-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RkiSwzhjf9Yf+QXYLqMgWQdbdT3AcRcuLUseA1ZHpoTcMRIF8snAxghIJXnhXE0C mv7TgQ8nfCm62zzk+uZIrQ== 0000950123-06-014148.txt : 20061114 0000950123-06-014148.hdr.sgml : 20061114 20061114172232 ACCESSION NUMBER: 0000950123-06-014148 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-14107 FILM NUMBER: 061216922 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 10-Q 1 y27180e10vq.txt 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q ---------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________ COMMISSION FILE NUMBER 000-21827 ---------- AMSCAN HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3911462 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
80 GRASSLANDS ROAD ELMSFORD, NY 10523 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (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 [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of November 14, 2006, 1,000.00 shares of Registrant's common stock, par value $0.10, were outstanding. ================================================================================ AMSCAN HOLDINGS, INC. FORM 10-Q SEPTEMBER 30, 2006 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005.............................................. 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005....................... 4 Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005....................... 5 Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2006........................... 6 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005....................... 7 Notes to Condensed Consolidated Financial Statements.............. 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 25 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 35 ITEM 4 CONTROLS AND PROCEDURES........................................... 36 PART II ITEM 5 OTHER INFORMATION................................................. 36 ITEM 6 EXHIBITS.......................................................... 36 SIGNATURE................................................................ 37
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 wholly owned subsidiaries and not to any other person. You may read and copy any materials we file with the Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov. 2 AMSCAN HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------ (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents ....................................................... $ 6,402 $ 8,745 Accounts receivable, net of allowances .......................................... 104,681 83,029 Inventories, net of allowances .................................................. 238,974 188,457 Prepaid expenses and other current assets ....................................... 44,107 39,561 ---------- ---------- Total current assets ......................................................... 394,164 319,792 Property, plant and equipment, net ................................................. 154,908 150,877 Goodwill ........................................................................... 432,729 505,731 Trade names ........................................................................ 145,600 68,500 Other intangible assets, net ....................................................... 47,075 48,699 Other assets ....................................................................... 28,671 25,348 ---------- ---------- Total assets ................................................................. $1,203,147 $1,118,947 ========== ========== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable ......................................................... $ 48,450 $ -- Accounts payable ................................................................ 119,865 105,787 Accrued expenses ................................................................ 70,295 50,806 Income taxes payable ............................................................ 296 3,387 Current portion of long-term obligations ........................................ 3,409 2,643 ---------- ---------- Total current liabilities .................................................... 242,315 162,623 Long-term obligations, excluding current portion ................................... 559,099 561,567 Deferred income tax liabilities .................................................... 49,906 63,782 Deferred rent and other long-term liabilities ...................................... 3,124 3,344 ---------- ---------- Total liabilities ............................................................ 854,444 791,316 Redeemable common securities ....................................................... 12,320 6,821 Commitments and contingencies Stockholders' equity: Common stock ($0.01 par value; 40,000.00 shares authorized; 30,087.63 and 27,882.73 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively) ............................................. -- -- Additional paid-in capital ...................................................... 327,610 300,983 Retained earnings ............................................................... 7,983 20,824 Accumulated other comprehensive income (loss) ................................... 790 (997) ---------- ---------- Total stockholders' equity ................................................... 336,383 320,810 ---------- ---------- Total liabilities, redeemable common securities and stockholders' equity ..... $1,203,147 $1,118,947 ========== ==========
Note: The balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date (see Note 3). See accompanying notes to condensed consolidated financial statements. 3 AMSCAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2006 2005 -------- -------- Revenues: Net sales .................................................... $220,514 $105,582 Royalties and franchise fees ................................. 4,505 -- -------- -------- Total revenues ............................................ 225,019 105,582 Expenses: Cost of sales ................................................ 156,383 69,560 Selling expenses ............................................. 9,978 9,148 Retail operating expenses .................................... 27,668 -- Franchise expenses ........................................... 3,424 -- General and administrative expenses .......................... 19,751 8,057 Art and development costs .................................... 2,504 2,330 -------- -------- Total expenses ............................................ 219,708 89,095 -------- -------- Income from operations ................................. 5,311 16,487 Interest expense, net ........................................... 14,226 7,989 Other expense, net .............................................. 319 8 -------- -------- (Loss) income before income taxes and minority interests .. (9,234) 8,490 Income tax (benefit) expense .................................... (3,671) 3,141 Minority interests .............................................. 112 70 -------- -------- Net (loss) income ......................................... $ (5,675) $ 5,279 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 AMSCAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2006 2005 -------- -------- Revenues: Net sales .................................................... $648,544 $307,243 Royalties and franchise fees ................................. 13,548 -- -------- -------- Total revenues ............................................ 662,092 307,243 Expenses: Cost of sales ................................................ 462,254 205,123 Selling expenses ............................................. 28,596 27,343 Retail operating expenses .................................... 76,230 -- Franchise expenses ........................................... 9,403 -- General and administrative expenses .......................... 59,390 25,793 Art and development costs .................................... 7,462 6,944 -------- -------- Total expenses ............................................ 643,335 265,203 -------- -------- Income from operations ................................. 18,757 42,040 Interest expense, net ........................................... 41,329 23,220 Other (income) expense, net ..................................... (1,638) 430 -------- -------- (Loss) income before income taxes and minority interests .. (20,934) 18,390 Income tax (benefit) expense .................................... (8,311) 5,365 Minority interests .............................................. 218 120 -------- -------- Net (loss) income ......................................... $(12,841) $ 12,905 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 AMSCAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2006 (DOLLARS IN THOUSANDS) (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER COMMON COMMON PAID-IN RETAINED COMPREHENSIVE SHARES STOCK CAPITAL EARNINGS (LOSS) INCOME TOTAL --------- ------ ---------- -------- ------------- -------- Balance at December 31, 2005......................... 27,882.73 $-- $300,983 $ 20,824 $ (997) $320,810 Net loss.......................................... (12,841) (12,841) Net change in cumulative translation adjustment... 1,727 1,727 Change in fair value of interest rate swap contracts, net of income tax expense........... 60 60 -------- Comprehensive loss............................. (11,054) Issuance of shares of common stock in connection with the Party America acquisition............. 2,070.24 29,501 29,501 Issuance of shares of common stock................ 134.66 1,614 1,614 Reclassification of common stock to redeemable common securities.............................. (3,871) (3,871) Decrease in additional paid-in capital due to appreciation in redeemable common securities... (1,459) (1,459) Equity based compensation expense................. 842 842 --------- --- -------- -------- ------ -------- Balance at September 30, 2006........................ 30,087.63 $-- $327,610 $ 7,983 $ 790 $336,383 ========= === ======== ======== ====== ========
6 AMSCAN HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2006 2005 -------- -------- Cash flows (used in) provided by operating activities: Net (loss) income ........................................................ $(12,841) $ 12,905 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization expense ................................. 30,626 11,457 Amortization of deferred financing costs .............................. 1,986 1,141 Provision for doubtful accounts ....................................... 1,283 1,127 Deferred income tax (benefit) expense ................................. (7,553) 3,361 Undistributed (gain) loss in unconsolidated joint venture ............. (184) 611 Gain on disposal of property, plant and equipment ..................... (1,156) (5) Equity based compensation ............................................. 842 223 Changes in operating assets and liabilities: Increase in accounts receivable .................................... (28,252) (9,637) Increase in inventories ............................................ (18,844) (15,265) Decrease (increase) in prepaid expenses, other current assets and other assets, net ............................................... 3,723 (710) Increase in accounts payable, accrued expenses, income taxes payable and other liabilities, net .............................. 8,319 7,988 Other, net ............................................................ -- (2,993) -------- -------- Net cash (used in) provided by operating activities ................ (22,051) 10,203 Cash flows used in investing activities: Cash paid in connection with acquisitions ................................ (14,270) -- Capital expenditures ..................................................... (29,338) (12,476) Proceeds from disposal of property, plant and equipment .................. 14,273 21 -------- -------- Net cash used in investing activities .............................. (29,335) (12,455) Cash flows provided by financing activities: Repayment of loans, notes payable and long-term obligations .............. (2,319) (2,105) Proceeds from short-term obligations ..................................... 48,450 4,095 Proceeds from the sale of common stock ................................... 1,614 600 Purchase and retirement of redeemable common stock held by a former employee ............................................. -- (104) -------- -------- Net cash provided by financing activities .......................... 47,745 2,486 Effect of exchange rate changes on cash and cash equivalents ................ 1,298 (1,678) -------- -------- Net decrease in cash and cash equivalents .......................... (2,343) (1,444) Cash and cash equivalents at beginning of period ............................ 8,745 4,252 -------- -------- Cash and cash equivalents at end of period .................................. $ 6,402 $ 2,808 ======== ======== Supplemental Disclosures: Interest paid ...................................................... $ 31,934 $ 13,962 Income taxes paid .................................................. 3,975 2,361
