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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 September 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 November 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
September 30, 2003
Table of Contents
PART I PAGE
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets at September 30, 2003
and December 31, 2002.................................. 3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2003 and 2002.......... 4
Consolidated Statement of Stockholders' Deficit for
the Nine Months Ended September 30, 2003............... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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.................................... 32
PART II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................... 33
Signature.............................................................. 34
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts )
September 30, December 31,
2003 2002
--------- ---------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 9,419 $ 2,400
Accounts receivable, net of allowances .............................. 86,858 74,247
Inventories, net of allowances ...................................... 84,834 93,890
Prepaid expenses and other current assets ........................... 12,413 15,233
--------- ---------
Total current assets ......................................... 193,524 185,770
Property, plant and equipment, net ....................................... 98,105 100,304
Goodwill, net ............................................................ 72,281 74,251
Notes receivable from officers ........................................... 1,942
Other assets, net ........................................................ 9,965 10,230
--------- ---------
Total assets ................................................. $ 373,875 $ 372,497
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................... $ 30,120 $ 39,245
Accrued expenses .................................................... 23,241 21,524
Income taxes payable ................................................ 3,803 2,525
Current portion of long-term obligations ............................ 3,133 3,220
--------- ---------
Total current liabilities .................................... 60,297 66,514
Long-term obligations, excluding current portion ......................... 293,082 295,420
Deferred income tax liabilities .......................................... 16,534 17,360
Other .................................................................... 2,332 2,317
--------- ---------
Total liabilities ............................................ 372,245 381,611
Redeemable convertible preferred stock ($0.10 par value; 100.00 shares
authorized; 44.94 and 42.40 shares issued and outstanding) .......... 6,945 6,646
Redeemable Common Stock .................................................. 8,745 30,523
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,217.92 and 1,233.27 shares issued and outstanding, respectively) -- --
Additional paid-in capital .......................................... 27,535 14,814
Unamortized restricted Common Stock awards .......................... (194) (323)
Notes receivable from stockholders .................................. (669) (638)
Deficit ............................................................. (39,789) (57,551)
Accumulated other comprehensive loss ................................ (943) (2,585)
--------- ---------
Total stockholders' deficit .................................. (14,060) (46,283)
--------- ---------
Total liabilities, redeemable convertible preferred and Common
Stock and stockholders' deficit ............................ $ 373,875 $ 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales ..................................... $ 103,220 $ 100,226 $ 304,060 $ 290,263
Cost of sales ................................. 68,242 65,761 204,161 189,416
--------- --------- --------- ---------
Gross profit ......................... 34,978 34,465 99,899 100,847
Operating expenses:
Selling expenses ........................... 9,206 8,984 27,322 25,810
General and administrative expenses ........ 8,067 7,901 23,896 23,707
Art and development costs .................. 2,322 2,486 7,145 7,462
Provision for doubtful accounts ............ 772 347 2,761 1,462
Restructuring charges ...................... 233 610 1,007 796
--------- --------- --------- ---------
Total operating expenses ............. 20,600 20,328 62,131 59,237
--------- --------- --------- ---------
Income from operations ............... 14,378 14,137 37,768 41,610
Interest expense, net ......................... 6,681 5,430 19,877 16,188
Gain on sale of available-for-sale securities . (1,022) (1,022)
Other expense (income), net ................... 12 (364) (45) (386)
--------- --------- --------- ---------
Income before income taxes and
minority interests ................ 8,707 9,071 18,958 25,808
Income tax expense ............................ 3,439 3,583 7,488 10,194
Minority interests ............................ 42 52 76 7
--------- --------- --------- ---------
Net income ........................... 5,226 5,436 11,394 15,607
Dividend on redeemable convertible
preferred stock ................... 102 95 299 280
--------- --------- --------- ---------
Net income applicable to common shares $ 5,124 $ 5,341 $ 11,095 $ 15,327
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Nine Months Ended September 30, 2003
(Dollars in thousands)
(Unaudited)
Unamortized
Common Restricted Notes Accumulated
Stock Additional Common Receivable Other
Common Par Paid-in Stock from Comprehensive
Shares Value Capital Awards Stockholders Deficit Loss Total
------ ----- ------- ------ ------------ ------- ---- -----
Balance at December 31, 2002 ...... 1,233.27 $ -- $ 14,814 $ (323) $ (638) $ (57,551) $(2,585) $(46,283)
Net income ........................ 11,394 11,394
Net change in cumulative
translation adjustment ....... 1,232 1,232
Change in fair value of
available-for-sale securities,
net of income taxes .......... 912 912
Reclassification adjustment for
available-for-sale securities
sold during the period, net of
income taxes .................. (618) (618)
Change in fair value of interest
rate swap and foreign
exchange contracts, net of
income taxes ................. 116 116
--------
Comprehensive income ...... 13,036
Exercise of stock options,
including tax
benefits of $79 .............. 6.65 910 910
Amortization of restricted
Common Stock awards .......... 129 129
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 expiration of
redemption feature ........... 13,597 6,000 19,597
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
officers ..................... (22.0)
Redeemable convertible
preferred stock dividend ..... (299) (299)
Accretion of interest income on
notes receivable from
stockholders ................. (31) (31)
-------- --------- -------- ------ ------ --------- ------- --------
Balance at September 30, 2003 ..... 1,217.92 $ -- $ 27,535 $ (194) $ (669) $ (39,789) $ (943) $(14,060)
======== ========= ======== ====== ====== ========= ======= ========
See accompanying notes to consolidated financial statements.
