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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 March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-21827
----------
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of May 15, 2003, 1,239.92 shares of Registrant's common stock, par value
$0.10 ("Common Stock"), were outstanding.
AMSCAN HOLDINGS, INC.
FORM 10-Q
March 31, 2003
Table of Contents
Part I Page
------ ----
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2003 and
December 31, 2002........................................... 3
Consolidated Statements of Income for the Three Months Ended
March 31, 2003 and 2002..................................... 4
Consolidated Statement of Stockholders' Deficit for the
Three Months Ended March 31, 2003........................... 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and 2002....................... 6
Notes to Consolidated Financial Statements...................... 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk ..... 26
Item 4 Controls and Procedures......................................... 27
Part II
-------
Item 6 Exhibits and Reports on Form 8-K................................ 27
Signature ................................................................ 28
Certification by Chief Executive Officer.................................. 29
Certification by Chief Financial Officer.................................. 30
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts )
March 31, December 31,
2003 2002
--------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 1,511 $ 2,400
Accounts receivable, net of allowances ............................ 84,998 74,247
Inventories, net of allowances .................................... 91,640 93,890
Prepaid expenses and other current assets ......................... 17,517 15,233
--------- ---------
Total current assets ......................................... 195,666 185,770
Property, plant and equipment, net .................................... 99,760 100,304
Goodwill, net ......................................................... 72,013 74,251
Notes receivable from officers ........................................ 1,960 1,942
Other assets, net ..................................................... 9,602 10,230
--------- ---------
Total assets ................................................. $ 379,001 $ 372,497
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term obligations ............................................ $ 9,500 $ --
Accounts payable .................................................. 32,124 39,245
Accrued expenses .................................................. 24,669 21,524
Income taxes payable .............................................. 3,648 2,525
Current portion of long-term obligations .......................... 3,191 3,220
--------- ---------
Total current liabilities .................................... 73,132 66,514
Long-term obligations, excluding current portion ...................... 294,611 295,420
Deferred income tax liabilities ....................................... 14,817 17,360
Other ................................................................. 2,247 2,317
--------- ---------
Total liabilities ............................................ 384,807 381,611
Redeemable convertible preferred stock ($0.10 par value; 100.00 shares
authorized; 44.94 and 42.40 shares issued and outstanding) ........ 6,742 6,646
Redeemable Common Stock ............................................... 30,523 30,523
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,233.27 shares issued and outstanding) ....................... -- --
Additional paid-in capital ........................................ 14,718 14,814
Unamortized restricted Common Stock awards, net ................... (278) (323)
Notes receivable from stockholders ................................ (649) (638)
Deficit ........................................................... (54,089) (57,551)
Accumulated other comprehensive loss .............................. (2,773) (2,585)
--------- ---------
Total stockholders' deficit .................................. (43,071) (46,283)
--------- ---------
Total liabilities, redeemable convertible preferred and Common
Stock and stockholders' deficit ............................ $ 379,001 $ 372,497
========= =========
Note: The balance sheet at December 31, 2002 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
March 31,
----------------------
2003 2002
-------- --------
Net sales ................................................... $ 99,844 $ 95,908
Cost of sales ............................................... 66,969 61,676
-------- --------
Gross profit ....................................... 32,875 34,232
Operating expenses:
Selling expenses ......................................... 9,142 8,179
General and administrative expenses ...................... 8,506 8,151
Art and development costs ................................ 2,537 2,276
Restructuring charges .................................... 316
-------- --------
Total operating expenses ........................... 20,501 18,606
-------- --------
Income from operations ............................. 12,374 15,626
Interest expense, net ....................................... 6,644 5,490
Other income, net ........................................... (18) (70)
-------- --------
Income before income taxes and minority interests .. 5,748 10,206
Income tax expense .......................................... 2,271 4,031
Minority interests .......................................... 15 (56)
-------- --------
Net income ......................................... 3,462 6,231
Dividend on redeemable convertible preferred
stock ........................................ 96 90
-------- --------
Net income applicable to common shares ............. $ 3,366 $ 6,141
======== ========
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three Months Ended March 31, 2003
(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, 2002 ..... 1,233.27 $-- $14,814 $(323) $(638) $(57,551) $(2,585) $(46,283)
Net income ..................... 3,462 3,462
Net change in cumulative
translation adjustment ....... (123) (123)
Change in fair value of
available-for-sale
investment, net of taxes .... (81) (81)
Change in fair value of interest
rate swap and foreign
exchange contracts, net of
taxes ........................ 16 16
--------
Comprehensive income ....... 3,274
Redeemable convertible
preferred stock dividend ..... (96) (96)
Amortization of restricted
Common Stock awards .......... 45 45
Accretion of interest income on
notes receivable from
stockholders ................. (11) (11)
---------- ----- -------- ----- ----- -------- ------- --------
Balance at March 31, 2003 ........ 1,233.27 $-- $14,718 $(278) $(649) $(54,089) $(2,773) $(43,071)
========== === ======= ===== ===== ======== ======= ========
See accompanying notes to consolidated financial statements.