See accompanying notes to condensed consolidated financial statements. 7 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 1 - DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan", "AHI" or the "Company") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities. The Company designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic balloons, gifts and stationery, throughout the world. In addition, following the acquisition of Party City in December 2005, the Company operates retail party supply superstores within the United States and sells franchises on an individual store and franchise area basis throughout the United States and Puerto Rico. NOTE 2 -ACQUISITIONS On December 23, 2005 (the "Party City Acquisition Date"), the Company completed the acquisition of Party City Corporation ("Party City") pursuant to an Agreement and Plan of Merger (the "Party City Acquisition"), dated September 26, 2005 (as amended, the "Acquisition Agreement"), by and among the Company, Party City and BWP Acquisition, Inc. ("BWP"), a Delaware corporation and a wholly-owned subsidiary of the Company. Pursuant to the terms of the Acquisition Agreement, BWP merged with and into Party City, with Party City continuing as the surviving corporation. Each share of common stock of Party City outstanding at the Party City Acquisition Date was cancelled and converted into the right to receive $17.50 in cash, without interest. Prior to the acquisition, Party City settled all outstanding stock options and warrants at the spread between $17.50 and their exercise price. Transaction costs associated with the Party City Acquisition totaled $9,667. Financing for the Party City Acquisition, including the repayment of the Company's borrowings under its 2004 Senior Secured Credit Facility, was provided by: (i) an equity investment of $166,425 (the "Equity Investment") in the Company's parent, AAH Holdings Corporation ("AAH"), a Delaware corporation jointly controlled by funds affiliated with Berkshire Partners, LLC and Weston Presidio (together the "Principal Investors"), (ii) borrowings under a First Lien Credit Agreement (the "First Lien Credit Agreement") consisting of a $325,000 term loan (net of an original issue discount of $3,250) (the "First Term Loan") and a committed revolving credit facility in an aggregate principal amount of $85,000 (the "First Term Loan Revolver"), (iii) borrowings under a Second Lien Credit Agreement (the "Second Lien Credit Agreement," and, together with the First Lien Credit Agreement, the "Credit Agreements") consisting of a $60,000 term loan (net of an original issue discount of $1,500) (the "Second Term Loan") and (iv) cash on-hand of $21,227, including $862 paid during the nine months ended September 30, 2006. Deferred financing costs associated with the Credit Agreements totaled $7,437. The Equity Investment consisted of the sale of 13,868.75 shares of AAH common stock to funds affiliated with Berkshire Partners, LLC and Weston Presidio, certain members of management and certain other investors. The excess of the Party City purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($35,200), which are being amortized using the straight-line method over the assets' estimated useful life (nine years), lease valuation assets ($338) which are being amortized over the remaining life of the specific lease, and trade names ($94,100) and goodwill ($148,576), which are not being amortized. In addition, there was an allocation to adjust property, plant and equipment to market value ($3,440). The acquisition was structured as a purchase of common stock and, accordingly, the amortization of intangible assets is not deductible for income tax purposes. The allocation of the purchase price is based, in-part, on our estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Management determined the fair market value of net assets acquired as of the Party City Acquisition Date with the assistance of independent valuation specialists. Based on the valuation results, during the nine months ended September 30, 2006, the Company increased the allocation of the purchase price to trade names ($59,100), franchise licenses ($5,200) and fixed assets ($3,440) and adjusted other net liabilities and deferred taxes, resulting in a net decrease in goodwill related to the Party City Acquisition of $73,657. The following unaudited pro forma information assumes the Party City Acquisition had occurred on January 1, 2005. The pro forma information, as presented below, is not necessarily indicative of the results that would have been obtained had the Party City Acquisition occurred on January 1, 2005, nor is it necessarily indicative of the Company's future results:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2005 ------------------ ------------------ Total revenues... $206,024 $605,695 Net loss......... (4,563) (14,600)
8 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The pro forma net loss reflects the following items: (i) adjustments to interest expense for new borrowings related to the Party City Acquisition and the elimination of historical interest on debt repaid in connection therewith, (ii) the elimination of non-recurring expenses related to the Party City Acquisition, (iii) adjustments to depreciation and amortization expense arising from the valuation of depreciable and amortizable tangible and intangible assets, as a result of a preliminary purchase price allocation, and (vi) the related income tax effects of the above items based upon a pro forma effective income tax rate of 39.5%. On September 29, 2006 (the "Party America Acquisition Date"), the Company acquired PA Acquisition Corp. (the "Party America Acquisition"), doing business as Party America ("Party America"), from Gordon Brothers Investment, LLC (see Note 11). In connection with the acquisition, the outstanding common stock, common stock options and subordinated debt of Party America were converted into AAH common stock and common stock options valued at $29,670. AAH also paid transaction costs of $1,100 and repaid $12,583 of Party America senior debt. A preliminary estimate of the excess of the Party America purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($2,300), which are being amortized using the straight-line method over the assets' estimated useful life (nine years) and trade names ($15,400) and goodwill ($2,628), which are not being amortized. In addition, there was an allocation to adjust property, plant and equipment to market value ($500). The acquisition was structured as a purchase of common stock and, accordingly, the amortization of intangible assets is not deductible for income tax purposes. The allocation of the purchase price is based, in-part, on our preliminary estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Independent valuation specialists are currently conducting a valuation of the net assets acquired as of the Party America Acquisition Date to assist management with the final determination of fair value. As a result of the Party America Acquisition, the Company assumed additional non-cancellable lease commitments totaling $77,500. NOTE 3 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements as of September 30, 2006 and December 31, 2005 and for the three and nine month periods ended September 30, 2006 and 2005 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 ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP 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. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. 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 the sales in October for the Halloween season and, to a lesser extent, other fourth quarter holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. Our retail segment's fiscal year and related fiscal quarters are based on the 52-week or 53-week period nearest to December 31 of each year. Accordingly, our retail segment's financial statements as of and for the three and nine months ended September 30, 2006 are based on the 13-week and 39-week periods ended September 30, 2006, respectively. The differences in the retail segment's quarter and year end close dates are not significant. 9 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 4 - INVENTORIES Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------ Finished goods......................................... $224,545 $172,232 Raw materials.......................................... 14,121 12,272 Work-in-process........................................ 5,216 6,139 -------- -------- 243,882 190,643 Less: reserve for slow moving and obsolete inventory... (4,908) (2,186) -------- -------- $238,974 $188,457 ======== ========
Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using the weighted average method. All other inventory cost is determined using the first-in, first-out method. NOTE 5 - INCOME TAXES The consolidated income tax (benefit) expense for the three and nine months ended September 2006 and 2005, was determined based upon estimates of the Company's consolidated effective income tax rate for the years ending December 31, 2006 and 2005, respectively. The differences between the consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes, available domestic tax credits and the effects of foreign operations, including available foreign tax credits. In addition, during the nine months ended September 30, 2005, the Company recorded a $1,400 reduction to its income tax expense and net deferred income tax liability to reflect a change in its estimated state income tax rate. The tax rate change results from a change in New York State tax law governing the apportionment of income. NOTE 6 - RESTRUCTURING In conjunction with the Party City Acquisition, the Company's management approved and initiated plans to restructure Party City's distribution operations and involuntarily terminate a limited number of Party City personnel. The distribution operations, which accounted for $7,528 and $27,314 of revenue from sales to franchises for the three and nine months ended September 30, 2006, respectively, and operating income (loss) of $238 and $(27) for the same respective periods, will be combined into the Company's existing wholesale distribution operations. We expect to complete the planned restructuring of Party City's distribution operations by March 31, 2007. Estimated restructuring costs associated with the Party City Acquisition of $3,000 were accrued for as part of the net assets acquired (see Note 2). To date, we have incurred $1,219 in severance costs. The restructuring reserve at September 30, 2006 of $1,781 includes $394 of additional severance payments to previously severed employees and $1,387 of costs to restructure the distribution operations. In connection with the Party American Acquisition, the Company may incur employee retention expenses of approximately $4,000 from the Party American Acquisition date to September 30, 2007. 10 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 7 - COMPREHENSIVE (LOSS) INCOME Comprehensive (loss) income consisted of the following:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------------ 2006 2005 2006 2005 ------- ------- -------- ------- Net (loss) income .......................................... $(5,675) $ 5,279 $(12,841) $12,905 Net change in cumulative translation adjustment ............ 202 (1,600) 1,727 (2,687) Change in fair value of interest rate swap contracts, net of income taxes of ($132), $170, $35 and $279 .............. (224) 289 60 454 Change in fair value of foreign exchange contracts, net of income taxes of $236 and $408 ........................... -- 401 -- 660 ------- ------- -------- ------- $(5,697) $ 4,369 $(11,054) $11,332 ======= ======= ======== =======
Accumulated other comprehensive income (loss) consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ------------ Cumulative translation adjustment................................ $730 $(997) Interest rate swap contracts, net of income tax expense of $35... 60 -- ---- ----- $790 $(997) ==== =====
NOTE 8 - CAPITAL STOCK At September 30, 2006 and December 31, 2005, the Company's authorized capital stock consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of which 30,087.63 and 27,882.73 shares were issued and outstanding, respectively. Certain employee stockholders owned 773.67 and 501.08 shares of AAH common stock at September 30, 2006 and December 31, 2005, respectively. Under the terms of the AAH stockholders' agreement dated April 30, 2004, the Company has an option to purchase all of the shares of common stock held by former 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' agreements is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may be payable by the Company to all employee stockholders based on the estimated fair market value of fully paid and vested common securities is classified as redeemable common securities on the consolidated balance sheet with a corresponding adjustment to stockholders' equity. At September 30, 2006 and December 31, 2005, the aggregate amount that may be payable by the Company to employee stockholders, based on the estimated market value, was approximately $12,320 and $6,821, respectively. As there is no active market for the Company's common stock, the Company estimated the fair value of its common stock at September 30, 2006 and December 31, 2005, based on the valuation of the Company common stock issued in connection with the acquisitions of Party America and Party City, respectively. NOTE 9 - SEGMENT INFORMATION Industry Segments Prior to the acquisition of Party City on December 23, 2005, the Company operated as a single business segment - Wholesale. Following the Party City Acquisition, the Company has two identifiable business segments - Wholesale and Retail. The Wholesale segment includes the design, manufacture, contract for manufacture and distribution of party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, gifts and stationery, at wholesale. The Retail segment includes the operation of company-owned retail party supply superstores in the United States and the sale of franchises on an individual store and franchise area basis throughout the United States and Puerto Rico. 11 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The Company's industry segment data is as follows:
