SEC Company Response from AMSCAN HOLDINGS INC (CIK 0001024729) — Sep 8, 2005
AMSCAN HOLDINGS INC (CIK 0001024729)
Date: Sept. 8, 2005 · CIK: 0001024729 · Accession: 0001275927-05-000074
AI Filing Summary & Sentiment
Letter
Via EDGAR and Facsimile Securities and Exchange Commission 100 F Street, N.E. Washington, D. C. 20549-7010 Attention: Ms. Jennifer Goeken
Re: Amscan Holdings - Annual Report on Form 10-K for the year ended December 31, 2004
Dear Sirs:
We have received your letter containing comments based on your review of the Annual Report on Form 10-K of Amscan Holdings, Inc. (the "Company") for the year ended December 31, 2004 (the "Form 10-K").
The purpose of this letter is to respond to your comments. To facilitate your review of our responses, we will set out each of your comments followed by the Company's response, [including the changes the Company would include in [an amendment to the Form 10-K; its future annual reports] in response to that comment.
Business, page 3 ----------------
The Transactions, page 3 ------------------------
SEC COMMENT NO. 1
1. We note the "merger agreement" between you (i.e., Amscan Holdings, Inc.) and AAH Acquisition, a wholly owned subsidiary of AAH Holdings, was structured
o as a purchase of common stock,
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Securities and Exchange Commission September 8, 2005 Page 2
o you were deemed to be the surviving entity, as a wholly owned subsidiary of AAH Holdings, and
o the resulting capital structure of the surviving entity is equal to that of AAH Holdings.
Please address each of the following:
o Clarify whether you, AAH Acquisition or AAH Holdings, paid cash of $530 million to consummate the acquisition.
o Describe the facts and circumstances of the acquisition, including the factors that resulted in the "ultimate beneficial ownership of the Successor."
o Provide an analysis that supports your accounting treatment of the transaction and specifically cite the authoritative literature you relied upon in support of your methodology.
o Clarify whose net assets will be fair valued based on the purchase price of $530 million.
RESPONSE
The acquisition of Amscan Holdings, Inc. ("Amscan Holdings") by AAH Holdings, Inc. ("AAH Holdings") was accomplished through a series of steps that, as an accounting matter, was deemed to be a purchase. As a legal matter, the following occurred:
o AAH Holdings and AAH Acquisition were formed as new legal entities;
o Capital in the amount of $140.5 million was contributed by the Principal Investors (as defined in the Form 10-K) and certain employee stockholders of Amscan Holdings to AAH Holdings;
o The capital of AAH Holdings was then contributed by AAH Holdings to AAH Acquisition;
o Pursuant to the Merger Agreement, AAH Acquisition was merged into Amscan Holdings with Amscan Holdings as the surviving entity of the merger;
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Securities and Exchange Commission September 8, 2005 Page 3
o Upon the consummation of the merger, (a) the assets of AAH Acquisition (including its capital that had been contributed by the Principal Investors and the employee stockholders) became assets of Amscan Holdings as the surviving corporation of the merger; (b) each share of Amscan Holdings then outstanding was converted into cash; and (c) each share of AAH Acquisition was converted into the right to receive one share of Amscan Holdings; and
o As a result, AAH Holdings continues as a legal entity whose sole function is to hold the capital stock of Amscan Holdings.
The transaction pursuant to which Amscan Holdings became a wholly-owned subsidiary of AAH Acquisition was not, as a legal matter, a purchase of common stock but rather was a statutory merger.
Since Amscan Holdings is merely a conduit between the operating companies and AAH Holdings, Amscan Holdings has determined that it is more appropriate disclosure to reflect on its financial statements the capital structure of AAH Holdings as the ultimate beneficial owner of the business. This information has been disclosed in the notes to the financial statements.
