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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission file number 000-21827
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (assuming for purposes of this calculation, without conceding, that
all executive officers and directors are "affiliates") at June 30, 2003, the
last business day of the registrant's most recently completed second fiscal
quarter, was $21,007,050.
As of March 26, 2004, 1,217.92 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 Business....................................................................... 3
ITEM 2 Properties..................................................................... 8
ITEM 3 Legal Proceedings.............................................................. 9
ITEM 4 Submission of Matters to a Vote of Security Holders............................ 9
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities........................... 9
ITEM 6 Selected Consolidated Financial Data........................................... 10
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 13
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk..................... 24
ITEM 8 Financial Statements and Supplementary Data.................................... 25
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 25
ITEM 9A Controls and Procedures........................................................ 25
PART III
ITEM 10 Directors and Executive Officers of the Registrant............................. 25
ITEM 11 Executive Compensation ........................................................ 27
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters................................................. 31
ITEM 13 Certain Relationships and Related Transactions................................. 33
ITEM 14 Principal Accountant Fees and Services......................................... 34
PART IV
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 35
Signatures..................................................................... 39
2
PART I
ITEM 1. BUSINESS
Amscan Holdings, Inc. ("Amscan" or the "Company") designs,
manufactures, contracts for manufacture and distributes party goods, including
paper and plastic tableware, metallic balloons, accessories, novelties, gifts
and stationery. We believe we are one of the largest manufacturers and
distributors of decorative party goods in the United States and the largest
manufacturer of metallic balloons in the world. We offer one of the broadest and
deepest product lines in the industry. Our gift and stationery product lines
encompass home, baby and wedding products for general gift giving or
self-purchase. We sell our products through party superstores, other party goods
retailers, independent card and gift stores, and other retailers and
distributors throughout the world, including North America, South America,
Europe, Asia and Australia. We believe we are the leading supplier to party
superstores in the United States and we have developed a specialty sales effort
to focus on card and gift stores and other independent retailers. We manufacture
items which represented approximately 65% of 2003 sales and purchase the
remainder from third-party manufacturers, many of whom are located in Asia.
We currently offer over 400 party ensembles, which range from
approximately 30 to 150 design-coordinated items spanning tableware,
accessories, novelties, decorations and gifts. The breadth of these ensembles
enables retailers to encourage additional sales for a single occasion.
We design, manufacture and market party goods for a wide variety of
occasions including seasonal and religious holidays, special events and themed
celebrations. Our seasonal and religious ensembles enhance holiday celebrations
throughout the year including New Year's, Valentine's Day, St. Patrick's Day,
Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and
Christmas. Our special event ensembles include birthdays, christenings, first
communions, bar mitzvahs, confirmations, graduations, bridal and baby showers
and anniversaries. Our theme-oriented ensembles include Hawaiian Luaus, Mardi
Gras, Fifties Rock-and-Roll Parties, Summer Fun and Patriotic. Approximately 80%
of our sales consist of products designed for non-seasonal occasions.
In addition to our long-standing relationships with independent card
and party retailers, we are a leading supplier to the party superstore
distribution channel. Party superstores provide consumers with a one-stop source
for all of their party needs, generally at discounted prices. Our sales to party
superstores represented approximately 41% of total sales in 2003 and have grown
at a 13.9% compound annual growth rate during the past five years. With our
products occupying an increasing share of party superstore shelf space in many
product categories, we believe we are well positioned to take advantage of
continued growth in the party superstore distribution channel.
To strengthen our position as a leader in the party goods industry and
to broaden our product line, we acquired Anagram International Inc. and certain
related companies ("Anagram") in 1998 and M&D Balloons, Inc. (since renamed M&D
Industries, Inc. ("M&D Industries")) in 2002, both of which manufacture metallic
balloons. We have leveraged their strong presence in the grocery, gift and
floral distribution channels to bring additional party goods to these markets.
Beginning in 1999, we realigned our sales force to create a specialty
sales effort which focuses more closely on card and gift stores and other
independent retailers. At December 31, 2003, the specialty sales force consisted
of 112 sales professionals. In order to further leverage our design, marketing
and distribution capabilities, we introduced an extensive gift line encompassing
home, wedding and baby products principally to service the independent retail
distribution channel's need for additional product lines and provide these
retailers with the opportunity to "one-stop shop."
3
SUMMARY FINANCIAL INFORMATION ABOUT THE COMPANY
Information about the Company's revenues, operating profits and assets
for the last five years is included in this report in Item 6, "Selected
Consolidated Financial Data." Despite a concentration of holidays in the fourth
quarter of the year, as a result of our expansive product lines and customer
base and increased promotional activities, the impact of seasonality on our
quarterly results of operations in recent years has been limited. Promotional
activities, including special dating terms, particularly with respect to
Halloween and Christmas products sold in the third quarter, and the introduction
of our new everyday products and designs during the fourth quarter result in
higher accounts receivables and inventory balances and higher interest costs to
support these balances.
