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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, 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 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
----- -----
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 August 14, 2003, 1,217.92 shares of Registrant's common stock, par value
$0.10 ("Common Stock"), were outstanding.
AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 2003
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2003 and
December 31, 2002........................................... 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2003 and 2002..................... 4
Consolidated Statement of Stockholders' Deficit for
the Six Months Ended June 30, 2003.......................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002............................... 6
Notes to Consolidated Financial Statements...................... 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 3 Quantitative and Qualitative Disclosures About Market Risk ..... 31
Item 4 Controls and Procedures......................................... 31
Part II
Item 2 Changes in Securities and Use of Proceeds....................... 32
Item 6 Exhibits and Reports on Form 8-K................................ 32
Signature ................................................................ 33
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts )
June 30, December 31,
2003 2002
--------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 3,107 $ 2,400
Accounts receivable, net of allowances ............................... 78,714 74,247
Inventories, net of allowances ....................................... 89,360 93,890
Prepaid expenses and other current assets ............................ 14,024 15,233
--------- ---------
Total current assets ............................................ 185,205 185,770
Property, plant and equipment, net ....................................... 99,643 100,304
Goodwill, net ............................................................ 72,334 74,251
Notes receivable from officers ........................................... 402 1,942
Other assets, net ........................................................ 10,720 10,230
--------- ---------
Total assets .................................................... $ 368,304 $ 372,497
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ..................................................... $ 34,066 $ 39,245
Accrued expenses ..................................................... 20,772 21,524
Income taxes payable ................................................. 1,446 2,525
Current portion of long-term obligations ............................. 3,157 3,220
--------- ---------
Total current liabilities ....................................... 59,441 66,514
Long-term obligations, excluding current portion ......................... 293,847 295,420
Deferred income tax liabilities .......................................... 15,974 17,360
Other .................................................................... 2,361 2,317
--------- ---------
Total liabilities ............................................... 371,623 381,611
Redeemable convertible preferred stock ($0.10 par value; 100.00 shares
authorized; 44.94 and 42.40 shares issued and
outstanding) ......................................................... 6,843 6,646
Redeemable Common Stock .................................................. 10,642 30,523
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,223.92 and 1,233.27 shares issued and outstanding, respectively) -- --
Additional paid-in capital ........................................... 26,640 14,814
Unamortized restricted Common Stock awards, net ...................... (233) (323)
Notes receivable from stockholders ................................... (659) (638)
Deficit .............................................................. (45,015) (57,551)
Accumulated other comprehensive loss ................................. (1,537) (2,585)
--------- ---------
Total stockholders' deficit ..................................... (20,804) (46,283)
--------- ---------
Total liabilities, redeemable convertible preferred and Common
Stock and stockholders' deficit ............................... $ 368,304 $ 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales ..................................... $ 100,996 $ 94,129 $ 200,840 $ 190,037
Cost of sales ................................. 68,950 61,979 135,919 123,655
--------- --------- --------- ---------
Gross profit ......................... 32,046 32,150 64,921 66,382
Operating expenses:
Selling expenses ........................... 8,974 8,647 18,116 16,826
General and administrative expenses ........ 7,927 8,258 15,829 15,806
Art and development costs .................. 2,286 2,700 4,823 4,976
Provision for doubtful accounts ............ 1,385 512 1,989 1,115
Restructuring charges ...................... 458 186 774 186
--------- --------- --------- ---------
Total operating expenses ............. 21,030 20,303 41,531 38,909
--------- --------- --------- ---------
Income from operations ............... 11,016 11,847 23,390 27,473
Interest expense, net ......................... 6,552 5,268 13,196 10,758
Other (income) expense, net ................... (39) 48 (57) (22)
--------- --------- --------- ---------
Income before income taxes and
minority interests ................ 4,503 6,531 10,251 16,737
Income tax expense ............................ 1,778 2,580 4,049 6,611
Minority interests ............................ 19 11 34 (45)
--------- --------- --------- ---------
Net income ........................... 2,706 3,940 6,168 10,171
Dividend on redeemable convertible
preferred stock
convertible preferred stock ....... 101 95 197 185
--------- --------- --------- ---------
Net income applicable to common shares $ 2,605 $ 3,845 $ 5,971 $ 9,986
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 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 ...................... 6,168 6,168
Net change in cumulative
translation adjustment ...... 1,276 1,276
Change in fair value of
available-for-sale
investment, net of income
taxes ...................... 58 58