5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
-----------------
September 30,
-------------
2003 2002
---- ----
Cash flows from operating activities:
Net income ....................................................................... $ 11,394 $ 15,607
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 12,033 9,852
Amortization of deferred financing costs ..................................... 1,570 843
Amortization of restricted Common Stock awards ............................... 129 177
Provision for doubtful accounts .............................................. 2,761 1,462
Deferred income tax expense .................................................. 2,444 4,462
Gain on sale of available-for-sale securities ................................ (1,022)
Loss (gain) on disposal of property and equipment ............................ 118 (311)
Non-cash restructuring charges ............................................... 104
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable .......................................... (15,372) (13,530)
Decrease (increase) in inventories ....................................... 9,056 (9,311)
Decrease (increase) in prepaid expenses and other current assets ......... 970 (2,390)
(Decrease) increase in accounts payable, accrued expenses and income taxes
payable ............................................................ (6,112) 7,028
Other, net ............................................................... (297) (2,042)
-------- --------
Net cash provided by operating activities ................................ 17,776 11,847
Cash flows from investing activities:
Cash paid in connection with acquisition ......................................... (13,547)
Capital expenditures ............................................................. (10,081) (11,396)
Proceeds from sale of available-for-sale securities .............................. 1,443
Proceeds from disposal of property and equipment ................................. 198 515
-------- --------
Net cash used in investing activities .................................... (8,440) (24,428)
Cash flows from financing activities:
Proceeds from short-term obligations ............................................. 16,300
Repayment of loans, notes payable and long-term obligations ...................... (2,788) (2,535)
Proceeds from exercise of stock options .......................................... 831
Purchase of Common Stock from officers ........................................... (3,300)
Repayment of notes receivable from officers ...................................... 1,990
-------- --------
Net cash (used in) provided by financing activities ...................... (3,267) 13,765
Effect of exchange rate changes on cash and cash equivalents ........................ 950 (248)
-------- --------
Net increase in cash and cash equivalents ................................ 7,019 936
Cash and cash equivalents at beginning of period .................................... 2,400 1,016
-------- --------
Cash and cash equivalents at end of period .......................................... $ 9,419 $ 1,952
======== ========
Supplemental Disclosures:
Interest paid ............................................................ $ 14,451 $ 12,487
Income taxes paid ........................................................ $ 4,013 $ 5,851
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 July 2003, the Company purchased 6 shares of Common Stock from its
President at a price of $150 per share, for an aggregate cash purchase price
of $900. The President used a portion of the proceeds to repay his
outstanding loan balance of $402. The Company retired the 6 shares of Common
Stock.
In June 2003, the Company purchased 16 shares of Common Stock from the Chief
Executive Officer at a price of $150 per share, for an aggregate cash
purchase price $2,400. The Chief Executive Officer used a portion of the
proceeds to repay his outstanding loan balance of $1,588. The Company retired
the 16 shares of Common Stock.
In April 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
(a $12,600 increase in additional paid-in capital and a $6,000 decrease in
accumulated deficit). The former officer's right to put an 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 nine months ended September 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):
September 30, December 31,
2003 2002
-------- --------
Finished goods ..................................... $ 72,443 $ 80,783
Raw materials ...................................... 9,061 8,763
Work-in-process .................................... 6,365 7,722
-------- --------
87,869 97,268
Less: reserve for slow moving and obsolete inventory (3,035) (3,378)
-------- --------
$ 84,834 $ 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 nine months ended
September 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 rates 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 Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income ......................................................... $ 5,226 $ 5,436 $ 11,394 $ 15,607
Net change in cumulative translation adjustment .................... (44) (10) 1,232 945
Change in fair value of available-for-sale securities, net of income
taxes of $558 and $596, respectively ............................ 854 912
Reclassification adjustment for available-for-sale securities sold
during the period, net of income taxes of $(404) ................ (618) (618)
Change in fair value of the Company's interest rate swap
contract, net of income taxes of $90, $(225), $36 and $(415),
respectively .................................................... 138 (345) 55 (636)
Change in fair value of the Company's foreign exchange
contracts, net of income taxes of $173, $84, $40 and
$(104), respectively ............................................ 264 129 61 (159)
------- -------- -------- --------
$ 5,820 $ 5,210 $ 13,036 $ 15,757
======= ======== ======== ========
Accumulated other comprehensive loss consisted of the following
(dollars in thousands):
September 30, December 31,
2003 2002
------- -------
Cumulative translation adjustment ........................................... $ (243) $(1,475)
Unrealized gain on available-for-sale securities, net of income taxes of $192 294
Interest rate swap contract qualifying as a hedge, net of income taxes of
$(385) and $(421), respectively .......................................... (589) (644)
Foreign exchange contracts qualifying as hedges, net of income taxes
of $(265) and $(305), respectively ....................................... (405) (466)
------- -------
$ (943) $(2,585)
======= =======
NOTE 6 - GAIN ON SALE OF AVAILABLE-FOR-SALE SECURITIES
During the three months ended September 30, 2003, the Company sold a
portion of the common stock of a customer which it had received in connection
with the customer's reorganization in bankruptcy. The Company received net
proceeds of approximately $1.4 million and recognized a gain of approximately
$1.0 million.
