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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-21827
---------
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
80 Grasslands Road
Elmsford, New York 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
------- -------
As of August 14, 2002, 1,233.27 shares of Registrant's common stock, par value
$0.10 ("Common Stock"), were outstanding.
AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 2002
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001........................................ 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2002 and 2001...................... 4
Consolidated Statement of Stockholders' Deficit for the
Six Months Ended June 30, 2002........................... 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001...................... 6
Notes to Consolidated Financial Statements................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 23
Item 3 Quantitative and Qualitative Disclosures About
Market Risk ............................................. 28
Part II
Item 1 Legal Proceedings............................................. 29
Item 6 Exhibits and Reports on Form 8-K.............................. 29
Signature .............................................................. 30
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2002 2001
------------ ------------
(Unaudited) (Note)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 2,200 $ 1,016
Accounts receivable, net of allowances ............................ 73,659 65,039
Inventories, net of allowances .................................... 85,637 72,582
Prepaid expenses and other current assets ......................... 17,384 13,659
--------- ---------
Total current assets ......................................... 178,880 152,296
Property, plant and equipment, net .................................... 97,977 94,589
Goodwill, net ......................................................... 76,413 55,985
Other assets, net ..................................................... 9,083 7,604
--------- ---------
Total assets ................................................. $ 362,353 $ 310,474
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term obligations ............................................ $ 14,000 $ 700
Accounts payable .................................................. 39,562 33,083
Accrued expenses .................................................. 20,119 16,047
Income taxes payable .............................................. 3,693 2,298
Current portion of long-term obligations .......................... 15,925 3,455
--------- ---------
Total current liabilities .................................... 93,299 55,583
Long-term obligations, excluding current portion ...................... 264,257 278,443
Deferred income tax liabilities ....................................... 17,960 15,181
Other ................................................................. 2,277 2,353
--------- ---------
Total liabilities ............................................ 377,793 351,560
Redeemable convertible preferred stock ($0.10 par value; 43.04 shares
authorized; 42.4 and 40.0 shares issued and outstanding) .......... 6,455 6,270
Redeemable Common Stock ............................................... 30,523 29,949
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,233.27 and 1,133.49 shares issued and outstanding) .......... -- --
Additional paid-in capital ........................................ 15,764 299
Unamortized restricted Common Stock awards, net ................... (441) (94)
Notes receivable from stockholders ................................ (620) (601)
Deficit ........................................................... (64,604) (74,016)
Accumulated other comprehensive loss .............................. (2,517) (2,893)
--------- ---------
Total stockholders' deficit .................................. (52,418) (77,305)
--------- ---------
Total liabilities, redeemable convertible preferred and Common
Stock and stockholders' deficit ............................ $ 362,353 $ 310,474
========= =========
Note: The balance sheet at December 31, 2001 has been derived from the
audited consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales ..................................... $ 94,129 $ 82,839 $ 190,037 $ 169,744
Cost of sales ................................. 61,979 54,526 123,655 109,843
--------- --------- --------- ---------
Gross profit ......................... 32,150 28,313 66,382 59,901
Operating expenses:
Selling expenses ........................... 8,647 7,672 16,826 15,567
General and administrative expenses ........ 8,770 8,611 16,921 17,136
Art and development costs .................. 2,700 2,257 4,976 4,342
Restructuring charges ...................... 186 -- 186 --
--------- --------- --------- ---------
Total operating expenses ............. 20,303 18,540 38,909 37,045
--------- --------- --------- ---------
Income from operations ............... 11,847 9,773 27,473 22,856
Interest expense, net ......................... 5,268 6,190 10,758 12,765
Other expense (income), net ................... 48 (67) (22) 44
--------- --------- --------- ---------
Income before income taxes and
minority interests ................ 6,531 3,650 16,737 10,047
Income tax expense ............................ 2,580 1,442 6,611 3,969
Minority interests ............................ 11 (1) (45) (6)
--------- --------- --------- ---------
Net income ........................... 3,940 2,209 10,171 6,084
Dividend requirement on redeemable
convertible preferred stock ........ 95 90 185 90
--------- --------- --------- ---------
Net income applicable to common shares $ 3,845 $ 2,119 $ 9,986 $ 5,994
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2002
(Dollars in thousands)
(Unaudited)
Unamortized
Restricted
Common Common Notes Accumulated
Stock Additional Stock Receivable Other
Common Par Paid-in Awards' from Comprehensive
Shares Value Capital Net Stockholders Deficit Loss Total
------ -------- ---------- --------- ------------ ------- ------------- -----
Balance at December 31, 2001 ..... 1,133 $ -- $ 299 $ (94) $ (601) $(74,016) $ (2,893) $(77,305)
Net income ..................... -- -- -- -- -- 10,171 -- 10,171
Net change in cumulative
translation adjustment ....... -- -- -- -- -- -- 955 955
Change in fair value of interest
rate swap and foreign
exchange contracts, net of
taxes (see Note 5) ........... -- -- -- -- -- -- (579) (579)
--------
Comprehensive income ....... -- -- -- -- -- -- -- 10,547
Issuance of Common Stock in
connection with acquisition .. 97 -- 15,000 -- -- -- -- 15,000
Grant of restricted Common
Stock award .................. 3 -- 465 (465) -- -- -- --
Redeemable convertible
preferred stock dividends .... -- -- -- -- -- (185) -- (185)
Amortization of restricted
Common Stock awards .......... -- -- -- 118 -- -- -- 118
Accrual of interest income
on notes receivable from
stockholders.................. -- -- -- -- (19) -- -- (19)
Increase in redeemable
Common Stock due to vesting
of restricted Common Stock
award ........................ -- -- -- -- -- (574) -- (574)
-------- ----------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2002 ......... 1,233 $ -- $ 15,764 $ (441) $ (620) $(64,604) $ (2,517) $(52,418)
======== =========== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income ...................................................................... $ 10,171 $ 6,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 6,598 7,719
Amortization of deferred financing costs ..................................... 536 499
Amortization of restricted Common Stock awards ............................... 118 30
Provision for doubtful accounts .............................................. 1,115 987
Deferred income tax expense .................................................. 3,227 231
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable ........................................... (5,703) (3,610)
(Increase) decrease in inventories ........................................ (6,979) 156
Increase in prepaid expenses and other current assets ..................... (4,069) (1,601)
Increase in accounts payable, accrued expenses and income taxes payable ... 6,690 3,161
Other, net ................................................................... (1,115) (1,713)
-------- --------
Net cash provided by operating activities ................................. 10,589 11,943
Cash flows from investing activities:
Cash paid in connection with the acquisition .................................... (13,547)
Capital expenditures ............................................................ (7,610) (15,110)
Proceeds from disposal of property and equipment ................................ 34 --
-------- --------
Net cash used in investing activities ..................................... (21,123) (15,110)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock ................ 6,000
Proceeds from short-term obligations ............................................ 13,300
Repayment of loans, notes payable and long-term obligations ..................... (1,675) (2,629)
Other ........................................................................... -- (5)
-------- --------
Net cash provided by financing activities ................................. 11,625 3,366
Effect of exchange rate changes on cash and cash equivalents ....................... 93 (540)
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... 1,184 (341)
Cash and cash equivalents at beginning of period ................................... 1,016 1,469
-------- --------
Cash and cash equivalents at end of period ......................................... $ 2,200 $ 1,128
======== ========
Supplemental Disclosures:
Interest paid ............................................................. $ 10,030 $ 12,875
Income taxes paid ......................................................... $ 1,619 $ 1,235
Supplemental information on non-cash activities:
In January 2002, 3.0 shares of restricted Common Stock aggregating $465 were
issued to an officer of the Company, subject to future vesting provisions.