WHOLESALE RETAIL ELIMINATIONS CONSOLIDATED --------- -------- ------------ ------------ THREE MONTHS ENDED SEPTEMBER 30, 2006 Revenues: Net sales ....................................... $135,134 $105,176 $(19,796) $220,514 Royalties and franchise fees .................... -- 4,505 -- 4,505 -------- -------- -------- -------- Total revenues ............................... $135,134 $109,681 $(19,796) $225,019 ======== ======== ======== ======== Income (loss) from operations ...................... $ 16,059 $ (7,508) $ (3,240) $ 5,311 ======== ======== ======== Interest expense, net .............................. 14,226 Other expense, net ................................. 319 -------- Loss before income taxes and minority interests .... $ (9,234) ======== Long-lived assets .................................. $455,876 $358,371 $ (5,264) $808,983 ======== ======== ======== ========
WHOLESALE RETAIL ELIMINATIONS CONSOLIDATED --------- -------- ------------ ------------ NINE MONTHS ENDED SEPTEMBER 30, 2006 Revenues: Net sales ....................................... $375,093 $322,278 $(48,827) $648,544 Royalties and franchise fees .................... -- 13,548 -- 13,548 -------- -------- -------- -------- Total revenues ............................... $375,093 $335,826 $(48,827) $662,092 ======== ======== ======== ======== Income (loss) from operations ...................... $ 39,428 $(12,052) $ (8,619) $ 18,757 ======== ======== ======== Interest expense, net .............................. 41,329 Other income, net .................................. (1,638) -------- Loss before income taxes and minority interests .... $(20,934) ======== Long-lived assets .................................. $455,876 $358,371 $ (5,264) $808,983 ======== ======== ======== ========
Geographic Segments The Company's export sales, other than intercompany sales reported below as sales between geographic areas, are not material. Sales between geographic areas primarily consist of sales of finished goods for distribution in foreign markets. No single foreign operation is significant to the Company's consolidated operations. Sales between geographic areas are made at cost plus a share of operating profit. 12 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The Company's geographic area data are as follows:
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ THREE MONTHS ENDED SEPTEMBER 30, 2006 Revenues: Net sales to unaffiliated customers ............. $199,959 $20,555 $ -- $220,514 Net sales between geographic areas .............. 5,920 -- (5,920) -- -------- ------- -------- -------- Net sales .................................... 205,879 20,555 (5,920) 220,514 Royalties and franchise fees .................... 4,505 -- -- 4,505 -------- ------- -------- -------- Total revenues ..................................... $210,384 $20,555 $ (5,920) $225,019 ======== ======= ======== ======== Income from operations ............................. $ 2,040 $ 3,197 $ 74 $ 5,311 ======== ======= ======== Interest expense, net .............................. 14,226 Other expense, net ................................. 319 -------- Loss before income taxes and minority interests .... $ (9,234) ======== Long-lived assets .................................. $841,436 $11,802 $(44,255) $808,983 ======== ======= ======== ========
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ THREE MONTHS ENDED SEPTEMBER 30, 2005 Revenues: Net sales to unaffiliated customers ............. $ 88,176 $17,406 $ -- $105,582 Net sales between geographic areas .............. 5,466 -- (5,466) -- -------- ------- -------- -------- Total revenues ..................................... $ 93,642 $17,406 $ (5,466) $105,582 ======== ======= ======== ======== Income from operations ............................. $ 13,931 $ 2,313 $ 243 $ 16,487 ======== ======= ======== Interest expense, net .............................. 7,989 Other expense, net ................................. 8 -------- Income before income taxes and minority interests .. $ 8,490 ======== Long-lived assets .................................. $475,111 $ 8,649 $(29,666) $454,094 ======== ======= ======== ========
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ NINE MONTHS ENDED SEPTEMBER 30, 2006 Revenues: Net sales to unaffiliated customers ............. $596,478 $52,066 $ -- $648,544 Net sales between geographic areas .............. 15,110 -- (15,110) -- -------- ------- -------- -------- Net sales .......................................... 611,588 52,066 (15,110) 648,544 Royalties and franchise fees .................... 13,548 -- -- 13,548 -------- ------- -------- -------- Total revenues ..................................... $625,136 $52,066 $(15,110) $662,092 ======== ======= ======== ======== Income from operations ............................. $ 12,409 $ 5,339 $ 1,009 $ 18,757 ======== ======= ======== Interest expense, net .............................. 41,329 Other income, net .................................. (1,638) -------- Loss before income taxes and minority interests .... $(20,934) ========
13 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ NINE MONTHS ENDED SEPTEMBER 30, 2005 Revenues: Net sales to unaffiliated customers ............. $260,483 $46,760 $ -- $307,243 Net sales between geographic areas .............. 15,457 -- (15,457) -- -------- ------- -------- -------- Total revenues ..................................... $275,940 $46,760 $(15,457) $307,243 ======== ======= ======== ======== Income from operations ............................. $ 36,786 $ 4,673 $ 581 $ 42,040 ======== ======= ======== Interest expense, net .............................. 23,220 Other expense, net ................................. 430 -------- Income before income taxes and minority interests .. $ 18,390 ======== Long-lived assets .................................. $475,111 $ 8,649 $(29,666) $454,094 ======== ======= ======== ========
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 - RELATED PARTY TRANSACTIONS In connection with its acquisition by AAH Holdings Corporation in April 2004, the Company executed a management agreement with Berkshire Partners LLC and Weston Presidio. Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio will be paid annual management fees of $833 and $417, respectively. At September 30, 2006 and December 31, 2005, accrued management fees payable to Berkshire Partners LLC and Weston Presidio totaled $139 and $69, respectively. Although the indenture governing our senior subordinated notes will permit the payments under the management agreement, such payments will be restricted during an event of default under the notes and will be subordinated in right of payment to all obligations due with respect to the notes in the event of a bankruptcy or similar proceeding of Amscan. An affiliate of Berkshire Partners, LLC owns approximately 34% of Gordon Brothers Investment, LLC. NOTE 12 - STOCK OPTION PLAN On May 1, 2004, the Company adopted the 2004 Equity Incentive Plan under which the Company may grant incentive awards in the form of options to purchase shares of the Company's common stock ("Company Stock Options") and shares of restricted and unrestricted common stock to certain directors, officers, employees and consultants of the Company and its affiliates. A committee of the Company's board of directors (the "Committee"), or the board itself in the absence of a Committee, is authorized to make grants and various other decisions under the 2004 Equity Incentive Plan. Unless otherwise determined by the Committee, any participant granted an award under the 2004 Equity Incentive Plan must become a party to, and agree to be bound by, the Company's stockholders' agreement. Company Stock Options reserved under the 2004 Equity Incentive Plan total 2,923.2068 and may include incentive and nonqualified stock options. Company Stock Options are nontransferable (except under certain limited circumstances) and, unless otherwise determined by the Committee, vest over five years and have a term of ten years from the date of grant. In April 2005, the Company granted 722 time-based options ("TBOs") and 760 performance based options ("PBOs") to key employees and its outside directors, exercisable at a strike price of $10,000. Under the PBO feature, the ability to exercise vested option awards is contingent upon the occurrence of an initial public offering of the Company's common stock or a change in control of the Company and the achievement of specified investment returns to the Company's shareholders. The Company used a minimum value method under SFAS No. 123, as amended by SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure," to determine the fair value of the Company Stock Options granted in April 2005, together with the following assumptions: dividend yield of 0%, risk-free interest rate of 3.1%, forfeitures and expected cancellation of 3% for TBOs and 6% for PBOs and an expected life of four years. The estimated fair value of the options granted in 2005 is amortized on a straight line basis to compensation expense, net of taxes, over the vesting period of four years. The Company recorded compensation expense of approximately $111 and $333 and $111 and $223 in general and administrative expenses during the three and nine months ended September 30, 2006 and 2005, respectively. 14 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) On January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based Payment," which is a revision of SFAS No. 123 "Accounting for Stock-Based Compensation" as amended. SFAS No. 123(R) establishes standards for the accounting for transactions where an entity exchanges its equity for goods or services and transactions that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Generally, the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123. The Company adopted SFAS No. 123(R) using the prospective method. Since the Company's common stock is not publicly traded, the options granted in 2005 under SFAS No. 123 continue to be expensed under the provisions of SFAS No. 123 using a minimum value method. Options issued subsequent to January 1, 2006 are expensed under the provisions of SFAS No. 123(R). During the quarter ended June 30, 2006, the Company granted an additional 434.5 TBOs and 790.5 PBOs to key employees and outside directors exercisable at a strike price of $12,000 per share. In addition, in connection with the acquisition of Party America, certain Party America employees elected to roll their options to purchase Party America common stock into fully vested Company Stock Options. As a result, the Company issued 19.0 fully vested TBOs exercisable at strike prices of $6,267 and $10,321 per share and with a fair market value of $170. The Company recorded compensation of $255 and $509 during the three and nine months ended September 30, 2006, respectively, related to the options granted in 2006 under SFAS No. 123(R), in general and administrative expenses. The fair value of each grant is estimated on the grant date using a Black-Scholes option valuation model based on the assumptions in the following table. Expected dividend rate ...................... -- Risk free interest rate ..................... 4.85% Weighted average expected lives, in years ... 7.5 Price volatility ............................ 15%
The weighted average expected lives (estimated period of time outstanding) was estimated using the simplified method for determining the expected term. Expected volatility was based on implied historical volatility of an applicable Dow Jones Industrial Average sector index for a period equal to the stock option's expected life. NOTE 13 - SALES LEASEBACK TRANSACTION On May 25, 2006, the Company sold a warehouse located in Chester, New York and entered into a leaseback for the same warehouse under a one-year lease agreement. Net proceeds from the sale of the property were approximately $12,613 and the total gain on the sales transaction was $2,666. Of the total gain, $1,353 was recognized in the second quarter of 2006, under the caption other (income) expense, and $1,313 was deferred, to be recognized as income over the one-year leaseback period. Additionally, $1,363 of rent expense will be recognized on a straight-line basis over the one-year leaseback period. During the three and nine months ended September 30. 2006, the Company amortized $328 and $437 of deferred gain to other income and recorded $341 and $454 of rent expense, respectively. NOTE 14 - RECENTLY ISSUED ACCOUNTING STANDARDS In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements." This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The new guidance will be effective for the Company on January 1, 2008. The Company is in the process of determining the effect, if any, of adopting SFAS No. 157 on the Company's consolidated financial statements. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." Among other things, FIN 48 requires applying a "more likely than not" threshold to the recognition and de-recognition of tax positions. The new guidance will be effective for the Company on January 1, 2007. The Company is in the process of determining the effect, if any, of adopting FIN 48 on the Company's consolidated financial statements. 15 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION On December 23, 2005, the Company financed the Party City Acquisition with (i) the Equity Investment of $166,425, (ii) the First Term Loan of $325,000 and the $85,000 First Term Loan Revolver, (iii) borrowings under the Second Term Loan of $60,000, and (iv) cash on-hand of $21,227, including $862 paid during the nine months ended September 30, 2006. Borrowings under the First Term Loan, First Term Loan Revolver, Second Term Loan and the Company's 8.75% $175,000 senior subordinated notes issued in April 30, 2004 and due in April 30, 2014, are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the "Guarantors"): - Amscan Inc. - Am-Source, LLC - Anagram International, Inc. - Anagram International Holdings, Inc. - Anagram International, LLC - M&D Industries, Inc. - SSY Realty Corp. - JCS Packaging Inc. (formerly JCS Realty Corp.) - Anagram Eden Prairie Property Holdings LLC - Trisar, Inc. - Party City Corporation - PA Acquisition Corp. Non-guarantor subsidiaries ("Non-guarantors") include the following: - Amscan Distributors (Canada) Ltd. - Amscan Holdings Limited - Amscan (Asia-Pacific) Pty. Ltd. - Amscan Partyartikel GmbH - Amscan de Mexico, S.A. de C.V. - Anagram International (Japan) Co., Ltd. - Anagram Espana, S.A. - Anagram France S.C.S. - JCS Hong Kong Ltd. The following information presents the condensed consolidating balance sheets as of September 30, 2006 and December 31, 2005, and the related condensed consolidating statements of operations for the three and nine month periods ended September 30, 2006 and 2005 and the consolidated statements of cash flows for the nine months ended September 30, 2006 and 2005 for the combined Guarantors and the combined Non-guarantors and the elimination entries necessary to consolidate the entities comprising the consolidated financial statements. 16 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2006