5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income ..................................................................... $ 3,462 $ 6,231
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ............................................... 3,976 3,148
Amortization of deferred financing costs .................................... 479 267
Amortization of restricted Common Stock awards .............................. 45 59
Provision for doubtful accounts ............................................. 604 603
Deferred income tax (benefit) expense ....................................... (402) 1,393
Loss on disposal of equipment ............................................... 22
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable .......................................... (11,355) (14,350)
Decrease in inventories .................................................. 2,250 1,324
Increase in prepaid expenses and other current assets .................... (2,144) (4,716)
(Decrease) increase in accounts payable, accrued expenses and income taxes
payable ............................................................... (2,932) 3,853
Other, net .................................................................. 23 (162)
-------- --------
Net cash used in operating activities .................................... (5,972) (2,350)
Cash flows from investing activities:
Cash paid in connection with acquisition ....................................... (13,289)
Capital expenditures ........................................................... (3,408) (4,107)
Proceeds from disposal of property and equipment ............................... 3
-------- --------
Net cash used in investing activities .................................... (3,405) (17,396)
Cash flows from financing activities:
Proceeds from short-term obligations ........................................... 9,500 21,550
Repayment of loans, notes payable and long-term obligations .................... (938) (831)
-------- --------
Net cash provided by financing activities ................................ 8,562 20,719
Effect of exchange rate changes on cash and cash equivalents ...................... (74) (102)
-------- --------
Net (decrease) increase in cash and cash equivalents ..................... (889) 871
Cash and cash equivalents at beginning of period .................................. 2,400 1,016
-------- --------
Cash and cash equivalents at end of period ........................................ $ 1,511 $ 1,887
======== ========
Supplemental Disclosures:
Interest paid ............................................................ $ 2,359 $ 2,370
Income taxes paid ........................................................ $ 1,479 $ 495
See accompanying notes to consolidated financial statements.
6
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
(Unaudited)
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 Industries, Inc., formerly known as M&D
Balloons, Inc. ("M&D Industries") (see Note 10).
There were no capital lease obligations recorded during the three months
ended March 31, 2003 or 2002.
See accompanying notes to consolidated financial statements.
7
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, "Amscan," "AHI" or the "Company") was incorporated on October 3,
1996 for the purpose of becoming the holding company for Amscan Inc. and certain
affiliated entities. AHI designs, manufactures, contracts for manufacture and
distributes party goods, including metallic balloons, gifts and stationery,
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 majority-owned and controlled entities. 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 months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the year ending December 31, 2003.
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, 2002 as filed with the Securities and Exchange Commission.
NOTE 3 - INVENTORIES
Inventories consisted of the following (dollars in thousands):
March 31, December 31,
2003 2002
-------- --------
Finished goods ..................................... $ 78,725 $ 80,783
Raw materials ...................................... 8,859 8,763
Work-in-process .................................... 7,497 7,722
-------- --------
95,081 97,268
Less: reserve for slow moving and obsolete inventory (3,441) (3,378)
-------- --------
$ 91,640 $ 93,890
======== ========
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or market.
NOTE 4 - INCOME TAXES
The consolidated income tax expense for the three months ended March
31, 2003 and 2002 was determined based upon estimates of the Company's
consolidated effective income tax rates for the year ending December 31, 2003
and the year ended December 31, 2002. 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.
8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income consisted of the following (dollars in
thousands):
Three Months Ended
March 31,
2003 2002
------- -------
Net income ................................................................. $ 3,462 $ 6,231
Net change in cumulative translation adjustment ............................ (123) (213)
Change in fair value of available-for-sale investment, net of taxes of $(53) (81)
Change in fair value of the Company's interest rate swap contract, net of
taxes of $6, and $(43), respectively .................................... 9 (67)
Change in fair value of the Company's foreign exchange contracts, net of
taxes of $4 and $87, respectively ....................................... 7 134
------- -------
$ 3,274 $ 6,085
======= =======
Accumulated other comprehensive loss consisted of the following
(dollars in thousands):
March 31, December 31,
2003 2002
------- -------
Cumulative translation adjustment ....................................... $(1,598) $(1,475)
Unrealized loss on available for sale investment, net of taxes of $(53). (81)
Interest rate swap contract qualifying as a hedge, net of taxes of $(415)
and $(421), respectively ............................................. (635) (644)
Foreign exchange contracts qualifying as hedges, net of taxes of $(300)
and $(305), respectively ............................................. (459) (466)
------- -------
$(2,773) $(2,585)
======= =======
NOTE 6 - CAPITAL STOCK
At March 31, 2003 and December 31, 2002, issued and outstanding shares
of Common Stock totaled 1,233.27, of which 196.92 fully paid and vested shares
were held by current and former employees of the Company. Under the terms of the
stockholders' agreement ("Stockholders' Agreement"), the Company can be required
to purchase all of the shares held by an employee stockholder for a period of
one year after the employee's death or three months after their disability, at a
price determined by a market valuation, or for a period of three months
following termination of employment by the Company, at the lower of the share's
cost, as defined, or the market valuation. All common shares subject to such put
provisions are recorded as redeemable Common Stock, at the estimated market
value of the stock, with a corresponding adjustment to stockholders' deficit. On
January 10, 2003, an executive officer of a wholly-owned subsidiary, owning 120
shares of the Company's Common Stock, terminated his employment with the Company
and, on April 9, 2003, the former officer exercised options to purchase an
additional 6.648 shares of the Company's Common Stock at $125,000 per share or
for $831,000. On April 10, 2003, the former officer's right to put the 120
shares of Common Stock back to the Company expired and, as a result, the Company
recorded a decrease in redeemable Common Stock and a decrease in stockholders'
deficit of $18,600,000 (a $12,600,000 increase in additional paid-in capital and
a $6,000,000 decrease in accumulated deficit) in April 2003. The former
officer's right to put the remaining 6.648 shares back to the Company expires in
July 2003.