NOTE 7 - CAPITAL STOCK
Under the terms of its 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 his disability, at a price determined by a market valuation, and 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. At September
30, 2003 and December 31, 2002, there were 58.30 and 196.92 shares,
respectively, of fully paid and vested Common Stock subject to such put
provisions. The shares are recorded as redeemable Common Stock, at their
estimated market value, with a corresponding adjustment to stockholders'
deficit.
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On January 10, 2003, an executive officer of a wholly-owned subsidiary and
stockholder terminated his employment with the Company and, on April 9, 2003,
exercised options to purchase 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 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 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 $997,000.
At September 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 3.00
shares of Restricted Stock outstanding at September 30, 2003 will vest in
December 2004. During the three and nine months ended September 30, 2003 and
2002, the Company recorded the amortization of Restricted Stock of $39,000,
$129,000, $59,000, and $177,000 respectively, as compensation expense, which is
included in general and administrative expenses in the Company's consolidated
statements of income.
At September 30, 2003 and December 31, 2002, the Company held notes
receivable from a former and current officer totaling $669,000 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%, respectively, 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 July 2003, the Company purchased 6 shares of Common Stock from its
President at a price of $150,000 per share, for an aggregate cost of $900,000.
The President used a portion of the proceeds to repay his outstanding loan
balance of $402,000. The Company retired the 6 shares of Common Stock.
In June 2003, the Company purchased 16 shares of Common Stock from its
Chief Executive Officer at a price of $150,000 per share, for an aggregate cost
of $2,400,000. The Chief Executive Officer used a portion of the proceeds to
repay his outstanding loan balance of $1,588,000. The Company retired the 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 options to purchase 25 shares of Common
Stock at $150,000 per share.
In February 2002, the Company issued 96.774 shares of its Common Stock,
valued at $155,000 per share, or a total of $15,000,000, 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
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Preferred Stock.
Each share of Series A Redeemable Convertible Preferred Stock is
convertible at the option of the holder, at any time, into one share of Common
Stock of the Company, $0.10 par value, subject to adjustment for the effects of
subsequent Common Stock splits or stock dividends.
The Series A Redeemable Convertible Preferred Stock is not redeemable on or
prior to March 30, 2004. To the extent the Company shall have funds legally
available to redeem these shares, the Company may redeem these shares, in whole
or, with the consent of the holders of a majority of the outstanding Series A
Redeemable 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 its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay dividends or distributions to its stockholders.
NOTE 8 - 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 SEPTEMBER 30, 2003
Sales to unaffiliated customers ................. $ 87,431 $ 15,789 $ 103,220
Sales between geographic areas .................. 5,450 $ (5,450) --
---------- ---------- -------- ---------
Net sales ....................................... $ 92,881 $ 15,789 $ (5,450) $ 103,220
========== ========== ======== =========
Income from operations .......................... $ 12,566 $ 1,546 $ 266 $ 14,378
========== ========== ========
Interest expense, net ........................... 6,681
Gain on sale of available-for-sale securities ... (1,022)
Other expense, net .............................. 12
---------
Income before income taxes and minority interests $ 8,707
=========
Long-lived assets, net at September 30, 2003 .... $ 172,013 $ 8,338 $ 180,351
========== ========== =========
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 2002
Sales to unaffiliated customers ................. $ 85,574 $ 14,652 $ 100,226
Sales between geographic areas .................. 6,489 $ (6,489) --
--------- -------- ---------- ---------
Net sales ....................................... $ 92,063 $ 14,652 $ (6,489) $ 100,226
========= ======== ========== =========
Income from operations .......................... $ 12,847 $ 1,137 $ 153 $ 14,137
========= ========= ==========
Interest expense, net ........................... 5,430
Other income, net ............................... (364)
---------
Income before income taxes and minority interests $ 9,071
=========
Long-lived assets, net at September 30, 2002 .... $ 177,693 $ 6,746 $ 184,439
========= ======== =========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
Sales to unaffiliated customers ................. $ 262,031 $ 42,029 $ 304,060
Sales between geographic areas .................. 15,063 $ (15,063) --
--------- -------- ---------- ---------
Net sales ....................................... $ 277,094 $ 42,029 $ (15,063) $ 304,060
========= ======== ========== =========
Income from operations .......................... $ 34,525 $ 2,326 $ 917 $ 37,768
========= ======== ==========
Interest expense, net ........................... 19,877
Gain on sale of available-for-sale securities ... (1,022)
Other income, net ............................... (45)
---------
Income before income taxes and minority interests $ 18,958
=========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Sales to unaffiliated customers ................. $ 250,406 $ 39,857 $ 290,263
Sales between geographic areas .................. 17,774 $ (17,774) --
--------- -------- ---------- ---------
Net sales ....................................... $ 268,180 $ 39,857 $ (17,774) $ 290,263
========= ======== ========== =========
Income from operations .......................... $ 39,310 $ 1,680 $ 620 $ 41,610
========= ======== ==========
Interest expense, net ........................... 16,188
Other income, net ............................... (386)
---------
Income before income taxes and minority interests $ 25,808
=========
NOTE 9 - 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 10 - 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"). FIN No. 46 provides 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. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for fiscal years that
begin after June 15, 2003. The Company is currently evaluating the effect the
adoption of the provisions of FIN 46 will have on its consolidated financial
condition or results of operations.
