the last several years given the economic
conditions. The amendments in this ASU clarify the accounting guidance for all banks
and other creditors that make concessions to borrowers who are experiencing financial
difficulties. The changes clarify the guidance on determining whether a concession
has been granted and whether a borrower is considered to be experiencing financial
difficulty.
The amendments are effective for the first interim or annual period beginning on
or after June 15, 2011, and should be applied retrospectively to the beginning of the
annual period of adoption. For purposes of measuring impairment of those
receivables, an entity should apply the amendments prospectively for the first
interim or annual period beginning on or after June 15, 2011. The disclosures that
were deferred by ASU 2011-01 will be effective for interim and annual periods
beginning on or after June 15, 2011. For nonpublic entities, the amendments are
effective for annual periods ending on or after December 15, 2012, including interim
periods within those annual periods. We do not anticipate any material impact from
this update.
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. We do not anticipate any material impact from this update.
18
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15 Condensed Consolidating Financial Information
Amscan Holdings is the issuer of the senior subordinated notes due April
30, 2014. The senior subordinated notes are guaranteed jointly and severally, fully
and unconditionally, by the following wholly-owned domestic subsidiaries
(collectively, the Guarantors), which subsidiaries are 100% owned, directly or
indirectly, by Amscan Holdings:
| Amscan Inc. | ||
| Am-Source, LLC | ||
| Anagram Eden Prairie Property Holdings LLC | ||
| Anagram International, Inc. | ||
| Anagram International Holdings, Inc. | ||
| Anagram International, LLC | ||
| Factory Card & Party Outlet Corp. | ||
| Gags & Games, Inc. | ||
| JCS Packaging Inc. | ||
| M&D Industries, Inc. | ||
| Party City Corporation | ||
| PA Acquisition Corporation | ||
| Party City Franchise Group Holdings, LLC | ||
| SSY Realty Corp. | ||
| Trisar, Inc. |
Non-guarantor subsidiaries (collectively, Non-guarantors) include the
following:
| Amscan (Asia-Pacific) Pty. Ltd. | ||
| Amscan de Mexico, S.A. de C.V. | ||
| Amscan Distributors (Canada) Ltd. | ||
| Amscan Holdings Limited | ||
| Anagram International (Japan) Co., Ltd. | ||
| Amscan Partyartikel GmbH | ||
| Christy Asia, Ltd. | ||
| Christys By Design, Ltd. | ||
| Christy Dress Up, Ltd. | ||
| Christy Garments & Accessories Ltd. | ||
| JCS Hong Kong Ltd. | ||
| Riethmüller GmbH |
The following information presents condensed consolidating balance sheets
at June 30, 2011 and December 31, 2010, the condensed consolidating statements of
operations for the three months ended June 30, 2011 and 2010, and the related
condensed consolidating statements of cash flows for the three months ended June 30,
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.
19
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2011
June 30, 2011
Amscan | ||||||||||||||||
Holdings, | ||||||||||||||||
Inc. and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 10,868 | $ | 4,711 | $ | | $ | 15,579 | ||||||||
Accounts receivable , net of allowances |
72,250 | 45,234 | | 117,484 | ||||||||||||
Inventories, net of allowances |
411,738 | 42,141 | (1,226 | ) | 452,653 | |||||||||||
Prepaid expenses and other current assets |
58,632 | 7,448 | | 66,080 | ||||||||||||
Total current assets |
553,488 | 99,534 | (1,226 | ) | 651,796 | |||||||||||
Property, plant and equipment, net |
190,535 | 14,086 | | 204,621 | ||||||||||||
Goodwill |
608,411 | 52,752 | | 661,163 | ||||||||||||
Trade names |
129,954 | 3,180 | | 133,134 | ||||||||||||
Other intangible assets, net |
50,267 | | | 50,267 | ||||||||||||
Investment in and advances to
unconsolidated subsidiaries |
120,552 | | (120,552 | ) | | |||||||||||
Due from affiliates |
72,444 | 70,502 | (142,946 | ) | | |||||||||||
Other assets, net |
27,700 | 900 | | 28,600 | ||||||||||||
Total assets |
$ | 1,753,351 | $ | 240,954 | $ | (264,724 | ) | $ | 1,729,581 | |||||||
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Loans and notes payable |
182,285 | | | 182,285 | ||||||||||||
Accounts payable |
112,763 | 20,502 | | 133,265 | ||||||||||||
Accrued expenses |
94,251 | 17,202 | | 111,453 | ||||||||||||
Income taxes payable |
37,439 | (658 | ) | (103 | ) | 36,678 | ||||||||||
Due to affiliates |
63,009 | 79,937 | (142,946 | ) | | |||||||||||
Current portion of long-term obligations |
9,073 | 43 | | 9,116 | ||||||||||||
Total current liabilities |
498,820 | 117,026 | (143,049 | ) | 472,797 | |||||||||||
Long-term obligations, excluding current portion |
836, 781 | 71 | | 836,852 | ||||||||||||
Deferred income tax liabilities |
93,854 | 764 | | 94,618 | ||||||||||||
Other |
17,818 | 47 | | 17,865 | ||||||||||||
Total liabilities |
1,447,273 | 117,908 | (143,049 | ) | 1,422,132 | |||||||||||
Redeemable common securities |
35,765 | | | 35,765 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Class A and Class B Common Stock |
| 336 | (336 | ) | | |||||||||||
Additional paid-in capital |
285,950 | 82,069 | (82,069 | ) | 285,950 | |||||||||||
Retained (deficit) earnings |
(14,466 | ) | 39,798 | (40,921 | ) | (15,589 | ) | |||||||||
Accumulated other comprehensive loss |