The cash paid in the merger to the holders of equity interests in Amscan Holdings was provided both by the Principal Investors and certain employee stockholders and by Amscan Holdings. As noted in the Form 10-K, the equity contribution of the Principal Investors and the employee stockholders (who exchanged equity interests in Amscan Holdings for equity interests in AAH Holdings) aggregated $140.5 million. The balance of the cash needed to consummate the acquisition was provided by Amscan Holdings (through borrowings (a term loan, a revolving loan and senior subordinated notes) and available cash on hand at Amscan Holdings).
The accounting treatment for the merger of AAH Acquisition into Amscan Holdings as a business combination to be accounted for under the purchase method of accounting is supported by Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"). The Principal Investors and certain members of management, through their investment in AAH Holdings and the merger of AAH Acquisition into Amscan Holdings, acquired control over 100% of the equity of Amscan Holdings. As substantially all of the common stock of AAH Holdings is owned by new shareholders, the change in control justifies the asset bases adjustment at Amscan Holdings. SFAS No. 141 paragraph 9 states that "a business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more other entities and obtains control over that entity or entities." Paragraph 10 states that "the provisions of this Statement apply equally to a business combination in which (a) one or more entities are merged or become subsidiaries, (b) one
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Securities and Exchange Commission September 8, 2005 Page 4
entity transfers net assets or its owners transfer their equity interests to another, or (c) all entities transfer net assets or the owners of those entities transfer their equity interests to a newly formed entity (some of which are referred to as roll-up or put-together transactions)." Paragraph 10 also states that "All those transactions are business combinations regardless of whether the form of consideration given is cash, other assets, a business or a subsidiary of the entity, debt, common or preferred shares or other equity interests, or a combination of those forms and regardless of whether the former owners of one of the combining entities as a group retain or receive a majority of the voting rights of the combined entity." SFAS No 141, paragraphs 13 and 15 require that all business combinations in the scope of SFAS No 141 shall be accounted for using the purchase method of accounting and that an acquiring entity must be determined in each business combination. SFAS No. 141 paragraph 16 states that "in a business combination effected solely through the distribution of cash or other assets or by incurring liabilities, the entity that distributes cash or other assets or incurs liabilities is generally the acquiring entity." As AAH Holdings distributed cash (including its initial equity contribution of $140.5 million) and indirectly assumed the new debt incurred to pay the former debt and equity holders of Amscan Holdings, AAH Holdings is considered the acquiring entity.
In our analysis supporting the treatment of the transactions as a business combination, we considered the provisions of EITF 88-16, "Basis in Leveraged Buyout Transactions," including the leverage computation below:
New net debt incurred $390,467,000 Less: Old debt paid 266,224,000 ------------- New leverage 124,243,000 New equity contribution 140,500,000 Leverage ratio 46.9% (124,243,000/(124,243,000+140,500,000))
Based on the leverage of 46.9%, we concluded that the transaction was not a highly leveraged transaction and EITF 88-16 would not apply.
As noted in both Part I of the Form 10-K and in Note 1 to the financial statements included in the Form 10-K, the purchase price (i.e., the $530.0 million) has been allocated based on estimates of the "fair value of the net assets acquired." The assets acquired in the transaction were the assets of Amscan Holdings at the time of the merger when Amscan Holdings became a wholly owned subsidiary of AAH Holdings.
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Securities and Exchange Commission September 8, 2005 Page 5
SEC COMMENT NO. 2
2. We also note, as a result of the transaction between you and AAH Acquisition, that you recorded indefinite-lived tradenames of $33.5 million. Please provide a schedule of the items included in this balance and an analysis to support your position that these intangible assets have an indefinite useful life.
RESPONSE
The Successor company recorded $33.5 million as the fair value of its Amscan(R) and Anagram(R) trade names. The Predecessor acquired the trade name Anagram(R) as part of its acquisition of the assets of Anagram International Inc and subsidiaries in 1998. The Successor continues to use the Anagram(R) trade name to identify its line of metallic balloons. The Successor determined the fair value of the trade names Amscan(R) and Anagram(R) based on an independent appraisal that employed the relief-from-royalty method. SFAS No. 141 does not preclude the recognition of trade names or "brands" as a single asset apart from goodwill, if the complimentary assets that make up the group have similar useful lives, which, in this case, are deemed to be indefinite.