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 11-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):
Nine Months
Ended September 30,
-------------------
2002
----
Net sales................ $294,370
Net income............... $ 16,000
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 nine months ended September 30, 2003, the Company sold
$2,387,000 and $4,636,000 respectively, of metallic balloons and other party
goods to American Greetings. During the three and nine months ended September
30, 2002, the Company sold $978,000 and $4,494,000, respectively, of metallic
balloons and other party goods to American Greetings. Trade accounts receivable
from American Greetings at September 30, 2003 and December 31, 2002 were
$2,104,000 and $2,632,000, respectively.
NOTE 12 - RESTRUCTURING CHARGES
During the three and nine months ended September 30, 2003 and 2002, the
Company incurred charges of $233,000, $1,007,000, $610,000 and $796,000,
respectively, resulting from the consolidation of certain domestic and foreign
distribution operations and the integration of M&D Industries into its balloon
operations.
The consolidation of our domestic distribution operations may result in
additional restructuring charges in subsequent periods.
NOTE 13 - 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
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
connection with the issuance of options under the 1997 Stock Incentive Plan as
all options were granted with exercise prices equal to the estimated fair market
value of the Common Stock on the date of grant.
Had the Company determined stock-based compensation based on the fair value
of the options granted at the grant date, consistent with the method prescribed
under SFAS No. 123, the Company's net income would have been reduced to amounts
indicated below (dollars in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income:
As reported ...................................... $ 5,226 $ 5,436 $11,394 $15,607
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax of $69, $84,
$139, and $253, respectively ............... 106 129 213 388
------- ------- ------- -------
SFAS No. 123 pro forma net income ............. $ 5,120 $ 5,307 $11,181 $15,219
======= ======= ======= =======
NOTE 14 - 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 1.5% and 2.6% of the Company's consolidated net
sales for the three and nine months ended September 30, 2003, respectively, and
at September 30, 2003, the pre-petition, gross account receivable balance due
from this customer totaled approximately $4,200,000. The Company has charged a
total of $3.3 million to the provision for doubtful accounts, of which
approximately $1,500,000, $1,600,000 and $200,000 were charged during the fourth
quarter of 2002 and the second and third quarters of 2003, respectively. 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 15 - 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 Am-Source, LLC
o Anagram Eden Prairie Property Holdings LLC
o Anagram International Holdings, Inc.
o Anagram International, Inc.
o Anagram International, LLC
o JCS Realty Corp.
o M&D Industries, Inc.
o SSY Realty Corp.
o Trisar, Inc.
Non-guarantor subsidiaries ("Non-guarantors") include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan de Mexico, S.A. de C.V.
o Amscan Holdings Limited
o Amscan Partyartikel GmbH
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Svenska AB
o Anagram Espana, S.A.
o Anagram France S.C.S.
o Anagram International (Japan) Co., Ltd.
o Anagram Mexico S. de R.L. de C.V.
The following information presents consolidating balance sheets as of
September 30, 2003 and December 31, 2002, and the related consolidating
statements of income for the three and nine months ended June 30, 2003 and 2002
and consolidating statements of cash flows for the nine months ended September
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
September 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 8,970 $ 449 $ 9,419
Accounts receivable, net of allowances .................... 71,014 15,844 86,858
Inventories, net of allowances ............................ 74,076 11,648 $ (890) 84,834
Prepaid expenses and other current assets ................. 10,624 2,000 (211) 12,413
--------- --------- --------- ---------
Total current assets ................................... 164,684 29,941 (1,101) 193,524
Property, plant and equipment, net ........................... 96,482 1,623 98,105
Goodwill, net ................................................ 66,454 5,827 72,281
Other assets, net ............................................ 37,417 1,287 (28,739) 9,965
--------- --------- --------- ---------
Total assets ........................................... $ 365,037 $ 38,678 $ (29,840) $ 373,875
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable .......................................... $ 28,310 $ 1,810 $ 30,120
Accrued expenses .......................................... 16,455 6,786 23,241
Income taxes payable ...................................... 4,007 $ (204) 3,803
Current portion of long-term obligations .................. 3,016 117 3,133
--------- --------- --------- ---------
Total current liabilities .............................. 51,788 8,713 (204) 60,297
Long-term obligations, excluding current portion ............. 292,969 113 293,082
Deferred income tax liabilities .............................. 16,534 16,534
Other ........................................................ 1,219 17,279 (16,166) 2,332
--------- --------- --------- ---------
Total liabilities ...................................... 362,510 26,105 (16,370) 372,245
Redeemable convertible preferred stock ....................... 6,945 6,945
Redeemable Common Stock ...................................... 8,745 8,745
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock .............................................. 339 (339) --
Additional paid-in capital ................................ 27,535 658 (658) 27,535
Unamortized restricted Common Stock
awards ................................................. (194) (194)
Notes receivable from stockholders ........................ (669) (669)
(Deficit) retained earnings ............................... (38,892) 12,161 (13,058) (39,789)
Accumulated other comprehensive loss ...................... (943) (585) 585 (943)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .............. (13,163) 12,573 (13,470) (14,060)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ................ $ 365,037 $ 38,678 $ (29,840) $ 373,875
========= ========= ========= =========