(1,171 | ) | (1,651 | ) | 1,651 | (1,171 | ) | |||||||||
Amscan Holdings, Inc. stockholders equity |
270,313 | 120,552 | (121,675 | ) | 269,190 | |||||||||||
Noncontrolling interests |
| 2,494 | | 2,494 | ||||||||||||
Total stockholders equity |
270,313 | 123,046 | (121,675 | ) | 271,684 | |||||||||||
Total liabilities, redeemable common
securities and stockholders equity |
$ | 1,753,351 | $ | 240,954 | $ | (264,724 | ) | $ | 1,729,581 | |||||||
20
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010
December 31, 2010
Amscan | ||||||||||||||||
Holdings, | ||||||||||||||||
Inc. and | ||||||||||||||||
Combined | Combined | |||||||||||||||
Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
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: |
||||||||||||||||
Class A and Class B 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 | |||||||
21
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING INCOME STATEMENT
Three Months Ended June 30, 2011
(Amounts in thousands)
Three Months Ended June 30, 2011
(Amounts in thousands)
Amscan | ||||||||||||||||
Holdings, Inc. | ||||||||||||||||
and Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 366,993 | $ | 57,051 | $ | (12,542 | ) | $ | 411,502 | |||||||
Royalties and franchise fees |
4,550 | | | 4,550 | ||||||||||||
Total revenues |
371,543 | 57,051 | (12,542 | ) | 416,052 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
217,691 | 42,491 | (12,395 | ) | 247,787 | |||||||||||
Selling expenses |
8,177 | 6,290 | | 14,467 | ||||||||||||
Retail operating expenses |
72,368 | | | 72,368 | ||||||||||||
Franchise expenses |
3,370 | | | 3,370 | ||||||||||||
General and administrative expenses |
26,787 | 4,259 | (90 | ) | 30,956 | |||||||||||
Art and development costs |
4,001 | 81 | | 4,082 | ||||||||||||
Total expenses |
332,394 | 53,121 | (12,485 | ) | 373,030 | |||||||||||
Income from operations |
39,149 | 3,930 | (57 | ) | 43,022 | |||||||||||
Interest expense, net |
20,100 | 212 | | 20,312 | ||||||||||||
Other (income) expense , net |
(3,280 | ) | (358 | ) | 3,823 | 185 | ||||||||||
Income before income taxes |
22,329 | 4,076 | (3,880 | ) | 22,525 | |||||||||||
Income tax expense |
7,704 | 297 | (54 | ) | 7,947 | |||||||||||
Net income |
14,625 | 3,779 | (3,826 | ) | 14,578 | |||||||||||
Less net income attributable to noncontrolling interests |
| 46 | | 46 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 14,625 | $ | 3,733 | $ | (3,826 | ) | $ | 14,532 | |||||||
22
Table of Contents
AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING INCOME STATEMENT
Six Months Ended June 30, 2011
(Amounts in thousands)
Six Months Ended June 30, 2011
(Amounts in thousands)
Amscan | ||||||||||||||||
Holdings, Inc. | ||||||||||||||||
and Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 683,736 | $ | 98,359 | $ | (18,092 | ) | $ | 764,003 | |||||||
Royalties and franchise fees |
8,231 | | | 8,231 | ||||||||||||
Total revenues |
691,967 | 98,359 | (18,092 | ) | 772,234 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
415,832 | 74,853 | (17,884 | ) | 472,801 | |||||||||||
Selling expenses |
16,490 | 11,829 | | 28,319 | ||||||||||||
Retail operating expenses |
134,216 | | | 134,216 | ||||||||||||
Franchise expenses |
6,736 | | | 6,736 | ||||||||||||
General and administrative expenses |
53,832 | 9,088 | (420 | ) | 62,500 | |||||||||||
Art and development costs |
7,890 | 142 | | 8,032 | ||||||||||||
Total expenses |
634,996 | 95,912 | (18,304 | ) | 712,604 | |||||||||||
Income from operations |
56,971 | 2,447 | 212 | 59,630 | ||||||||||||
Interest expense, net |
40,229 | 451 | | 40,680 | ||||||||||||
Other (income) expense, net |
(1,440 | ) | (996 | ) | 2,683 | 247 | ||||||||||
Income before income taxes |
18,182 | 2,992 | (2,471 | ) | 18,703 | |||||||||||
Income tax expense |
6,082 | 612 | (77 | ) | 6,617 | |||||||||||
Net income |
12,100 | 2,380 | (2,394 | ) | 12,086 | |||||||||||
Less net income attributable to noncontrolling interests |
| 117 | | 117 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 12,100 | $ | 2,263 | $ | (2,394 | ) | $ | 11,969 | |||||||
23
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 June 30, 2010
(Amounts in thousands)
Three Months Ended June 30, 2010
(Amounts in thousands)
Amscan Holdings, | ||||||||||||||||
Inc. and Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 313,882 | $ | 54,042 | $ | (15,219 | ) | $ | 352,705 | |||||||
Royalties and franchise fees |
5,716 | | (1,263 | ) | 4,453 | |||||||||||
Total revenues |
319,598 | 54,042 | (16,482 | ) | 357,158 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
188,513 | 37,395 | (15,043 | ) | 210,865 | |||||||||||
Wholesale selling expenses |
8,415 | 2,430 | | 10,845 | ||||||||||||
Retail operating expenses |
56,763 | 8,916 | (1,263 | ) | 64,416 | |||||||||||
Franchise expenses |
3,149 | | | 3,149 | ||||||||||||
General and administrative expenses |
26,066 | 3,146 | (330 | ) | 28,882 | |||||||||||
Art and development costs |
3,656 | (22 | ) | | 3,634 | |||||||||||
Total expenses |
286,562 | 51,865 | (16,636 | ) | 321,791 | |||||||||||
Income from operations |
33,036 | 2,177 | 154 | 35,367 | ||||||||||||
Interest expense, net |
8,528 | 598 | | 9,126 | ||||||||||||
Other (income) expense, net |
(1,786 | ) | 214 | 1,694 | 122 | |||||||||||
Income before income taxes |
26,294 | 1,365 | (1,540 | ) | 26,119 | |||||||||||
Income tax expense |
10,150 | 266 | (828 | ) | 9,588 | |||||||||||
Net income |