In February 2002, the Company issued 96.774 shares of its Common Stock, at a
value of $155 per share, to American Greetings Corporation in connection
with the acquisition of M&D Balloons Inc. See Note 10 to the consolidated
financial statements.
See accompanying notes to consolidated financial statements.
6
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and Description of Business
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, "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. AHI designs, manufactures, contracts for manufacture and
distributes decorative party goods, metallic balloons, stationery and gift items
principally in North America, South America, Europe, Asia and Australia.
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Amscan Holdings and its majority-owned subsidiaries. All
material intercompany balances and transactions have been eliminated in
consolidation. The unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2002. The results of operations may be affected by seasonal factors
such as the timing of holidays or 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 Amscan Holdings' Annual Report on Form 10-K for the
year ended December 31, 2001 as filed with the Securities and Exchange
Commission.
In November 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Product." EITF 01-09 was effective for Amscan as of January 1,
2002. EITF 01-09 clarifies the income statement classification of costs incurred
by a vendor in connection with the reseller's purchase or promotion of the
vendor's products, resulting in certain advertising and product placement costs
previously classified as selling expenses to be reflected as a reduction of
revenues earned from that activity. The new guidance requires retroactive
restatement of all periods presented to reflect the new accounting provision. As
a result of applying the provisions of EITF 01-09, the Company's revenues and
costs were each reduced by $524,000 and $1,125,000 for the three and six months
ended June 30, 2001, respectively.
Note 3 - Inventories
Inventories consisted of the following (dollars in thousands):
June 30, December 31,
2002 2001
-------- -----------
Finished goods ..................................... $ 76,633 $ 65,376
Raw materials ...................................... 7,019 5,992
Work-in-process .................................... 5,318 4,520
-------- --------
88,970 75,888
Less: reserve for slow moving and obsolete inventory (3,333) (3,306)
-------- --------
$ 85,637 $ 72,582
======== ========
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or market.
7
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 4 - Income Taxes
The consolidated income tax expense for the three and six months ended
June 30, 2002 and 2001 was determined based upon estimates of the Company's
consolidated effective income tax rates for the years ending December 31, 2002
and 2001, respectively. The differences between the consolidated effective
income tax rate and the U.S. Federal statutory rate are primarily attributable
to state income taxes and the effects of foreign operations.
Note 5 - Comprehensive Income (Loss)
Comprehensive income consisted of the following (dollars in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income .................................................. $ 3,940 $ 2,209 $ 10,171 $ 6,084
Net change in cumulative translation adjustment ............. 1,168 26 955 (778)
Cumulative effect of a change in accounting principle to
recognize the fair value of the Company's interest rate
swap contracts, net of taxes of $(148) ................... -- -- -- (227)
Change in fair value of the Company's interest rate swap
contracts, net of taxes of $(146), $(57), $(190) and $3,
respectively ............................................. (224) (88) (291) 5
Change in fair value of the Company's foreign exchange
contracts, net of taxes of $(275) and $(188), respectively (422) (288)
-------- -------- -------- --------
$ 4,462 $ 2,147 $ 10,547 $ 5,084
======== ======== ======== ========
Accumulated other comprehensive loss consisted of the following
(dollars in thousands):
June 30, December 31,
2002 2001
--------- ------------
Cumulative translation adjustment ................ $(1,824) $(2,779)
Interest rate swap contract qualifying as a hedge,
net of taxes of $(190) ......................... (291)
Foreign exchange contracts qualifying as hedges,
net of taxes of $(262) and $(76), respectively . (402) (114)
------- -------
$(2,517) $(2,893)
======= =======
Note 6 - Capital Stock
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as "Series A
Redeemable Convertible Preferred Stock". Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GS
Capital Partners II, L.P. and certain other private investment funds managed by
Goldman, Sachs & Co. (collectively, "GSCP"), for proceeds of $6.0 million.
Dividends are cumulative and payable annually at 6% per annum. Such dividends
payable on or prior to March 30, 2004, shall be payable in additional shares of
Series A Redeemable Convertible Preferred Stock based on a value of $150,000 per
share. Subsequent to March 30, 2004, dividends shall be payable, at the option
of the Company, either in cash or additional shares of Series A Redeemable
Convertible Preferred Stock. As of June 30, 2002, accrued dividends aggregated
$95,000 and are included in redeemable convertible preferred stock on the
consolidated balance sheet.
8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
At June 30, 2002 and December 31, 2001, 42.40 and 40.0 shares of Series
A Redeemable Convertible Preferred Stock, respectively, were issued and
outstanding.
Each share of the Series A Redeemable Convertible Preferred Stock is
convertible at the option of the holder at any time, into shares of Common Stock
at a conversion price equal to the fair value of the Common Stock at the date
the redeemable convertible preferred stock was issued, subject to adjustment for
the effects of subsequent common stock splits or stock dividends. At June 30,
2002, the redeemable convertible preferred stock is convertible into Common
Stock at a price of $150,000 per common share. As of June 30, 2002, there were
43.04 shares of Common Stock reserved for such conversion.
The Series A Redeemable Convertible Preferred Stock is not redeemable
on or prior to March 30, 2004. To the extent the Company shall have funds
legally available to redeem these shares, the Company may redeem these shares,
in whole or, with the consent of the holders of a majority of the outstanding
Series A Redeemable Convertible Preferred Stock, in part, at a redemption price
of $150,000 per share, in cash, together with accrued and unpaid dividends. To
the extent the Company shall have funds legally available to redeem these shares
on March 30, 2008, the Company is required to redeem all outstanding shares of
Series A Redeemable Convertible Preferred Stock at a redemption price per share
equal to $150,000 in cash, together with accrued and unpaid dividends. The
holders of the Series A Redeemable Convertible Preferred Stock have liquidation
rights equal to their original investment plus accrued but unpaid dividends.
On January 1, 2002, the Company issued 3.0 shares of restricted Common
Stock with an aggregate value of $465,000 to its Executive Vice President,
subject to the vesting provisions of an employment agreement.
In February 2002, the Company issued 96.774 shares of its Common Stock,
at a value of $155,000 per share, to American Greetings Corporation in
connection with the acquisition of M&D Balloons Inc. (see Note 10).
At June 30, 2002, of the 1,233.27 shares of Common Stock issued and
outstanding, 203.3 shares of redeemable Common Stock were held by employees, of
which 6.38 shares (the "Restricted Stock") are subject to the vesting provisions
of certain employment agreements with the President and Executive Vice President
of the Company. The President's shares of Restricted Stock will vest in June
2003 and the Executive Vice President's shares of Restricted Stock will vest in
December 2004. During the three months ended June 30, 2002 and 2001, the Company
recorded the amortization of Restricted Stock of $59,000 and $18,000,
respectively, as compensation expense, which is included in general and
administrative expenses in the Company's consolidated statements of income.