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
At March 31, 2003 and December 31, 2002, 6.38 shares of Common Stock
(the "Restricted Stock") were held by the Company's President and its Executive
Vice President subject to the vesting provisions of their employment agreements.
The Restricted Stock held by the President and the Executive Vice President will
vest in June 2003 and December 2004, respectively. During the three months ended
March 31, 2003 and 2002, the Company recorded the amortization of Restricted
Stock of $45,000 and $59,000, respectively, as compensation expense, which is
included in general and administrative expenses in the Company's consolidated
statements of income.
At March 31, 2003, the Company held notes receivable from a former
officer and a current officer of $624,000 and $25,000, respectively. At December
31, 2002, the Company held notes receivable from a former officer and a current
officer totaling $638,000. These notes arose in connection with the issuance of
shares of Common Stock to the officers. The notes held at March 31, 2003 bear
interest at 6.65% and LIBOR plus 2% and mature in March 2009 and January 2004,
respectively. The notes receivable are shown on the consolidated balance sheets
as an increase in stockholders' deficit.
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 ("American
Greetings") in connection with the acquisition of M&D Industries (see Note 10).
In September 1998, the Company issued warrants to purchase 10.0 shares
of Common Stock at $125,000 per share in connection with the acquisition of all
the capital stock of Anagram. The warrants, which were valued at $225,000 and
were fully exercisable upon issuance, expire on September 17, 2008 and were
included as a cost of the acquisition of Anagram.
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 ("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 $6,000,000. Dividends are cumulative and
payable annually, at 6% per annum. On March 30, 2003 and 2002, the annual
dividend was distributed in additional shares of Series A Redeemable Convertible
Preferred Stock. Dividends payable on or prior to March 30, 2004, are payable in
additional shares of Series A Redeemable Convertible Preferred Stock. Subsequent
to March 30, 2004, dividends are payable, at the option of the Company, either
in cash or additional shares of Series A Redeemable Convertible Preferred Stock.
Each share of Series A Redeemable Convertible Preferred Stock is
convertible at the option of the holder, at any time, into one share of Common
Stock of the Company, $0.10 par value, subject to adjustment for the effects of
subsequent Common Stock splits or stock dividends.
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
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
The Company has not paid any dividends on the 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
party goods, including metallic balloons, gifts, and stationery.
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 are as follows (dollars in
thousands):
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended March 31, 2003
Sales to unaffiliated customers ................. $ 87,030 $ 12,814 $ 99,844
Sales between geographic areas .................. 4,523 $ (4,523) --
--------- --------- -------- ---------
Net sales ....................................... $ 91,553 $ 12,814 $ (4,523) $ 99,844
========= ========= ======== =========
Income from operations .......................... $ 11,983 $ 124 $ 267 $ 12,374
========= ========= ========
Interest expense, net ........................... 6,644
Other income, net ............................... (18)
---------
Income before income taxes and minority interests $ 5,748
=========
Long-lived assets, net at March 31, 2003 ........ $ 175,413 $ 7,922 $ 183,335
========= ========= =========
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended March 31, 2002
Sales to unaffiliated customers ................. $ 83,792 $ 12,116 $ 95,908
Sales between geographic areas .................. 5,282 $ (5,282) --
--------- ---------- -------- ---------
Net sales ....................................... $ 89,074 $ 12,116 $ (5,282) $ 95,908
========= ========== ======== =========
Income (loss) from operations ................... $ 15,350 $ (34) $ 310 $ 15,626
========== ========== ========
Interest expense, net ........................... 5,490
Other income, net ............................... (70)
---------
Income before income taxes and minority interests $ 10,206
=========
Long-lived assets, net at March 31, 2002 ........ $ 173,750 $ 6,421 $ 180,171
========== ========== =========
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
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No.
146") was issued. SFAS No. 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3 (" EITF 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 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. The adoption of SFAS No. 146 did not have
a material effect on the Company's consolidated financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34," ("FIN No. 45") was issued. FIN No. 45 clarifies requirements relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN No. 45 requires that upon issuance of a guarantee,
companies recognize a liability for the fair value of the obligation it assumes
under that guarantee. The disclosure provisions of FIN No. 45 became effective
commencing in the fourth quarter of 2002. The recognition requirements of FIN
No. 45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002. The adoption of this interpretation did not have a material
effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB 51" ("FIN No. 46"). The
primary objectives of FIN No. 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights ("VIE's") and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity in which either (1) the equity investors (if any) do not have a
controlling financial
12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. The consolidation provisions of FIN No. 46 apply immediately
to variable interests in VIE's created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003 (July 1, 2003
for calendar year-end companies) to VIE's in which an enterprise that is a
public company holds a variable interest that it acquired before February 1,
2003. The Company does not expect the adoption of this interpretation to have a
material effect on the consolidated financial statements.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not
applicable or not significant to the financial statements of the Company.