Change in fair value of interest
rate swap and foreign
exchange contracts, net of
income taxes ................ (286) (286)
--------
Comprehensive income ...... 7,216
Exercise of stock options,
including tax benefits of $79 ... 6.65 910 910
Amortization of restricted
Common Stock awards ......... 90 90
Increase in redeemable Common
Stock due to exercise of
stock options and vesting of
restricted Common Stock award (1,537) (1,537)
Decrease in redeemable Common
Stock due to change in market
value of Common Stock ....... 50 368 418
Purchase and retirement of
Common Stock held by officer (16.00)
Decrease in redeemable Common
Stock due to expiration of
redemption feature .......... 12,600 6,000 18,600
Redeemable convertible
preferred stock dividend .... (197) (197)
Accretion of interest income
on notes receivable from
stockholders ................ (21) (21)
-------- ------ -------- ------ ------ --------- -------- --------
Balance at June 30, 2003 ........ 1,223.92 $ -- $ 26,640 $ (233) $ (659) $ (45,015) $ (1,537) $(20,804)
======== ====== ======== ====== ====== ========= ======== ========
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,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net income ...................................................................... $ 6,168 $ 10,171
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 8,156 6,598
Amortization of deferred financing costs ..................................... 1,011 536
Amortization of restricted Common Stock awards ............................... 90 118
Provision for doubtful accounts .............................................. 1,989 1,115
Deferred income tax expense .................................................. 1,757 3,227
Loss on disposal of property and equipment ................................... 109
Non-cash restructuring charges ............................................... 104
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable ........................................... (6,456) (5,703)
Decrease (increase) in inventories ........................................ 4,530 (6,979)
Increase in prepaid expenses and other current assets ..................... (704) (4,069)
(Decrease) increase in accounts payable, accrued expenses and income taxes
payable ........................................................... (7,597) 6,690
Other, net ................................................................... (374) (1,115)
-------- --------
Net cash provided by operating activities ................................. 8,783 10,589
Cash flows from investing activities:
Cash paid in connection with acquisition ........................................ (13,547)
Capital expenditures ............................................................ (7,560) (7,610)
Proceeds from disposal of property and equipment ................................ 86 34
-------- --------
Net cash used in investing activities ..................................... (7,474) (21,123)
Cash flows from financing activities:
Proceeds from short-term obligations ............................................ 13,300
Repayment of loans, notes payable and long-term obligations ..................... (1,862) (1,675)
Proceeds from exercise of stock options ......................................... 831
Purchase of Common Stock from officer ........................................... (2,115)
Repayment of note receivable from officer ....................................... 1,588
-------- --------
Net cash (used in) provided by financing activities ....................... (1,558) 11,625
Effect of exchange rate changes on cash and cash equivalents ....................... 956 93
-------- --------
Net increase in cash and cash equivalents ................................. 707 1,184
Cash and cash equivalents at beginning of period ................................... 2,400 1,016
-------- --------
Cash and cash equivalents at end of period ......................................... $ 3,107 $ 2,200
======== ========
Supplemental Disclosures:
Interest paid ............................................................. $ 11,145 $ 10,030
Income taxes paid ......................................................... $ 3,364 $ 1,619
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 June 2003, the Company purchased 16 shares of Common Stock from its Chief
Executive Officer at a price of $150 per share, or for an aggregate cash
purchase price $2,400, of which $2,115 and $285 were received by him in June
2003 and July 2003, respectively. The Chief Executive Officer used a portion
of the proceeds to repay his outstanding loan balance of $1,588. The Company
retired 16 shares of Common Stock.
On April 10, 2003, a former officer's right to put 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 additional 6.648 shares back to the Company
expired in July 2003 and as a result, the Company recorded a decrease in
redeemable Common Stock and an increase in additional paid-in capital of
$997.
In February 2002, the Company issued 96.774 shares of its Common Stock, at a
value of $155 per share, to American Greetings Corporation ("American
Greetings") in connection with the acquisition of M&D Industries, Inc.,
formerly known as M&D Balloons, Inc. ("M&D Industries") (see Note 10).
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.
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 its 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 and six months ended June 30, 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):
June 30, December 31,
2003 2002
-------- --------
Finished goods ..................................... $ 76,470 $ 80,783
Raw materials ...................................... 8,904 8,763
Work-in-process .................................... 6,792 7,722
-------- --------
92,166 97,268
Less: reserve for slow moving and obsolete inventory (2,806) (3,378)
-------- --------
$ 89,360 $ 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 and six months ended
June 30, 2003 and 2002 was determined based upon estimates of the Company's
consolidated effective income tax rates for the years ending December 31, 2003
and 2002, 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.