The Successor determined that the Amscan(R) and Anagram(R) trade names have indefinite lives based on the following:
o The Company has no plans to retire the trade names and intends to operate under the trade names indefinitely, as a going concern. The use of the trade names is not limited by a relationship with another asset or group of assets or by any legal, regulatory or contractual provisions.
o The Amscan(R) and Anagram(R) trade names have been established for over 57 years and 27 years, respectively, and are recognized as market leaders in the party goods industry.
o The Company's products (decorative party goods including tableware, balloons, and coordinated and non-coordinated party accessories) are not subject to technical obsolescence or uncertainties due to legislative or regulatory changes.
o Demand for the Company's branded products is evidenced by the Predecessor's 11% organic revenue growth over the past 10 years. Due to limited availability of market data for the party goods industry, independent studies were commissioned by the Company in 2003 which indicate it occupies approximately 30% of the shelf space in the party superstore channel, which channel represents approximately 50%
<PAGE>
Securities and Exchange Commission September 8, 2005 Page 6
of its domestic revenue. The Company has longstanding relationships with wholesale party goods customers, including small, independent party and gift stores and large party superstores chains, and sells to over 40,000 customers.
o The Company expects its market share to continue to grow as it continually expands the number of innovative decorative products in its lines; focuses on additional channels of distribution, including mass marketers and focuses on the further development of a less mature European market.
o The party goods industry is relatively stable. Competitors include small independent specialty manufacturers as well as divisions or subsidiaries of larger companies. However, the population of competitors has not grown significantly in the past due to barriers to entry including substantial investments in artwork and inventories and state-of the art distribution facilities. As a result, the Company does not expect to lose significant market share to new or existing competitors and expects to remain a leader in the industry.
o The Company does not believe revenue generation is dependent upon the continued employment of key employees. The breath of product, which distinguishes Amscan and Anagram from its competitors, is generated by a large creative staff of over 100 employees.
Based on the factors above, the Company expects the Amscan(R) and Anagram(R) trade names will continue to generate cash flow indefinitely and, accordingly, have deemed their useful lives to be indefinite.
Note 16 - Segment Information, page F-30 ----------------------------------------
SEC COMMENT NO. 3
3. We note your disclosure that you operate in one industry segment and that this one segment "involves the design, manufacture, contract for manufacture and distribution of party goods, including decorative party goods, metallic balloons, stationery and gift items." Please identify your operating segments, as defined in paragraph 10 of SFAS 131, and expand your disclosure to identify the factors used to identify your reportable segments, as required by paragraph 26(a) of SFAS 131. We note that your segment reporting was addressed in your communication with the staff during 2003.
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Securities and Exchange Commission September 8, 2005 Page 7
RESPONSE
The CEO and management consider the Company the "one stop source" for celebratory products (i.e., party goods) of all kinds, including decorative tableware and coordinated and non-coordinated accessories. Coordinated and non-coordinated accessories include balloons (e.g., metallic and latex), stationery (e.g., confetti, stickers, invitations, thank you notes, gift wrap, ribbon, memory books and albums) and gifts (e.g., ceramic giftware, picture frames, mugs, and decorative candles). Our products are generally presented to party goods retailers, through our catalogues, as general, seasonal and themed party ensembles. The primary objective of our design staff is to create new ensembles and new products in all product lines to expand those ensembles. Management does not use product line financial performance as a basis for business operating decisions.
As noted in our communication with the staff during 2003, the Company considers itself a single operating segment based on the "management approach" (i.e., based on how management internally evaluates the operating performance of its business units). The Company's chief operating decision maker is considered to be the Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. The consolidated financial information reviewed by the CEO is similar to the information presented in the consolidated financial statements. Accordingly, the Company has determined that it operates in a single operating segment and, as a result, a single reportable segment.