NOTE 10-ACQUISITION
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Industries, a Manteno, Illinois-based manufacturer of
metallic and plastic balloons, from American Greetings for $27,500,000 plus
certain other related costs of $1,048,000. The Company financed the acquisition
by borrowing $13,289,000 in the first quarter of 2002 (and an additional
$259,000 in the second quarter of 2002) under its revolving credit facility and
issuing 96.774 shares of its Common Stock to American Greetings. The Company
purchased M&D Industries to supplement its existing balloon operations. American
Greetings continues 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 Industries have been included in the Company's consolidated financial
statements since the date of acquisition.
The purchase price has been allocated based upon the estimated fair
value of net assets acquired at the date of acquisition. Such allocations were
based on studies and valuations. The excess of the purchase price over tangible
net assets acquired has been 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
$15,606,000, 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
Industries acquisition had occurred on January 1, 2002. The pro forma
information, as presented below, is not necessarily indicative of the results
that would have been obtained had the transaction occurred on January 1, 2002,
nor is it necessarily indicative of the Company's future results (dollars in
thousands):
Three Months Ended
March 31, 2002
--------------
Net sales................. $100,015
Net income................ 6,624
The net income amount reflects adjustments for interest expense from
additional borrowings necessary to finance the acquisition and amortization of
other intangible assets and income tax effects based upon a pro forma effective
tax rate of 39.5%. The pro forma information gives effect only to the
adjustments described above and does not reflect management's estimate of any
anticipated cost savings or other benefits as a result of the acquisition.
13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
During the three months ended March 31, 2003 and 2002, the Company sold
$615,000 and $959,000, respectively, of metallic balloons and other party goods
to American Greetings. Trade accounts receivable from American Greetings at
March 31, 2003 and December 31, 2002 were $547,000 and $2,632,000, respectively.
NOTE 11 - RESTRUCTURING CHARGES
During the three months ended March 31, 2003, the Company incurred
charges of $316,000 resulting from the consolidation of the domestic
distribution operations which may result in additional restructuring charges in
subsequent periods.
NOTE 12 - STOCK OPTION PLAN
The Company accounts for stock based awards in accordance with the
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." SFAS No. 123 permits entities
to recognize as expense, over the vesting period, the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to apply the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of compensation expense at the date of grant only if the current
market price of the underlying stock exceeds the exercise price, and to provide
pro forma net income disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the intrinsic value method of APB No. 25 for
awards granted under its stock-based compensation plans and has provided the pro
forma disclosures required by SFAS No. 123. Accordingly, no compensation cost
has been recognized in connection with the issuance of options under the 1997
Stock Incentive Plan as all options were granted with exercise prices equal to
the estimated fair market value of the Common Stock on the date of grant.
Had the Company determined stock-based compensation based on the fair
value of the options granted at the grant date, consistent with the method
prescribed under SFAS No. 123, the Company's net income would have been reduced
to amounts indicated below (dollars in thousands):
Three Months
Ended March 31,
2003 2002
------ ------
Net income:
As reported ..................................... $3,462 $6,231
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax of $30 and
$84, respectively ........................... 46 129
------ ------
SFAS No. 123 pro forma net income ............... $3,416 $6,102
====== ======
NOTE 13 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On December 20, 2002, Amscan amended and restated its credit facility
with various lenders (the "Lenders"), and with Goldman Sachs Credit Partners
L.P. as sole lead arranger, sole bookrunner and syndication agent. Under the
terms of the Second Amended and Restated Credit and Guaranty Agreement (the
"Credit Agreement") the Lenders agreed to amend and restate the Company's then
existing bank credit agreements (the "Bank Credit Facilities") in their entirety
and to provide a $200,000,000 senior secured facility consisting of a
$170,000,000 term loan (the "Term Loan") and up to $30,000,000 aggregate
principal amount of revolving loans (the "Revolver"). The proceeds of the
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Term Loan were used to redesignate and replace the Company's AXEL term loan and
revolver borrowings existing under the Bank Credit Facilities at the closing
date and to pay certain fees and expenses associated with the refinancing.
On December 19, 1997, the Company also issued $110,000,000 aggregate
principal amount of 9.875% senior subordinated notes (the `Notes") due in
December 2007.