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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income ................................................................ $ 2,706 $ 3,940 $ 6,168 $ 10,171
Net change in cumulative translation adjustment ........................... 1,399 1,168 1,276 955
Change in fair value of available-for-sale investment, net of income taxes
of $91 and $38, respectively ........................................... 139 58
Change in fair value of the Company's interest rate swap
contract, net of income taxes of $(60), $(147), $(54) and $(190),
respectively ........................................................... (92) (224) (83) (291)
Change in fair value of the Company's foreign exchange
contracts, net of income taxes of $(137), $(275), $(133) and $(188),
respectively ........................................................... (210) (422) (203) (288)
-------- -------- -------- --------
$ 3,942 $ 4,462 $ 7,216 $ 10,547
======== ======== ======== ========
Accumulated other comprehensive loss consisted of the following
(dollars in thousands):
June 30, December 31,
2003 2002
-------- ------------
Cumulative translation adjustment .................................................. $ (199) $(1,475)
Unrealized gain on available-for-sale investment, net of income taxes of $38 ....... 58
Interest rate swap contract qualifying as a hedge, net of income taxes of $(475) and
$(421), respectively ............................................................ (727) (644)
Foreign exchange contracts qualifying as hedges, net of income taxes of $(438) and
$(305), pectively ............................................................... (669) (466)
------- -------
$(1,537) $(2,585)
======= =======
NOTE 6 - CAPITAL STOCK
At June 30, 2003 and December 31, 2002, current and former employees of
the Company held 70.95 and 196.92 shares, respectively, of fully paid and vested
Common Stock. 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). The former
officer's right to put the additional 6.648 shares back to the Company expired
in
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
July 2003 and as a result, the Company recorded a decrease in redeemable Common
Stock and an increase in additional paid-in capital of $997.
At June 30, 2003 and December 31, 2002, officers of the Company held
3.00 and 6.38 shares of Common Stock, respectively, subject to the vesting
provisions of their employment agreements (the "Restricted Stock"). The 3.0
shares of Restricted Stock outstanding at June 30, 2003 will vest in December
2004. During the three months ended June 30, 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. During the six months ended
June 30, 2003 and 2002, the Company recorded the amortization of Restricted
Stock of $90,000 and $118,000, respectively, as compensation expense.
At June 30, 2003 and December 31, 2002, the Company held notes
receivable from a former and current officer totaling $659,000 and $638,000,
respectively. These notes arose in connection with the issuance of shares of
Common Stock to the officers. The notes 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 June 2003, the Company purchased 16 shares of Common Stock from its
Chief Executive Officer at a price of $150,000 per share, or for an aggregate
cash purchase price $2,400,000, of which $2,115,000 and $285,000 were received
by him in June 2003 and July 2003, respectively. The Chief Executive Officer
used a portion of the proceeds to repay his outstanding loan balance of
$1,588,000. The Company retired 16 shares of Common Stock.
In June 2003, the Stock Incentive Plan was amended by the Board of
Directors increasing the total number of shares of Common Stock reserved and
available for grant from 150 to 200. In June 2003, the Chief Executive Officer
and the President were each granted Common Stock options to purchase 25 shares
of Common Stock at $150,000 per share.
In July 2003, the Company purchased 6 shares of Common Stock from its
President at a price of $150,000 per share, or for an aggregate cash purchase
price of $900,000. The President used a portion of the proceeds to repay his
outstanding loan balance of $402,000. The Company retired 6 shares of Common
Stock.
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).
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
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 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 Segment
- ----------------
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 June 30, 2003
- --------------------------------
Sales to unaffiliated customers ................. $ 87,570 $ 13,426 $ 100,996
Sales between geographic areas .................. 5,090 $ (5,090) --
--------- --------- ---------- ---------
Net sales ....................................... $ 92,660 $ 13,426 $ (5,090) $ 100,996
========= ========= ========== =========
Income from operations .......................... $ 9,976 $ 656 $ 384 $ 11,016
========= ========= ==========
Interest expense, net ........................... 6,552
Other income, net ............................... (39)
---------
Income before income taxes and minority interests $ 4,503
=========
Long-lived assets, net at June 30, 2003 ......... $ 174,784 $ 8,315 $ 183,099
========= ========= =========
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 .......................... $ 11,113 $ 577 $ 157 $ 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
-------- ------- ------------ ------------
Six Months Ended June 30, 2003
- ------------------------------
Sales to unaffiliated customers ................. $ 174,600 $ 26,240 $ 200,840
Sales between geographic areas .................. 9,613 $ (9,613) --
--------- --------- ---------- ---------
Net sales ....................................... $ 184,213 $ 26,240 $ (9,613) $ 200,840
========= ========= ========== =========
Income from operations .......................... $ 21,959 $ 780 $ 651 $ 23,390
========= ========= ==========
Interest expense, net ........................... 13,196
Other income, net ............................... (57)
---------
Income before income taxes and minority interests $ 10,251
=========
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 .......................... $ 26,463 $ 543 $ 467 $ 27,473
========= ========= ==========
Interest expense, net ........................... 10,758
Other income, net ............................... (22)
---------
Income before income taxes and minority interests $ 16,737
=========
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 these proceedings will result,
individually or in the aggregate, in a material adverse effect on its financial
condition or future results of operations.