During the six months ended June 30, 2002 and 2001, the Company recorded the
amortization of Restricted Stock of $118,000 and $30,000, respectively.
In September 1998, the Company issued warrants to purchase 100,000
shares of Common Stock at $125,000 per share in connection with the acquisition
of all the capital stock of Anagram International, Inc. and certain related
companies ("Anagram"). The warrants, which were valued at $225,000, were fully
exercisable upon issuance and expire on September 17, 2008.
The Company has not paid any dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay dividends or distributions to its stockholders.
Note 7 - Segment Information
Industry Segments
- -----------------
The Company manages its operations as one industry segment which
involves the design, manufacture, contract for manufacture and distribution of
decorative party goods, metallic balloons, stationery and gift items.
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Geographic Segments
- -------------------
The Company's export sales, other than those 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.
The Company's geographic area data is as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended June 30, 2002
Sales to unaffiliated customers ................. $ 81,040 $ 13,089 $ 94,129
Sales between geographic areas .................. 6,003 $ (6,003) --
--------- --------- --------- ---------
Net sales ....................................... $ 87,043 $ 13,089 $ (6,003) $ 94,129
========= ========= ========= =========
Income from operations .......................... $ 11,270 $ 577 $ 11,847
========= =========
Interest expense, net ........................... 5,268
Other expense, net .............................. 48
---------
Income before income taxes and minority interests $ 6,531
=========
Long-lived assets, net at June 30, 2002 ......... $ 176,723 $ 6,750 $ 183,473
========= ========= =========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended June 30, 2001
Sales to unaffiliated customers ................. $ 71,901 $ 10,938 $ 82,839
Sales between geographic areas .................. 5,700 $ (5,700) --
--------- --------- --------- ---------
Net sales ....................................... $ 77,601 $ 10,938 $ (5,700) $ 82,839
========= ========= ========= =========
Income from operations .......................... $ 9,204 $ 569 $ 9,773
========= =========
Interest expense, net ........................... 6,190
Other income, net ............................... (67)
---------
Income before income taxes and minority interests $ 3,650
=========
Long-lived assets, net at June 30, 2001 ......... $ 137,163 $ 6,731 $ 143,894
========= ========= =========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Six Months Ended June 30, 2002
Sales to unaffiliated customers ................. $ 164,832 $ 25,205 $ 190,037
Sales between geographic areas .................. 11,285 $ (11,285) --
--------- --------- --------- ---------
Net sales ....................................... $ 176,117 $ 25,205 $ (11,285) $ 190,037
========= ========= ========= =========
Income from operations .......................... $ 26,930 $ 543 $ 27,473
========= =========
Interest expense, net ........................... 10,758
Other income, net ............................... (22)
---------
Income before income taxes and minority interests $ 16,737
=========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Six Months Ended June 30, 2001
Sales to unaffiliated customers ................. $ 147,774 $ 21,970 $ 169,744
Sales between geographic areas .................. 12,265 $ (12,265) --
--------- --------- --------- ---------
Net sales ....................................... $ 160,039 $ 21,970 $ (12,265) $ 169,744
========= ========= ========= =========
Income from operations .......................... $ 21,435 $ 1,421 $ 22,856
========= =========
Interest expense, net ........................... 12,765
Other expense, net .............................. 44
---------
Income before income taxes and minority interests $ 10,047
=========
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 8 - 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.
Note 9 - Recently Adopted Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No 142"). SFAS No 141 revises the accounting treatment
for business combinations to require the use of purchase accounting and prohibit
the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No 142 revises the accounting
for goodwill to eliminate the amortization of goodwill on transactions
consummated after June 30, 2001 and of all other goodwill as of January 1, 2002.
Other intangible assets will continue to be amortized over their useful lives.
SFAS No. 142 also requires goodwill and other intangible assets to be assessed
for impairment each year and more frequently if circumstances indicate a
possible impairment. During the second quarter of 2002, the Company completed
the initial impairment test as of January 1, 2002 and no impairment was noted.
Had SFAS No. 142 been effective in fiscal year 2001, net income would have been
reported as the following amounts (dollars in thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Reported net income ........................ $ 3,940 $ 2,209 $10,171 $ 6,084
Add back goodwill amortization, net of taxes -- 387 -- 782
------- ------- ------- -------
Adjusted net income ........................ $ 3,940 $ 2,596 $10,171 $ 6,866
======= ======= ======= =======
Intangible assets, net of amortization, of $915,000 at June 30, 2002
were comprised of licensing agreements which are being amortized using the
straight-line method over the lives of the contracts (one to three years with an
average life of 2.7 years). Intangible assets at December 31, 2001 were fully
amortized and were comprised of patents which were amortized using the
straight-line method over three years. Accumulated amortization was $3,155,000
and $3,000,000 at June 30, 2002 and December 31, 2001, respectively.
Amortization of intangible assets for the three and six months ended June 30,
2002 was $114,000 and $155,000, respectively. Amortization of intangible assets
for the three and six months ended June 30, 2001, was $249,000 and $498,000,
respectively. Estimated amortization expense for the years ending December 31,
2002, 2003, and 2004 was $383,000, $456,000 and $231,000, respectively.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No 144"). SFAS No. 144 supercedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of Accounting Principles Board No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
and expands the scope of a discontinued operation to include a component of an
entity. The adoption of SFAS No. 144 on January 1, 2002 did not impact the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost was recognized at the date an entity
committed to an exit plan. The provisions of SFAS No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002.
Note 10-Acquisition
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Balloons, Inc. ("M&D Balloons"), a Manteno, Illinois-based
manufacturer of metallic and plastic balloons, from American Greetings
Corporation ("American Greetings") for $27,500,000 plus certain other related
costs of $1,047,000. The Company believes that this acquisition will supplement
its existing balloon operations. The Company financed the acquisition by
borrowing $13,547,000 under its revolving credit facility and issuing 96.774
shares of its Common Stock to American Greetings. American Greetings will
continue to distribute metallic balloons under a supply agreement with the
Company. The acquisition has been accounted for under the provisions of SFAS No.
141, "Business Combinations" and, accordingly, the operating results of M&D
Balloons have been included in the Company's consolidated financial statements
since the date of acquisition.
The purchase price has been preliminarily allocated based upon the
estimated fair value of net assets acquired at the date of acquisition. Such
allocations are based on studies and valuations that have not yet been completed
and will be subject to change in future periods. The excess of the purchase
price over tangible net assets acquired has been preliminarily allocated to
intangible assets consisting of licensing agreements in the amount of
$1,070,000, which are being amortized using the straight-line method over the
lives of the contracts (one to three years with an average life of 2.7 years),
and goodwill in the amount of $20,292,000, which is not being amortized. The
transaction was structured as a purchase of common stock and, accordingly, the
amortization of intangible assets is not deductible for income tax purposes.