AHI AND COMBINED COMBINED GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ..................................... $ 5,597 $ 805 $ $ 6,402 Accounts receivable, net ...................................... 85,492 19,189 104,681 Inventories, net .............................................. 226,097 13,443 (566) 238,974 Prepaid expenses and other current assets ..................... 42,450 1,657 44,107 ---------- ------- -------- ---------- Total current assets ....................................... 359,636 35,094 (566) 394,164 Property, plant and equipment, net ............................... 152,587 2,321 154,908 Goodwill ......................................................... 428,657 4,072 432,729 Trade names ...................................................... 145,600 -- 145,600 Other intangible assets, net ..................................... 47,075 -- 47,075 Other assets ..................................................... 67,517 5,409 (44,255) 28,671 ---------- ------- -------- ---------- Total assets ............................................... $1,201,072 $46,896 $(44,821) $1,203,147 ========== ======= ======== ========== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable ....................................... $ 48,450 $ -- $ $ 48,450 Accounts payable .............................................. 117,337 2,528 119,865 Accrued expenses .............................................. 62,923 7,372 70,295 Income taxes payable .......................................... 117 171 8 296 Current portion of long-term obligations ...................... 3,233 176 3,409 ---------- ------- -------- ---------- Total current liabilities .................................. 232,060 10,247 8 242,315 Long-term obligations, excluding current portion ................. 558,978 121 559,099 Deferred income tax liabilities .................................. 49,236 670 49,906 Deferred rent and other long-term liabilities .................... 11,548 36,060 (44,484) 3,124 ---------- ------- -------- ---------- Total liabilities .......................................... 851,822 47,098 (44,476) 854,444 Redeemable common securities ..................................... 12,320 -- 12,320 Commitments and contingencies Stockholders' equity: Common stock .................................................. -- 339 (339) -- Additional paid-in capital .................................... 327,610 -- 327,610 Retained earnings ............................................. 8,530 (461) (86) 7,983 Accumulated other comprehensive income (loss) ................. 790 (80) 80 790 ---------- ------- -------- ---------- Total stockholders' equity ................................. 336,930 (202) (345) 336,383 ---------- ------- -------- ---------- Total liabilities, redeemable common securities and stockholders' equity .................................... $1,201,072 $46,896 $(44,821) $1,203,147 ========== ======= ======== ==========
17 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2005
AHI AND COMBINED COMBINED GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ......................... $ 7,695 $ 1,050 $ $ 8,745 Accounts receivable, net .......................... 71,234 11,795 83,029 Inventories, net .................................. 175,087 13,955 (585) 188,457 Prepaid expenses and other current assets ......... 37,851 1,710 39,561 ---------- ------- -------- ---------- Total current assets ........................... 291,867 28,510 (585) 319,792 Property, plant and equipment, net ................... 148,580 2,297 150,877 Goodwill, net ........................................ 501,985 3,746 505,731 Trade names .......................................... 68,500 -- 68,500 Other intangible assets, net ......................... 48,699 -- 48,699 Other assets ......................................... 52,650 5,448 (32,750) 25,348 ---------- ------- -------- ---------- Total assets ................................... $1,112,281 $40,001 $(33,335) $1,118,947 ========== ======= ======== ========== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................. $ 102,259 $ 3,528 $ $ 105,787 Accrued expenses .................................. 46,093 4,713 50,806 Income taxes payable .............................. 3,331 168 (112) 3,387 Current portion of long-term obligations .......... 2,438 205 2,643 ---------- ------- -------- ---------- Total current liabilities ...................... 154,121 8,614 (112) 162,623 Long-term obligations, excluding current portion ........ 561,366 201 561,567 Deferred income tax liabilities ......................... 63,164 618 63,782 Deferred rent and other long-term liabilities ........... 5,553 30,552 (32,761) 3,344 ---------- ------- -------- ---------- Total liabilities .............................. 784,204 39,985 (32,873) 791,316 Redeemable common securities ............................ 6,821 -- 6,821 Commitments and contingencies Stockholders' equity: Common stock ...................................... -- 339 (339) -- Additional paid-in capital ........................ 300,983 -- 300,983 Retained earnings ................................. 21,270 (243) (203) 20,824 Accumulated other comprehensive loss .............. (997) (80) 80 (997) ---------- ------- -------- ---------- Total stockholders' equity ..................... 321,256 16 (462) 320,810 ---------- ------- -------- ---------- Total liabilities, redeemable common securities and stockholders' equity .. $1,112,281 $40,001 $(33,335) $1,118,947 ========== ======= ======== ==========
18 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
AHI AND COMBINED COMBINED GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------- -------------- ------------ ------------ Revenues: Net sales ....................................... $205,879 $20,555 $(5,920) $220,514 Royalties and franchise fees .................... 4,505 -- 4,505 -------- ------- ------- -------- Total revenues ............................... 210,384 20,555 (5,920) 225,019 Expenses: Cost of sales ................................... 149,021 13,026 (5,664) 156,383 Selling expenses ................................ 7,782 2,196 9,978 Retail operating expenses ....................... 27,668 -- 27,668 Franchise expenses .............................. 3,424 -- 3,424 General and administrative expenses ............. 17,945 2,136 (330) 19,751 Art and development costs ....................... 2,504 -- 2,504 -------- ------- ------- -------- Total expenses ............................... 208,344 17,358 (5,994) 219,708 -------- ------- ------- -------- Income from operations .................... 2,040 3,197 74 5,311 Interest expense, net .............................. 14,178 48 14,226 Other (income) expense, net ........................ (2,046) (99) 2,464 319 -------- ------- ------- -------- (Loss) income before income taxes and minority interests ................................. (10,092) 3,248 (2,390) (9,234) Income tax (benefit) expense ....................... (4,578) 1,002 (95) (3,671) Minority interests ................................. -- 112 112 -------- ------- ------- -------- Net (loss) income ............................ $ (5,514) $ 2,134 $(2,295) $ (5,675) ======== ======= ======= ========
19 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AHI AND COMBINED COMBINED GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------- -------------- ------------ ------------ Revenues: Net sales ............................................... $93,642 $17,406 $(5,466) $105,582 Expenses: Cost of sales ........................................... 63,598 11,341 (5,379) 69,560 Selling expenses ........................................ 7,249 1,899 9,148 General and administrative expenses ..................... 6,534 1,853 (330) 8,057 Art and development costs ............................... 2,330 -- 2,330 ------- ------- ------- -------- Total expenses ....................................... 79,711 15,093 (5,709) 89,095 ------- ------- ------- -------- Income from operations ............................ 13,931 2,313 243 16,487 Interest expense, net ...................................... 7,955 34 7,989 Other (income) expense, net ................................ (1,824) (108) 1,940 8 ------- ------- ------- -------- Income before income taxes and minority interests .... 7,800 2,387 (1,697) 8,490 Income tax (benefit) expense ............................... 2,466 707 (32) 3,141 Minority interests ......................................... -- 70 70 ------- ------- ------- -------- Net income ........................................... $ 5,334 $ 1,610 $(1,665) $ 5,279 ======= ======= ======= ========
20 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
AHI AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ------------ ------------ Revenues: Net sales ..................................................... $611,588 $52,066 $(15,110) $648,544 Royalties and franchise fees .................................. 13,548 -- 13,548 -------- ------- -------- -------- Total revenues ............................................. 625,136 52,066 (15,110) 662,092 Expenses: Cost of sales ................................................. 442,927 34,456 (15,129) 462,254 Selling expenses .............................................. 22,534 6,062 28,596 Retail operating expenses ..................................... 76,230 -- 76,230 Franchise expenses ............................................ 9,403 -- 9,403 General and administrative expenses ........................... 54,171 6,209 (990) 59,390 Art and development costs ..................................... 7,462 -- 7,462 -------- ------- -------- -------- Total expenses ............................................. 612,727 46,727 (16,119) 643,335 -------- ------- -------- -------- Income from operations .................................. 12,409 5,339 1,009 18,757 Interest expense, net ............................................ 41,209 120 41,329 Other (income) expense, net ...................................... (6,150) 237 4,275 (1,638) -------- ------- -------- -------- (Loss) income before income taxes and minority interests ... (22,650) 4,982 (3,266) (20,934) Income tax (benefit) expense ..................................... (9,798) 1,479 8 (8,311) Minority interests ............................................... -- 218 218 -------- ------- -------- -------- Net (loss) income .......................................... $(12,852) $ 3,285 $ (3,274) $(12,841) ======== ======= ======== ========
21 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
AHI AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ------------ ------------ Revenues: Net sales ..................................................... $275,940 $46,760 $(15,457) $307,243 Expenses: Cost of sales ................................................. 189,570 30,601 (15,048) 205,123 Selling expenses .............................................. 21,578 5,765 27,343 General and administrative expenses ........................... 21,062 5,721 (990) 25,793 Art and development costs ..................................... 6,944 -- 6,944 -------- ------- -------- -------- Total expenses ............................................. 239,154 42,087 (16,038) 265,203 -------- ------- -------- -------- Income from operations .................................. 36,786 4,673 581 42,040 Interest expense, net ............................................ 23,129 91 23,220 Other (income) expense, net ...................................... (3,749) (124) 4,303 430 -------- ------- -------- -------- Income before income taxes and minority interests .......... 17,406 4,706 (3,722) 18,390 Income tax expense ............................................... 4,242 1,273 (150) 5,365 Minority interests ............................................... -- 120 120 -------- ------- -------- -------- Net income ................................................. $ 13,164 $ 3,313 $ (3,572) $ 12,905 ======== ======= ======== ========
22 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