The Company does business in the United States and in other geographic
areas of the world. Information about the Company's revenues, operating profits
and assets relating to geographic areas outside the United States for each of
the years in the three-year period ended December 31, 2003, is included in Note
16 to the Company's 2003 Consolidated Financial Statements which are included in
this report beginning on page F-2.
OUR STRATEGY
Our objective is to be the primary source for consumers' party goods
requirements, including a recognized supplier of quality stationery and gift
items. The key elements of our strategy are as follows:
- BUILD UPON OUR POSITION AS A LEADING PROVIDER TO PARTY GOODS RETAILERS.
We continue to offer convenient "one-stop shopping" for both large
party superstores and smaller party goods retailers. We seek to grow
our sales to existing stores by increasing our share of sales volume
and shelf space, continuing to develop innovative new products and by
helping retailers promote coordinated ensembles that boost average
purchase volume per consumer through "add-on" or impulse purchases.
Given our position in the party superstore distribution channel and the
strength of our relationships with major chains, we expect our sales
will continue to grow as new party superstores are opened.
- INCREASE PENETRATION IN INDEPENDENT RETAIL DISTRIBUTION CHANNEL. We
believe there is a significant opportunity to expand our sales to card
and gift stores and other independent retailers. We have made
significant investments by adding management and expanding our customer
service and marketing infrastructure to support the existing specialty
sales effort as well as additional sales representatives that we expect
to hire. As our existing sales representatives become more seasoned and
productive, and as we add new sales representatives, we expect to
increase sales and profitability from this distribution channel as
sales growth is achieved with relatively fixed support costs.
- CAPITALIZE ON INVESTMENTS IN INFRASTRUCTURE. We intend to increase our
sales and profitability by leveraging the significant investments that
we have made in our infrastructure. In addition to developing our
specialty sales effort and expanding our gift product offerings, we
invested approximately $30 million to construct a new 544,000 square
foot distribution facility that was completed in the fourth quarter of
2002 and has enabled us to consolidate further our distribution
capabilities. We also intend to leverage our relationships with Asian
suppliers, utilizing them as a direct source for customers with the
internal infrastructure, global logistics and distribution capabilities
to deliver products to their retail outlets. During 2003 we opened
product showrooms in both New York and Hong Kong to support this
program. We expect these changes will enable us to support
substantially greater sales volume over the long term. We also expect
to realize additional savings from the recent integration of M&D
Industries.
- EXPAND INTERNATIONAL PRESENCE. We believe there is an opportunity to
expand our international business, which represented approximately 14%
of our sales in each of the years in the three-year period ended
December 31, 2003. We currently have a presence in Mexico, Canada,
Europe and Asia. We have our own sales force in Mexico, Canada, and the
United Kingdom, and operate through third-party sales representatives
elsewhere. The market for decorative party goods outside the U.S. is
less mature due to lower consumer awareness of party products and less
developed retail
4
distribution channels. Our strategy is to grow our international sales
by broadening our distribution network, increasing accessorization and
customization of our products to local tastes and holidays and
continuing to deepen retail penetration. In December 2003, we acquired
the balloon assets of a competitor, in exchange for 50.1% of the common
stock of our wholly-owned metallic balloon distribution subsidiary
located in Mexico, thereby creating a joint venture to distribute
certain metallic balloons principally in Mexico and Latin America.
- CONTINUED GROWTH THROUGH TARGETED ACQUISITIONS. We believe that there
will be from time to time opportunities to make acquisitions of
complementary businesses. Through such businesses, we can leverage our
existing marketing, distribution and production capabilities, expand
our presence in the various retail distribution channels, further
broaden and deepen our product lines and increase our penetration in
international markets.
INNOVATIVE PRODUCT DEVELOPMENT AND DESIGN CAPABILITIES
Our 119 person in-house design staff continuously develops fresh,
innovative and contemporary product designs and concepts. Our continued
investment in art and design results in a steady supply of fresh ideas and the
creation of complex, unique ensembles that appeal to consumers. In 2003, we
introduced over 5,000 new products and 42 new ensembles. Our proprietary designs
help us keep our products differentiated from the competition.