The following unaudited pro forma information assumes the M&D Balloons
acquisition had occurred on January 1, 2002 and 2001, respectively. The pro
forma information, as presented below, is not indicative of the results that
would have been obtained had the transaction occurred on January 1, 2001, nor is
it indicative of the Company's future results (dollars in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- ------------------------
2001 2002 2001
---- ---- ----
Net sales ................ $ 88,849 $194,144 $180,564
Net income ............... 2,913 10,564 6,631
The above amounts reflect adjustments for interest expense from
additional borrowings necessary to finance the acquisition and amortization of
intangible assets, net of their related income tax effects based upon a pro
forma effective tax rate of 39.5%. The unaudited pro forma information gives
effect only to adjustments described above and does not reflect management's
estimate of any anticipated cost savings or other benefits as a result of the
acquisition.
12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
During the three and six months ended, June 30, 2002, the Company sold
$2,557,000 and $3,516,000, respectively, of metallic balloons and other party
goods to American Greetings. Trade accounts receivable from American Greetings
at June 30, 2002 were $2,197,000.
Note 11 - Restructuring Charges
During the second quarter of 2002, the Company incurred charges of
$93,000 relating to the consolidation of its domestic distribution operations,
which began in 1998 and is scheduled to be completed by the end of 2002. In
addition, the Company incurred charges of $93,000 relating to the closure of its
distribution facilities in Spain and France which was substantially completed by
June 30, 2002 and has resulted in the elimination of 6 positions. The continued
consolidation of the Company's distribution facilities may result in additional
restructuring charges in subsequent periods.
Note 12 - Initial Public Offering
On June 13, 2002, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of the Common
Stock. The filing has not yet become effective. The Company anticipates that, if
the offering is completed, it will use the net proceeds it receives to pay
existing debt. In addition, the board of directors plans to approve a 10,000 for
one stock split of the Common Stock, effective immediately prior to the
offering.
Note 13 - Subsequent Event
On July 3, 2002, the Company entered into an amended revolving loan
credit agreement which extended the expiration of its revolving credit facility
from December 2002 to December 2003 and reduced the maximum borrowing from $50
million to $40 million (the "Revolving Credit Facility"). The Revolving Credit
Facility bears interest, at the option of the Company, at the lenders' prime
rate plus, based on performance, a range of 1.25% to 3.50% per annum or at the
lenders' reserve adjusted Eurodollar rate plus, based on performance, a range of
1.875% to 4.50% per annum.
Note 14 - Condensed Consolidating Financial Information
On December 19, 1997, the Company entered into a bank credit agreement
("Bank Credit Facilities") providing for borrowings in the aggregate principal
amount of approximately $117,000,000 under a term loan (the "Term Loan") and
additional borrowings under the Revolving Credit Facility. The Term Loan was
subsequently amended in September 1998 to provide for additional borrowings of
$40,000,000 to partially finance the acquisition of Anagram. On December 19,
1997, the Company also issued $110,000,000 aggregate principal amount of 9.875%
senior subordinated notes due in December 2007 (the "Notes"). The repayment of
the Notes and borrowings under the Bank Credit Facilities are guaranteed jointly
and severally, fully and unconditionally, by the wholly-owned domestic
subsidiaries of the Company (the "Guarantors").
13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Guarantor subsidiaries include the following:
o Amscan Inc.
o Trisar, Inc.
o Am-Source, LLC
o Anagram International, Inc.
o Anagram International Holdings, Inc.
o Anagram International, LLC
o M&D Balloons, Inc.
o SSY Realty Corp.
o JCS Realty Corp.
o Anagram Eden Prairie Property Holdings LLC
Non-guarantor subsidiaries ("Non-guarantors") include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan Svenska AB
o Amscan de Mexico, S.A. de C.V.
o Anagram International (Japan) Co., Ltd.
o Anagram Mexico S. de R.L. de C.V.
o Anagram Espana, S.A.
o Anagram France S.C.S.
The following information presents consolidating balance sheets as of
June 30, 2002 and December 31, 2001, and the related consolidating statements of
income for the three and six months ended June 30, 2002 and 2001, and cash flows
for each of the six months ended June 30, 2002 and 2001 for the combined
Guarantors and the combined Non-guarantors and elimination entries necessary to
consolidate the entities comprising the combined companies.
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
June 30, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 780 $ 1,420 $ 2,200
Accounts receivable, net .................... 62,262 11,397 73,659
Inventories ................................. 75,784 10,637 $ (784) 85,637
Prepaid expenses and other current assets ... 15,002 2,382 17,384
--------- --------- --------- ---------
Total current assets ........................ 153,828 25,836 (784) 178,880
Property, plant and equipment, net ............... 96,533 1,444 97,977
Intangible assets, net ........................... 71,421 4,992 76,413
Other assets, net ................................ 35,570 2,074 (28,561) 9,083
--------- --------- --------- ---------
Total assets ................................ $ 357,352 $ 34,346 $ (29,345) $ 362,353
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND
COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable ..................... $ 14,000 $ -- $ 14,000
Accounts payable ............................ 38,148 1,414 39,562
Accrued expenses ............................ 14,847 5,272 20,119
Income taxes payable ........................ 3,693 - 3,693
Current portion of long-term
obligations ............................... 15,778 147 15,925
--------- --------- --------- ---------
Total current liabilities ................... 86,466 6,833 93,299
Long-term obligations, excluding
current portion ................................ 264,069 188 264,257
Deferred income tax liabilities .................. 17,960 17,960
Other ............................................ 3,513 15,739 $ (16,975) 2,277
--------- --------- --------- ---------
Total liabilities ................................ 372,008 22,760 (16,975) 377,793
Redeemable convertible preferred stock ........... 6,455 6,455
Redeemable Common Stock .......................... 30,523 30,523
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 15,764 658 (658) 15,764
Unamortized restricted Common Stock
award, net ............................... (441) (441)
Notes receivable from stockholders .......... (620) (620)
(Deficit) retained earnings ................. (63,820) 12,727 (13,511) (64,604)
Accumulated other comprehensive loss ........ (2,517) (2,138) 2,138 (2,517)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .... (51,634) 11,586 (12,370) (52,418)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 357,352 $ 34,346 $ (29,345) $ 362,353
========= ========= ========= =========
15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2001
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 60 $ 956 $ 1,016
Accounts receivable, net .................... 56,408 8,631 65,039
Inventories ................................. 65,939 7,414 $ (771) 72,582
Prepaid expenses and other current assets ... 12,339 1,320 13,659
--------- --------- --------- ---------
Total current assets ........................ 134,746 18,321 (771) 152,296
Property, plant and equipment, net ............... 93,420 1,169 94,589
Intangible assets, net ........................... 51,136 4,849 55,985
Other assets, net ................................ 24,499 4,880 (21,775) 7,604
--------- --------- --------- ---------
Total assets ................................ $ 303,801 $ 29,219 $ (22,546) $ 310,474
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND
COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable ..................... $ 700 $ -- $ 700
Accounts payable ............................ 32,127 956 33,083
Accrued expenses ............................ 12,178 3,869 16,047
Income taxes payable ........................ 2,225 73 2,298
Current portion of long-term
obligations ............................... 3,318 137 3,455
--------- --------- --------- ---------
Total current liabilities ................... 50,548 5,035 55,583
Long-term obligations, excluding
current portion ................................ 278,198 245 278,443