The repayment of the Notes and borrowings under the Credit Agreement
are guaranteed jointly and severally, fully and unconditionally, by the
following wholly-owned domestic subsidiaries of the Company (the "Guarantors"):
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 Industries, 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
March 31, 2003 and December 31, 2002, and the related consolidating statements
of income and consolidating statements of cash flows for the three months ended
March 31, 2003 and 2002 for the combined Guarantors and the combined
Non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
March 31, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 752 $ 759 $ 1,511
Accounts receivable, net of allowances ...... 72,422 12,576 84,998
Inventories, net of allowances .............. 81,321 11,259 $ (940) 91,640
Prepaid expenses and other current assets ... 15,112 2,918 (513) 17,517
--------- -------- -------- ---------
Total current assets ........................ 169,607 27,512 (1,453) 195,666
Property, plant and equipment, net ............... 98,159 1,601 99,760
Goodwill, net .................................... 66,455 5,558 72,013
Notes receivable from officers ................... 1,960 1,960
Other assets, net ................................ 35,010 1,059 (26,467) 9,602
--------- -------- -------- ---------
Total assets ................................ $ 371,191 $ 35,730 $(27,920) $ 379,001
========= ======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term obligations ...................... $ 9,500 $ -- $ 9,500
Accounts payable ............................ 29,910 2,214 32,124
Accrued expenses ............................ 18,967 5,702 24,669
Income taxes payable ........................ 4,174 $ (526) 3,648
Current portion of long-term obligations .... 3,026 165 3,191
--------- -------- -------- ---------
Total current liabilities ................... 65,577 8,081 (526) 73,132
Long-term obligations, excluding current portion . 294,510 101 294,611
Deferred income tax liabilities .................. 14,817 14,817
Other ............................................ 1,166 17,479 (16,398) 2,247
--------- -------- -------- ---------
Total liabilities ........................... 376,070 25,661 (16,924) 384,807
Redeemable convertible preferred stock ........... 6,742 6,742
Redeemable Common Stock .......................... 30,523 30,523
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 14,718 658 (658) 14,718
Unamortized restricted Common Stock
awards, net .............................. (278) (278)
Notes receivable from stockholders .......... (649) (649)
(Deficit) retained earnings ................. (53,162) 11,101 (12,028) (54,089)
Accumulated other comprehensive loss ........ (2,773) (2,029) 2,029 (2,773)
--------- -------- -------- ---------
Total stockholders' (deficit) equity .... (42,144) 10,069 (10,996) (43,071)
--------- -------- -------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 371,191 $ 35,730 $(27,920) $ 379,001
========= ======== ======== =========
16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 1,483 $ 917 $ 2,400
Accounts receivable, net of allowances ...... 62,520 11,727 74,247
Inventories, net of allowances .............. 83,659 11,138 $ (907) 93,890
Prepaid expenses and other current assets ... 13,411 2,280 (458) 15,233
--------- -------- -------- ---------
Total current assets ........................ 161,073 26,062 (1,365) 185,770
Property, plant and equipment, net ............... 98,951 1,353 100,304
Goodwill, net .................................... 68,611 5,640 74,251
Notes receivable from officers ................... 1,942 1,942
Other assets, net ................................ 34,788 627 (25,185) 10,230
--------- -------- -------- ---------
Total assets ................................ $ 365,365 $ 33,682 $(26,550) $ 372,497
========= ======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term obligations ...................... $ -- $ -- $ --
Accounts payable ............................ 37,813 1,432 39,245
Accrued expenses ............................ 15,937 5,587 21,524
Income taxes payable ........................ 3,037 $ (512) 2,525
Current portion of long-term obligations .... 3,052 168 3,220
--------- -------- -------- ---------
Total current liabilities ................... 59,839 7,187 (512) 66,514
Long-term obligations, excluding current portion . 295,274 146 295,420
Deferred income tax liabilities .................. 17,360 17,360
Other ............................................ 1,153 16,052 (14,888) 2,317
--------- -------- -------- ---------
Total liabilities ................................ 373,626 23,385 (15,400) 381,611
Redeemable convertible preferred stock ........... 6,646 6,646
Redeemable Common Stock .......................... 30,523 30,523
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 14,814 658 (658) 14,814
Unamortized restricted Common Stock
awards, net .............................. (323) (323)
Notes receivable from stockholders .......... (638) (638)
(Deficit) retained earnings ................. (56,698) 11,198 (12,051) (57,551)
Accumulated other comprehensive loss ........ (2,585) (1,898) 1,898 (2,585)
--------- -------- -------- ---------
Total stockholders' (deficit) equity .... (45,430) 10,297 (11,150) (46,283)
--------- -------- -------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 365,365 $ 33,682 $(26,550) $ 372,497
========= ======== ======== =========
17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 91,553 $ 12,790 $(4,499) $ 99,844
Cost of sales ................................. 62,187 9,248 (4,466) 66,969
-------- -------- ------- --------
Gross profit ......................... 29,366 3,542 (33) 32,875
Operating expenses:
Selling expenses .......................... 7,590 1,552 9,142
General and administrative expenses ....... 6,940 1,866 (300) 8,506
Art and development costs ................. 2,537 2,537
Restructuring charges ..................... 316 316
-------- -------- ------- --------
Total operating expenses ............. 17,383 3,418 (300) 20,501
-------- -------- ------- --------
Income from operations ............... 11,983 124 267 12,374
Interest expense, net ......................... 6,483 161 6,644
Other (income) expense, net ................... (225) 4 203 (18)
-------- -------- ------- --------
Income (loss) before income taxes and
minority interests ................. 5,725 (41) 64 5,748
Income tax expense (benefit) .................. 2,243 41 (13) 2,271
Minority interests ............................ 15 15
-------- -------- ------- --------
Net income (loss) .................... 3,482 (97) 77 3,462
Dividend on redeemable convertible
preferred stock ................... 96 96
-------- -------- ------- --------
Net income (loss) applicable to common
shares ............................ $ 3,386 $ (97) $ 77 $ 3,366
======== ======== ======= ========
18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ............................................ $ 92,800 $ 12,116 $(9,008) $ 95,908