PARTY PRODUCT LINES
The percentage of sales for each product line for 2003, 2002 and 2001
are set forth in the following table:
2003 2002 2001
----- ----- -----
Party Goods................ 65% 65% 69%
Metallic Balloons.......... 24 23 21
Stationery................. 8 7 7
Gift....................... 3 5 3
---- ---- ----
100% 100% 100%
==== ==== ====
The following table sets forth the principal products in each of the
product lines, excluding metallic balloons:
PARTY GOODS STATIONERY GIFT
----------- ---------- ----
Decorative and Solid Color Baby and Wedding Memory Ceramic Giftware
Tableware Books Decorative Candles
Candles Decorative Tissues Decorative Frames
Cascades and Centerpieces Gift Wrap, Bows and Bags Mugs
Crepe Invitations, Notes and Plush Toys
Cutouts Stationery Wedding Accessories
Flags and Banners Photograph Albums and Cake Tops
Guest Towels Ribbons
Latex Balloons Stickers and Confetti
Party Favors
Party Hats
Pinatas
Our products span a wide range of lifestyle events from age-specific
birthdays to theme parties and sporting events, as well as holidays such as
Halloween and New Year's. Approximately 80% of our sales consist of items
designed for non-seasonal occasions, with the remaining 20% comprised of items
used for holidays and events throughout the year. Our product offerings cover
the following:
5
SEASONAL THEMES EVERYDAY
- ---------------- ------------------ ------------
New Year's Card Night Birthdays
Valentine's Day Fiesta Graduations
St. Patrick's Day Fifties Rock and Roll Weddings
Easter Hawaiian Luau Anniversaries
Passover Mardi Gras Showers
Fourth of July Masquerade First Communions
Halloween Patriotic Confirmations
Thanksgiving Religious Retirements
Hanukkah Sports Christenings
Christmas Summer Fun Bar Mitzvahs
Western
MANUFACTURED PRODUCTS
Our vertically integrated manufacturing capability (i.e., our ability
to perform each of the steps in the process of converting raw materials into our
finished products) enables us to control costs, monitor product quality and
manage inventory investment better and provide more efficient order fulfillment.
We manufacture items representing approximately 65% of our 2003 sales. Our
facilities in New York, Kentucky, Rhode Island, Minnesota and Mexico are highly
automated and produce paper and plastic plates and cups, napkins, metallic
balloons and other party and novelty items. State-of-the art printing, forming,
folding and packaging equipment support these manufacturing operations. Given
our size and sales volume, we are generally able to operate our manufacturing
equipment on the basis of at least two shifts per day thus lowering production
costs per unit. In addition, we manufacture products for third parties, which
allows us to maintain a satisfactory level of equipment utilization.
PURCHASED PRODUCTS
We purchase products created and designed by us, representing
approximately 35% of sales in 2003, from independently-owned manufacturers, many
of whom are located in Asia and with whom we have long-standing relationships.
We have relationships of over 15 years with our two largest suppliers. We
believe that the quality and price of the products manufactured by these
suppliers provide a significant competitive advantage. Our business, however, is
not dependent upon any single source of supply for these products.
RAW MATERIALS
The principal raw materials used in manufacturing our products are
paper and petroleum-based resin. While we currently purchase such raw material
from a relatively small number of sources, paper and resin are available from
numerous sources. Therefore, we believe our current suppliers could be replaced
without adversely affecting our manufacturing operations in any material
respect.
SALES AND MARKETING
Our principal sales and marketing efforts are conducted through a
domestic direct employee sales force of approximately 144 professionals
servicing over 40,000 retail accounts. Included in this sales force are
approximately 32 seasoned sales professionals who service the party superstore
and party specialty retailer distribution channel and who, on average, have been
affiliated with us for over 9 years. In addition to the employee sales team, a
select group of manufacturers' representatives handle specific account
situations. Employees of subsidiaries outside the United States generally
service international customers.
To focus more closely on the needs of the independent retail
distribution channel, we utilize a specialty sales force which currently totals
approximately 112 sales professionals. Our specialty sales force is unique in
the party goods industry in its ability to offer both gift products and a
comprehensive line of decorative party goods and accessories. Anagram and M&D
Industries utilize a group of approximately 40 independent distributors to bring
their metallic balloons to the grocery, gift and floral markets, as well as to
our party superstore and specialty retailer customers.
6
Our practice of including party goods retailers in all facets of our
product development is a key element of our sales and marketing efforts. We
target important consumer preferences by integrating our own market research
with the input of party goods retailers in the creation of our designs and
products. In addition, our sales force assists customers in the actual set-up
and layout of displays of our products and, from time to time, provides
customers with promotional displays.
To support our sales and marketing efforts, we produce four main
decorative party product catalogues annually (three catalogues for seasonal
products and one catalogue for everyday products), with additional catalogues to
market our metallic balloons and gift and stationery products. We have also
developed a website which displays and describes our product assortment and
capabilities. This website enables our key customers to access real time
information regarding the status of existing orders and stock availability and
to place new orders. In the future, we plan to utilize this website as a vital
marketing tool, providing us with the ability to announce special product
promotions and other information in an expeditious manner and to make the
website available to all of our customers.
DISTRIBUTION AND SYSTEMS
We ship our products directly to customers throughout the United States
and Canada from distribution facilities that employ computer assisted systems.
Our electronic-order entry and information systems allow us to manage our
inventory with minimal waste, achieve average fill rates in excess of 90% and
provide quick order turnaround times of generally between 24 to 48 hours.
Our distribution facilities for paper party items are principally
located in New York; represent more than 1,000,000 square feet in the aggregate
and include a new 544,000 square foot facility which became fully operational
during the fourth quarter of 2002. We distribute our metallic balloons
domestically from facilities in Minnesota and New York. Products for markets
outside the United States are also shipped from our distribution facilities in
Mexico, United Kingdom and Australia.