We propose to modify the segment disclosure in the notes to the financial statements in our future filings as follows. In addition, we will add similar disclosur
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[LETTERHEAD OF MURTHA CULLINA LLP]
PAUL G. HUGHES
(203) 772-7726 DIRECT TELEPHONE
(860) 240-5726 DIRECT FACSIMILE
PHUGHES@MURTHALAW.COM
September 8, 2005
Via EDGAR and Facsimile
Securities and Exchange Commission
100 F Street, N.E.
Washington, D. C. 20549-7010
Attention: Ms. Jennifer Goeken
Re: Amscan Holdings - Annual Report on Form 10-K for the year ended
December 31, 2004
Dear Sirs:
We have received your letter containing comments based on your review of
the Annual Report on Form 10-K of Amscan Holdings, Inc. (the "Company") for the
year ended December 31, 2004 (the "Form 10-K").
The purpose of this letter is to respond to your comments. To facilitate
your review of our responses, we will set out each of your comments followed by
the Company's response, [including the changes the Company would include in [an
amendment to the Form 10-K; its future annual reports] in response to that
comment.
Business, page 3
----------------
The Transactions, page 3
------------------------
SEC COMMENT NO. 1
1. We note the "merger agreement" between you (i.e., Amscan Holdings, Inc.)
and AAH Acquisition, a wholly owned subsidiary of AAH Holdings, was
structured
o as a purchase of common stock,
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 2
o you were deemed to be the surviving entity, as a wholly owned
subsidiary of AAH Holdings, and
o the resulting capital structure of the surviving entity is equal
to that of AAH Holdings.
Please address each of the following:
o Clarify whether you, AAH Acquisition or AAH Holdings, paid cash
of $530 million to consummate the acquisition.
o Describe the facts and circumstances of the acquisition,
including the factors that resulted in the "ultimate beneficial
ownership of the Successor."
o Provide an analysis that supports your accounting treatment of
the transaction and specifically cite the authoritative
literature you relied upon in support of your methodology.
o Clarify whose net assets will be fair valued based on the
purchase price of $530 million.
RESPONSE
The acquisition of Amscan Holdings, Inc. ("Amscan Holdings") by AAH
Holdings, Inc. ("AAH Holdings") was accomplished through a series of steps that,
as an accounting matter, was deemed to be a purchase. As a legal matter, the
following occurred:
o AAH Holdings and AAH Acquisition were formed as new legal entities;
o Capital in the amount of $140.5 million was contributed by the
Principal Investors (as defined in the Form 10-K) and certain employee
stockholders of Amscan Holdings to AAH Holdings;
o The capital of AAH Holdings was then contributed by AAH Holdings to
AAH Acquisition;
o Pursuant to the Merger Agreement, AAH Acquisition was merged into
Amscan Holdings with Amscan Holdings as the surviving entity of the
merger;
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 3
o Upon the consummation of the merger, (a) the assets of AAH Acquisition
(including its capital that had been contributed by the Principal
Investors and the employee stockholders) became assets of Amscan
Holdings as the surviving corporation of the merger; (b) each share of
Amscan Holdings then outstanding was converted into cash; and (c) each
share of AAH Acquisition was converted into the right to receive one
share of Amscan Holdings; and
o As a result, AAH Holdings continues as a legal entity whose sole
function is to hold the capital stock of Amscan Holdings.
The transaction pursuant to which Amscan Holdings became a wholly-owned
subsidiary of AAH Acquisition was not, as a legal matter, a purchase of common
stock but rather was a statutory merger.
Since Amscan Holdings is merely a conduit between the operating companies
and AAH Holdings, Amscan Holdings has determined that it is more appropriate
disclosure to reflect on its financial statements the capital structure of AAH
Holdings as the ultimate beneficial owner of the business. This information has
been disclosed in the notes to the financial statements.
The cash paid in the merger to the holders of equity interests in Amscan
Holdings was provided both by the Principal Investors and certain employee
stockholders and by Amscan Holdings. As noted in the Form 10-K, the equity
contribution of the Principal Investors and the employee stockholders (who
exchanged equity interests in Amscan Holdings for equity interests in AAH
Holdings) aggregated $140.5 million. The balance of the cash needed to
consummate the acquisition was provided by Amscan Holdings (through borrowings
(a term loan, a revolving loan and senior subordinated notes) and available cash
on hand at Amscan Holdings).