16,144 | 1,099 | (712 | ) | 16,531 | |||||||||||
Less net income attributable to noncontrolling interests |
| 71 | | 71 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 16,144 | $ | 1,028 | $ | (712 | ) | $ | 16,460 | |||||||
24
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
Six Months Ended June 30, 2010
(Amounts in thousands)
Six Months Ended June 30, 2010
(Amounts in thousands)
Amscan | ||||||||||||||||
Holdings, Inc. | ||||||||||||||||
and Combined | Combined Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 578,401 | $ | 107,650 | $ | (28,967 | ) | $ | 657,084 | |||||||
Royalties and franchise fees |
10,785 | | (2,488 | ) | 8,297 | |||||||||||
Total revenues |
589,186 | 107,650 | (31,455 | ) | 665,381 | |||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
363,425 | 75,437 | (28,097 | ) | 410,765 | |||||||||||
Wholesale selling expenses |
16,172 | 5,063 | | 21,235 | ||||||||||||
Retail operating expenses |
102,647 | 17,217 | (2,488 | ) | 117,376 | |||||||||||
Franchise expenses |
6,273 | | | 6,273 | ||||||||||||
General and administrative expenses |
53,176 | 6,291 | (660 | ) | 58,807 | |||||||||||
Art and development costs |
7,315 | (46 | ) | | 7,269 | |||||||||||
Total expenses |
549,008 | 103,962 | (31,245 | ) | 621,725 | |||||||||||
Income from operations |
40,178 | 3,688 | (210 | ) | 43,656 | |||||||||||
Interest expense, net |
17,181 | 1,246 | | 18,427 | ||||||||||||
Other (income) expense, net |
(3,049 | ) | 536 | 2,566 | 53 | |||||||||||
Income before income taxes |
26,046 | 1,906 | (2,776 | ) | 25,176 | |||||||||||
Income tax expense |
9,335 | 355 | (677 | ) | 9,013 | |||||||||||
Net income |
$ | 16,711 | $ | 1,551 | $ | (2,099 | ) | $ | 16,163 | |||||||
Less net income attributable to noncontrolling interests |
| 114 | | 114 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 16,711 | $ | 1,437 | $ | (2,099 | ) | $ | 16,049 | |||||||
25
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 CASH FLOWS
Six Months Ended June 30, 2011
(Amounts in thousands)
Six Months Ended June 30, 2011
(Amounts in thousands)
Amscan | ||||||||||||||||
Holdings, Inc. | ||||||||||||||||
and | Combined | |||||||||||||||
Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows used in operating activities: |
||||||||||||||||
Net income |
12,100 | 2,380 | (2,394 | ) | 12,086 | |||||||||||
Net income attributable to noncontrolling interest |
| 117 | | 117 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 12,100 | $ | 2,263 | $ | (2,394 | ) | $ | 11,969 | |||||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||||||||||
Depreciation and amortization expense |
26,040 | 1,199 | | 27,239 | ||||||||||||
Amortization of deferred financing costs |
2,394 | | | 2,394 | ||||||||||||
Provision for doubtful accounts |
508 | 196 | | 704 | ||||||||||||
Deferred income tax expense (benefit) |
(255 | ) | | | (255 | ) | ||||||||||
Deferred rent |
4,550 | | | 4,550 | ||||||||||||
Undistributed loss (gain) in unconsolidated joint venture |
(596 | ) | | | (596 | ) | ||||||||||
(Gain) Loss on disposal of equipment |
79 | 2 | | 81 | ||||||||||||
Equity based compensation |
809 | | | 809 | ||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||||||||||
Decrease (increase) in accounts receivable |
3,805 | (6,220 | ) | | (2,415 | ) | ||||||||||
(Increase) in inventories |
(5,432 | ) | (7,430 | ) | 208 | (12,654 | ) | |||||||||
Decrease (increase) in prepaid expenses and other current assets |
455 | (2,334 | ) | | (1,879 | ) | ||||||||||
Increase in accounts payable, accrued expenses and income taxes payable |
8,223 | 9,141 | 2,186 | 19,550 | ||||||||||||
Net cash provided by (used) in operating activities |
52,680 | (3,183 | ) | | 49,497 | |||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions, net of cash acquired |
(60,500 | ) | | | (60,500 | ) | ||||||||||
Capital expenditures |
(23,406 | ) | (666 | ) | | (24,072 | ) | |||||||||
Proceeds from disposal of property and equipment |
6 | 16 | | 22 | ||||||||||||
Net cash used in investing activities |
(83,900 | ) | (650 | ) | | (84,550 | ) | |||||||||
Cash flows provided by financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(5,012 | ) | (21 | ) | | (5,033 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
32,187 | | | 32,187 | ||||||||||||
Capital contributions and proceeds from issuance of common stock and
exercise of options, net of retirements |
148 | | | 148 | ||||||||||||
Net cash provided by (used in) financing activities |
27,323 | (21 | ) | | 27,302 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
567 | 2,309 | | 2,876 | ||||||||||||
Net decrease in cash and cash equivalents |
(3,330 | ) | (1,545 | ) | | (4,875 | ) | |||||||||
Cash and cash equivalents at beginning of period |
14,198 | 6,256 | 20,454 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 10,868 | $ | 4,711 | $ | | $ | 15,579 | ||||||||
26
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 CASH FLOWS
Six Months Ended June 30, 2010
(Amounts in thousands)
Six Months Ended June 30, 2010
(Amounts in thousands)
Amscan Holding, Inc. | Combined | |||||||||||||||
and Combined | Non- | |||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows provided by operating activities: |
||||||||||||||||
Net income |
16,711 | 1,551 | (2,099 | ) | 16,163 | |||||||||||
Net income attributable to noncontrolling interest |
| 114 | | 114 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 16,711 | $ | 1,437 | $ | (2,099 | ) | $ | 16,049 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||