Cost of sales ........................................ 62,122 8,632 (9,078) 61,676
-------- -------- ------- --------
Gross profit ................................ 30,678 3,484 70 34,232
Operating expenses:
Selling expenses ................................. 6,704 1,475 8,179
General and administrative expenses .............. 6,348 2,043 (240) 8,151
Art and development costs ........................ 2,276 2,276
-------- -------- ------- --------
Total operating expenses .................... 15,328 3,518 (240) 18,606
-------- -------- ------- --------
Income (loss) from operations ............... 15,350 (34) 310 15,626
Interest expense, net ................................ 5,331 159 5,490
Other (income) expense, net .......................... (183) 58 55 (70)
-------- -------- ------- --------
Income (loss) before income taxes and
minority interests ....................... 10,202 (251) 255 10,206
Income tax expense (benefit) ......................... 4,041 (10) 4,031
Minority interests ................................... (56) (56)
-------- -------- ------- --------
Net income (loss) ........................... 6,161 (185) 255 6,231
Dividend on redeemable convertible preferred
stock .................................... 90 90
-------- -------- ------- --------
Net income (loss) applicable to common shares $ 6,071 $ (185) $ 255 $ 6,141
======== ======== ======= ========
19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income (loss) .................................................. $ 3,482 $ (97) $ 77 $ 3,462
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization .................................. 3,855 121 3,976
Amortization of deferred financing costs ....................... 479 479
Amortization of restricted Common Stock awards ................. 45 45
Provision for doubtful accounts ................................ 457 147 604
Deferred income tax benefit .................................... (402) (402)
Loss on disposal of equipment .................................. 15 7 22
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable ........................ (10,359) (996) (11,355)
Decrease (increase) in inventories ..................... 2,338 (121) 33 2,250
Increase in prepaid expenses and other current
assets .............................................. (1,561) (583) (2,144)
(Decrease) increase in accounts payable,
accrued expenses and income taxes payable ........... (3,768) 849 (13) (2,932)
Other, net .................................................... (903) 1,023 (97) 23
-------- ------- ------- --------
Net cash (used in) provided by operating activities .... (6,322) 350 -- (5,972)
Cash flows from investing activities:
Capital expenditures ............................................... (3,028) (380) (3,408)
Proceeds from disposal of property and equipment ................... 3 3
-------- ------- ------- --------
Net cash used in investing activities .................. (3,028) (377) -- (3,405)
Cash flows from financing activities:
Proceeds from short-term obligations ............................... 9,500 9,500
Repayment of loans, notes payable and long-term
obligations ................................................... (895) (43) (938)
-------- ------- ------- --------
Net cash provided by (used in) financing activities .... 8,605 (43) -- 8,562
Effect of exchange rate changes on cash and cash equivalents ........... 14 (88) (74)
-------- ------- ------- --------
Net decrease in cash and cash equivalents .............. (731) (158) (889)
Cash and cash equivalents at beginning of period ....................... 1,483 917 2,400
-------- ------- ------- --------
Cash and cash equivalents at end of period ............................. $ 752 $ 759 $ -- $ 1,511
======== ======= ======= ========
20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2002
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income (loss) .............................................. $ 6,161 $ (185) $ 255 $ 6,231
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization .............................. 3,057 91 3,148
Amortization of deferred financing costs ................... 267 267
Amortization of restricted Common Stock awards ............. 59 59
Provision for doubtful accounts ............................ 70 533 603
Deferred income tax expense ................................ 1,393 1,393
Changes in operating assets and liabilities:
Increase in accounts receivable .................... (13,403) (947) (14,350)
Decrease (increase) in inventories ................. 1,442 (48) (70) 1,324
Increase in prepaid expenses and other
current assets .................................. (3,876) (840) (4,716)
Increase in accounts payable, accrued
expenses and income taxes payable ............... 3,383 470 3,853
Other, net ................................................ (1,459) 1,482 (185) (162)
-------- -------- -------- --------
Net cash (used in) provided by operating activities . (2,906) 556 -- (2,350)
Cash flows from investing activities:
Cash paid in connection with acquisition ....................... (13,289) (13,289)
Capital expenditures ........................................... (4,094) (13) (4,107)
-------- -------- -------- --------
Net cash used in investing activities .............. (17,383) (13) -- (17,396)
Cash flows from financing activities:
Proceeds from short-term obligations ........................... 21,550 21,550
Repayment of loans, notes payable and long-term
obligations ................................................ (824) (7) (831)
-------- -------- -------- --------
Net cash provided by (used in) financing activities . 20,726 (7) -- 20,719
-------- -------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ....... (73) (29) (102)
-------- -------- -------- --------
Net increase in cash and cash equivalents ........... 364 507 871
Cash and cash equivalents at beginning of period ................... 42 974 1,016
-------- -------- -------- --------
Cash and cash equivalents at end of period ......................... $ 406 $ 1,481 $ -- $ 1,887
======== ======== ======== ========
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Percentage of Net Sales
- -----------------------
Three Months Ended
------------------
March 31,
---------
2003 2002
----- -----
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 67.1 64.3
----- -----
Gross profit .................................... 32.9 35.7
Operating expenses:
Selling expenses ................................... 9.2 8.5
General and administrative expenses ................ 8.5 8.5
Art and development costs .......................... 2.5 2.4
Restructuring charges .............................. 0.3
----- -----
Total operating expenses ........................ 20.5 19.4
----- -----
Income from operations .......................... 12.4 16.3
Interest expense, net .................................. 6.6 5.7
Other income, net ...................................... (0.1)
----- -----
Income before income taxes and minority interests 5.8 10.7
Income tax expense ..................................... 2.3 4.2
Minority interests .....................................