AHI AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ------------ ------------ Cash flows used in operating activities: Net (loss) income.............................................. $(12,852) $ 3,285 $(3,274) $(12,841) Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization expense....................... 30,026 600 30,626 Amortization of deferred financing costs.................... 1,986 -- 1,986 Provision for doubtful accounts............................. 988 295 1,283 Deferred income tax benefit................................. (7,553) -- (7,553) Undistributed gain in unconsolidated joint venture.......... (184) -- (184) Gain on disposal of property, plant and equipment........... (1,152) (4) (1,156) Equity based compensation................................... 842 -- 842 Changes in operating assets and liabilities: Increase in accounts receivable.......................... (20,563) (7,689) (28,252) (Increase) decrease in inventories....................... (19,337) 512 (19) (18,844) (Increase) decrease in prepaid expenses, other current assets and other, net................................. (90) 528 3,285 3,723 Increase in accounts payable, accrued expenses, income taxes payable and other liabilities................... 6,646 1,665 8 8,319 -------- ------- ------- -------- Net cash used in operating activities................. (21,243) (808) -- (22,051) Cash flows used in investing activities: Cash paid in connection with acquisitions................ (14,270) -- (14,270) Capital expenditures..................................... (28,819) (519) (29,338) Proceeds from disposal of property, plant and equipment.. 14,229 44 14,273 -------- ------- ------- -------- Net cash used in investing activities................. (28,860) (475) -- (29,335) Cash flows provided by (used in) financing activities: Repayment of loans, notes payable and long-term obligations........................................... (2,115) (204) (2,319) Proceeds from short term obligations..................... 48,450 -- 48,450 Proceeds from the sale of common stock................... 1,614 -- 1,614 -------- ------- ------- -------- Net cash provided by (used in) financing activities... 47,949 (204) -- 47,745 Effect of exchange rate changes on cash and cash equivalents... 56 1,242 1,298 -------- ------- -------- Net decrease in cash and cash equivalents............. (2,098) (245) (2,343) Cash and cash equivalents at beginning of period............... 7,695 1,050 8,745 -------- ------- ------- -------- Cash and cash equivalents at end of period..................... $ 5,597 $ 805 $ $ 6,402 ======== ======= ======= ========
23 AMSCAN HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
AHI AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ---------- ------------ ------------ Cash flows provided by operating activities: Net income ............................................................ $ 13,164 $ 3,313 $(3,572) $ 12,905 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense .............................. 10,957 500 11,457 Amortization of deferred financing costs ........................... 1,141 -- 1,141 Provision for doubtful accounts .................................... 890 237 1,127 Deferred income tax expense ........................................ 3,361 -- 3,361 Undistributed loss in unconsolidated joint venture ................. 611 -- 611 Gain on disposal of property, plant and equipment .................. -- (5) (5) Equity based compensation .......................................... 223 -- 223 Changes in operating assets and liabilities, net of acquisitions: Increase in accounts receivable ................................. (4,881) (4,756) (9,637) Increase in inventories ......................................... (13,203) (2,471) 409 (15,265) Increase in prepaid expenses, other current assets and other assets, net ............................................ (565) (145) (710) Increase in accounts payable, accrued expenses, income taxes payable and other liabilities, net ........................... 7,084 1,054 (150) 7,988 Other, net ...................................................... (10,722) 4,416 3,313 (2,993) -------- ------- ------- -------- Net cash provided by operating activities ....................... 8,060 2,143 -- 10,203 Cash flows used in investing activities: Capital expenditures ............................................... (11,888) (588) (12,476) Proceeds from disposal of equipment ................................ -- 21 21 -------- ------- -------- Net cash used in investing activities ........................... (11,888) (567) (12,455) Cash flows provided by (used in) financing activities: Repayment of loans, notes payable and long-term obligations ........ (1,943) (162) (2,105) Proceeds from short term obligations ............................... 4,095 -- 4,095 Proceeds from the sale of common stock ............................. 600 -- 600 Purchase and retirement of redeemable common stock held by former employee ................................................. (104) -- (104) -------- ------- -------- Net cash provided by (used in) financing activities ............. 2,648 (162) 2,486 Effect of exchange rate changes on cash and cash equivalents .......... (7) (1,671) (1,678) -------- ------- -------- Net decrease in cash and cash equivalents ....................... (1,187) (257) (1,444) Cash and cash equivalents at beginning of period ...................... 3,153 1,099 4,252 -------- ------- ------- -------- Cash and cash equivalents at end of period ............................ $ 1,966 $ 842 $ $ 2,808 ======== ======= ======= ========
24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE ACQUISITIONS On December 23, 2005 (the "Party City Acquisition Date"), the Company completed the acquisition of Party City Corporation ("Party City") pursuant to an Agreement and Plan of Merger (the "Party City Acquisition"), dated September 26, 2005 (as amended, the "Acquisition Agreement"), by and among the Company, Party City and BWP Acquisition, Inc. ("BWP"), a Delaware corporation and a wholly-owned subsidiary of the Company. Pursuant to the terms of the Acquisition Agreement, BWP merged with and into Party City, with Party City continuing as the surviving corporation. Each share of common stock of Party City outstanding at the Party City Acquisition Date was cancelled and converted into the right to receive $17.50 in cash, without interest. Prior to the acquisition, Party City settled all outstanding stock options and warrants at the spread between $17.50 and their exercise price. Transaction costs associated with the Party City Acquisition totaled $9.7 million. Financing for the Party City Acquisition, including the repayment of the Company's borrowings under its 2004 senior secured credit facility, was provided by: (i) an equity investment of $166.4 million (the "Equity Investment") in AAH, (ii) borrowings under a First Lien Credit Agreement (the "First Lien Credit Agreement") consisting of a $325.0 million term loan (net of an original issue discount of $3.25 million) (the "First Term Loan") and a committed revolving credit facility in an aggregate principal amount of $85.0 million (the "First Term Loan Revolver"), (iii) borrowings under a Second Lien Credit Agreement (the "Second Lien Credit Agreement," and, together with the First Lien Credit Agreement, the "Credit Agreements") consisting of a $60.0 million term loan (net of an original issue discount of $1.5 million) (the "Second Term Loan") and (iv) cash on-hand of $21.2 million, including $0.9 million paid during the nine months ended September 30, 2006. Deferred financing costs associated with the Credit Agreements totaled $7.4 million. The Equity Investment consisted of the sale of 13,868.75 shares of AAH common stock to funds affiliated with Berkshire Partners, LLC and Weston Presidio, certain members of management and certain other investors. The excess of the Party City purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($35.2 million), which are being amortized using the straight-line method over the assets' estimated useful life (nine years) and lease valuation assets ($0.3 million) which are being amortized over the remaining life of the specific lease, and trade names ($94.1 million) and goodwill ($148.6 million), which are not being amortized. In addition, there has been an allocation to adjust property, plant and equipment to market value ($3.4 million). The acquisition was structured as a purchase of common stock and, accordingly, the amortization of intangible assets is not deductible for income tax purposes. The allocation of the purchase price is based, in-part, on our estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Management determined the fair market value of net assets acquired as of the Party City Acquisition Date with the assistance of independent valuation specialists. Based on the valuation results, during the nine months ended September 30, 2006, the Company increased the allocation of the purchase price to trade names ($59.1 million), franchise licenses ($5.2 million) and fixed assets ($3.4 million) and adjusted other net liabilities and deferred taxes, resulting in a net decrease in goodwill related to the Party City Acquisition of $73.7 million. The results of Party City's operations are included in the Company's consolidated results of operations from the date of acquisition on December 23, 2005. As a result, the Company's consolidated results of operations for the three and nine months ended September 30, 2006 and 2005 vary significantly. Accordingly, the Company has made comparisons of the Company's consolidated results of operations for the three and nine months ended September 30, 2006 to its historical and pro forma consolidated results of operations for the three and nine months ended September 30, 2005. The pro forma consolidated results of operations assume the acquisition had occurred on January 1, 2005, and reflect the following items: (i) adjustments to interest expense for new borrowings related to the Party City Acquisition and the elimination of historical interest on debt repaid in connection therewith, (ii) the elimination of non-recurring expenses related to the Party City Acquisition, (iii) adjustments to depreciation and amortization expense arising from the valuation of depreciable and amortizable tangible and intangible assets, as a result of a preliminary purchase price allocation, and (vi) the related income tax effects of the above items based upon a pro forma effective income tax rate of 39.5%. The pro forma information, as presented below, is not necessarily indicative of the results that would have been obtained had the Party City Acquisition occurred on January 1, 2005, nor is it necessarily indicative of the Company's future results. On September 29, 2006 (the "Party America Acquisition Date"), the Company acquired PA Acquisition Corp. (the "Party America Acquisition"), doing business as Party America ("Party America") from Gordon Brothers Investment, LLC. In connection with the acquisition, the outstanding common stock, common stock options and subordinated debt of Party America were converted into AAH Holdings Corporation common stock and common stock options valued at $29.7 million. AAH Holdings also paid transaction costs of $1.1 million and repaid $12.6 million of Party America senior debt upon closing. 25 A preliminary estimate of the excess of the Party America purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($2.3 million), which are being amortized using the straight-line method over the assets' estimated useful life (nine years) and trade names ($15.4 million) and goodwill ($2.6 million), which are not being amortized. In addition, there has been an allocation to adjust property, plant and equipment to market value ($0.5 million). The allocation of the purchase price is based, in-part, on our preliminary estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Independent valuation specialists are currently conducting a valuation of the net assets acquired as of the Party America Acquisition Date to assist management with the final determination of fair value. The acquisition was structured as a purchase of common stock and, accordingly, the amortization of intangible assets is not deductible for income tax purposes. The results of Party America's operations for September 30, 2006 were immaterial to and excluded from the consolidated results of operations below. THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005 PERCENTAGE OF TOTAL REVENUES The following table sets forth the Company's consolidated statements of operations for the three months ended September 30, 2006 and 2005 and, on a pro forma basis, for the three months ended September 30, 2005, respectively, as a percentage of total revenues.
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2005 2006 2005 PRO FORMA ----- ----- --------- Revenues: Net sales............................... 98.0% 100.0% 98.0% Royalties and franchise fees............ 2.0 -- 2.0 ----- ----- ----- Total revenues....................... 100.0 100.0 100.0 Expenses: Cost of sales........................... 69.5 65.9 68.9 Selling expenses........................ 4.4 8.7 4.4 Retail operating expenses............... 12.3 -- 12.8 Franchise expenses...................... 1.5 -- 1.5 General and administrative expenses..... 8.8 7.6 8.4 Art and development costs............... 1.1 2.2 1.1 ----- ----- ----- Total expenses....................... 97.6 84.4 97.1 ----- ----- ----- Income from operations............ 2.4 15.6 2.9 Interest expense, net...................... 6.3 7.6 6.5 Other expense, net......................... 0.2 -- -- ----- ----- ----- (Loss) income before income taxes and minority interests.................. (4.1) 8.0 (3.6) Income tax (benefit) expense............... (1.6) 3.0 (1.4) ----- ----- ----- Net (loss) income.................... (2.5%) 5.0% (2.2)% ===== ===== =====
TOTAL REVENUES For the quarter ended September 30, 2006, revenues totaled $225.0 million, consisting of net sales, at wholesale, of $115.3 million, retail sales of $105.2 million and franchise related revenues of $4.5 million. For the quarter ended September 30, 2005, revenue consisted of net sales, at wholesale, totaling $105.6 million. Assuming the Party City Acquisition had occurred on January 1, 2005, pro forma revenue for the third quarter of 2005 totaled $206.0 million, consisting of net sales, at wholesale, of $101.3 million, retail net sales of $100.6 million and franchise-related revenue of $4.1 million. 26 The following table sets forth the composition of the Company's total revenues for the three months ended September 30, 2006 and 2005 and, on a pro forma basis, for the three months ended September 30, 2005, respectively.