The accounting treatment for the merger of AAH Acquisition into Amscan
Holdings as a business combination to be accounted for under the purchase method
of accounting is supported by Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS No. 141"). The Principal Investors and certain
members of management, through their investment in AAH Holdings and the merger
of AAH Acquisition into Amscan Holdings, acquired control over 100% of the
equity of Amscan Holdings. As substantially all of the common stock of AAH
Holdings is owned by new shareholders, the change in control justifies the asset
bases adjustment at Amscan Holdings. SFAS No. 141 paragraph 9 states that "a
business combination occurs when an entity acquires net assets that constitute a
business or acquires equity interests of one or more other entities and obtains
control over that entity or entities." Paragraph 10 states that "the provisions
of this Statement apply equally to a business combination in which (a) one or
more entities are merged or become subsidiaries, (b) one
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 4
entity transfers net assets or its owners transfer their equity interests to
another, or (c) all entities transfer net assets or the owners of those entities
transfer their equity interests to a newly formed entity (some of which are
referred to as roll-up or put-together transactions)." Paragraph 10 also states
that "All those transactions are business combinations regardless of whether the
form of consideration given is cash, other assets, a business or a subsidiary of
the entity, debt, common or preferred shares or other equity interests, or a
combination of those forms and regardless of whether the former owners of one of
the combining entities as a group retain or receive a majority of the voting
rights of the combined entity." SFAS No 141, paragraphs 13 and 15 require that
all business combinations in the scope of SFAS No 141 shall be accounted for
using the purchase method of accounting and that an acquiring entity must be
determined in each business combination. SFAS No. 141 paragraph 16 states that
"in a business combination effected solely through the distribution of cash or
other assets or by incurring liabilities, the entity that distributes cash or
other assets or incurs liabilities is generally the acquiring entity." As AAH
Holdings distributed cash (including its initial equity contribution of $140.5
million) and indirectly assumed the new debt incurred to pay the former debt and
equity holders of Amscan Holdings, AAH Holdings is considered the acquiring
entity.
In our analysis supporting the treatment of the transactions as a business
combination, we considered the provisions of EITF 88-16, "Basis in Leveraged
Buyout Transactions," including the leverage computation below:
New net debt incurred $390,467,000
Less: Old debt paid 266,224,000
-------------
New leverage 124,243,000
New equity contribution 140,500,000
Leverage ratio 46.9% (124,243,000/(124,243,000+140,500,000))
Based on the leverage of 46.9%, we concluded that the transaction was not a
highly leveraged transaction and EITF 88-16 would not apply.
As noted in both Part I of the Form 10-K and in Note 1 to the financial
statements included in the Form 10-K, the purchase price (i.e., the $530.0
million) has been allocated based on estimates of the "fair value of the net
assets acquired." The assets acquired in the transaction were the assets of
Amscan Holdings at the time of the merger when Amscan Holdings became a wholly
owned subsidiary of AAH Holdings.
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 5
SEC COMMENT NO. 2
2. We also note, as a result of the transaction between you and AAH
Acquisition, that you recorded indefinite-lived tradenames of $33.5
million. Please provide a schedule of the items included in this balance
and an analysis to support your position that these intangible assets have
an indefinite useful life.
RESPONSE
The Successor company recorded $33.5 million as the fair value of its
Amscan(R) and Anagram(R) trade names. The Predecessor acquired the trade name
Anagram(R) as part of its acquisition of the assets of Anagram International Inc
and subsidiaries in 1998. The Successor continues to use the Anagram(R) trade
name to identify its line of metallic balloons. The Successor determined the
fair value of the trade names Amscan(R) and Anagram(R) based on an independent
appraisal that employed the relief-from-royalty method. SFAS No. 141 does not
preclude the recognition of trade names or "brands" as a single asset apart from
goodwill, if the complimentary assets that make up the group have similar useful
lives, which, in this case, are deemed to be indefinite.