12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
NOTE 9 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In July 2002, Statement of Financial Accounting Standards ("SFAS") 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 January 2003, the Financial Accounting Standards Board ("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 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 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 consolidated 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
$258,000 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 following unaudited pro forma information assumes the M&D
Industries acquisition had occurred on
13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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):
Six Months
Ended June 30,
--------------
2002
----
Net sales......... $194,144
Net income ....... 10,564
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.
During the three and six months ended June 30, 2003, the Company sold
$1,634,000 and $2,249,000, respectively, of metallic balloons and other party
goods to American Greetings. 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, 2003 and December 31, 2002 were $1,380,000
and $2,632,000, respectively.
NOTE 11 - RESTRUCTURING CHARGES
During the three and six months ended June 30, 2003, the Company
incurred charges of $458,000 and $774,000, respectively, resulting from the
consolidation of certain domestic and foreign distribution operations, and the
ongoing integration of M&D Industries into our balloon operations.
During the second quarter of 2002, the Company incurred charges of
$186,000 relating to the consolidation of certain domestic distribution
operations and the closure of its distribution facilities in Spain and France.
The consolidation of our domestic distribution operations and the
ongoing integration of M&D Industries 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.
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported ...................................... $ 2,706 $ 3,940 $ 6,168 $10,171
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax of $40, $85,
$70, and $169, respectively .................. 62 129 107 258
------- ------- ------- -------
SFAS No. 123 pro forma net income ............. $ 2,644 $ 3,811 $ 6,061 $ 9,913
======= ======= ======= =======
NOTE 13 - PROVISION FOR DOUBTFUL ACCOUNTS
During the second quarter of 2003, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. This
customer accounted for approximately 2.6% and 1.7% of the Company's consolidated
net sales for the three and six months ended June 30, 2003, respectively, and at
June 30, 2003, the gross accounts receivable balance due from this customer
totaled $4.2 million. As a result, the Company has charged a total of $3.1
million to the provision for doubtful accounts, of which $1.6 million was
charged during the second quarter of 2003. The Company does not believe the
potential loss of this customer will have a material adverse effect on the
Company's future results of operations or its financial condition.
NOTE 14 - 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 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.
15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The repayment of the borrowings under the Credit Agreement and Notes
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
June 30, 2003 and December 31, 2002, and the related consolidating statements of
income for the three and six months ended June 30, 2003 and 2002 and
consolidating statements of cash flows for the six months ended June 30, 2003
and 2002 for the combined Guarantors and the combined Non-guarantors and
elimination entries necessary to consolidate the entities comprising the
combined companies.
16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
June 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 2,807 $ 300 $ 3,107
Accounts receivable, net of allowances ........ 65,613 13,101 78,714
Inventories, net of allowances ................ 77,820 12,396 $ (856) 89,360
Prepaid expenses and other current assets ..... 11,736 2,930 (642) 14,024
--------- --------- --------- ---------
Total current assets ........................ 157,976 28,727 (1,498) 185,205
Property, plant and equipment, net ............... 98,000 1,643 99,643
Goodwill, net .................................... 66,455 5,879 72,334
Note receivable from officer ..................... 402 402
Other assets, net ................................ 37,239 1,561 (28,080) 10,720
--------- --------- --------- ---------
Total assets ................................ $ 360,072 $ 37,810 $ (29,578) $ 368,304
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .............................. $ 32,066 $ 2,000 $ 34,066
Accrued expenses .............................. 14,124 6,648 20,772
Income taxes payable .......................... 2,068 $ (622) 1,446
Current portion of long-term obligations ...... 3,021 136 3,157
--------- --------- --------- ---------
Total current liabilities ................... 51,279 8,784 (622) 59,441
Long-term obligations, excluding current portion . 293,742 105 293,847
Deferred income tax liabilities .................. 15,974 15,974
Other ............................................ 1,520 17,433 (16,592) 2,361
--------- --------- --------- ---------
Total liabilities ........................... 362,515 26,322 (17,214) 371,623
Redeemable convertible preferred stock ........... 6,843 6,843
Redeemable Common Stock .......................... 10,642 10,642
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 26,640 658 (658) 26,640
Unamortized restricted Common Stock
awards, net .............................. (233) (233)
Notes receivable from stockholders .......... (659) (659)
(Deficit) retained earnings ................. (44,139) 11,344 (12,220) (45,015)
Accumulated other comprehensive loss ........ (1,537) (853) 853 (1,537)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .... (19,928) 11,488 (12,364) (20,804)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 360,072 $ 37,810 $ (29,578) $ 368,304