Deferred income tax liabilities .................. 15,181 15,181
Other ............................................ 189 14,236 $ (12,072) 2,353
--------- --------- --------- ---------
Total liabilities ................................ 344,116 19,516 (12,072) 351,560
Redeemable convertible preferred stock ........... 6,270 6,270
Redeemable Common Stock .......................... 29,949 29,949
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 299 658 (658) 299
Unamortized restricted Common Stock
award, net ............................... (94) (94)
Notes receivable from stockholders .......... (601) (601)
(Deficit) retained earnings ................. (73,245) 11,082 (11,853) (74,016)
Accumulated other comprehensive loss ........ (2,893) (2,376) 2,376 (2,893)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .... (76,534) 9,703 (10,474) (77,305)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 303,801 $ 29,219 $ (22,546) $ 310,474
========= ========= ========= =========
16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 84,168 $ 13,089 $ (3,128) $ 94,129
Cost of sales ................................. 55,588 9,436 (3,045) 61,979
-------- -------- -------- --------
Gross profit ......................... 28,580 3,653 (83) 32,150
Operating expenses:
Selling expenses .......................... 7,230 1,417 8,647
General and administrative expenses ....... 7,444 1,566 (240) 8,770
Art and development costs ................. 2,700 2,700
Restructuring charges ..................... 93 93 186
-------- -------- -------- --------
Income from operations ............... 11,113 577 157 11,847
Interest expense, net ......................... 5,111 157 5,268
Other (income) expense, net ................... (426) (64) 538 48
-------- -------- -------- --------
Income before income taxes
and minority interests ............. 6,428 484 (381) 6,531
Income tax expense ............................ 2,405 175 2,580
Minority interests ............................ 11 11
-------- -------- -------- --------
Net income ........................... 4,023 298 (381) 3,940
Dividend requirement on redeemable
convertible preferred stock ....... 95 95
-------- -------- -------- --------
Net income applicable to common shares $ 3,928 $ 298 $ (381) $ 3,845
======== ======== ======== ========
17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 2001
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 80,499 $ 11,434 $ (9,094) $ 82,839
Cost of sales ................................. 55,129 8,130 (8,733) 54,526
-------- -------- -------- --------
Gross profit ......................... 25,370 3,304 (361) 28,313
Operating expenses:
Selling expenses .......................... 6,297 1,375 7,672
General and administrative expenses ....... 7,261 1,398 (48) 8,611
Art and development costs ................ 2,257 2,257
-------- -------- -------- --------
Income from operations ............... 9,555 531 (313) 9,773
Interest expense, net ......................... 6,018 172 6,190
Other (income) expense, net ................... (425) (17) 375 (67)
-------- -------- -------- --------
Income before income taxes
and minority interests ............. 3,962 376 (688) 3,650
Income tax expense ............................ 1,392 50 1,442
Minority interests ............................ (1) (1)
-------- -------- -------- --------
Net income ........................... 2,570 327 (688) 2,209
Dividend requirement on redeemable
convertible preferred stock ....... 90 90
-------- -------- -------- --------
Net income applicable to common shares $ 2,480 $ 327 $ (688) $ 2,119
======== ======== ======== ========
18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 176,968 $ 25,205 $ (12,136) $ 190,037
Cost of sales ................................. 117,710 18,068 (12,123) 123,655
--------- --------- --------- ---------
Gross profit ......................... 59,258 7,137 (13) 66,382
Operating expenses:
Selling expenses .......................... 13,934 2,892 16,826
General and administrative expenses ....... 13,792 3,609 (480) 16,921
Art and development costs ................. 4,976 4,976
Restructuring charges ..................... 93 93 186
--------- --------- --------- ---------
Income from operations ............... 26,463 543 467 27,473
Interest expense, net ......................... 10,442 316 10,758
Other (income) expense, net ................... (609) (6) 593 (22)
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 16,630 233 (126) 16,737
Income tax expense ............................ 6,446 165 6,611
Minority interests ............................ (45) (45)
--------- --------- --------- ---------
Net income ........................... 10,184 113 (126) 10,171
Dividend requirement on redeemable
convertible preferred stock ....... 185 185
--------- --------- --------- ---------
Net income applicable to common shares $ 9,999 $ 113 $ (126) $ 9,986
========= ========= ========= =========
19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 2001
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 162,344 $ 21,981 $ (14,581) $ 169,744
Cost of sales ................................. 108,882 15,213 (14,252) 109,843
--------- --------- --------- ---------
Gross profit ......................... 53,462 6,768 (329) 59,901
Operating expenses:
Selling expenses .......................... 12,897 2,670 15,567
General and administrative expenses ....... 14,555 2,677 (96) 17,136
Art and development costs ................ 4,342 4,342
--------- --------- --------- ---------
Income from operations ............... 21,668 1,421 (233) 22,856
Interest expense, net ......................... 12,438 327 12,765
Other (income) expense, net ................... (841) 47 838 44
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 10,071 1,047 (1,071) 10,047
Income tax expense ............................ 3,658 311 3,969
Minority interests ............................ (6) (6)
--------- --------- --------- ---------
Net income ........................... 6,413 742 (1,071) 6,084
Dividend requirement on redeemable
convertible preferred stock ....... 90 90
--------- --------- --------- ---------
Net income applicable to common shares $ 6,323 $ 742 $ (1,071) $ 5,994
========= ========= ========= =========
20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2002
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ................................................. $ 10,184 $ 113 $ (126) $ 10,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................... 6,411 187 6,598
Amortization of deferred financing costs ................ 536 536
Provision for doubtful accounts ......................... 481 634 1,115
Amortization of restricted Common Stock award ........... 118 118
Deferred income tax provision ........................... 3,227 3,227
Changes in operating assets and liabilities, net of
acquisition:
Increase in accounts receivable ................... (2,854) (2,849) (5,703)
(Increase) decrease in inventories ................ (5,676) (1,316) 13 (6,979)
Increase in prepaid expenses and other current
assets, net .................................... (3,149) (920) (4,069)
Increase in accounts payable, accrued expenses
and income taxes payable ....................... 5,130 1,560 6,690
Other, net ............................................. (4,021) 2,793 113 (1,115)
-------- -------- -------- --------
Net cash provided by operating activities ......... 10,387 202 -- 10,589
Cash flows from investing activities:
Cash paid in connection with the acquisition ............... (13,547) (13,547)
Capital expenditures ....................................... (7,405) (205) (7,610)
Proceeds from disposal of property and equipment ........... 34 34
-------- -------- -------- --------
Net cash used in investing activities ............. (20,952) (171) (21,123)
Cash flows from financing activities:
Proceeds from loans, notes payable and
long-term obligations, ............................... 13,300 13,300
Repayment of loans, notes payable and
long-term obligations ................................ (1,669) (6) (1,675)
-------- -------- -------- --------
Net cash provided by (used in) financing activities 11,631 (6) -- 11,625
Effect of exchange rate changes on cash ....................... (328) 421 93
-------- -------- -------- --------
Net increase in cash and cash equivalents ......... 738 446 1,184
Cash and cash equivalents at beginning of period .............. 42 974 1,016
-------- -------- -------- --------
Cash and cash equivalents at end of period .................... $ 780 $ 1,420 $ -- $ 2,200
======== ======== ======== ========
21
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2001
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ............................................ $ 6,413 $ 742 $ (1,071) $ 6,084
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 7,435 284 7,719