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 PRO FORMA --------------------- --------------------- --------------------- % OF TOTAL % OF TOTAL % OF TOTAL $ REVENUES $ REVENUES $ REVENUES -------- ---------- -------- ---------- -------- ---------- Net sales: Wholesale sales ............ $135,134 60.1% $105,582 100.0% $113,801 55.2% Eliminations ............... (19,796) (8.8) -- -- (12,462) (6.0) -------- ----- -------- ----- -------- ----- Wholesale net sales ..... 115,338 51.3 105,582 100.0 101,339 49.2 Retail sales ............... 105,176 46.7 -- -- 100,622 48.8 -------- ----- -------- ----- -------- ----- Total net sales ......... 220,514 98.0 105,582 100.0 201,961 98.0 Royalties and franchise fees .. 4,505 2.0 -- -- 4,063 2.0 -------- ----- -------- ----- -------- ----- Total revenues .......... $225,019 100.0% $105,582 100.0% $206,024 100.0% ======== ===== ======== ===== ======== =====
WHOLESALE Net sales, at wholesale, of $115.3 million were $14.0 million or 13.8% higher than the pro forma sales for the third quarter of 2005. Net sales to party superstores, including sales to Party City franchisees, totaled $26.6 million or 32.3% higher than in 2005. The Company attributes the increase in sales to party superstores principally to synergistic growth, as the Company expands the number of product lines available to Party City franchise stores. Net sales to Party City company-owned stores totaled $19.8 million or 58.9% higher than in 2005, and are eliminated in consolidation. International sales totaled $20.6 million or 18.1% higher than in 2005. The Company attributes the increase in international sales to the favorable reception of our 2006 ensemble designs and product lines. Net sales of metallic balloons were $21.4 million or 16.0% higher than in 2005, with the increase primarily attributable to the introduction of a new musical balloon line in the fourth quarter of 2005, strong retail demand for shaped and other specialty balloons and strong sales of flexible packaging during the quarter. RETAIL Net retail sales for company-owned stores for the third quarter of 2006 totaled $105.2 million or 4.5% higher than pro forma net retail sales for the third quarter of 2005. Same-store net retail sales during the third quarter 2006 totaled $103.4 million or 6.4% higher than for the third quarter of 2005. Same-store net sales of seasonal and non-seasonal merchandise increased by 6.3% and 8.8%, respectively. The increase in net retail sales also reflects a 4.2% increase in the average net sale per retail transaction and a 2.4% increase in customer count at our company-owned stores. ROYALTIES AND FRANCHISE FEES Franchise related revenue for the third quarter of 2006 totaled $4.5 million or 10.9% higher than the pro forma revenue for the third quarter of 2005. During the third quarter of 2006 the retail network included an average of 257 franchises stores, or two more than in the third quarter of 2005. In addition, one new franchise store opened in each of the third quarter of 2006 and 2005. Franchise stores reported same-store net sales of $108.5 million, or an increase of 8.4% when comparing the third quarters of 2006 and 2005. 27 GROSS PROFIT The following table sets forth the Company's consolidated gross profit on net sales for the three months ended September 30, 2006 and 2005 and, on a pro forma basis, for the three months ended September 30, 2005, respectively.
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 PRO FORMA -------------------- -------------------- -------------------- % OF % OF % OF ASSOCIATED ASSOCIATED ASSOCIATED $ NET SALES $ NET SALES $ NET SALES ------- ---------- ------- ---------- ------- ---------- GROSS PROFIT: Wholesale............... $35,719 31.0% $36,022 34.1% $33,864 33.4% Retail.................. 28,412 27.0 -- -- 26,075 25.9 ------- ---- ------- ---- ------- ---- Total gross profit... $64,131 29.1% $36,022 34.1% $59,939 29.7% ======= ==== ======= ==== ======= ====
The gross profit margin on net sales, at wholesale, for the quarter ended September 30, 2006 was 31.0% or 310 basis points lower than in 2005. The decrease in gross profit margin principally reflects the inclusion, in 2006, of $7.5 million of net sales of Party City to its franchisees, at minimal gross profit margins. The remaining reduction in margin is attributable to changes in product sales mix across the Company's many product lines as well as higher raw material and manufacturing costs. Retail gross profit margin for the third quarter 2006 of 27.0% was 110 basis points higher than the gross profit margin, on a pro forma basis, for the third quarter 2005, principally due to the increase in retail sales, the corresponding leveraging of fixed occupancy costs and lower distribution costs partially offset by higher markdown activity. OPERATING EXPENSES Selling expenses of $9.9 million for the quarter ended September 30, 2006 were $0.8 million higher than for the third quarter of 2005, consistent with the increase in sales, at wholesale, and also reflecting increases in base compensation and employee benefits partially offset by a reduction in the size of our sales force. Selling expenses were 4.4% of total revenues for the three months ended September 30, 2006 and 2005. Retail operating expenses of $27.7 million were $1.3 million higher in the third quarter of 2006 than in the third quarter of 2005 and decreased from 12.8% to 12.3% of revenues when compared to the pro forma expenses for the third quarter of 2005. The decrease in retail operating expenses as a percentage of revenues reflects the increase in net sales during the quarter. The increase in actual retail operating expenses reflects higher payroll costs due to increased sales and in-store programs partially offset by the timing of advertising expenses. Franchise expenses for the third quarter of 2006 of $3.4 million were comparable to the pro forma expenses for the third quarter of 2005, at 1.5% of total revenues. General and administrative expenses of $19.8 million for the quarter ended September 30, 2006 were $2.5 million higher than the pro forma expenses for the third quarter of 2005. As a percentage of total revenues, general and administrative expenses were 8.8% for the third quarter of 2006 as compared to 8.4%, on a pro forma basis, for the quarter ended September 30, 2005. The increase in general and administrative expenses principally reflects higher base compensation and employee benefits, as well as higher stock-based compensation as a result of the issuance of additional stock options in 2006. Art and development costs of $2.5 million for the quarter ended September 30, 2006 were $0.2 million higher than costs for the third quarter of 2005. As a percentage of total revenues, art and development costs were 1.1% of total revenue for the third quarter of 2006 and pro forma total revenue for the comparable quarter of 2005. INTEREST EXPENSE, NET Interest expense, net, of $14.2 million for the three months ended September 30, 2006 was $6.2 million higher than for the three months ended September 30, 2005, reflecting higher average borrowings following the Party City Acquisition in December 2005 and higher variable interest rates as compared to the third quarter of 2005. 28 OTHER EXPENSE, NET Other expense, net, of $0.3 million for the third quarter of 2006 includes a $0.6 million loss recognized on the sale of one retail store and the closure of five additional stores during the quarter. Other expense, net, also includes a $0.1 million undistributed loss in an unconsolidated joint venture and $0.4 million of a previously deferred gain on the sale-leaseback of a warehouse in Chester, New York. The other expense, net, for the third quarter of 2005 principally consists of the undistributed loss in an unconsolidated joint venture. The undistributed loss represents our share of the operations of a Mexican balloon distribution joint venture, including the elimination of intercompany profit in the joint venture's inventory at September 30, 2006 and 2005. INCOME TAXES Income taxes for the third quarter of 2006 and 2005 were based upon the estimated consolidated effective income tax rates of 39.7% and 37.0% for the years ending December 31, 2006 and 2005, respectively. The increase in the 2006 effective income tax rate is primarily attributable to a higher average state income tax rate based on the numerous jurisdictions in which our retail stores operate. NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005 PERCENTAGE OF TOTAL REVENUES The following table sets forth the Company's consolidated statements of operations for the nine months ended September 30, 2006 and 2005 and, on a pro forma basis, for the nine months ended September 30, 2005, respectively, as a percentage of total revenues.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2005 2006 2005 PRO FORMA ----- ----- --------- Revenues: Net sales..................................................... 98.0% 100.0% 97.9% Royalties and franchise fees.................................. 2.0 -- 2.1 ----- ----- ----- Total revenues............................................. 100.0 100.0 100.0 Expenses: Cost of sales................................................. 69.8 66.8 68.5 Selling expenses.............................................. 4.3 8.9 4.5 Retail operating expenses..................................... 11.5 -- 12.7 Franchise expenses............................................ 1.4 -- 1.6 General and administrative expenses........................... 9.0 8.4 9.0 Art and development costs..................................... 1.2 2.2 1.1 ----- ----- ----- Total expenses............................................. 97.2 86.3 97.4 ----- ----- ----- Income from operations.................................. 2.8 13.7 2.6 Interest expense, net............................................ 6.2 7.6 6.5 Other (income) expense, net...................................... (0.2) 0.1 0.1 ----- ----- ----- (Loss) income before income taxes and minority interests..... (3.2) 6.0 (4.0) Income tax (benefit) expense.................................. (1.3) 1.8 (1.6) ----- ----- ----- Net (loss) income.......................................... (1.9)% 4.2% (2.4)% ===== ===== =====
TOTAL REVENUES For the nine months ended September 30, 2006, revenues totaled $662.1 million, consisting of net sales, at wholesale, of $326.3 million, retail sales of $322.3 million and franchise related revenues of $13.5 million. For the nine months ended September 30, 2005, revenue consisted of net sales, at wholesale, totaling $307.2 million. Assuming the Party City Acquisition had occurred on January 1, 2005, pro forma revenue for the nine months ended September 30, 2005 totaled $605.7 million, consisting of net sales, at wholesale, of $290.4 million, retail net sales of $302.9 million and franchise-related revenue of $12.4 million. 29 The following table sets forth the Company's total revenues for the nine months ended September 30, 2006 and 2005 and, on a pro forma basis, for the nine months ended September 30, 2005, respectively.