CUSTOMERS
Our customers are principally party superstores, other party goods
retailers, independent card and gift retailers and other distributors. We have
also expanded our presence in the gift shop, supermarket and other smaller
independent retail distribution channels. In the aggregate, we supply more than
40,000 retail outlets both domestically and internationally.
We have a diverse customer base with only one customer, Party City, the
nation's largest party goods retailer, accounting for more than 10% of our sales
in 2003. For each of the years ended December 31, 2003, 2002 and 2001, sales to
Party City's corporate-owned and operated stores represented 12%, 13%, and 13%
of consolidated net sales, respectively. For the years ended December 31, 2003,
2002 and 2001, sales to Party City's franchise-owned and operated stores
represented 13%, 14% and 15% of consolidated net sales, respectively.
Franchisees are financially independent from Party City and diversify our credit
exposure.
COMPETITION
We compete on the basis of diversity and quality of our product
designs, breadth of product line, product availability, price, reputation and
customer service. Although we have many competitors with respect to one or more
of our products, we believe that there are few competitors who manufacture and
distribute products with the complexity of design and breadth of product lines
that we do. Furthermore, our design and manufacturing processes create
efficiencies in manufacturing that few of our competitors achieve in the
production of numerous coordinated products in multiple design types.
Competitors include smaller independent specialty manufacturers, as
well as divisions or subsidiaries of large companies with greater financial and
other resources than ourselves. Certain of these competitors control various
product licenses for widely recognized images, such as cartoon or motion picture
characters, which could provide them with a competitive advantage. However,
through the acquisitions of Anagram and
7
M&D Industries, we have acquired a strong portfolio of character licenses for
use in the design and production of our metallic balloons.
COPYRIGHTS
We own copyrights on the designs we create and use on our products and
trademarks on the words and designs used on or in connection with our products.
It is our practice to register our copyrights with the United States Copyright
Office to the extent we deem reasonable. We do not believe that the loss of
copyrights or trademarks with respect to any particular product or products
would have a material adverse effect on our business. We hold over 150 licenses,
allowing us to use various cartoon and other characters and designs principally
on our metallic balloons. None of these licenses is individually material to our
aggregate business and we do not incur any material licensing expenses.
EMPLOYEES
As of December 31, 2003, the Company had approximately 1,900 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Elmsford, New York
and conducts its principal design, manufacturing and distribution operations at
the following facilities:
OWNED OR LEASED
LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE)
- ------------------------- ---------------------------------- ------------------- ------------------------
Elmsford, New York Executive Offices; showrooms; 109,000 square feet Leased (expiration date:
design and art production of party December 31, 2007)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 2006)
Providence, Rhode Island Manufacture and distribution 277,700 square feet Leased (expiration date:
of plastic plates, cups and bowls April 26, 2006)
Louisville, Kentucky Manufacture and distribution 189,000 square feet Leased (expiration date:
of paper plates March 31, 2010)
Newburgh, New York Manufacture of paper napkins 53,000 square feet Leased (expiration date:
and cups May 31, 2008)
Eden Prairie, Minnesota Manufacture and distribution 115,600 square feet Owned
of balloons and accessories
Tijuana, Mexico Manufacture and distribution 75,000 square feet Leased (expiration date:
of party products May 16, 2007)
Chester, New York (1) Distribution of decorative party 287,000 square feet Owned
products
Chester, New York (2) Distribution of decorative party 544,000 square feet Owned
and gift products
Goshen, New York Warehousing of decorative 130,000 square feet Leased (expiration date:
party products October 31, 2006)
Milton Keynes, England Distribution of party products 110,000 square feet Leased (expiration date:
throughout United Kingdom June 30, 2017)
and Europe
Chanhassen, Minnesota Distribution of balloons and 62,200 square feet Leased (expiration date:
accessories October 14, 2004)
(1) Property subject to a ten-year mortgage securing a loan in the original
principal amount of $5.9
8
million and bearing interest at a rate of 8.51%. The loan matures in
September 2004. The principal amount outstanding as of December 31,
2003 was approximately $445,000.
(2) Property subject to first and second lien mortgage loans 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, we have utilized an interest rate swap agreement to
effectively fix the loan rate at 8.40% for the term of the loan. The
second lien mortgage note bears interest at a rate of 3.31%, subject to
change under certain conditions. Both notes are for a term of 96 months
and require monthly payments based on a 180-month amortization period
with balloon payments upon maturity in January 2010. At December 31,
2003, the principal amounts outstanding under the first and second lien
mortgage notes were approximately $8.7 million and $9.0 million,
respectively.
Additionally, we maintain smaller distribution facilities in Australia,
Canada and Mexico. We also maintain sales offices in Australia, Canada, Hong
Kong and Japan and showrooms in New York, California, Georgia, Texas, Canada and
Hong Kong.