----- -----
Net income ...................................... 3.5% 6.5%
===== =====
Net sales of $99.8 million for the three months ended March 31, 2003
were $3.9 million higher than net sales for the three months ended March 31,
2002. Sales performance during the first quarter of 2003 was adversely affected
by severe weather and general economic conditions resulting in a weak retail
environment. Net sales for the three months ended March 31, 2003 included an
18.3% increase in net domestic sales of metallic balloons and flexible
packaging, reflecting the February 2002 acquisition of M&D Industries, Inc.,
formerly known as M&D Balloons, Inc. ("M&D Industries") (see Liquidity and
Capital Resources). In addition, net international sales reported for the first
quarter of 2003 increased by 5.8%, principally as a result of foreign currency
exchange fluctuations.
Gross profit margin for the three months ended March 31, 2003, of 32.9%
was 2.8% lower than during the three months ended March 31, 2002. Gross profit
margin during the first quarter of 2003 reflects the impact of product mix,
particularly solid color tableware, as well as additional production costs
incurred in connection with the ongoing integration of the M&D Industries
fabrication process into our Anagram balloon operations and additional
distribution costs incurred as a result of severe weather conditions and
redundant costs arising from the Company's transition from four to three east
coast distribution facilities. The Company expects the ongoing benefits of the
integration and transition to be realized beginning in the latter half of 2003.
Selling expenses of $9.1 million for the quarter ended March 31, 2003
were $1.0 million higher than in the corresponding period in 2002, principally
as a result of the continued expansion of the Company's specialty sales force
and the inclusion of the M&D Industries acquisition for the entire quarter.
General and administrative expenses of $8.5 million for the quarter
ended March 31, 2003 were $0.4 million higher than the corresponding period in
2002. As a percentage of sales, general and administrative expenses remained
consistent at 8.5% for the first quarter of 2003 and 2002. The net increase in
general and administrative expenses principally reflects higher insurance,
employee and occupancy costs and the inclusion of the operations of M&D
Industries for the entire quarter, partially offset by synergies realized from
the integration of M&D Industries' administrative functions into our existing
operations.
22
Art and development costs of $2.5 million for the quarter ended March
31, 2003 were $0.3 million higher as compared to 2002, principally due to an
increase in staff and the inclusion of the operating results of M&D Industries.
As a percentage of sales, art and development costs were relatively consistent
at 2.5% for the first quarter of 2003 and 2.4% for the first quarter of 2002.
During the three months ended March 31, 2003, the Company incurred
charges of $0.3 million resulting from the consolidation of its domestic
distribution operations, which may result in additional restructuring charges in
subsequent periods.
Interest expense, net, of $6.6 million for the three months ended March
31, 2003 was $1.2 million higher than for the three months ended March 31, 2002,
principally due to a higher average effective interest rate (8.4% in 2003 versus
7.0% in 2002).
Income taxes for the first quarter of 2003 and 2002 were based upon
estimated consolidated effective income tax rates of 39.5% for the years ending
December 31, 2003 and 2002.
Liquidity and Capital Resources
- -------------------------------
On December 20, 2002, we amended and restated our existing credit
facility with various lenders (the "Lenders"), with Goldman Sachs Credit
Partners L.P. as sole lead arranger, sole bookrunner and syndication agent.
Under the terms of the Second Amended and Restated Credit and Guaranty Agreement
(the "Credit Agreement") the Lenders agreed to amend and restate the Company's
existing bank credit agreements in their entirety and to provide a $200,000,000
senior secured facility consisting of a $170,000,000 term loan (the "Term Loan")
and up to $30,000,000 aggregate principal amount of revolving loans (the
"Revolver"). The proceeds of the Term Loan were used to redesignate and replace
the Company's AXEL term loan of $148.5 million and revolver borrowings of $16.0
million existing at the closing date and to pay certain fees and expenses
associated with the refinancing.
The Term Loan was funded at a 1.0% original issue discount and provides
for amortization (in quarterly installments) of 1.0% per annum through June 15,
2006, and will then amortize in equal quarterly payments through June 15, 2007.
The Term Loan bears interest, at the option of the Company, at the index rate
plus 3.50% per annum or at LIBOR plus 4.50% per annum, with a LIBOR floor of
2.0%. At March 31, 2003, the Term Loan, net of unamortized discount, was
$167,988,000 and the floating interest rate on the Term Loan was 6.51%. The
Company is required to make prepayments under the Credit Agreement based upon
the net proceeds from certain asset sales and insurance or condemnation awards,
the issuances of certain debt and equity securities, and based on annual cash
flows, as defined.
The Revolver expires on June 15, 2007, and bears interest, at the
option of the Company, at the index rate plus, based on performance, a margin
ranging from 2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a
margin ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At
March 31, 2003, the Company had $9,500,000 borrowings under the Revolver.
Standby letters of credit totaling $6.8 million were outstanding and the Company
had borrowing capacity of approximately $13.7 million under the terms of the
Revolver at March 31, 2003.
The Term Loan and borrowings under the Revolver are secured by a first
priority lien on substantially all of the Company's assets and are guaranteed by
the Company's domestic subsidiaries. The Company is required to maintain certain
financial ratios during the term of the Credit Agreement, including leverage and
interest coverage ratios.
At March 31, 2003, the Company had $110,000,000 of senior subordinated
notes (the "Notes") outstanding. The Notes bear interest at a rate of 9.875% per
annum and mature in December 2007. Interest is payable semi-annually on June 15
and December 15 of each year. The Notes are redeemable at the option of the
Company, in
23
whole or in part, at redemption prices ranging from 104.937% to 100%, plus
accrued and unpaid interest to the date of redemption. Upon the occurrence of a
Change of Control, as defined in the note indenture, the Company will be
obligated to make an offer to purchase the Notes, in whole or in part, at a
price equal to 101% of the aggregate principal amount of the Notes, plus accrued
and unpaid interest, if any, to the date of purchase. If a Change of Control
were to occur, the Company may not have the financial resources to repay all of
its obligations under the Credit Agreement, the note indenture and the other
indebtedness that would become payable upon the occurrence of such Change of
Control.