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 ................................................. (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 September 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 92,881 $ 15,789 $ (5,450) $ 103,220
Cost of sales ................................. 62,861 10,797 (5,416) 68,242
--------- --------- --------- ---------
Gross profit ......................... 30,020 4,992 (34) 34,978
Operating expenses:
Selling expenses .......................... 7,578 1,628 9,206
General and administrative expenses ....... 6,729 1,638 (300) 8,067
Art and development costs ................. 2,322 2,322
Provision for doubtful accounts ........... 592 180 772
Restructuring charges ..................... 233 233
--------- --------- --------- ---------
Total operating expenses ............. 17,454 3,446 (300) 20,600
--------- --------- --------- ---------
Income from operations ............... 12,566 1,546 266 14,378
Interest expense, net ......................... 6,494 187 6,681
Gain on sale of available-for-sale securities . (1,022) (1,022)
Other (income) expense, net ................... (1,082) (23) 1,117 12
--------- --------- --------- ---------
Income before income taxes and
minority interests ................. 8,176 1,382 (851) 8,707
Income tax expense ............................ 2,929 523 (13) 3,439
Minority interests ............................ 42 42
--------- --------- --------- ---------
Net income ........................... 5,247 817 (838) 5,226
Dividend on redeemable convertible
preferred stock ................... 102 102
--------- --------- --------- ---------
Net income applicable to common shares $ 5,145 $ 817 $ (838) $ 5,124
========= ========= ========= =========
19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended September 30, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 92,063 $ 14,652 $ (6,489) $ 100,226
Cost of sales ................................. 61,932 10,231 (6,402) 65,761
--------- --------- --------- ---------
Gross profit ......................... 30,131 4,421 (87) 34,465
Operating expenses:
Selling expenses .......................... 7,366 1,618 8,984
General and administrative expenses ....... 6,643 1,498 (240) 7,901
Art and development costs ................. 2,486 2,486
Provision for doubtful accounts ........... 244 103 347
Restructuring charges ..................... 545 65 610
--------- --------- --------- ---------
Total operating expenses ............. 17,284 3,284 (240) 20,328
--------- --------- --------- ---------
Income from operations ............... 12,847 1,137 153 14,137
Interest expense, net ......................... 5,274 156 5,430
Other (income) expense, net ................... (1,199) (12) 847 (364)
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 8,772 993 (694) 9,071
Income tax expense ............................ 3,249 334 3,583
Minority interests ............................ 52 52
--------- --------- --------- ---------
Net income ........................... 5,523 607 (694) 5,436
Dividend requirement on redeemable
convertible preferred stock ....... 95 95
--------- --------- --------- ---------
Net income applicable to common shares $ 5,428 $ 607 $ (694) $ 5,341
========= ========= ========= =========
20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended September 30, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 277,094 $ 42,029 $ (15,063) $ 304,060
Cost of sales ................................. 189,805 29,436 (15,080) 204,161
--------- --------- --------- ---------
Gross profit ......................... 87,289 12,593 17 99,899
Operating expenses:
Selling expenses .......................... 22,649 4,673 27,322
General and administrative expenses ....... 19,710 5,086 (900) 23,896
Art and development costs ................. 7,145 7,145
Provision for doubtful accounts ........... 2,280 481 2,761
Restructuring charges ..................... 980 27 1,007
--------- --------- --------- ---------
Total operating expenses ............. 52,764 10,267 (900) 62,131
--------- --------- --------- ---------
Income from operations ............... 34,525 2,326 917 37,768
Interest expense, net ......................... 19,375 502 19,877
Gain on sale of available-for-sale securities . (1,022) (1,022)
Other (income) expense, net ................... (1,912) 4 1,863 (45)
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 18,084 1,820 (946) 18,958
Income tax expense ............................ 6,700 781 7 7,488
Minority interests ............................ 76 76
--------- --------- --------- ---------
Net income ........................... 11,384 963 (953) 11,394
Dividend on redeemable convertible
preferred stock ................... 299 299
--------- --------- --------- ---------
Net income applicable to common shares $ 11,085 $ 963 $ (953) $ 11,095
========= ========= ========= =========
21
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended September 30, 2002
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 268,180 $ 39,857 $ (17,774) $ 290,263
Cost of sales ................................. 178,791 28,299 (17,674) 189,416
--------- --------- --------- ---------
Gross profit ......................... 89,389 11,558 (100) 100,847
Operating expenses:
Selling expenses .......................... 21,300 4,510 25,810
General and administrative expenses ....... 19,954 4,473 (720) 23,707
Art and development costs ................. 7,462 7,462
Provision for doubtful accounts ........... 725 737 1,462
Restructuring charges ..................... 638 158 796
--------- --------- --------- ---------
Total operating expenses ............. 50,079 9,878 (720) 59,237
--------- --------- --------- ---------
Income from operations ............... 39,310 1,680 620 41,610
Interest expense, net ......................... 15,716 472 16,188
Other (income) expense, net ................... (1,808) (18) 1,440 (386)
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 25,402 1,226 (820) 25,808
Income tax expense ............................ 9,695 499 10,194
Minority interests ............................ 7 7
--------- --------- --------- ---------
Net income ........................... 15,707 720 (820) 15,607
Dividend requirement on redeemable
convertible preferred stock ....... 280 280
--------- --------- --------- ---------
Net income applicable to common shares $ 15,427 $ 720 $ (820) $ 15,327
========= ========= ========= =========
22
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2003