Depreciation and amortization expense |
21,680 | 2,026 | | 23,706 | ||||||||||||
Amortization of deferred financing costs |
928 | 132 | | 1,060 | ||||||||||||
Provision for doubtful accounts |
729 | 116 | | 845 | ||||||||||||
Deferred income tax expense |
595 | | | 595 | ||||||||||||
Deferred rent |
641 | 170 | | 811 | ||||||||||||
Undistributed income in unconsolidated joint venture |
(364 | ) | | | (364 | ) | ||||||||||
Loss on disposal of equipment |
100 | 137 | | 237 | ||||||||||||
Equity based compensation |
276 | | | 276 | ||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||||||||||
Increase in accounts receivable |
(5,189 | ) | (14 | ) | | (5,203 | ) | |||||||||
Increase in inventories |
(10,386 | ) | (122 | ) | 938 | (9,570 | ) | |||||||||
Increase in prepaid expenses and other current assets |
(3,629 | ) | (2,027 | ) | (285 | ) | (5,941 | ) | ||||||||
Decrease increase in accounts payable, accrued expenses and income taxes
payable |
(18,966 | ) | 1,681 | 1,446 | (15,839 | ) | ||||||||||
Net cash provided by operating activities |
3,126 | 3,536 | | 6,662 | ||||||||||||
Cash flows used in investing activities: |
||||||||||||||||
Cash paid in connection with acquisitions, net of cash acquired |
(5,263 | ) | 2 | | (5,261 | ) | ||||||||||
Capital expenditures |
(22,447 | ) | (723 | ) | | (23,170 | ) | |||||||||
Proceeds from disposal of property and equipment |
104 | 30 | | 134 | ||||||||||||
Net cash used in investing activities |
(27,606 | ) | (691 | ) | | (28,297 | ) | |||||||||
Cash flows provided by (used in) financing activities: |
||||||||||||||||
Repayments of loans, notes payable and long-term obligations |
(25,345 | ) | (3,897 | ) | | (29,242 | ) | |||||||||
Proceeds from loans, notes payable and long-term obligations |
53,245 | 39 | | 53,284 | ||||||||||||
Net cash provided by (used in) financing activities |
27,900 | (3,858 | ) | | 24,042 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(5 | ) | (1,776 | ) | | (1,781 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
3,415 | (2,789 | ) | | 626 | |||||||||||
Cash and cash equivalents at beginning of period |
8,239 | 7,181 | 15,420 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 11,654 | $ | 4,392 | $ | | $ | 16,046 | ||||||||
27
Table of Contents
2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Our Company
We are a global leader in decorated party supplies. We make it easy and fun
to enhance special occasions with a wide 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 believe 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.
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 and
international sales accounted for 86% and 14%, respectively, of our total wholesale
sales in 2010 and 77% and 23%, respectively, during the first six months of 2011.
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.
28
Table of Contents
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.
Cost of Sales. Cost of sales at wholesale 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 sales 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 sales 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.
Our cost of sales 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 sales. 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 sales. 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.
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
29
Table of Contents
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.
Results of Operations
Three Months Ended June 30, 2011 Compared To Three Months Ended June 30, 2010
The following tables set forth our operating results and operating results
as a percentage of total revenues for the three months ended June 30, 2011 and 2010.
Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 411,502 | 98.9 | % | $ | 352,705 | 98.8 | % | ||||||||
Royalties and franchise fees |
4,550 | 1.1 | 4,453 | 1.2 | ||||||||||||
Total revenues |
416,052 | 100.0 | 357,158 | 100.0 | ||||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
247,787 | 59.6 | 210,865 | 59.0 | ||||||||||||
Wholesale selling expenses |
14,467 | 3.5 | 10,845 | 3.0 | ||||||||||||
Retail operating expenses |
72,368 | 17.4 | 64,416 | 18.0 | ||||||||||||
Franchise expenses |
3,370 | 0.8 | 3,149 | 0.9 | ||||||||||||
General and administrative expenses |
30,956 | 7.4 | 28,882 | 8.1 | ||||||||||||
Art and development costs |
4,082 | 1.0 | 3,634 | 1.0 | ||||||||||||
Total expenses |
373,030 | 89.7 | 321,791 | 90.0 | ||||||||||||
Income from operations |
43,022 | 10.3 | 35,367 | 10.0 | ||||||||||||
Interest expense, net |
20,312 | 4.9 | 9,126 | 2.6 | ||||||||||||
Other expense, net |
185 | 0.0 | 122 | 0.0 | ||||||||||||
Income before income taxes |
22,525 | 5.4 | 26,119 | 7.4 | ||||||||||||
Income tax expense |
7,947 | 1.9 | 9,588 | 2.7 | ||||||||||||
Net income |
14,578 | 3.5 | 16,531 | 4.7 | ||||||||||||
Less net income attributable to noncontrolling interests |
46 | 0.0 | 71 | 0.0 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 14,532 | 3.5 | % | $ | 16,460 | 4.7 | % | ||||||||
30
Table of Contents
Revenues
Total revenues for the second quarter of 2011 were $416.1 million, or 16.5%
higher than for the second quarter of 2010, reflecting growth in both reporting
segments. The following table sets forth our total revenues for the quarters ended
June 30, 2011 and 2010, respectively.
Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Dollars in | Total | Dollars in | Total | |||||||||||||
Thousands | Revenue | Thousands | Revenue | |||||||||||||
Revenues |
||||||||||||||||
Sales |
||||||||||||||||
Wholesale |
$ | 213,971 | 51.4 | % | $ | 183,465 | 51.4 | % | ||||||||
Eliminations |
(72,107 | ) | (17.3) | % | (70,698 | ) | (19.8) | % | ||||||||
Net wholesale |
141,864 | 34.1 | % | 112,767 | 31.6 | % | ||||||||||
Retail |
269,638 | 64.8 | % | 239,938 | 67.2 | % | ||||||||||
Total net sales |
411,502 | 98.9 | % | 352,705 | 98.8 | % | ||||||||||
Franchise related |
4,550 | 1.1 | % | 4,453 | 1.2 | % | ||||||||||
Total revenues |
$ | 416,052 | 100.0 | % | $ | 357,158 | 100.0 | % | ||||||||
Wholesale
Net sales for the second quarter of 2011 of $141.9 million were $29.1
million or 25.8% 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 second quarter of 2011 totaled
$68.3 million and were comparable to the corresponding 2010 sales. Net sales of
metallic balloons of $25.8 million were $0.8 million or 3.0% higher than in the
second quarter of 2010, principally driven by an increase in sales of our value price
balloon line to the dollar store channel. International sales totaled $47.8 million
and were $27.3 million higher than in the second quarter of 2010, principally
reflecting additional sales as a result of the acquisition of the Christys Group in
September 2010 and Riethmüller in late January 2011 of $9.7 million and $15.8
million, respectively. In addition, changes in foreign currency exchange rates
resulted in a 10.0% increase in international sales over 2010.
Intercompany sales to our retail affiliates of $72.1 million were $1.4
million or 2.0% higher than in the second quarter of 2010 and represented 33.7% of
total wholesale sales in the second quarter of 2011 compared to 38.5% in the second
quarter of 2010. The increase in intercompany sales principally reflects the
conversion of an additional 44 FCPO retail stores to the Party City format and the re-merchandising of the stores to carry a greater percentage of our wholesale product. During the second
quarter of 2011, our wholesale sales to our retail stores represented 59.4% of the
retail stores total purchases, compared to 66.1% in 2010. The decrease, as a
percentage of total purchases, is attributable to the accelerated timing of purchases
of third party Halloween products into the second quarter of 2011 as compared to the
third quarter of 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 second quarter of 2011 of $269.6 million were $29.7
million or 12.4% higher than retail sales in the second quarter of 2010. The retail
sales at our Party City stores (including converted FCPO stores) totaled $250.3
million and were $26.3 million or 11.8%, higher than in 2010. Party City same-store
sales increased 6.0% during 2011, driven by a 1.9% increase in average transaction
size and a 4.1% increase in transaction count. The increase in sales is partially
attributable to the successful shift in our principal advertising strategy from free
31
Table of Contents
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 June 30, 2011, including the net acquisition of 19 stores from franchisees, and
the conversion of 44 stores from the FCPO store format to the Party City store
format. During the second quarter of 2011, sales at stores converted from the FCPO
format to Party City during the twelve months ended June 30, 2011 were 15.3% higher
than sales at these same stores during the second 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 $13.8 million in
the second quarter of 2011 and were $7.3 million or 111.3% higher than in the second
quarter of 2010, reflecting continued performance in the online channel following the successful re-launch of the PartyCity.com website in
August 2009, mainly driven by our national advertising campaign, coupled with other online initiatives. Sales at all other store formats, including unconverted FCPO and outlet
stores, totaled $5.5 million and were $3.9 million or 41.6% lower than in 2010. The
decrease reflects the net closure of 23 stores during the twelve months ended June
30, 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 second quarter of 2011 were $4.6
million and comparable to the second quarter of 2010, as the negative impact on
royalty income from our acquisition of 19 franchise stores, net, during the twelve
months ended June 30, 2011 was offset principally by the impact of
increased same-store sales at remaining franchise stores.
Gross Profit
Our total margin on net sales for the second quarter of 2011 was 39.8%, or
40 basis points lower than in the second quarter of 2010. The following table sets
forth our gross profit on net sales for the three months ended June 30, 2011 and
2010.
Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Sales | Thousands | Sales | |||||||||||||
Wholesale |
$ | 51,880 | 36.6 | % | $ | 42,203 | 37.4 | % | ||||||||
Retail |
111,835 | 41.5 | % | 99,637 | 41.5 | % | ||||||||||
Total |
$ | 163,715 | 39.8 | % | $ | 141,840 | 40.2 | % | ||||||||
The gross profit margin on net sales at wholesale for the second quarter of
2011 was 36.6% or 80 basis points lower than in the second quarter of 2010. The
decrease in wholesale gross profit margin reflects the mix shift associated with our recent international acquisitions, the Christys Group and
Riethmüller, which have lower historical gross profit margins relative to our wholesale operations. Wholesale gross profit margin, excluding the impact of the Christys
Group and Riethmüller acquisitions, was 37.7% in the second quarter of 2011 compared
to 37.4% in the second quarter of 2010.
Retail gross profit margin for the second quarter of 2011 and 2010 was
41.5%. During the second quarter of 2011, 66.4% of our retail store sales were
products supplied by our wholesale operations, compared to 68.3% for 2010.
Operating expenses
Wholesale selling expenses of $14.5 million for the second quarter of 2011
were $3.6 million higher than for the second quarter of 2010. The increase in 2011
wholesale selling expense, as compared to 2010, principally reflects the additional
expenses related to the acquisitions of the Christys Group and Riethmüller of $1.9
million and $1.3 million, respectively, as well as inflationary increases in
compensation and employee benefits. Wholesale selling expenses were 6.8% of total
wholesale sales in the second quarter of 2011 compared to 5.9% for the comparable
quarter of 2010.