========= ========= ========= =========
17
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:
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
========= ========= ========== =========
18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended June 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 92,660 $ 13,426 $ (5,090) $ 100,996
Cost of sales ................................. 64,757 9,367 (5,174) 68,950
--------- --------- --------- ---------
Gross profit ......................... 27,903 4,059 84 32,046
Operating expenses:
Selling expenses .......................... 7,481 1,493 8,974
General and administrative expenses ....... 6,498 1,729 (300) 7,927
Art and development costs ................. 2,286 2,286
Provision for doubtful accounts ........... 1,231 154 1,385
Restructuring charges ..................... 431 27 458
--------- --------- --------- ---------
Total operating expenses ............. 17,927 3,403 (300) 21,030
--------- --------- --------- ---------
Income from operations ............... 9,976 656 384 11,016
Interest expense, net ......................... 6,398 154 6,552
Other (income) expense, net ................... (605) 23 543 (39)
--------- --------- --------- ---------
Income before income taxes and
minority interests ................. 4,183 479 (159) 4,503
Income tax expense ............................ 1,528 217 33 1,778
Minority interests ............................ 19 19
--------- --------- --------- ---------
Net income ........................... 2,655 243 (192) 2,706
Dividend on redeemable convertible
preferred stock ................... 101 101
--------- --------- --------- ---------
Net income applicable to common shares $ 2,554 $ 243 $ (192) $ 2,605
========= ========= ========= =========
19
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 ..................................... $ 87,043 $ 13,089 $ (6,003) $ 94,129
Cost of sales ................................. 58,463 9,436 (5,920) 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 ....... 7,033 1,465 (240) 8,258
Art and development costs ................. 2,700 2,700
Provision for doubtful accounts ........... 411 101 512
Restructuring charges ..................... 93 93 186
-------- -------- -------- --------
Total operating expenses ............. 17,467 3,076 (240) 20,303
-------- -------- -------- --------
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 on redeemable convertible
preferred stock ................... 95 95
-------- -------- -------- --------
Net income applicable to common shares $ 3,928 $ 298 $ (381) $ 3,845
======== ======== ======== ========
20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Six Months Ended June 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 184,213 $ 26,240 $ (9,613) $ 200,840
Cost of sales ................................. 126,944 18,639 (9,664) 135,919
--------- --------- --------- ---------
Gross profit ......................... 57,269 7,601 51 64,921
Operating expenses:
Selling expenses .......................... 15,071 3,045 18,116
General and administrative expenses ....... 12,981 3,448 (600) 15,829
Art and development costs ................. 4,823 4,823
Provision for doubtful accounts ........... 1,688 301 1,989
Restructuring charges ..................... 747 27 774
--------- --------- --------- ---------
Total operating expenses ............. 35,310 6,821 (600) 41,531
--------- --------- --------- ---------
Income from operations ............... 21,959 780 651 23,390
Interest expense, net ......................... 12,881 315 13,196
Other (income) expense, net ................... (830) 27 746 (57)
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 9,908 438 (95) 10,251
Income tax expense ............................ 3,771 258 20 4,049
Minority interests ............................ 34 34
--------- --------- --------- ---------
Net income ........................... 6,137 146 (115) 6,168
Dividend on redeemable convertible
preferred stock ................... 197 197
--------- --------- --------- ---------
Net income applicable to common shares $ 5,940 $ 146 $ (115) $ 5,971
========= ========= ========= =========
21
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 ..................................... $ 176,117 $ 25,205 $ (11,285) $ 190,037
Cost of sales ................................. 116,859 18,068 (11,272) 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 ....... 13,311 2,975 (480) 15,806
Art and development costs ................. 4,976 4,976
Provision for doubtful accounts ........... 481 634 1,115
Restructuring charges ..................... 93 93 186
--------- --------- --------- ---------
Total operating expenses ............. 32,795 6,594 (480) 38,909
--------- --------- --------- ---------
Income from operations ............... 26,463 543 467 27,473
Interest expense, net ......................... 10,442 316 10,758
Other (income), 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 on redeemable convertible
preferred stock ................... 185 185
--------- --------- --------- ---------
Net income applicable to common shares $ 9,999 $ 113 $ (126) $ 9,986
========= ========= ========= =========
22
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2003
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ..................................................... $ 6,137 $ 146 $ (115) $ 6,168
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................... 7,885 271 8,156
Amortization of deferred financing costs .................... 1,011 1,011
Amortization of restricted Common Stock awards .............. 90 90
Provision for doubtful accounts ............................. 1,688 301 1,989
Deferred income tax expense ................................. 1,757 1,757
Loss on disposal of property and equipment .................. 80 29 109
Non-cash restructuring charges .............................. 104 104
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable ....................... (4,781) (1,675) (6,456)
Decrease (increase) in inventories .................... 5,839 (1,258) (51) 4,530