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ................................................. $ 11,384 $ 963 $ (953) $ 11,394
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 11,630 403 12,033
Amortization of deferred financing costs ................ 1,570 1,570
Amortization of restricted Common Stock awards .......... 129 129
Provision for doubtful accounts ......................... 2,280 481 2,761
Deferred income tax expense ............................. 2,444 2,444
Gain on sale of available-for-sale securities ........... (1,022) (1,022)
Loss on disposal of property and equipment .............. 110 8 118
Non-cash restructuring charges .......................... 104 104
Changes in operating assets and liabilities, net of
acquisition:
Increase in accounts receivable ................... (10,774) (4,598) (15,372)
Decrease (increase) in inventories ................ 9,583 (510) (17) 9,056
Decrease in prepaid expenses and other current
assets ......................................... 937 33 970
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable .............. (8,039) 1,920 7 (6,112)
Other, net ......................................... (1,830) 570 963 (297)
-------- -------- ------- --------
Net cash provided by (used in) operating activities 18,506 (730) -- 17,776
Cash flows from investing activities:
Capital expenditures ....................................... (9,444) (637) (10,081)
Proceeds from sale of available-for-sale securities ........ 1,443 1,443
Proceeds from disposal of property and equipment ........... 128 70 198
-------- -------- ------- --------
Net cash used in investing activities ............. (7,873) (567) -- (8,440)
Cash flows from financing activities:
Repayment of loans, notes payable and long-term
obligations ............................................ (2,655) (133) (2,788)
Proceeds from exercise of stock options .................... 831 831
Purchase of Common Stock from officers ..................... (3,300) (3,300)
Repayment of notes receivable from officers ................ 1,990 1,990
-------- -------- ------- --------
Net cash used in financing activities ............. (3,134) (133) -- (3,267)
Effect of exchange rate changes on cash and cash equivalents .. (12) 962 950
-------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents ............................. 7,487 (468) 7,019
Cash and cash equivalents at beginning of period .............. 1,483 917 2,400
-------- -------- ------- --------
Cash and cash equivalents at end of period .................... $ 8,970 $ 449 $ -- $ 9,419
======== ======== ======= ========
23
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2002
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income .................................................. $ 15,707 $ 720 $ (820) $ 15,607
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................ 9,557 295 9,852
Amortization of deferred financing costs ................. 843 843
Amortization of restricted Common Stock awards ........... 177 177
Provision for doubtful accounts .......................... 725 737 1,462
Deferred income tax expense .............................. 4,462 4,462
(Gain) loss on disposal of equipment ..................... (346) 35 (311)
Changes in operating assets and liabilities, net of
acquisition:
Increase in accounts receivable .................... (9,013) (4,517) (13,530)
(Increase) decrease in inventories ................. (7,494) (1,917) 100 (9,311)
Increase in prepaid expenses and other current
assets .......................................... (1,748) (642) (2,390)
Increase in accounts payable, accrued expenses
and income taxes payable ........................ 5,317 1,711 7,028
Other, net .......................................... (5,952) 3,190 720 (2,042)
-------- -------- ------- --------
Net cash provided by (used in) operating activities 12,235 (388) -- 11,847
Cash flows from investing activities:
Cash paid in connection with acquisition .................... (13,547) (13,547)
Capital expenditures ........................................ (11,129) (267) (11,396)
Proceeds from disposal of property and equipment ............ 481 34 515
-------- -------- ------- --------
Net cash used in investing activities .............. (24,195) (233) -- (24,428)
Cash flows from financing activities:
Proceeds from short-term obligations ........................ 16,300 16,300
Repayment of loans, notes payable and
long-term obligations ................................. (2,523) (12) (2,535)
-------- -------- ------- --------
Net cash provided by (used in) financing activities 13,777 (12) -- 13,765
Effect of exchange rate changes on cash and cash equivalents ... (671) 423 (248)
-------- -------- ------- --------
Net increase (decrease) in cash and cash equivalents 1,146 (210) 936
Cash and cash equivalents at beginning of period ............... 60 956 1,016
-------- -------- ------- --------
Cash and cash equivalents at end of period ..................... $ 1,206 $ 746 $ -- $ 1,952
======== ======== ======= ========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Percentage of Net Sales
- -----------------------
Three Months Ended
------------------
September 30,
-------------
2003 2002
------ ------
Net sales................................................... 100.0% 100.0%
Cost of sales............................................... 66.1 65.6
------ ------
Gross profit......................................... 33.9 34.4
Operating expenses:
Selling expenses........................................ 8.9 9.0
General and administrative expenses..................... 7.8 7.9
Art and development costs............................... 2.3 2.5
Provision for doubtful accounts......................... 0.7 0.3
Restructuring charges................................... 0.3 0.6
------ ------
Total operating expenses............................. 20.0 20.3
------ ------
Income from operations............................... 13.9 14.1
Interest expense, net....................................... 6.5 5.4
Gain on sale of available-for-sale securities............... (1.0)
Other income, net........................................... (0.4)
------ ------
Income before income taxes and minority interests.... 8.4 9.1
Income tax expense.......................................... 3.3 3.6
Minority interests.......................................... 0.1
------ ------
Net income........................................... 5.1% 5.4%
====== ======
Net sales of $103.2 million for the quarter ended September 30, 2003 were
$3.0 million higher than net sales for the quarter ended September 30, 2002.