Retail operating expenses for the second quarter of 2011 totaled $72.4 million
or $8.0 million higher than in the second quarter of 2010, principally reflecting
additional costs associated with the national broadcasting campaign
and the growth in our retail store base and our e-commerce business. E-commerce costs reflect additional
32
Table of Contents
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 26.8% for the second quarter of 2011 and
2010. Franchise expenses for the second quarter of 2011 of $3.4 million were $0.2
million, or 7.0% higher than in the second quarter of 2010.
As a percentage of total revenues, general and administrative expenses decreased
to 7.4% for the second quarter of 2011, compared to 8.1% for the second quarter of
2010. General and administrative expenses for the quarter totaled $31.0 million, or
$2.1 million higher than in the second quarter of 2010, principally due to the
additional expenses related to the acquisitions of the Christys Group and
Riethmüller of $0.7 million and $1.4 million, respectively, as well as inflationary
compensation and employee benefit cost increases. These increases were partially
offset by nonrecurring costs incurred in the second quarter of 2010 relating to the
restructure of the FCPO corporate office in Naperville, Illinois.
Art and development costs of $4.1 million for the quarter ended June 30, 2011 were
$0.4 million or 12.3% higher than in the second quarter of 2010, principally
reflecting increases in personnel, compensation and employee benefits. As a
percentage of total revenues, art and development costs were 1.0% in the second
quarter of 2011 and 2010.
Interest expense, net
Interest expense of $20.3 million for the quarter ended June 30, 2011 was
$11.2 million higher than for the second quarter of 2010, reflecting the increase in
the New ABL Facility and New Term Loan Credit Agreement interest rates and a $326.6
million increase in our term loan borrowings following the New ABL Facility and New
Term Loan Credit Agreement refinancings in August and December of 2010, respectively.
Other expense, net
Other expense, net, was $0.2 million for the second quarter of 2011
compared to $0.1 million for the second quarter of 2010. Other expense, 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 expense
The income tax expense for the quarters ended June 30, 2011 and 2010 were
determined based upon the Companys estimated consolidated effective income tax rates
of 36.3% 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 expense for the quarter ended June 30, 2011
reflects the settlement of the audit of the Companys 2008 and 2009 federal tax
returns and the settlement of the audit of several 2007 and 2008 state income tax
returns. Also, the income tax expense for the quarter ended June 30, 2010 reflects
the settlement of the Companys 2007 federal tax return.
33
Table of Contents
Six Months Ended June 30, 2011 Compared To Six Months Ended June 30, 2010
The following tables set forth our operating results and operating results as a
percentage of total revenues for the six months ended June 30, 2011 and 2010.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Net sales |
$ | 764,003 | 98.9 | % | $ | 657,084 | 98.8 | % | ||||||||
Royalties and franchise fees |
8,231 | 1.1 | 8,297 | 1.2 | ||||||||||||
Total revenues |
772,234 | 100.0 | 665,381 | 100.0 | ||||||||||||
Expenses: |
||||||||||||||||
Cost of sales |
472,801 | 61.2 | 410,765 | 61.7 | ||||||||||||
Wholesale selling expenses |
28,319 | 3.7 | 21,235 | 3.2 | ||||||||||||
Retail operating expenses |
134,216 | 17.4 | 117,376 | 17.6 | ||||||||||||
Franchise expenses |
6,736 | 0.9 | 6,273 | 0.9 | ||||||||||||
General and administrative expenses |
62,500 | 8.1 | 58,807 | 8.8 | ||||||||||||
Art and development costs |
8,032 | 1.0 | 7,269 | 1.1 | ||||||||||||
Total expenses |
712,604 | 92.3 | 621,725 | 93.3 | ||||||||||||
Income from operations |
59,630 | 7.7 | 43,656 | 6.7 | ||||||||||||
Interest expense, net |
40,680 | 5.3 | 18,427 | 2.8 | ||||||||||||
Other expense, net |
247 | 0.0 | 53 | 0.0 | ||||||||||||
Income before income taxes |
18,703 | 2.4 | 25,176 | 3.9 | ||||||||||||
Income tax expense |
6,617 | 0.9 | 9,013 | 1.4 | ||||||||||||
Net income |
12,086 | 1.5 | 16,163 | 2.5 | ||||||||||||
Less net income attributable to noncontrolling interests |
117 | 0.0 | 114 | 0.0 | ||||||||||||
Net income attributable to Amscan Holdings, Inc. |
$ | 11,969 | 1.5 | % | $ | 16,049 | 2.5 | % | ||||||||
Revenues
Total revenues for the six months ended June 30, 2011 were $772.2 million,
or 16.1% higher than for the six months ended June 30, 2010, reflecting growth in
both reporting segments. The following table sets forth our total revenues for the
quarters ended June 30, 2011 and 2010, respectively.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Dollars in | Total | Dollars in | Total | |||||||||||||
Thousands | Revenue | Thousands | Revenue | |||||||||||||
Revenues |
||||||||||||||||
Sales |
||||||||||||||||
Wholesale |
$ | 413,547 | 53.6 | % | $ | 344,424 | 51.8 | % | ||||||||
Eliminations |
(139,288 | ) | (18.0) | % | (125,734 | ) | (18.9) | % | ||||||||
Net wholesale |
274,259 | 35.5 | % | 218,690 | 32.9 | % | ||||||||||
Retail |
489,744 | 63.4 | % | 438,394 | 65.9 | % | ||||||||||
Total net sales |
764,003 | 98.9 | % | 657,084 | 98.8 | % | ||||||||||
Franchise related |
8,231 | 1.1 | % | 8,297 | 1.2 | % | ||||||||||
Total revenues |
$ | 772,234 | 100.0 | % | $ | 665,382 | 100.0 | % | ||||||||
34
Table of Contents
Wholesale
Net sales for the first six months of 2011 of $274.3 million were $55.6
million or 25.4% 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 six months of 2011 totaled
$134.5 million and were $5.3 million or 4.1% higher than 2010 sales. The increase in
sales reflects the benefit of Designware product sales during the entire six months
ended June 30, 2011 compared to less than four full months in 2010, which represented
an increase of $0.8 million. In addition, sales of party
accessories, plasticware and wearable products were higher than in the first six months of 2010 due, in part, to increased
marketing. Net sales of metallic balloons of $52.6 million were $3.2 million or 6.4%
higher than in the first six months of 2010, principally driven by an increase in
sales of our value price balloon line to the dollar store channel. International
sales totaled $87.2 million and were $47.1 million higher than in the first six
months of 2010, principally reflecting additional sales as a result of the
acquisition of the Christys Group in September 2010 and Riethmüller in late January
2011 of $14.6 million and $29.1 million, respectively. In addition, changes in
foreign currency exchange rates resulted in a 7.7% increase in international sales
over 2010.