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 PRO FORMA --------------------- --------------------- ---------------------- % OF TOTAL % OF TOTAL % OF TOTAL $ REVENUES $ REVENUES $ REVENUES -------- ---------- -------- ---------- -------- ----------- Net sales: Wholesale sales ............ $375,093 56.7% $307,243 100.0% $331,834 54.8% Eliminations ............... (48,827) (7.4) -- -- (41,479) (6.9) -------- ----- -------- ----- -------- ----- Wholesale net sales ..... 326,266 49.3 307,243 100.0 290,355 47.9 Retail sales ............... 322,278 48.7 -- -- 302,909 50.0 -------- ----- -------- ----- -------- ----- Total net sales ......... 648,544 98.0 307,243 100.0 593,264 97.9 Royalties and franchise fees .. 13,548 2.0 -- -- 12,431 2.1 -------- ----- -------- ----- -------- ----- Total revenues .......... $662,092 100.0% $307,243 100.0% $605,695 100.0% ======== ===== ======== ===== ======== =====
WHOLESALE Net sales, at wholesale, of $326.3 million were $35.9 million or 12.4% higher than the pro forma sales for the nine months ended September 30, 2005. Net sales to party superstores, including sales to Party City franchisees, totaled $77.8 million and were 16.0% higher than in 2005. The Company attributes the increase in sales to party superstores to synergistic growth, as the Company expands the number of product lines available to Party City franchise stores, as well as to the favorable reception and increased demand for our 2006 ensemble designs and product lines. Net sales to Party City company-owned stores totaled $48.8 million or 17.7% higher than in 2005, and are eliminated in consolidation. International sales totaled $52.1 million or 11.3% higher than in 2005. The Company also attributes the increase in international sales to the favorable reception and increased demand for our 2006 ensemble designs and product lines. Net sales of metallic balloons were $65.5 million or 14.6% higher than in 2005, with the increase primarily attributable to the introduction of a new musical balloon line in the fourth quarter of 2005, strong retail demand for shaped and other specialty balloons and strong flexible packaging sales during the first nine months of 2006. RETAIL Net retail sales for company-owned stores for the nine months ended September 30, 2006 totaled $322.3 million or 6.4% higher than pro forma net retail sales for the nine months ended September 30, 2005. Same-store net retail sales for company-owned stores during the nine months ended September 30, 2006 totaled $318.1 million or 6.7% higher than for the comparable period of 2005. Same-store net sales of seasonal and non-seasonal merchandise increased 4.6% and 7.3%, respectively. The increase in net retail sales also reflects a 4.2% increase in the average net sale per retail transaction and a 2.4% increase in customer count at our company-owned stores. ROYALTIES AND FRANCHISE FEES Franchise related revenue for the nine months ended September 30, 2006 totaled $13.5 million or 9.0% higher than the pro forma revenue for the comparable period of 2005. During the nine months ended September 30, 2006, the retail network included an average of 256 franchises stores, or one more than in the corresponding period of 2005. In addition, during the nine months ended September 30, 2006, we opened ten new franchise stores, as compared to four new stores in the first nine months of 2005. Franchise stores reported same-store net sales of $332.3 million or an increase of 7.7% for the nine months ended September 30, 2006 when compared to the pro forma nine months ended September 30, 2005. 30 GROSS PROFIT The following table sets forth the Company's consolidated gross profit on net sales for the nine months ended September 30, 2006 and 2005 and, on a pro forma basis, for the nine months ended September 30, 2005, respectively.
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 PRO FORMA --------------------- --------------------- --------------------- % OF % OF % OF ASSOCIATED ASSOCIATED ASSOCIATED $ NET SALES $ NET SALES $ NET SALES -------- ---------- -------- ---------- ------- ----------- GROSS PROFIT: Wholesale .................... $ 96,700 29.6% $102,120 33.2% $ 93,918 32.3% Retail ....................... 89,590 27.8 -- -- 84,440 27.9 -------- ---- -------- ---- -------- ---- Total gross profit ........ $186,290 28.7% $102,120 33.2% $178,358 30.1% ======== ==== ======== ==== ======== ====
The gross profit margin on net sales, at wholesale, for the nine months ended September 30, 2006 was 29.6% or 360 basis points lower than in 2005. The decrease in gross profit margin principally reflects the inclusion, in 2006, of $27.3 million of net sales of Party City to its franchisees, at minimal gross profit margins. The remaining reduction in margin is attributable to changes in product sales mix across the Company's many product lines as well as higher raw material and manufacturing costs. Retail gross profit margin for the first three quarters of 2006 of 27.8% was comparable to the gross profit margin, on a pro forma basis, for the first three quarters of 2005 as lower vendor rebates and discounts in the first half of 2006 and higher markdown activity during the third quarter of 2006, were offset by the leveraging of fixed occupancy costs and lower distribution costs. OPERATING EXPENSES Selling expenses of $28.6 million for the nine months ended September 30, 2006 were $1.3 million higher than the comparable period of 2005, consistent with the increase in sales, at wholesale, and also reflects increases in base compensation and employee benefits partially offset by a reduction in the size of our sales force. As a percent of total revenues, selling expenses were 4.3% for the nine months ended September 30, 2006 as compared to 4.5% of pro forma total revenue for the same period in 2005. Retail operating expenses of $76.2 million were $0.4 million lower for the first nine months of 2006 than during the first nine months of 2005 on a pro forma basis and decreased from 12.7% to 11.5% of revenues compared to the pro forma expenses for the first three quarters of 2005. The decrease in retail operating expenses as a percentage of revenues principally reflects the increase in net sales for the nine months ended September 30, 2006. Franchise expenses for the nine months ended September 30, 2006 of $9.4 million were comparable to the pro forma expenses for the nine months ended September 30, 2005. General and administrative expenses of $59.4 million for the nine months ended September 30, 2006 increased by $5.0 million over the pro forma expenses for the same period in 2005. As a percentage of total revenues, general and administrative expenses were 9.0% for the first nine months of 2006 and pro forma 2005. The increase in general and administrative expenses principally reflects higher base compensation and employee benefits, as well as higher stock-based compensation as a result of the issuance of additional stock options in 2006. Art and development costs of $7.5 million for the nine months ended September 30, 2006 were $0.5 million higher than costs for the comparable period of 2005. As a percentage of total revenues, art and development costs were 1.2% of total revenues for the nine months ended September 30, 2006 and 1.1% of total pro forma revenues for the nine month period ended September 30, 2005. INTEREST EXPENSE, NET Interest expense, net, of $41.3 million for the nine months ended September 30, 2006 was $18.1 million higher than for the nine months ended September 30, 2005, reflecting higher average borrowings following the Party City Acquisition in December 2005 and higher variable interest rates during the first nine months 2006 compared to the first nine months of 2005. OTHER (INCOME) EXPENSE, NET Other income, net for the first nine months of 2006 principally consists of a recognized gain on the sale-leaseback of a warehouse in Chester, New York of $1.8 million and undistributed income in an unconsolidated joint venture. The other expense, net, for the first nine months of 2005 principally consists of the undistributed loss in an unconsolidated joint venture. The undistributed (income) loss represents our share of the operations of a Mexican balloon distribution joint venture, including the elimination of intercompany profit in the joint venture's inventory at September 30, 2006 and 2005. 31 INCOME TAXES Income taxes for the first nine months of 2006 and 2005 were based upon the estimated consolidated effective income tax rates of 39.7% and 37.0% for the years ending December 31, 2006 and 2005, respectively. The increase in the 2006 effective income tax rate is primarily attributable to a higher average state income tax rate based on the numerous jurisdictions in which our retail stores operate. In addition, during the second quarter of 2005, the Company recorded a $1.4 million reduction to its income tax expense and net deferred income tax liability to reflect a change in its estimated state income tax rate. The tax rate change results from a change in New York State tax law governing the apportionment of income. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE THE FIRST LIEN CREDIT AGREEMENT. Our First Lien Credit Agreement consists of (i) the $325 million First Term Loan and (ii) the $85 million First Term Revolver, which is available for working capital, general corporate purposes and the issuance of letters of credit. The First Term Loan was issued at a 1% or $3.25 million discount that is being amortized by the effective interest method over the term of the loan. The net proceeds of the First and Second Term Loans were used, together with the Equity Investment and cash on-hand, to (a) pay the cash portion of the purchase price of the Party City Acquisition, (b) repay the outstanding balances under the Company's then existing term loan, (c) pay all other amounts payable as of the Party City Acquisition Date pursuant to the Party City Acquisition Agreement and (d) pay transaction costs. The First Lien Credit Agreement provides for two interest rate options: (i) loans on which interest is payable quarterly at a Base Rate equal to the higher of (x) the Federal Funds rate plus 50 basis points or (y) the prime rate plus an applicable margin initially equal to 2.00% and subject to adjustment downward based on improvements in the Company's leverage ratio and (ii) loans on which interest accrues for one, two, three, six or, if generally available, nine or twelve month interest periods, at a rate of interest per annum equal to the reserve adjusted Eurodollar rate, plus an applicable margin initially equal to 3.00% per annum, subject to downward adjustment based on improvements in the leverage ratio. In addition to paying interest on outstanding principal under the First Term Loan and First Term Revolver, the Company is required to pay a commitment fee to the lenders under the First Term Loan Revolver based on the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per annum. The Company must also pay customary letter of credit fees. The Company is required to repay the First Term Loan in quarterly principal installment amounts of 0.25% of the funded total principal amount for the first six years and nine months, with the remaining principal balance payable on the seventh anniversary of the closing of the First Lien Credit Agreement. The First Term Loan Revolver expires on December 23, 2011. The obligations of the Company under the First Lien Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on substantially all of its assets. At September 30, 2006, the balance of the First Term Loan was $323.4 million, borrowings under the First Term Loan Revolver were $48.5 million and outstanding standby letters of credit totaled $14.4 million. THE SECOND LIEN CREDIT AGREEMENT. The Second Lien Credit Agreement consists of the Second Term Loan of $60 million. The Second Term Loan was issued at a 2.5% or $1.5 million discount that is being amortized by the effective interest method over the term of the loan. The Second Lien Credit Agreement provides for two interest rate options: (i) loans on which interest is payable quarterly at a Base Rate equal to the higher of (x) the Federal Funds rate plus 50 basis points or (y) the prime rate plus an applicable margin equal to 4.00% and (ii) loans on which interest accrues for one, two, three, six or, if generally available, nine or twelve month interest periods at a rate of interest per annum equal to the reserve adjusted Eurodollar rate, plus an applicable margin initially equal to 5.00% per annum. The Second Lien Credit Agreement is not subject to any mandatory sinking fund payments and is payable on the seventh anniversary of the closing of the Second Lien Credit Facility. The obligations of the Company under the Second Lien Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a second priority lien on substantially all of its assets. Our Credit Agreements contain financial covenants and maintenance tests, including a minimum interest coverage test and a maximum total leverage test, and restrictive covenants, including restrictions on our ability to make capital expenditures or pay dividends. Borrowings under our Credit Agreements are secured by substantially all of our assets and the assets of some of our subsidiaries, and by a pledge of all of our domestic subsidiaries' capital stock and a portion of our wholly owned foreign subsidiaries' capital stock. At September 30, 2006, we have a $0.4 million Canadian dollar denominated revolving credit facility that bears interest at the Canadian prime rate plus 0.6% and expires in April 2007, a 1.0 million British Pound Sterling denominated revolving credit facility that 32 bears interest at the U.K. base rate plus 1.75% and expires on May 31, 2007 and a $1.0 million revolving credit facility that bears interest at LIBOR plus 1.0% and expires on December 31, 2006. No borrowings were outstanding under these revolving credit facilities at September 30, 2006 and December 31, 2005. We expect to renew these revolving credit facilities upon expiration. Long-term borrowings at September 30, 2006 include a mortgage note with the New York State Job Development Authority of $8.1 million which requires monthly payments based on a 180-month amortization period with a balloon payment upon maturity in January 2010. The