During the third quarter of 2003, the Company's domestic sales of party goods,
including metallic balloons, were comparable to sales during the third quarter
of 2002. Domestic sales performance during the third quarter of 2003 continued
to be adversely affected by general economic conditions resulting in a weak
retail environment. Contract manufacturing during the third quarter increased by
18.3% over the third quarter of 2002. International net sales reported for the
three months ended September 30, 2003 were 7.8% higher as compared to the
corresponding period in 2002 primarily due to an increase in volume combined
with favorable foreign currency exchange fluctuations.
Gross profit margin for the quarter ended September 30, 2003, of 33.9% was
0.5% lower than during the quarter ended September 30, 2002. The decrease in
gross profit margin during the third quarter of 2003 reflects the increase in
contract manufacturing and the additional depreciation, amortization and
equipment rental costs associated with the new distribution facility that became
operational in the fourth quarter of 2002, partially offset by the operating
efficiencies from the transition to the new distribution facility.
Selling expenses of $9.2 million for the quarter ended September 30, 2003
were $0.2 million higher than in the corresponding period in 2002. However, as a
percent of sales, selling expenses were 8.9%, or 0.1% 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 $8.1 million for the quarter ended
September 30, 2003 were $0.2 million higher than the corresponding period in
2002. As a percentage of sales, general and administrative expenses were 7.8%
for the third quarter of 2003, or 0.1% lower than in the corresponding period in
2002. The net decrease in general and administrative expenses as a percentage of
sales principally reflects synergies realized from the consolidation of the
administrative functions of M&D Industries, Inc., ("M&D Industries") into the
Company's existing operations, partially offset by higher insurance and
occupancy costs.
25
Art and development costs of $2.3 million for the quarter ended September
30, 2003 were $0.2 million lower as compared to 2002, principally due to
synergies realized from the consolidation of M&D Industries' art and development
departments into the Company's existing operations. As a percentage of sales,
art and development costs were 2.3% for the third quarter of 2003 and 2.5% for
the third 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 an additional $0.2 million to the provision for
doubtful accounts during the third quarter of 2003. This customer accounted for
approximately 1.5% of the Company's consolidated net sales for the three months
ended September 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 September 30, 2003 and 2002, the Company
incurred restructuring charges of $0.2 million and $0.6 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
may result in additional restructuring charges in subsequent periods.
During the three months ended September 30, 2003, the Company sold a
portion of the common stock of a customer which it had received in connection
with the customer's reorganization in bankruptcy. The Company received net
proceeds of approximately $1.4 million and recognized a gain of approximately
$1.0 million.
Interest expense, net, of $6.7 million for the three months ended September
30, 2003 was $1.3 million higher than for the three months ended September 30,
2002, principally due to the impact of higher average borrowings and a higher
average effective interest rate (8.9% in 2003 versus 7.3% in 2002).
Income taxes for the third 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.
26
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Percentage of Net Sales
- -----------------------
Nine Months Ended September 30,
-------------------------------
2003 2002
------ ------
Net sales.................................................... 100.0% 100.0%
Cost of sales................................................ 67.1 65.3
------ ------
Gross profit.......................................... 32.9 34.7
Operating expenses:
Selling expenses......................................... 9.0 8.9
General and administrative expenses...................... 7.9 8.1
Art and development costs................................ 2.4 2.6
Provision for doubtful accounts.......................... 0.9 0.5
Restructuring charges.................................... 0.3 0.3
------ ------
Total operating expenses.............................. 20.5 20.4
------ ------
Income from operations................................ 12.4 14.3
Interest expense, net........................................ 6.5 5.5
Gain on sale of available-for-sale securities................ (0.3)
Other income, net............................................ (0.1)
------ ------
Income before income taxes and minority interests..... 6.2 8.9
Income tax expense........................................... 2.5 3.5
Minority interests...........................................
------ ------
Net income............................................ 3.7% 5.4%
====== ======
Net sales of $304.1 million for the nine months ended September 30, 2003
were $13.8 million higher than net sales for the nine months ended September 30,
2002. During the nine months ended September 30, 2003, the Company's domestic
sales of party goods, including metallic balloons, grew by 3.6% over the
corresponding period in 2002. Domestic sales performance during the nine months
ended September 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 nine months ended
September 30, 2003 increased by 15.6% over the corresponding period in 2002.
International net sales reported for the nine months ended September 30, 2003
increased by 5.4%, principally as a result of favorable foreign currency
exchange fluctuations partially offset by a small decrease in volume.
Gross profit margin for the nine months ended September 30, 2003, of 32.9%
was 1.8% lower than during the nine months ended September 30, 2002. Gross
profit margin for the nine months ended September 30, 2003 reflects the impact
of product sales and customer mix (particularly solid color tableware and
contract manufacturing) and additional depreciation and amortization and
equipment rental costs associated with the new distribution facility that became
operational in the fourth quarter of 2002. Gross profit margin for the nine
months ended September 30, 2003 also reflects additional production costs
incurred during the first and second quarters of 2003 in connection with the
integration of the M&D Industries into the Company's 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, partially
offset by operating efficiencies from the transition to new distribution
facility.
Selling expenses of $27.3 million for the nine months ended September 30,
2003 were $1.5 million higher than in the corresponding period in 2002
principally due to the inclusion of the operating results of M&D Industries for
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 8.9% to 9.0%.
General and administrative expenses of $23.9 million for the nine months
ended September 30, 2003 were relatively consistent with the corresponding
period in 2002 as increased insurance and occupancy costs were offset
27
by synergies realized from the consolidation of M&D Industries' administrative
functions into the Company's existing operations. As a percentage of sales,
general and administrative expenses decreased by 0.2% to 7.9%.