Intercompany sales to our retail affiliates of $139.3 million were $13.6
million or 10.8% higher than in the first six months of 2010 and represented 33.7% of
total wholesale sales in the first six months of 2011 compared to 36.5% in the first
six months of 2010. The increase in intercompany sales principally reflects the
impact of the acquisition of Designware and the conversion of an additional 44 FCPO
retail stores to the Party City format and the re-merchandising of the stores to carry a greater percentage of our wholesale product. During the first six months of 2011, our wholesale sales to
our retail stores represented 62.8% of the retail stores total purchases, compared
to 66.2% in 2010. The decrease, as a percentage of total purchases, is attributable
to the accelerated timing of purchases of third party Halloween products in the
second quarter of 2011, as compared to 2010. The intercompany sales of our wholesale
segment are eliminated against the intercompany purchases of our retail segment in
the consolidated financial statements.
35
Table of Contents
Retail
Retail sales for the first six months of 2011 of $489.7 million were $51.3
million or 11.7% higher than retail sales in the first six months of 2010. The retail
sales at our Party City stores (including converted FCPO stores) totaled $453.2
million and were $44.4 million or 10.9%, higher than in 2010. Party City same-store
sales increased 5.3% during 2011, driven by a 2.5% increase in average transaction
size and a 2.8% 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 June 30, 2011, including the net acquisition of 19 stores from franchisees, and
the conversion of 44 FCPO stores to the Party City format. During the first six
months of 2011, sales at stores converted from the FCPO format to Party City during
the twelve months ended June 30, 2011 were 15.6% higher than sales at these same
stores during the first six months 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 $26.0 million in the first six months of
2011 and were $13.6 million or 109.9% higher than in the first six months of 2010,
reflecting continued performance in the online channel following the successful re-launch of the PartyCity.com website in August 2009, mainly driven by our naional advertising campaign and other online initiatives.
Sales at all other store formats, including unconverted FCPO and outlet stores,
totaled $10.5 million and were $6.7 million or 38.7% lower than in 2010. The decrease
reflects the net closure of 23 stores during the twelve months ended June 30, 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 six months of 2011 were $8.2
million and comparable to the first six months of 2010, as the negative impact on
royalty income from our acquisition of 19 franchise store, net, during the twelve
months ended June 30, 2011 was offset principally by the impact of
increased same-store sales at remaining franchise stores.
Gross Profit
Our total margin on net sales for the six months ended June 30, 2011 was
38.1%, or 60 basis points higher than in the six months ended June 30, 2010. The
following table sets forth our gross profit on net sales for the six months ended
June 30, 2011 and 2010.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Dollars in | Percentage of | Dollars in | Percentage of | |||||||||||||
Thousands | Sales | Thousands | Sales | |||||||||||||
Wholesale |
$ | 96,052 | 35.0 | % | $ | 80,078 | 36.6 | % | ||||||||
Retail |
195,150 | 39.8 | % | 166,242 | 37.9 | % | ||||||||||
Total |
$ | 291,202 | 38.1 | % | $ | 246,320 | 37.5 | % | ||||||||
The gross profit margin on net sales at wholesale for the first six months
of 2011 was 35.0% or 160 basis points lower than in the first six months of 2010. The
decrease in wholesale gross profit margin reflects the mix shift associated with our recent international acquisitions, the Christys Group and
Riethmüller, which have lower historical gross profit margins relative to our wholesale operations. Wholesale gross profit margin, excluding the impact of the Christys
Group and Riethmüller acquisitions, was 36.8% in the first six months of 2011
compared to 36.6% in the first six months of 2010.
Retail gross profit margin for the first six months of 2011 was 39.8% or
190 basis points higher than in the first six months of 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
previously deferred
manufacturing and distribution margin in the first six months of 2011 compared to the
first six months of 2010. During the six months ended June 30, 2011, 65.4% of our
retail store sales were products supplied by our wholesale operations, compared to
63.1% for 2010.
36
Table of Contents
Operating expenses
Wholesale selling expenses of $28.3 million for the first six months of
2011 were $7.1 million higher than for the first six months of 2010. The increase in
2011 wholesale selling expense, as compared to 2010, principally reflects the
additional expenses related to the acquisitions of the Christys Group and
Riethmüller of $3.6 million and $2.3 million, respectively, as well as inflationary
increases in compensation and employee benefits. Wholesale selling expenses were 6.8%
of total wholesale sales in the first six months of 2011 compared to 6.2% in the
first six months of 2010.