Increase in prepaid expenses and other current
assets ............................................. (238) (466) (704)
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable .................. (8,859) 1,242 20 (7,597)
Other, net ................................................. (969) 449 146 (374)
------- ------- ------- -------
Net cash provided by (used in) operating activities ... 9,744 (961) -- 8,783
Cash flows from investing activities:
Capital expenditures ........................................... (7,049) (511) (7,560)
Proceeds from disposal of property and equipment ............... 63 23 86
------- ------- ------- -------
Net cash used in investing activities ................. (6,986) (488) -- (7,474)
Cash flows from financing activities:
Repayment of loans, notes payable and long-term
obligations .............................................. (1,773) (89) (1,862)
Proceeds from exercise of stock options ...................... 831 831
Purchase of Common Stock from officer ........................ (2,115) (2,115)
Repayment of note receivable from officer .................... 1,588 1,588
------- ------- ------- -------
Net cash used in financing activities ................. (1,469) (89) -- (1,558)
Effect of exchange rate changes on cash and cash equivalents ...... 35 921 956
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents ................................. 1,324 (617) 707
Cash and cash equivalents at beginning of period .................. 1,483 917 2,400
------- ------- ------- -------
Cash and cash equivalents at end of period ........................ $ 2,807 $ 300 $ -- $ 3,107
======= ======= ======= =======
23
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
Amortization of restricted Common Stock awards ................. 118 118
Provision for doubtful accounts ................................ 481 634 1,115
Deferred income tax expense .................................... 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 short-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
======== ======== ======== ========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Percentage of Net Sales
- -----------------------
Three Months Ended
------------------
June 30,
--------
2003 2002
---- ----
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 68.3 65.8
----- -----
Gross profit .................................... 31.7 34.2
Operating expenses:
Selling expenses ................................... 8.9 9.2
General and administrative expenses ................ 7.8 8.8
Art and development costs .......................... 2.3 2.9
Provision for doubtful accounts .................... 1.4 0.5
Restructuring charges .............................. 0.4 0.2
----- -----
Total operating expenses ........................ 20.8 21.6
----- -----
Income from operations .......................... 10.9 12.6
Interest expense, net .................................. 6.5 5.6
Other (income) expense, net ............................ (0.1) 0.1
----- -----
Income before income taxes and minority interests 4.5 6.9
Income tax expense ..................................... 1.8 2.7
Minority interests .....................................
----- -----
Net income ...................................... 2.7% 4.2%
===== =====
Net sales of $101.0 million for the quarter ended June 30, 2003 were
$6.9 million higher than net sales for the quarter ended June 30, 2002. During
the second quarter of 2003, the Company's domestic sales of party goods,
including metallic balloons, grew by 6.8% over the second quarter of 2002.
Domestic sales performance during the second quarter of 2003 continued to be
adversely affected by general economic conditions resulting in a weak retail
environment. Contract manufacturing during the second quarter increased by 26.7%
over the second quarter of 2002. Net international sales reported for the three
months ended June 30, 2003 were relatively flat as compared to the corresponding
period in 2002 with a small decrease in volume offset by foreign currency
exchange fluctuations.
Gross profit margin for the quarter ended June 30, 2003, of 31.7% was
2.5% lower than during the quarter ended June 30, 2002. Gross profit margin
during the second quarter of 2003 reflects the impact of product sales mix,
particularly solid color tableware and the increase in contract manufacturing,
additional depreciation, amortization and equipment rental costs relating to the
new distribution facility that became operational in the fourth quarter of 2002
and redundant costs arising from the Company's transition from four to three
east coast distribution facilities. The Company expects the benefits of the
transition to be realized beginning in the latter half of 2003.
Selling expenses of $9.0 million for the quarter ended June 30, 2003
were $0.3 million higher than in the corresponding period in 2002. However, as a
percent of sales, selling expenses were 8.9%, or 0.3% less than in the
corresponding period in 2002, reflecting the further leveraging of our sales
infrastructure, and the maturation of our specialty sales force.
General and administrative expenses of $7.9 million for the quarter
ended June 30, 2003 were $0.3 million lower than the corresponding period in
2002. As a percentage of sales, general and administrative expenses were 7.8%
for the second quarter of 2003, or 1.0% lower than in the corresponding period
in 2002. The net decrease in general and administrative expenses principally
reflects synergies realized from the integration of the administrative functions
of M&D Industries, Inc., ("M&D Industries") into our existing operations
partially offset by higher insurance and occupancy costs.
25
Art and development costs of $2.3 million for the quarter ended June
30, 2003 were $0.4 million lower as compared to 2002, principally due to
synergies realized from the integration of M&D Industries' art and development
departments into our existing operations. As a percentage of sales, art and
development costs were 2.3% for the second quarter of 2003 and 2.9% for the
second quarter of 2002.