We believe that our properties have been adequately maintained, are in
generally good condition and are suitable for our business as presently
conducted. We believe our existing facilities provide sufficient production
capacity for our present needs and for our anticipated needs in the foreseeable
future. To the extent such capacity is not needed for the manufacture of our
products, we generally use such capacity for the manufacture of products for
others pursuant to terminable agreements. All properties generally are used on a
basis of two shifts per day. We also believe that upon the expiration of our
current leases, we will be able either to secure renewal terms or to enter into
leases for alternative locations at market terms.
ITEM 3. LEGAL PROCEEDINGS
We are a party to certain claims and litigation in the ordinary course
of business. We do not believe any of these proceedings will have, individually
or in the aggregate, a material adverse effect on our financial condition or
future results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no public trading market for the Company Common Stock.
As of the close of business on March 26, 2004, there were 27 holders of
record of the Company Common Stock.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock ("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. 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. See Note 14 to the Company's
9
2003 Consolidated Financial Statements which are included in this report
beginning on page F-2.
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 cash dividends or distributions to its stockholders.
EQUITY COMPENSATION PLAN INFORMATION
(c)
Number of securities
(a) (b) remaining available for
Number of securities to be Weighted - average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------------- ------------------- ---------------------------
Equity compensation plans
approved by security holders 186.485 $113,715 13.515
Equity compensation plans not
approved by security holders - - -
------- -------- ------
Total 186.485 $113,715 13.515
======= ======== ======
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Income Data," and "Balance Sheet Data" as of the end of
and for each of the years in the five-year period ended December 31, 2003, are
derived from the consolidated financial statements of Amscan Holdings, Inc. The
consolidated financial statements as of December 31, 2003 and 2002 and for each
of the years in the three-year period ended December 31, 2003 and the report
thereon, are included in this report under Item 8, "Financial Statements and
Supplementary Data." The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
10
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
STATEMENT OF INCOME DATA:
Net sales .................................................... $ 402,816 $ 385,603 $ 345,183 $ 323,484 $ 304,892
Cost of sales ................................................ 269,125 252,980 225,036 206,872 194,632
--------- --------- --------- --------- ---------
Gross profit ................................................. 133,691 132,623 120,147 116,612 110,260
Selling expenses ............................................. 36,515 34,619 31,414 28,578 23,235
General and administrative expenses .......................... 31,925 32,056 33,317 31,958 30,694
Provision for doubtful accounts .............................. 2,588 3,008 3,758 7,133 2,906
Art and development costs .................................... 9,395 10,301 8,772 8,453 8,650
Write-off of deferred financing and IPO-related costs (1) .... 2,261
Restructuring charges (2) .................................... 1,007 1,663 500 995
--------- --------- --------- --------- ---------
Income from operations ....................................... 52,261 48,715 42,886 39,990 43,780
Interest expense, net ........................................ 26,368 21,792 24,069 26,355 26,365
Gain on sale of available-for-sale securities (3) ............ (1,486)
Other expense (income), net .................................. 52 (311) 24 96 35
--------- --------- --------- --------- ---------
Income before income taxes and minority interests ............ 27,327 27,234 18,793 13,539 17,380
Income tax expense ........................................... 10,065 10,757 7,423 5,348 7,100
Minority interests ........................................... 99 12 68 75 73
--------- --------- --------- --------- ---------
Net income ................................................... 17,163 16,465 11,302 8,116 10,207
Dividend on redeemable convertible preferred stock ........... 399 376 270
--------- --------- --------- --------- ---------
Net income applicable to common shares ....................... $ 16,764 $ 16,089 $ 11,032 $ 8,116 $ 10,207
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Gross margin percentage ...................................... 33.2% 34.4% 34.8% 36.0% 36.2%
Capital expenditures, including assets under capital leases .. $ 12,668 $ 17,765 $ 37,623 $ 18,576 $ 12,283
Depreciation and amortization (4) ............................ 16,119 13,962 15,468 14,487 12,931
Ratio of earnings to fixed charges (5) ....................... 1.9x 2.0x 1.6x 1.4x 1.6x
AT DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
BALANCE SHEET DATA:
Working capital .............................................. $ 120,559 $ 119,256 $ 96,713 $ 83,760 $ 82,228
Total assets ................................................. 382,102 372,497 310,474 280,627 263,487
Short-term obligations (6) ................................... $ 23,237 $ 3,220 $ 4,155 $ 14,089 $ 8,250
Long-term obligations ........................................ 272,272 295,420 278,443 261,815 266,891
------- --------- --------- --------- ---------
Total obligations ............................................ $ 295,509 $ 298,640 $ 282,598 $ 275,904 $ 275,141
======== ======== ======== ======== ========
Redeemable convertible preferred stock (7) ................... $ 7,045 $ 6,646 $ 6,270
Redeemable Common Stock (8) .................................. 9,498 30,523 29,949 $ 28,768 $ 23,582
Stockholders' deficit (8) .................................... (8,619) (46,283) (77,305) (86,881) (88,529)
(1) During the fourth quarter of 2002, we amended and restated our
credit facility with various lenders which resulted in a $1.5
million write-off of deferred financing costs associated with
the facility. Additionally, during the fourth quarter of 2002,
we decided not to pursue an initial public offering ("IPO") of
shares of our Common Stock given valuations available in the
equity markets at that time, which resulted in a $0.8 million
write-off of costs associated with the offering. On March 12,
2003, we filed a Form RW with the Commission withdrawing our
registration statement for the IPO.