Amortization of deferred financing costs ........... 499 499
Provision for doubtful accounts .................... 919 68 987
Amortization of restricted Common Stock award ...... 30 30
Deferred income tax provision ...................... 231 231
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ... (3,620) 10 (3,610)
Decrease (increase) in inventories ........... 3,071 (3,244) 329 156
Increase in prepaid expenses and other current
assets, net ............................... (1,225) (376) (1,601)
Increase (decrease) in accounts payable,
accrued expenses and income taxes payable.. 3,690 (529) 3,161
Other, net ........................................ (6,232) 3,777 742 (1,713)
-------- -------- -------- --------
Net cash provided by operating activities .... 11,211 732 -- 11,943
Cash flows from investing activities:
Capital expenditures ............................... (14,944) (166) (15,110)
-------- -------- --------
Net cash used in investing activities ........ (14,944) (166) (15,110)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible
preferred stock .................................. 6,000 6,000
Repayment of loans, notes payable and long-term
obligations ....................................... (2,556) (73) (2,629)
Other ................................................. (310) 305 (5)
-------- -------- -------- --------
Net cash provided by financing activities .... 3,134 232 -- 3,366
Effect of exchange rate changes on cash .................. 75 (615) (540)
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents ...................... (524) 183 (341)
Cash and cash equivalents at beginning of period ......... 559 910 1,469
-------- -------- -------- --------
Cash and cash equivalents at end of period ............... $ 35 $ 1,093 $ -- $ 1,128
======== ======== ======== ========
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Percentage of Net Sales
Three Months Ended June 30,
---------------------------
2002 2001
------- -------
Net sales................................................ 100.0% 100.0%
Cost of sales............................................ 65.8 65.8
------- -------
Gross profit ..................................... 34.2 34.2
Operating expenses:
Selling expenses..................................... 9.2 9.3
General and administrative expenses.................. 9.3 10.4
Art and development costs............................ 2.9 2.7
Restructuring charges................................ 0.2
------- -------
Total operating expenses.......................... 21.6 22.4
------- -------
Income from operations............................ 12.6 11.8
Interest expense, net.................................... 5.6 7.5
Other expense (income), net.............................. 0.1 (0.1)
------- -------
Income before income taxes and minority interests 6.9 4.4
Income tax expense....................................... 2.7 1.7
Minority interests.......................................
------- -------
Net income........................................ 4.2% 2.7%
======= =======
Net sales of $94.1 million for the three months ended June 30, 2002
were $11.3 million higher than net sales for the three months ended June 30,
2001. During the second quarter of 2002, the Company's sales of printed
ensembles, solid color tableware and other party goods to the national
superstore distribution channel grew by 3.3%. The Company's specialty sales
force, which brings party goods and related gift products to card and gift
stores and other independent retailers, achieved 56.4% sales growth during the
second quarter of 2002, contributing $8.3 million to net sales. Net sales from
contract manufacturing during the second quarter increased by $1.9 million when
compared to the second quarter of 2001. In addition, net sales for the second
quarter of 2002 included $5.3 million as a result of the February 2002
acquisition of M&D Balloons, Inc. ("M&D Balloons") (See Liquidity and Capital
Resources).
Gross profit for the second quarter of 2002 of 34.2% was consistent
with that of the second quarter of 2001 as the incremental margin achieved as a
result of increased sales was offset by lower margin attributable to product mix
and a higher effective rate of sales incentives.
Selling expenses of $8.6 million for the three months ended June 30,
2002 were $1.0 million higher than in the corresponding period in 2001
principally due to the inclusion of the operating results of M&D Balloons and
the continued development of the Company's specialty sales force. Selling
expenses, as a percentage of net sales, decreased from 9.3% to 9.2%, reflecting
the increase in net sales and the maturation of the specialty sales force.
General and administrative expenses of $8.8 million for the three
months ended June 30, 2002 represents a decrease of $0.2 million as compared to
the corresponding period in 2001. The net decrease in general and administrative
expenses reflects the elimination of goodwill amortization in 2002, which
amortization totaled $0.6 million during the second quarter of 2001, partially
offset by the inclusion of the operating results of M&D Balloons and higher
employee wages. As a percentage of sales, general and administrative expenses
decreased by 1.1%, to 9.3%.
23
Art and development costs of $2.7 million for the second quarter of
2002 were $0.4 million higher than in the second quarter of 2001, principally
due to an increase of staff and higher wages and the inclusion of the operating
results of M&D Balloons.
During the second quarter of 2002, the Company incurred charges of $0.1
million relating to the consolidation of its domestic distribution operations,
which began in 1998 and is scheduled to be completed by the end of 2002. In
addition, the Company incurred charges of $0.1 million relating to the closure
of its distribution facilities in Spain and France which was substantially
completed by June 30, 2002 and has resulted in the elimination of 6 positions.
The continued consolidation of the Company's distribution facilities may result
in additional restructuring charges in subsequent periods.
Interest expense, net, of $5.3 million for the second quarter of 2002
was $0.9 million lower than in the corresponding period in 2001 and reflects a
lower average interest rate (6.8% in 2002 versus 8.7% in 2001), partially offset
by the impact of higher average borrowings.
Income taxes for the second quarter of 2002 and 2001 were based upon
estimated consolidated effective income tax rates of 39.5% for the years ending
December 31, 2002 and 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Percentage of Net Sales
Six Months Ended June 30,
-------------------------
2002 2001
------ ------
Net sales ............................................... 100.0% 100.0%
Cost of sales ........................................... 65.1 64.7
------ ------
Gross profit ..................................... 34.9 35.3
Operating expenses:
Selling expenses .................................... 8.8 9.2
General and administrative expenses ................. 8.9 10.1
Art and development costs ........................... 2.6 2.6
Restructuring charges ............................... 0.1
------ ------
Total operating expenses ......................... 20.4 21.9
------ ------
Income from operations ........................... 14.5 13.4
Interest expense, net ................................... 5.7 7.5
Other (income) expense, net .............................
------ ------
Income before income taxes and minority interests 8.8 5.9
Income tax expense ...................................... 3.4 2.3
Minority interests ......................................
------ ------
Net income ....................................... 5.4% 3.6%
====== ======
Net sales of $190.0 million for the six months ended June 30, 2002 were
$20.3 million higher than net sales for the six months ended June 30, 2001.
During the six months ended June 30, 2002, the Company's sales of printed
ensembles, solid color tableware and other party goods to the national
superstore distribution channel grew by 8.2%. The Company's specialty sales
force, which brings party goods and related gift products to the independent
retail distribution channel, achieved 56.1% sales growth during the six months
ended June 30, 2002, contributing $17.9 million to net sales. Net sales for the
six months ended June 30, 2002 also included $7.5 million as a result of the
February 2002 acquisition of M&D Balloons (See Liquidity and Capital Resources).
These net sales gains were partially offset by a decline in net sales to craft
stores and mass merchants.
Gross profit for the six months ended June 30, 2002 of 34.9% was 0.4%
lower than during the first half of 2001 as incremental margins achieved as a
result of higher sales were more than offset by the impact of product mix,
particularly solid color tableware and a higher effective rate of sales
incentives.