The Credit Agreement and the Notes 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 March 31, 2003, the Company did
not have material commitments for capital expenditures or other acquisitions.
In addition to the Revolver, the Company has a 400,000 Canadian dollar
denominated revolving credit facility which bears interest at the Canadian prime
rate plus 0.6% and expires on April 30, 2004, 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 December
31, 2003. We expect to renew these revolving credit facilities upon expiration.
No borrowings were outstanding under these revolving credit facilities at March
31, 2003.
The Company financed the cost to purchase property in 2000 and to
construct a new domestic distribution facility completed in 2001 (total cost of
$30.2 million), using borrowings under the then existing revolving credit
facility and, in 2001, 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 in the original
principal amount 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 the rate of
3.77%, and is subject to review and adjustment semi-annually based on the New
York State Job Development Authority's confidential internal protocols. 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.
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. Dividends payable
on or prior to March 30, 2004, are 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 are payable, at the option of the
Company, either in cash or additional shares of Series A Redeemable Convertible
Preferred Stock. On March 30, 2003, the annual dividend was distributed in
additional shares of Series A Redeemable Convertible Preferred Stock. At March
31, 2003, 44.94 shares of Series A Redeemable Convertible Preferred Stock were
issued and outstanding.
On February 19, 2002, the Company purchased all of the outstanding
Common Stock of M&D Industries, 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 then existing 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 continues to distribute
metallic balloons under a supply agreement with the Company.
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
24
insurance costs. Rent expense for the quarters ended March 31, 2003 and 2002,
totaled $3.3 million and $2.5 million, respectively. The minimum lease payments
currently required under non-cancelable operating leases for the year ending
December 31, 2003, approximate $12.1 million.
On June 13, 2002, the Company filed a registration statement with the
Commission for an IPO of its Common Stock. However, during the fourth quarter of
2002, the Company decided not to pursue the IPO, which resulted in a $0.8
million write-off of costs associated with the offering. On March 12, 2003, the
Company filed a Form RW with the Commission withdrawing its registration
statement for the IPO.
Based upon the current level of operations and anticipated growth, we
anticipate that our operating cash flow, together with available borrowings
under the Revolver will be adequate to meet our anticipated future requirements
for working capital and operating expenses for at least the next 12 months.
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 its future performance, which, to a certain extent,
will be subject to general economic, financial, competitive, business and other
factors beyond its control.
Cash Flow Data - Three Months Ended March 31, 2003 Compared Three Months Ended
March 31, 2002
Net cash used in operating activities during the three months ended
March 31, 2003 and 2002, totaled $6.0 million and $2.4 million, respectively.
Net cash flow provided by operating activities before changes in operating
assets and liabilities for the three months ended March 31, 2003 and 2002, was
$8.2 million and $11.7 million, respectively. Changes in operating assets and
liabilities, net of acquisition for the three months ended March 31, 2003 and
2002, resulted in the use of cash of $14.2 million and $14.1 million,
respectively.
Net cash used in investing activities during the three months ended
March 31, 2003 of $3.4 million consisted of additional investments in
distribution and manufacturing equipment. Net cash used in investing activities
during the three months ended March 31, 2002 of $17.4 million consisted of $13.3
million relating to the acquisition of M&D Industries and $4.1 million relating
to capital expenditures, principally for distribution and data processing
equipment.
During the three months ended March 31, 2003, net cash provided by
financing activities of $8.6 million consisted of proceeds from short-term
borrowings, partially offset by the scheduled payment of the Term Loan and other
long-term obligations. During the three months ended March 31, 2002, net cash
provided by financing activities of $20.7 million included proceeds from
short-term working capital borrowings, including $13.3 million used to finance
the acquisition of M&D Industries, partially offset by the scheduled payments of
the AXEL 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.
"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
25
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 March 31,
2003 and 2002, 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 $0.9 million and $0.8 million, respectively.
These amounts are determined by considering the impact of the hypothetical
interest rates on our borrowings and interest rate swap agreements. This
analysis does not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the uncertainty of the
specific actions that we would take and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the
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 March 31, 2003 and 2002, 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.
26
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and
procedures performed by the Company's Chief Executive Officer and its Chief
Financial Officer within 90 days of the filing of this report, the Company's
Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
its principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
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
On January 30, 2003, the Company filed a Current Report on Form 8-K
dated December 20, 2002 (File No. 000-21827) responding to Item. 5 and
reporting the refinancing of its term loan and credit facility.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
-----------------------
Michael A. Correale
Chief Financial Officer
(on behalf of the registrant and as
Date: May 15, 2003 principal financial and accounting
------------ officer)
28
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14
I, Gerald C. Rittenberg, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Gerald C. Rittenberg
------------ ------------------------
Gerald C. Rittenberg
Chief Executive Officer
(Principal executive officer)
29
CERTIFICATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14
I, Michael A. Correale, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Michael A. Correale
-------------- -----------------------
Michael A. Correale
Chief Financial Officer
Principal financial officer)
30