mortgage note bears interest at the rate of 6.76%, and is subject to review and adjustment semi-annually based on the New York State Job Development Authority's confidential internal protocols. The mortgage note is collateralized by a distribution facility located in Chester, New York. In connection with its acquisition by AAH Holdings Corporation in April 2004, the Company issued $175.0 million of 8.75% senior subordinated notes due 2014 to their initial purchasers, which were subsequently resold to qualified institutional buyers and non-U.S. persons in reliance upon Rule 144A and Regulation S under the Securities Act of 1933 (the "Note Offering"). In August 2004, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4, offering to exchange registered notes for the notes issued in connection with the Note Offering. The terms of the notes and the exchange notes were substantially identical. The exchange was completed in October 2004. Interest is payable semi-annually on May 1 and November 1 of each year. We have entered into various capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 7.70% to 8.80% which extend to 2009. The Company has numerous non-cancelable operating leases for its retail store sites as well as several leases for offices, distribution and manufacturing facilities, showrooms and equipment. These leases expire on various dates through 2018 and generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance costs. As a result of the acquisition of Party America, the Company assumed additional non-cancellable lease commitments totaling $77.5 million. In addition, in May 2006, the Company sold a warehouse located in Chester, New York and entered into a leaseback for the same warehouse under a one-year lease agreement. Net proceeds to the Company for the sale of the property were approximately $12.3 million and the total gain on the transaction was $2.7 million. Of the total gain, $1.4 million was recognized in the second quarter of 2006 under the caption other (income) expense, and $1.3 million was deferred, to be recognized as income over the one-year leaseback period. Additionally, $1.4 million of rent expense will be recognized on a straight-line basis over the one-year leaseback period. Rent expense for the nine months ended September 30, 2006 and 2005 totaled $45.2 million and $8.3 million, respectively. Minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2006, including Party America corporate facilities and company-owned stores, approximate $64.9 million. In conjunction with the Party City Acquisition, the Company's management approved and initiated plans to restructure Party City's distribution operations and involuntarily terminate a limited number of Party City personnel. The distribution operations, which accounted for $7.5 million and $27.3 million of revenue from sales to franchises for the three and nine months ended September 30, 2006, respectively, and operating income of $0.2 million and an operating loss of $27,000 for the same respective periods, will be combined into the Company's existing wholesale distribution operations. We expect to complete the planned restructuring of Party City's distribution operations by March 31, 2007. Estimated restructuring costs associated with the Party City Acquisition of $3,000 were accrued for as part of the net assets acquired. To date, we have incurred $1.2 million in severance costs. The restructuring reserve at September 30, 2006 of $1.8 million includes $0.4 million of additional severance payments to previously severed employees and $1.4 million of costs to restructure Party City's distribution operations. In connection with the Party America Acquisition, the Company may incur employee retention expenses of approximately $4.0 million from the Party America Acquisition Date to September 30, 2007. The Company has a management agreement with its Principal Investors, Berkshire Partners LLC and Weston Presidio. Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio will be paid annual management fees of $0.8 million and $0.4 million, respectively. Although the indenture governing the 8.75% senior subordinated notes will permit the payments under the management agreement, such payments will be restricted during an event of default under the notes and will be subordinated in right of payment to all obligations due with respect to the notes in the event of a bankruptcy or similar proceeding of Amscan. We expect that cash generated from operating activities and availability under our Credit Agreements will be our principal sources of liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facilities in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs. 33 CASH FLOW DATA - NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005 Net cash used in operating activities during the nine months ended September, 2006 totaled $22.1 million while net cash provided by operating activities during the nine months ended September 30, 2005 totaled $10.2 million. Net cash flow provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2006 and 2005, was $13.0 million and $30.6 million, respectively. Changes in operating assets and liabilities for the nine months ended September 30, 2006 and 2005 resulted in the use of cash of $35.1 million and $20.4 million, respectively. The increase in the use of cash during the nine months ended September 30, 2006 principally reflects the payment, in 2006, of Party City's Halloween and other fourth quarter seasonal trade payables following the December 23, 2005 acquisition of Party City, using borrowings under the First Term Loan Revolver. Net cash used in investing activities during the nine months ended September 30, 2006 and 2005 totaled $29.3 million and $12.5 million, respectively. During the nine months ended September 30, 2006, the Company paid $13.4 million in connection with the acquisition of Party America, including $12.6 million to repay Party America's long-term debt at closing, and also paid $0.9 million of professional and other fees associated with the December 2005 acquisition of Party City. During the first nine months of 2006 and 2005, the Company invested $18.8 million and $12.5 million, respectively, in its wholesale operations, including expenditures in 2006 of $11.6 million, to expand its new distribution warehouse in Chester, New York. In addition, during the first nine months of 2006, the Company invested $12.5 million in its retail operations, which included leasehold improvements and furniture and fixtures for company-owned stores as well as the Company's retail headquarters in Rockaway, New Jersey. The Company also received net proceeds from the sale of property, plant and equipment during the nine months ended September 30, 2006 of $14.3 million, principally from the sale-leaseback of a Chester, New York warehouse and the sale of several company-owned retail stores. During the nine months ended September 30, 2006, net cash provided by financing activities of $47.7 million included borrowings under the First Term Loan Revolver of $48.5 million used principally to pay down trade payables from seasonally higher year end balances and the proceeds from the sale of common stock to directors and certain employees of $1.6 million, partially offset by scheduled payments of $1.6 million on the First Term Loan and $0.8 million on capital leases and other long-term obligations. During the nine months ended September 30, 2005 net cash provided by financing activities of $2.5 million included proceeds of $4.1 million of short-term borrowings under the revolver, scheduled payments of $2.1 million on the term loan and other long-term obligations, proceeds from the sale of common stock to directors and certain employees of $0.6 million as well as the purchase and retirement of redeemable common stock held by a former employee totaling $0.1 million. 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 Our business is subject to substantial seasonal variations. Historically, 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 the sales in October for the Halloween season and, to a lesser extent, other fourth quarter holiday sales. We expect that this general pattern will continue. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q may contain "forward-looking statements." 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, 2005. 34 CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based Payment," which is a revision of SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123(R) establishes standards for the accounting for transactions where an entity exchanges its equity for goods or services and transactions that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Generally, the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123. The Company adopted SFAS No. 123(R) using the prospective method. Since the Company's stock is not publicly traded, options granted under SFAS No. 123 continue to be expensed under the provisions of SFAS No. 123 using a minimum value method while options issued subsequent to adoptions are expensed under the provisions of SFAS No. 123(R). During 2006, the Company granted options to key employees and outside directors and recorded related compensation expense of $0.3 million and $0.5 for the three and nine months ended September 30, 2006, respectively, in general and administrative expenses. The fair value of each grant is estimated on the grant date using a Black-Scholes option valuation model. During the three and nine months ended September 30, 2006 and 2005, the Company also recorded compensation expense related to options granted under SFAS No. 123 of $0.1 million and $0.3 million and $0.1 million and $0.2 million, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair value measurements." This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The new guidance will be effective for the Company on January 1, 2008. The Company is in the process of determining the effect, if any, of adopting SFAS No. 157 on the Company's consolidated financial statements. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." Among other things, FIN 48 requires applying a "more likely than not" threshold to the recognition and de-recognition of tax positions. The new guidance will be effective for the Company on January 1, 2007. The Company is in the process of determining the effect, if any, of adopting FIN 48 on the Company's consolidated financial statements. 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 September, 2006 and 2005, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and the loss before income taxes and minority interest for the three months ended September 30, 2006 would have increased by $1.5 million and the income before income taxes and minority interest for the nine months ended September 30, 2005 would have decreased by $1.0 million, respectively. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the nine months ended September, 2006 and 2005, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and the loss before income taxes and minority interest for the nine months ended September 30, 2006 would have increased by $4.8 million and the income before income taxes and minority interest for the nine months ended September 30, 2005 would have decreased by $3.0 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure. Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we 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 gross profit of $1.3 million and $1.1 million for the three months ended September 30, 2006 and 2005, respectively. 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 gross profit of $3.4 million and $3.0 million for the nine months ended September 30, 2006 and 2005, 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 35 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 Based on an evaluation of the effectiveness of the Company's disclosure controls and procedures performed by the Company's management, with the participation of the Company's Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report, the Company's Chief Executive Officer and its Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. As used herein, "disclosure controls and procedures" means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during the Company's fiscal quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II ITEM 5. OTHER INFORMATION In connection with the acquisition by the Company of Party America on September 29, 2006, the Company issued 2,090.24 shares of its Common Stock, $0.01 par value, that were not registered under the Securities Act of 1933. These shares were issued to Gordon Brothers Investment, LLC, an entity in which an affiliate of Berkshire Partners, LLC holds an investment, and a limited number of employees of Party America. The Company claims an exemption from registration of the offer and sale of these shares pursuant to Section 4(2) of the Securities Act and Rule 506 thereunder. 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. 36 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: November 14, 2006 37 EX-31.1 2 y27180exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act, as amended I, Gerald C. Rittenberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted as permitted; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14, 2006 /s/ Gerald C. Rittenberg ---------------------------------------- Gerald C. Rittenberg Chief Executive Officer EX-31.2 3 y27180exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act, as amended I, Michael A. Correale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted as permitted; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14, 2006 /s/ Michael A. Correale ---------------------------------------- Michael A. Correale Chief Financial Officer EX-32 4 y27180exv32.txt CERTIFICATION Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Amscan Holdings, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Gerald C. Rittenberg, Chief Executive Officer and Michael A. Correale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gerald C. Rittenberg ---------------------------------------- Gerald C. Rittenberg Chief Executive Officer /s/ Michael A. Correale ---------------------------------------- Michael A. Correale Chief Financial Officer November 14, 2006 -----END PRIVACY-ENHANCED MESSAGE-----