The Successor determined that the Amscan(R) and Anagram(R) trade names have
indefinite lives based on the following:
o The Company has no plans to retire the trade names and intends to
operate under the trade names indefinitely, as a going concern. The
use of the trade names is not limited by a relationship with another
asset or group of assets or by any legal, regulatory or contractual
provisions.
o The Amscan(R) and Anagram(R) trade names have been established for
over 57 years and 27 years, respectively, and are recognized as market
leaders in the party goods industry.
o The Company's products (decorative party goods including tableware,
balloons, and coordinated and non-coordinated party accessories) are
not subject to technical obsolescence or uncertainties due to
legislative or regulatory changes.
o Demand for the Company's branded products is evidenced by the
Predecessor's 11% organic revenue growth over the past 10 years. Due
to limited availability of market data for the party goods industry,
independent studies were commissioned by the Company in 2003 which
indicate it occupies approximately 30% of the shelf space in the party
superstore channel, which channel represents approximately 50%
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 6
of its domestic revenue. The Company has longstanding relationships
with wholesale party goods customers, including small, independent
party and gift stores and large party superstores chains, and sells to
over 40,000 customers.
o The Company expects its market share to continue to grow as it
continually expands the number of innovative decorative products in
its lines; focuses on additional channels of distribution, including
mass marketers and focuses on the further development of a less mature
European market.
o The party goods industry is relatively stable. Competitors include
small independent specialty manufacturers as well as divisions or
subsidiaries of larger companies. However, the population of
competitors has not grown significantly in the past due to barriers to
entry including substantial investments in artwork and inventories and
state-of the art distribution facilities. As a result, the Company
does not expect to lose significant market share to new or existing
competitors and expects to remain a leader in the industry.
o The Company does not believe revenue generation is dependent upon the
continued employment of key employees. The breath of product, which
distinguishes Amscan and Anagram from its competitors, is generated by
a large creative staff of over 100 employees.
Based on the factors above, the Company expects the Amscan(R) and
Anagram(R) trade names will continue to generate cash flow indefinitely and,
accordingly, have deemed their useful lives to be indefinite.
Note 16 - Segment Information, page F-30
----------------------------------------
SEC COMMENT NO. 3
3. We note your disclosure that you operate in one industry segment and that
this one segment "involves the design, manufacture, contract for
manufacture and distribution of party goods, including decorative party
goods, metallic balloons, stationery and gift items." Please identify your
operating segments, as defined in paragraph 10 of SFAS 131, and expand your
disclosure to identify the factors used to identify your reportable
segments, as required by paragraph 26(a) of SFAS 131. We note that your
segment reporting was addressed in your communication with the staff during
2003.
<PAGE>
Securities and Exchange Commission
September 8, 2005
Page 7
RESPONSE
The CEO and management consider the Company the "one stop source" for
celebratory products (i.e., party goods) of all kinds, including decorative
tableware and coordinated and non-coordinated accessories. Coordinated and
non-coordinated accessories include balloons (e.g., metallic and latex),
stationery (e.g., confetti, stickers, invitations, thank you notes, gift wrap,
ribbon, memory books and albums) and gifts (e.g., ceramic giftware, picture
frames, mugs, and decorative candles). Our products are generally presented to
party goods retailers, through our catalogues, as general, seasonal and themed
party ensembles. The primary objective of our design staff is to create new
ensembles and new products in all product lines to expand those ensembles.
Management does not use product line financial performance as a basis for
business operating decisions.
As noted in our communication with the staff during 2003, the Company
considers itself a single operating segment based on the "management approach"
(i.e., based on how management internally evaluates the operating performance of
its business units). The Company's chief operating decision maker is considered
to be the Chief Executive Officer ("CEO"). The CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions,
assessing financial performance and allocating resources. The consolidated
financial information reviewed by the CEO is similar to the information
presented in the consolidated financial statements. Accordingly, the Company has
determined that it operates in a single operating segment and, as a result, a
single reportable segment.
We propose to modify the segment disclosure in the notes to the financial
statements in our future filings as follows. In addition, we will add similar
disclosur