Art and development costs of $7.1 million for the nine months ended
September 30, 2003 were $0.3 million lower than for the corresponding period in
2002, principally due to synergies realized from the integration of M&D
Industries' art and development departments into the Company's existing
operations. As a percentage of sales, art and development costs were 2.4% for
the nine months ended September 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 $1.8 million to the provision for doubtful accounts
during the nine months ended September 30, 2003. This customer accounted for
approximately 2.6% of the Company's consolidated net sales for the nine months
ended September 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 nine months ended September 30, 2003 and 2002, the Company
incurred restructuring charges of $1.0 million and $0.8 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
may result in additional restructuring charges in subsequent periods.
During the nine months ended September 30, 2003, the Company sold a portion
of the common stock of a customer which it had received in connection with the
customer's reorganization in bankruptcy. The Company received net proceeds of
approximately $1.4 million and recognized a gain of $1.0 million.
Interest expense, net, of $19.9 million for the nine months ended September
30, 2003 was $3.7 million higher than in the corresponding period in 2002 and
reflects the impact of higher average borrowings and a higher average effective
interest rate (8.7% in 2003 versus 7.3% in 2002).
Income taxes for the nine months ended September 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.
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 September 30, 2003, the Term Loan, net of unamortized discount, was
$167,347,000 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.
28
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 September
30, 2003, the Company had no borrowings under the Revolver. Standby letters of
credit totaling $6.9 million were outstanding and the Company had borrowing
capacity of approximately $23.1 million under the terms of the Revolver at
September 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 September 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
September 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 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 3.31%, 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
September 30, 2003, 44.94 shares of Series A Redeemable Convertible Preferred
Stock were issued and outstanding.
29
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 nine months ended
September 30, 2003 and 2002, totaled $9.3 million and $8.0 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 September 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.
Cash Flow Data - Nine Months Ended September 30, 2003 Compared to Nine Months
Ended September 30, 2002
- --------------------------------------------------------------------------------
Net cash provided by operating activities during the nine months ended
September 30, 2003 and 2002, totaled $17.8 million and $11.8 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the nine months ended September 30, 2003
and 2002, was $29.6 million and $32.1 million, respectively. Changes in
operating assets and liabilities, net of acquisition for the nine months ended
September 30, 2003 and 2002, resulted in the use of cash of $11.8 million and
$20.3 million, respectively. The reduction in the use of cash in 2003
principally reflects the Company's efforts to reduce its investment in working
capital.
Net cash used in investing activities during the nine months ended
September 30, 2003 of $8.4 million consisted principally of additional
investments in distribution and manufacturing equipment and other assets,
partially offset by proceeds received from the disposal of equipment and the
sale of a portion of the Company's investment in the common stock of a customer
received in connection with the customer's reorganization in bankruptcy. Net
cash used in investing activities during the nine months ended September 30,
2002 of $24.4 million consisted of $13.5 million relating to the acquisition of
M&D Balloons and $11.4 million of costs associated with the new domestic
distribution facility as well as additional investments in data processing and
manufacturing equipment, partially offset by proceeds from disposal of property
and equipment.
During the nine months ended September 30, 2003, net cash used in financing
activities of $3.3 million consisted of the scheduled payments on the Term Loan
and other long-term obligations and the purchase of Common Stock from both the
Company's Chief Executive Officer and President, partially offset by proceeds
from the exercise of stock options and the repayment of the notes receivable by
both the Chief Executive Officer and
30
President. During the comparable period in 2002, net cash provided by financing
activities of $13.8 million consisted of proceeds from short-term borrowings,
including $13.5 million used to finance the acquisition of M&D Balloons,
partially offset by the scheduled payments of the Term Loan and other long-term
obligations.
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 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 September 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 and
minority interest would have decreased, by $0.9 million in each of the periods.
If market interest rates for our variable rate indebtedness averaged 2% more
than the interest rate actually paid for the nine months ended September 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 and minority interest would have decreased, by $2.6 million and $2.5
million, respectively. These amounts are determined by considering the impact of
the hypothetical interest rates on our borrowings and interest
31
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 $0.5 million and $0.4
million, for the three months ended September 30, 2003 and 2002, respectively. A
uniform 10% strengthening in the value of the U.S. dollar relative to the
currencies in which our foreign sales are denominated would have resulted in a
decrease in gross profit of $1.3 million and $1.2 million for the nine months
ended September 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 that it files or submits under the Securities Exchange
Act is accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation described in the
preceding paragraph that occurred during the Company's fiscal quarter ended
September 30, 2003 that have materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
32
PART II
-------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10 (a) Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended to June
2003.
10 (b) Employment Agreement, dated as of June 19, 2003, by and among the
Company and Gerald C. Rittenberg.
10 (c) Employment Agreement, dated as of June 19, 2003, by and among the
Company and James M. Harrison.
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.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
-----------------------
Michael A. Correale
Chief Financial Officer
(on behalf of the registrant and as
Date: November 14, 2003 principal financial and accounting
----------------- officer)
EXHIBIT INDEX
No. Description
--- -----------
10 (a) Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended to June
2003.
10 (b) Employment Agreement, dated as of June 19, 2003, by and among the
Company and Gerald C. Rittenberg.
10 (c) Employment Agreement, dated as of June 19, 2003, by and among the
Company and James M. Harrison.
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.