(2) During 2003 and 2002, we incurred restructuring charges of
$1.0 million and $1.7 million, respectively, resulting from
the consolidation of certain domestic and foreign distribution
operations, and during 2003, the ongoing integration of M&D
Industries.
We recorded charges of $0.5 million in 2000 in connection with
the restructuring of our distribution
11
operations and consolidation of certain manufacturing
operations.
During the fourth quarter of 1999, we recorded restructuring
charges of $1.0 million in association with the proposed
construction of a new distribution facility. The charges
represented building costs written-off due to the relocation
of the proposed site.
(3) During 2003, the Company sold shares of common stock of a
customer that it received in connection with the customer's
reorganization in bankruptcy. The Company received net
proceeds of approximately $2.0 million and recognized a gain
of approximately $1.5 million.
(4) Depreciation and amortization includes amortization of
goodwill of $2.6 million, $2.6 million, and $2.7 million in
2001, 2000, and 1999, respectively.
(5) For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as earnings before income taxes
and minority interests plus fixed charges. Fixed charges
consist of interest expense on all obligations, amortization
of deferred financing costs and an estimate of the rental
expense on operating leases representing that portion of
rental expense deemed by the Company to be attributable to
interest.
(6) Short-term obligations consists primarily of borrowings under
bank lines of credit and the current portion of long-term
debt. At December 31, 2003, the current portion of long-term
debt includes a $20.2 million prepayment of the Company's Term
Loan which was paid in March 2004 and was required based on
the Company's excess cash flows, as defined, for the year
ended December 31, 2003.
(7) On March 30, 2001, the Board of Directors authorized 500
shares of our preferred stock, $0.10 par value, and designated
100 shares as Series A Redeemable Convertible Preferred Stock.
Also on March 30, 2001, the Company issued 40 shares of Series
A Redeemable Convertible Preferred Stock to GSCP, for proceeds
of $6.0 million. Dividends are cumulative and payable
annually, at 6% per annum. Dividends payable on or prior to
March 30, 2004, are payable in additional shares of Series A
Redeemable Convertible Preferred Stock. Subsequent to March
30, 2004, dividends are payable, at the option of the Company,
either in cash or additional shares of Series A Redeemable
Convertible Preferred Stock. On March 30, 2003 and 2002, the
annual dividend was distributed in additional shares of Series
A Redeemable Convertible Preferred Stock. As of December 31,
2003, accrued dividends aggregated approximately $0.3 million,
and are included in redeemable convertible preferred stock on
the consolidated balance sheet. At December 31, 2003, 44.94
shares of our preferred stock were issued and outstanding.
Each share of Series A Redeemable Convertible Preferred Stock
is convertible at the option of the holder at any time into
shares of Common Stock of the Company, $0.10 par value, at a
conversion rate of 1.0 share of Common Stock for each share of
Series A Redeemable Convertible Preferred Stock, subject to
adjustment under certain conditions.
(8) Under the terms of the Company's amended and restated
stockholders' agreement dated February 20, 2002 (the
"Stockholders' Agreement"), the Company can purchase all of
the shares held by an employee stockholder and, under certain
circumstances, an employee stockholder can require the Company
to purchase all of the shares held by the employee. The
purchase price as prescribed in the Stockholders' Agreement is
to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on
cost, as defined therein. The aggregate amount that may be
payable by the Company to employee stockholders based on fully
paid and vested shares has been classified as redeemable
Common Stock.
During 2003, the redemption feature on 126.65 shares of Common
Stock held by a former officer expired, resulting in a $19.6
million reduction in redeemable Common Stock and a
corresponding decrease in stockholders' deficit. In addition,
during 2003, the Company purchased and retired 22 shares of
redeemable Common Stock held by officers of the Company at a
fair value of $150,000 per share, resulting in a reduction in
redeemable Common Stock of $3.3 million.
During 2002, as partial consideration for the acquisition of
M&D Industries, the Company issued
12
96.774 shares of Common Stock to American Greetings
Corporation ("American Greetings") at a fair value of $155,000
per share, or an aggregate value of $15.0 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the past several years, the party goods industry has experienced
significant changes in both distribution channels and product offerings.
Although there has been consolidation in the party superstore distribution
channel in the past five years, the number of party superstores continues to
increase. Due, in part, to the success of the party superstore distribution
channel, party goods manufacturers have broadened their product offerings to
support the celebration of a greater number of occasions. The industry's growth
has been directly affected by these changes. To achieve further sales growth and
expansion, we utilize a specialty sales effort to focus more closely on card and
gift stores and other independent retailers and have created expansive gift
lines encompassing home, baby and wedding products for general gift giving or
self-purchase, principally for this distribution channel.