24
Selling expenses of $16.8 million for the six months ended June 30,
2002 were $1.3 million higher than in the corresponding period in 2001
principally due to the inclusion of the operating results of M&D Balloons and
the continued development of the Company's specialty sales force. Selling
expenses, as a percentage of net sales, decreased from 9.2% to 8.8%, reflecting
the increase in net sales and the maturation of the specialty sales force.
General and administrative expenses of $16.9 million for the six months
ended June 30, 2002 represents a decrease of $0.2 million as compared to the
corresponding period in 2001. The net decrease in general and administrative
expenses reflects the elimination of goodwill amortization in 2002, which
amortization totaled $1.3 million during the first half of 2001, partially
offset by the inclusion of the operating results of M&D Balloons and higher
employee wages. As a percentage of sales, general and administrative expenses
decreased by 1.2% to 8.9%.
Art and development costs of $5.0 million for the six months ended June
30, 2002 were $0.6 million higher than in the first half of 2001, principally
due to an increase in staff and higher employee wages and the inclusion of the
operating results of M&D Balloons.
During the six months ended June 30, 2002, the Company incurred charges
of $0.1 million relating to the consolidation of its domestic distribution
operations, which began in 1998 and is scheduled to be completed by the end of
2002. In addition, the Company incurred charges of $0.1 million relating to the
closure of its distribution facilities in Spain and France which was
substantially completed by June 30, 2002 and has resulted in the elimination of
6 positions. The continued consolidation of the Company's distribution
facilities may result in additional restructuring charges in subsequent periods.
Interest expense, net, of $10.8 million for the six months ended June
30, 2002 was 2.0 million lower than in the corresponding period in 2001 and
reflects a lower average interest rate (6.8% in 2002 versus 8.9% in 2001),
partially offset by the impact of higher average borrowings.
Income taxes for the six months ended June 30, 2002 and 2001 were based
upon estimated consolidated effective income tax rates of 39.5% for the years
ending December 31, 2002 and 2001.
Liquidity and Capital Resources
- -------------------------------
At June 30, 2002, the Company had an outstanding Term Loan of $148.9
million provided under a bank credit agreement (the "Bank Credit Facilities"),
together with senior subordinated notes of $110.0 million (the "Notes")
(collectively, the "Financings"). The Term Loan matures in December 2004 and
provides for amortization (in quarterly installments) of one percent of the
principal amount thereof per year for the first five years and 32.3% and 62.7%
of the principal amount thereof in the sixth and seventh years, respectively.
The Term Loan bears interest, at the option of the Company, at the lenders'
prime rate plus 1.625% per annum or at the lenders' reserve adjusted Eurodollar
rate plus 2.625% per annum. At June 30, 2002, the floating interest rate on the
Term Loan was 4.52%. The Notes bear interest at a rate of 9.875% per annum and
mature in December 2007. The Company is required to make prepayments on the Bank
Credit Facilities based upon the net proceeds from certain asset sales, the
issuances of certain debt and equity securities and insurance or condemnation
awards, as well as based on annual cash flows, as defined.
The Bank Credit Facilities, as amended on July 3, 2002, also provide
for revolving loan borrowings of up to $40 million (the "Revolving Credit
Facility"). The Revolving Credit Facility bears interest, at the option of the
Company, at the lenders' prime customary base rate plus, based on performance, a
range of 1.25% to 3.50% per annum or at the lenders' reserve adjusted Eurodollar
rate plus, based on performance, a range of 1.875% to 4.50% per annum. At June
30, 2002, the Company had borrowing capacity of approximately $19.0 million
under the terms of the Revolving Credit Facility, as amended. The Revolving
Credit Facility requires the Company to maintain certain financial ratios
including, at June 30, 2002, minimum consolidated earnings before interest
taxes,
25
depreciation and amortization ("EBITDA") of $58,500,000 for the four fiscal
quarters ended June 30, 2002, a ratio of consolidated EBITDA to consolidated
fixed charges (principally includes capital expenditures, scheduled debt
payments, cash interest and income tax payments) equal to or greater than 1.10
to 1.00 for the four fiscal quarters ended June 30, 2002 and a ratio of
consolidated debt to EBITDA of not more than 4.80 to 1.00 for the four fiscal
quarters ended June 30, 2002 and making annual capital expenditures of not more
than $15,000,000 plus any unused 2001 capital expenditure limit up to an
additional $7,500,000.
In addition to the Revolving Credit Facility, the Company has a
$400,000 Canadian dollar denominated revolving credit facility which bears
interest at the Canadian prime rate and expires on June 15, 2003, a $1.0 million
British Pound Sterling denominated revolving credit facility which bears
interest at the U.K. base rate plus 1.75% and expires on June 1, 2003 and a $1.0
million revolving credit facility which bears interest at LIBOR plus 1.0% and
expires on January 31, 2003. No borrowings were outstanding under these
revolving credit facilities at June 30, 2002.
The Company financed the costs to purchase property and construct a new
domestic distribution facility with a total cost of $30.1 million during the
fourth quarter of 2001, using borrowings under its Revolving Credit Facility,
the proceeds from the issuance of the Series A Redeemable Convertible Preferred
Stock of $6.0 million (noted below) and long-term borrowings consisting of a
first and second lien mortgage note of $10.0 million each with a financial
institution and the New York State Job Development Authority, respectively. The
first lien mortgage note bears interest at LIBOR plus 2.75%. However, the
Company has utilized an interest rate swap agreement to effectively fix the loan
rate at 8.40% for the term of the loan. The second lien mortgage note bears
interest at a rate 4.75%, subject to change under certain conditions. Both notes
are for a term of 96 months and require monthly payments based on a 180-month
amortization period with balloon payments upon maturity in January 2010. The
Company has amended and restated its Bank Credit Facilities to provide for,
among other things, the additional borrowings and capital expenditures for the
construction of the facility.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP for
proceeds of $6.0 million. Dividends are cumulative and payable annually at 6%
per annum. Such dividends payable on or prior to March 30, 2004 shall be payable
in additional shares of Series A Redeemable Convertible Preferred Stock based on
a value of $150,000 per share. Subsequent to March 30, 2004, dividends shall be
payable at the option of the Company either in cash or additional shares of
Series A Redeemable Convertible Preferred Stock. Annual dividends were
distributed in additional shares of Series A Redeemable Convertible Preferred
Stock on March 30, 2002. At June 30, 2002, 42.40 shares of Series A Redeemable
Convertible Preferred Stock were issued and outstanding.
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms and warehouse
equipment. These leases expire on various dates through 2017 and generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance. Rent expense for the three and six months ended
June 30, 2002, totaled $2.4 million and $5.4 million, respectively. The minimum
lease payments currently required under non-cancelable operating leases for the
year ending December 31, 2002, approximate $11.8 million.
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Balloons, a Manteno, Illinois-based manufacturer of metallic
and plastic balloons, from American Greetings Corporation ("American Greetings")
for $27.5 million plus related costs. The Company financed the acquisition by
borrowing $13.5 million under its Revolving Credit Facility and issuing 96.774
shares of its Common Stock to American Greetings, at a value of $155,000 per
share. American Greetings will continue to distribute metallic balloons under a
supply agreement with the Company.