During the second quarter of 2003, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code and as
a result, the Company charged $1.6 million to the provision for doubtful
accounts during the second quarter of 2003. This customer accounted for
approximately 2.6% of the Company's consolidated net sales for the three months
ended June 30, 2003. The Company does not believe the potential loss of this
customer will have a material adverse effect on the Company's future results of
operations or its financial condition.
During the three months ended June 30, 2003 and 2002, the Company
incurred restructuring charges of $0.5 million and $0.2 million, respectively,
resulting from the consolidation of certain domestic and foreign distribution
operations, and during 2003, the ongoing integration of M&D Industries into our
balloon operations. The consolidation of our domestic distribution operations
and the continued integration of M&D Industries may result in additional
restructuring charges in subsequent periods.
Interest expense, net, of $6.6 million for the three months ended June
30, 2003 was $1.3 million higher than for the three months ended June 30, 2002,
principally due to the impact of higher average borrowings and a higher average
effective interest rate (8.6% in 2003 versus 7.1% in 2002).
Income taxes for the second 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.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Percentage of Net Sales
- -----------------------
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 67.7 65.1
----- -----
Gross profit .................................... 32.3 34.9
Operating expenses:
Selling expenses ................................... 9.0 8.8
General and administrative expenses ................ 7.9 8.3
Art and development costs .......................... 2.4 2.6
Provision for doubtful accounts .................... 1.0 0.6
Restructuring charges .............................. 0.4 0.1
----- -----
Total operating expenses ........................ 20.7 20.4
----- -----
Income from operations .......................... 11.6 14.5
Interest expense, net .................................. 6.5 5.7
Other income, net ......................................
----- -----
Income before income taxes and minority interests 5.1 8.8
Income tax expense ..................................... 2.0 3.4
Minority interests .....................................
----- -----
Net income ...................................... 3.1% 5.4%
===== =====
Net sales of $200.8 million for the six months ended June 30, 2003 were
$10.8 million higher than net sales for the six months ended June 30, 2002.
During the six months ended June 30, 2003, the Company's domestic sales of party
goods, including metallic balloons, grew by 5.9% over the corresponding period
in 2002. Domestic sales
26
performance during the six months ended June 30, 2003 were adversely affected by
general economic conditions resulting in a weak retail environment and, during
the first quarter of 2003, severe weather conditions. Contract manufacturing
during the six months ended June 30, 2003 increased by 16.9% over the
corresponding period in 2002. Net international sales reported for the six
months ended June 30, 2003 increased by 4.1%, principally as a result of foreign
currency exchange fluctuations.
Gross profit margin for the six months ended June 30, 2003, of 32.3%
was 2.6% lower than during the six months ended June 30, 2002. Gross profit
margin for the six months ended June 30, 2003 reflects the impact of product
sales mix (particularly solid color tableware and contract manufacturing),
additional depreciation and amortization, and equipment rental costs relating to
the new distribution facility that became operational in the fourth quarter of
2002. Gross profit margin for the current period also reflects additional
production costs incurred in connection with the integration of the M&D
Industries into our balloon operations, additional distribution costs incurred
as a result of severe weather conditions during the first quarter of 2003 and
redundant costs arising from the Company's transition from four to three east
coast distribution facilities. The Company expects the benefits of the
integration and transition to be realized beginning in the latter half of 2003.
Selling expenses of $18.1 million for the six months ended June 30,
2003 were $1.3 million higher than in the corresponding period in 2002
principally due to the inclusion of the operating results of M&D Industries for
an additional two additional months in 2003 and the continued development of the
Company's specialty sales force. Selling expenses, as a percentage of net sales,
increased from 8.8% to 9.0%.
General and administrative expenses of $15.8 million for the six months
ended June 30, 2003 were relatively consistent with the corresponding period in
2002 as increased insurance and occupancy costs were offset by synergies
realized from the integration of M&D Industries' administrative functions into
our existing operations. As a percentage of sales, general and administrative
expenses decreased by 0.4% to 7.9%.
Art and development costs of $4.8 million for the six months ended June
30, 2003 were $0.2 million lower than in the first half of 2002, principally due
to synergies realized from the integration of M&D Industries' art and
development departments into our existing operations. As a percentage of sales,
art and development costs were 2.4% for the six months ended June 30, 2003 and
2.6% for the corresponding period in 2002.
During the second quarter of 2003, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code and as
a result, the Company charged $1.6 million to the provision for doubtful
accounts during the second quarter of 2003. This customer accounted for
approximately 1.7% of the Company's consolidated net sales for the six months
ended June 30, 2003. The Company does not believe the potential loss of this
customer will have a material adverse effect on the Company's future results of
operations or its financial condition.