Retail operating expenses for the first six months of 2011 totaled $134.2
million or $16.8 million higher than in the first six months of 2010, principally
reflecting additional costs associated with the national broadcasting
campaign and the growth in our retail store base and our e-commerce business. E-commerce costs reflect
additional 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 27.4% for the first six
months of 2011, as compared to 26.8% for the first six months of 2010. Franchise
expenses for the first six months of 2011 of $6.7 million were $0.5 million or 7.4%
higher than in the first six months of 2010.
As a percentage of total revenues, general and administrative expenses
decreased to 8.1% for the first six months of 2011, compared to 8.8% for the first
six months of 2010. General and administrative expenses for the quarter totaled $62.5
million, or $3.7 million higher than in the first six months of 2010, principally
due to the additional expenses related to the acquisitions of the Christys Group and
Riethmüller of $1.3 million and $3.4 million, respectively, as well as inflationary
compensation and employee benefit cost increases. These increases were substantially
offset by the non-recurring costs incurred in the first six months of 2010 relating
to the restructure of the FCPO corporate office in Naperville, Illinois as well as
higher legal and professional costs in the first six months of 2010.
Art and development costs of $8.0 million for the quarter ended June 30,
2011 were $0.8 million or 10.5% higher than in the first six months of 2010,
principally reflecting increases in personnel, compensation and employee benefits. As
a percentage of total revenues, art and development costs were 1.0% and 1.1% in the
first six months of 2011 and 2010, respectively.
Interest expense, net
Interest expense of $40.7 million for the quarter ended June 30, 2011 was
$22.3 million higher than for the first six months of 2010, reflecting the increase
in the New ABL Facility and New Term Loan Credit Agreement interest rates and a
$326.6 million increase in our term loan borrowings following the New ABL Facility
and New Term Loan Credit Agreement refinancing in August and December of 2010,
respectively.
Other expense, net
Other expense, net, was $0.2 million for the first six months of 2011
compared to $0.1 million for the first six months of 2010. Other expense, 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 expense
The income tax expense for the six months ended June 30, 2011 and 2010 were
determined based upon the Companys estimated consolidated effective income tax rates
of 36.3% 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 expense for the six months ended June 30, 2011
reflects the settlement of the audit of the Companys 2008 and 2009 federal tax
returns and the settlement of the audit of several 2007 and 2008 state income tax
returns. Also, the income tax expense for the six months ended June 30, 2010 reflects
the settlement of the Companys 2007 federal tax return.
37
Table of Contents
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 the New ABL Facility and the New Term Loan
Agreement in an amount sufficient to enable us to repay our indebtedness, including
the notes, or to fund our other liquidity needs.
Cash Flow Data Six Months Ended June 30, 2011 Compared To Six Months Ended
June 30, 2010
Net cash provided by operating activities totaled $49.5 million during the
six months ended June 30, 2011, as compared to $6.7 million during the comparable six
months ended June 30, 2010. Net cash flow provided by operating activities before
changes in operating assets and liabilities was $46.9 million during the six months
ended June 30, of 2011 and $43.2 million during the comparable six months ended June
30, 2010. Changes in operating assets and liabilities during the first six months of
2011 and 2010 resulted in the source of cash of $2.6 million and a use of cash $36.5
million, respectively, and principally reflect the timing of certain seasonal trade
and income tax payments.
Net cash used in investing activities totaled $84.5 million during the six
months ended June 30, 2011, as compared to $28.3 million during the comparable six
month period of 2010. Investing activities during the six months ended June 30, 2011
included $47.1 million paid in connection with the acquisition of Riethmüller, $4.0
million paid in connection with the acquisition of Christys, and $9.5 million paid
in connection with the purchase of retail franchise stores. Capital expenditures
totaled $24.1 million during the six months ended June 30, 2011 compared to $23.2
million in the six months ended June 30, 2010. Retail capital expenditures totaled
$17.6 million in 2011 and were principally for new stores and store renovations,
while wholesale capital expenditures, principally for printing plates and dies and
distribution equipment, totaled $6.5 million.
Net cash provided by financing activities was $27.3 million during the six
months ended June 30, 2011, compared to $24.0 million in the six months ended June
30, 2010 and principally reflects borrowings under our revolving credit facility, net
of scheduled term debt repayment.
Required repayments under our term debt for the remainder of 2011 will be
$3.4 million. At June 30, 2011, we had $127.4 million of excess availability under
the New ABL Facility.
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 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.
38
Table of Contents
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 June 30, 2011 and 2010, our interest expense, after considering the
effects of our interest rate swap agreements, would have increased by $3.7 million and
$1.5 million, respectively. The income before income taxes for the quarters ended June 30,
2011 and 2010 would also have decreased by the same amounts. If market interest rates for
our variable rate indebtedness averaged 2% more than the interest rate actually paid for
the six months ended June 30, 2011 and 2010, our interest expense, after considering the
effects of our interest rate swap agreements, would have increased by $7.3 million and
$3.0 million, respectively. The income before income taxes for the quarters ended June 30,
2011 and 2010 would also have decreased 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 $4.0 million and $1.4 million for the three months
ended June 30, 2011 and 2010 and 7.0 million and 2.7 million for the six months ended June
30, 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.
Item 4. Controls and Procedures
We have carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures as of June 30, 2011 pursuant to Rules l3a-15(b)
and l5d-15(b) of the Securities Exchange Act of 1934, as amended (the Act). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in ensuring that information required to be disclosed by us in the reports
that we file or submit under the Act is (i) recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and forms; and (ii) accumulated
and communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in our internal control over financial reporting (as defined in Rules l3a-15(f)
and l5d-15(f) under the Act) during the six months ended June 30, 2011 identified in connection with the
evaluation by our management, including our Chief Executive Officer and Chief Financial Officer, that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
39
Table of Contents
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. |
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. |
||||
By: | /s/ Michael A. Correale | |||
Michael A. Correale | ||||
Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer) | ||||
Date: August 15, 2011
40