Our revenues are generated from sales of approximately 38,000 SKU's
consisting of party goods for all occasions, including paper and plastic
tableware, accessories and novelties, metallic balloons, stationery and gift
items. Tableware (plates, cups, cutlery, napkins and tablecovers) is our core
product category, with coordinating accessories (e.g., balloons, banners, gifts
and stationery) and novelties (e.g., party favors) being offered to complement
these tableware products. As a metallic balloon manufacturer, we have a strong
presence in grocery, gifts and floral distribution channels, and have leveraged
our strong presence to bring additional party goods to these markets. In
February 2002, we completed the strategic acquisition of M&D Industries, a
metallic balloon manufacturer with a strong portfolio of character licenses that
complement those of our previously existing portfolio.
FACTORS WHICH AFFECT OUR FINANCIAL PERFORMANCE
Sales Concentration
Our sales volume is concentrated with several important customers,
generally party superstores. Our sales concentration also causes our receivables
to be concentrated within the party superstore channel. From time to time, we
have made significant additional provisions for credit losses and have
restructured the terms of accounts receivable because of changes in the credit
condition of certain superstore customers. Economic difficulties experienced in
this channel have affected and may continue to affect the Company's financial
results.
Design Trends and Customer Preferences
Our strategy and our relationships with our customers are dependent on
our regular introduction of new designs that are attractive and distinctive. We
must anticipate the tastes and preferences of party goods retailers and
consumers in order to compete for their business successfully. Our failure to
anticipate, identify or react appropriately to changes in consumer tastes could,
among other things, lead to excess inventories, a shortage of products and lost
sales.
Competition
The party goods industry is highly competitive. We compete with many
other companies, including smaller, independent specialty manufacturers and
divisions or subsidiaries of larger companies with greater financial and other
resources than we have. Some of our competitors control licenses for widely
recognized images, such as cartoon or motion picture characters, and have
broader access to mass market retailers which could provide them with a
competitive advantage
13
Raw Material and Production Costs
The costs of our key raw materials (paper and petroleum-based resin)
fluctuate. Generally, the Company absorbs movements in raw material costs it
considers temporary or insignificant. However, cost increases that are
considered other than temporary may require the Company to increase its prices
to maintain its margins. Customers may resist such price increases.
Products we manufacture, primarily tableware and metallic balloons,
represented approximately 65% of our sales in 2003. During the past three years,
we have invested approximately $26.0 million in printing, fabrication, packaging
and other manufacturing equipment, which has allowed us to increase productivity
rates, thereby lowering labor and overhead as a percentage of manufacturing
costs and increasing manufacturing margins. We believe our ability to
manufacture approximately 65% of our products enables us to lower production
costs by optimizing production while minimizing inventory investment, to ensure
product quality through rigid quality control procedures during production and
to be responsive to our customers' product design demands.
Interest Rates
Although we may utilize interest rate swap agreements to manage the
market risk associated with fluctuations in interest rates, we are exposed to
fluctuations in interest rates on a significant portion of our variable rate
debt.
Exchange Rates
We are exposed to foreign currency risk, predominately in European
countries, principally from fluctuations in the Euro and British Pound and their
impact on 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
------ ------
Net sales ................................................... 100.0% 100.0%
Cost of sales ............................................... 66.8 65.6
----- -----
Gross profit ............................................ 33.2 34.4
Operating expenses:
Selling expenses ........................................ 9.1 9.0
General and administrative expenses ..................... 7.9 8.3
Provision for doubtful accounts ......................... 0.6 0.8
Art and development costs ............................... 2.3 2.7
Write-off of deferred financing and IPO-related costs ... 0.6
Restructuring charges ................................... 0.3 0.4
----- -----
Total operating expenses .................................... 20.2 21.8
----- -----
Income from operations .................................. 13.0 12.6
Interest expense, net ....................................... 6.5 5.6
Gain on sale of available-for-sale securities ............... (0.3)
Other income, net ........................................... (0.1)
----- -----
Income before income taxes and minority interests ....... 6.8 7.1
Income tax expense .......................................... 2.5 2.8
Minority interests
----- -----
Net income .............................................. 4.3% 4.3%
===== =====
Net Sales
14
Net sales of $402.8 million for the year ended December 31, 2003 were
$17.2 million or 4.5% higher than net sales for the year ended December 31,
2002. During the year ended December 31, 2003, our domestic sales of party
goods, including metallic balloons, grew by 3.1% over 2002. Contract
manufacturing increased by 17.5% during 2003, as compared to 2002. International
net sales reported for the year ended December 31, 2003 increased by 5.3%,
principally as a result of favorable foreign currency exchange fluctuations.