During the six months ended June 30, 2003 and 2002, the Company
incurred restructuring charges of $0.8 million and $0.2 million, respectively,
resulting from the consolidation of certain domestic and foreign distribution
operations, and during 2003, the ongoing integration of M&D Industries into our
balloon operations. The consolidation of its domestic distribution operations
and the continued integration of M&D Industries may result in additional
restructuring charges in subsequent periods.
Interest expense, net, of $13.2 million for the six months ended June
30, 2003 was $2.4 million higher than in the corresponding period in 2002 and
reflects the impact of higher average borrowings and a higher average effective
interest rate (8.6% in 2003 versus 7.2% in 2002).
Income taxes for the six months ended June 30, 2003 and 2002 were based
upon estimated consolidated effective income tax rates of 39.5% for the years
ending December 31, 2003 and 2002.
27
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 June 30, 2003, the Term Loan, net of unamortized discount, was
$167,668,000 and the floating interest rate on the Term Loan was 6.50%. 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
June 30, 2003, the Company had no borrowings under the Revolver. Standby letters
of credit totaling $7.0 million were outstanding and the Company had borrowing
capacity of approximately $23.0 million under the terms of the Revolver at June
30, 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 June 30, 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 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.
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, 2004 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 June
30, 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
28
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 June
30, 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 insurance costs. Rent expense for the six months ended
June 30, 2003 and 2002, totaled $6.5 million and $5.4 million, respectively. The
minimum lease payments currently required under non-cancelable operating leases
for the year ending December 31, 2003, approximate $12.9 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 Securities and Exchange Commission withdrawing
its registration statement for the IPO.
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 June 30, 2003, the Company did
not have material commitments for capital expenditures or other acquisitions.
Based upon the current level of operations and anticipated growth, the Company
anticipates that its operating cash flow, together with available borrowings
under the Revolver will be adequate to meet 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.
29
Cash Flow Data - Six Months Ended June 30, 2003 Compared to Six Months Ended
- --------------------------------------------------------------------------------
June 30, 2002
- -------------
Net cash provided by operating activities during the six months ended
June 30, 2003 and 2002, totaled $8.8 million and $10.6 million, respectively.
Net cash flow provided by operating activities before changes in operating
assets and liabilities for the six months ended June 30, 2003 and 2002, was
$19.4 million and $21.8 million, respectively. Changes in operating assets and
liabilities, net of acquisition for the six months ended June 30, 2003 and 2002,
resulted in the use of cash of $10.6 million and $11.2 million, respectively.
Net cash used in investing activities during the six months ended June
30, 2003 of $7.5 million consisted of additional investments in distribution and
manufacturing equipment. 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 Industries 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, 2003, net cash used in financing
activities of $1.6 million consisted of the scheduled payment on the Term Loan
and other long-term obligations, the purchase of Common Stock from the Chief
Executive Officer, partially offset by proceeds from the exercise of stock
options and the repayment of the note from the Chief Executive Officer. During
the comparable period in 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 Industries, partially offset by
the scheduled payments on the then outstanding 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 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
30
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,
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. 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, 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 $1.8 million and $1.7 million, respectively. These amounts are
determined by considering the impact of the hypothetical interest rates on our
borrowings and interest rate swap agreements. This analysis does not consider
the effects of the reduced level of overall economic activity that could exist
in such an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate our exposure to the
change. However, due to the uncertainty of the specific actions that we would
take and their possible effects, the sensitivity analysis assumes no changes in
our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the U.S.
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $0.4 million for the three
months ended June 30, 2003 and 2002. A uniform 10% strengthening in the value of
the U.S. dollar relative to the currencies in which our foreign sales are
denominated would have resulted in a decrease in gross profit of $0.8 million
and $0.7 million for the six months ended June 30, 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of the Company's disclosure
controls and procedures performed by the Company's management, with the
participation of the Company's Chief Executive Officer and its Chief Financial
Officer as of the end of the period covered by this report, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures 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 Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports
31
that it files or submits under the Securities Exchange Act is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation described in the
preceding paragraph that occurred during the Company's fiscal quarter ended June
30, 2003 that have materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) On April 7, 2003, the Company issued 6.648 shares of Common Stock to
a former employee upon exercise of stock options for $831,000 in
cash. No underwriting discounts or commissions were paid in
connection with such sale. These shares were part of an offering to
a limited number of accredited investors and employees of the
Company. Such sale was exempt under Section 4 (2) of the Securities
Act of 1933.
d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31(1) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.
31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32 Section 1350 Certification.
b) Reports on Form 8-K
None.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
-----------------------
Michael A. Correale
Chief Financial Officer
(on behalf of the registrant and as
principal financial and accounting
Date: August 14, 2003 officer)
---------------
33
EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
31(1) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.
31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32 Section 1350 Certification.