On June 13, 2002, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of the Common
Stock. The filing has not yet become effective. The Company anticipates
26
that, if the offering is completed, it will use the net proceeds it receives to
pay existing debt. In addition, the board of directors plans to approve a 10,000
for one stock split of the Common Stock, effective immediately prior to the
offering.
Based upon the current level of operations and anticipated growth, the
Company anticipates that its operating cash flow, together with available
borrowings under the Revolving Credit Facility will be adequate to meet its
anticipated future requirements for working capital and operating expenses for
at least the next 12 months. Scheduled debt payments for the years ended
December 31, 2002 and 2003 total $3.5 million and $52.3 million, respectively,
with increasing amounts thereafter. The Company is exploring a number of options
to repay or refinance these debt maturities. The Company has had good access to
capital markets and expects to repay or refinance these debt maturities as they
become due. However, the Company's ability to make scheduled payments of
principal of, or to pay interest on, or to refinance its indebtedness and to
satisfy its other obligations will depend upon several factors including the
volatility of capital markets and the Company's future performance, which, to a
certain extent, will be subject to general economic, financial, competitive,
business and other factors beyond its control.
The Financings may affect the Company's ability to make future capital
expenditures and potential acquisitions. However, management believes that
current asset levels provide adequate capacity to support its operations for at
least the next 12 months. At June 30, 2002, the Company did not have material
commitments for capital expenditures or other acquisitions.
Cash Flow Data - Six Months Ended June 30, 2002 Compared Six Months Ended June
30, 2001
Net cash provided by operating activities during the six months ended
June 30, 2002 and 2001, totaled $10.6 million and $11.9 million, respectively.
Net cash flow provided by operating activities before changes in operating
assets and liabilities for the six months ended June 30, 2002 and 2001, was
$21.8 million and $15.6 million, respectively. Changes in operating assets and
liabilities for the six months ended June 30, 2002 and 2001, resulted in the use
of cash of $11.2 million and $3.7 million, respectively. The changes in
operating assets and liabilities principally reflect an increase in accounts
receivable and inventories, net of a corresponding increase in accounts payable,
consistent with the growth in operations. In addition, the increase in prepaid
expenses and other current assets for the six months ended June 30, 2002 was
higher than the prior period's figure primarily due to deposits on equipment
relating to the outfitting of the newly constructed domestic distribution
facility.
Net cash used in investing activities during the six months ended June
30, 2002 of $21.1 million consisted of $13.5 million relating to the acquisition
of M&D Balloons and $7.6 million of costs associated with the new domestic
distribution facility as well as additional investments in data processing and
manufacturing equipment. During the six months ended June 30, 2001, net cash
used in investing activities of $15.1 million included payments of $10.5 million
associated with the construction of the new domestic distribution facility and
additional investments primarily in manufacturing equipment.
During the six months ended June 30, 2002, net cash provided by
financing activities of $11.6 million included proceeds from short-term
borrowings, including $13.5 million used to finance the acquisition of M&D
Balloons, partially offset by the scheduled payments of the Term Loan and other
long-term obligations. During the comparable period in 2001, net cash provided
by financing activities was $3.4 million and primarily consisted of proceeds
from the issuance of the Series A Redeemable Convertible Preferred Stock
totaling $6.0 million partially offset by payments made against the Term Loan
and other long-term obligations.
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.
27
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
This report includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, including any changes to operations, goals, expansion and
growth of the Company's business and operations, plans, references to future
success and other such matters are forward-looking statements. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. Actual results may differ materially from
those discussed. Whether actual results and developments will conform with the
Company's expectations and predictions is subject to a number of risks and
uncertainties, including, but not limited to (1) the concentration of sales by
the Company to party goods superstores where the reduction of purchases by a
small number of customers could materially reduce the Company's sales and
profitability, (2) the concentration of the Company's credit risk in party goods
superstores, several of which are privately held and have expanded rapidly in
recent years, (3) the failure by the Company to anticipate changes in tastes and
preferences of party goods retailers and consumers, (4) introduction of new
product lines by the Company, (5) the introduction of new products by the
Company's competitors, (6) the inability of the Company to increase prices to
recover fully future increases in raw material prices, especially increases in
paper prices, (7) the loss of key employees, (8) changes in general business
conditions, (9) other factors which might be described from time to time in the
Company's filings with the Commission and (10) other factors which are beyond
the control of the Company. Consequently, all of the forward-looking statements
made in this report are qualified by these cautionary statements, and the actual
results or developments anticipated by the Company may not be realized or, even
if substantially realized, may not have the expected consequences to or effects
on the Company or its business or operations. Although the Company believes that
it has the product offerings and resources needed for continued growth in
revenues and margins, future revenue and margin trends cannot be reliably
predicted. Changes in such trends may cause the Company to adjust its operations
in the future. Because of the foregoing and other factors, recent trends should
not be considered reliable indicators of future financial results. In addition,
the highly leveraged nature of the Company may impair its ability to finance its
future operations and capital needs and its flexibility to respond to changing
business and economic conditions and business opportunities.
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 utilize interest rate swap
agreements to manage the market risk associated with fluctuations in interest
rates. If market interest rates for our variable rate indebtedness averaged 2%
more than the interest rate actually paid for the three months ended June 30,
2002 and 2001, our interest expense, after considering the effects of our
interest rate swap agreements, would have increased, and income before income
taxes would have decreased, by $0.8 million and $0.4 million, respectively. If
market interest rates for our variable rate indebtedness averaged 2% more than
the interest rate actually paid for the six months ended June 30, 2002 and 2001,
our interest expense, after considering the effects of our interest rate swap
agreements, would have increased, and income before income taxes would have
decreased, by $1.7 million and $0.9 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
28
the value of the dollar relative to the currencies in which our foreign sales
are denominated would have resulted in a decrease in gross profit of $0.4
million and $0.3 million for the three months ended June 30, 2002 and 2001,
respectively. A uniform 10% strengthening in the value of the dollar relative to
the currencies in which our foreign sales are denominated would have resulted in
a decrease in gross profit of $0.7 million in each of the six month periods
ended June 30, 2002 and 2001, respectively. These calculations assume that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, which could change
the U.S. dollar value of the resulting sales, changes in exchange rates may also
affect the volume of sales or the foreign currency sales price as competitors'
products become more or less attractive. Our sensitivity analysis of the effects
of changes in foreign currency exchange rates does not factor in a potential
change in sales levels or local currency prices.
Part II
Item 1. 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.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4(i) Third Amendment to Amended and Restated Revolving Loan Credit
Agreement, dated as of July 3, 2002, by and among the Registrant, the
financial institutions parties thereto, Goldman, Sachs Credit
Partners L.P., as arranger and syndication agent, and Fleet National
Bank, as administrative agent.
99 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
A Current Report on Form 8-K dated May 24, 2002, was filed responding to Item 5.
On May 24, 2002, Amscan issued a press release announcing that it had begun
reviewing options available to it to effect a recapitalization of the Company.
A Current Report on Form 8-K dated June 13, 2002, was filed responding to Item
5. On June 13, 2002, Amscan issued a press release announcing that it had filed
a registration statement with the Securities and Exchange Commission for an
underwritten public offering of shares of its common stock.
29
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
Vice President
(on behalf of the registrant and
Date: August 14, 2002 as principal financial and accounting
--------------- officer)
30