Domestic sales performance during 2003 was adversely affected by general
economic conditions which resulted in a weak retail environment and, during the
first quarter of 2003, severe weather conditions.
Gross Profit
Gross profit margin for the year ended December 31, 2003, of 33.2% was
1.2% lower than the corresponding period in 2002. Gross profit margin for the
year ended December 31, 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 year ended December 31, 2003 also reflects
additional production costs incurred during the first and second quarters of
2003 in connection with the integration of M&D Industries, redundant costs
arising from the Company's transition from four to three east coast distribution
facilities and additional distribution costs incurred as a result of severe
weather conditions during the first quarter of 2003, partially offset by
operating efficiencies from the transition to the new distribution facility.
Operating Expenses
Selling expenses of $36.5 million for the year ended December 31, 2003
were $1.9 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 our specialty sales
effort. Selling expenses, as a percentage of net sales, increased from 9.0% to
9.1%.
General and administrative expenses of $31.9 million for the year ended
December 31, 2003 were relatively consistent with the corresponding period in
2002 as increased insurance and occupancy costs were offset by synergies
realized from the consolidation of M&D Industries' administrative functions into
our existing operations. As a percentage of sales, general and administrative
expenses decreased by 0.4% to 7.9% for the year ended December 31, 2003.
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, we charged $1.8 million to the provision for doubtful accounts
during the year ended December 31, 2003. This customer accounted for
approximately 2.1% of our net sales for the year ended December 31, 2003. We do
not believe the potential loss of this customer will have a material adverse
effect on our future results of operations or our financial condition.
Art and development costs of $9.4 million for the year ended December
31, 2003 were $0.9 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 our existing operations. As a percentage of
sales, art and development costs decreased by 0.4% to 2.3% for the year ended
December 31, 2003.
During the fourth quarter of 2002, we amended and restated our credit
facility with various lenders which resulted in a $1.5 million write-off of
deferred financing costs associated with the facility. Additionally, during the
fourth quarter of 2002, we decided not to pursue an initial public offering of
our Common Stock, given the valuations available in the equity markets at that
time, which resulted in a $0.8 million write-off of costs associated with the
offering. On March 12, 2003, we filed a Form RW with the Commission withdrawing
our registration statement for the IPO.
During the years ended December 31, 2003 and 2002, we incurred
restructuring charges of $1.0 million and $1.7 million, respectively, resulting
from the consolidation of certain domestic and foreign distribution operations,
in addition to the ongoing integration of M&D Industries. The further
consolidation of domestic distribution operations may result in additional
restructuring charges in subsequent periods.
15
Interest Expense, net
Interest expense, net, of $26.4 million for the year ended December 31,
2003 was $4.6 million higher than for the year ended December 31, 2002 and
reflects the impact of higher average borrowings and a higher average effective
interest rate (8.8% in 2003 versus 7.2% in 2002). We incurred a higher average
effective interest rate in 2003 as a result of the amortization of the original
issue discount and the 2% LIBOR floor required by our Second Amended and
Restated Credit and Guaranty Agreement dated December 20, 2002.
Gain on sale of available-for-sale securities
During the year ended December 31, 2003, we sold shares of common stock
of a customer which we received in connection with the customer's reorganization
in bankruptcy. We received net proceeds of approximately $2.0 million and
recognized a gain of $1.5 million.
Income Taxes
Income taxes for the years ended December 31, 2003 and 2002 were
provided for at consolidated effective income tax rates of 36.8% and 39.5%,
respectively. Our effective income tax rates exceed the federal statutory income
tax rate primarily due to state income taxes, partially offset, for the year
ended December 31, 2003, by the benefit of foreign tax credits.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
-------- -------
Net sales ........................................................ 100.0% 100.0%
Cost of sales .................................................... 65.6 65.2
----- -----
Gross profit ................................................. 34.4 34.8
Operating expenses:
Selling expenses ............................................. 9.0 9.1
General and administrative expenses .......................... 8.3 9.7
Provision for doubtful accounts .............................. 0.8 1.1
Art and development costs .................................... 2.7 2.5
Write-off of deferred financing and IPO-related costs ........ 0.6
Restructuring charges ........................................ 0.4
----- -----
Total operating expenses ......................................... 21.8 22.4
----- -----
Income from operations ....................................... 12.6 12.4
Interest expense, net ............................................ 5.6 7.0
Other income, net ................................................ (0.1)
----- -----
Income before income taxes and minority interests ............ 7.1 5.4
Income tax expense ............................................... 2.8 2.1
Minority interests ...............................................
----- -----
Net income ................................................... 4.3% 3.3%
===== =====
Net Sales
Net sales of $385.6 million for the year ended December 31, 2002 were
$40.4 million or 11.7% higher than net sales for the year ended December 31,
2001. During the year ended December 31, 2002, our net sales of party goods to
the party superstore distribution channel grew by 5.3%. Our specialty sales
effort, which brings party goods and related gift products to card and gift
stores and other independent retailers, achieved 42.1% net sales growth during
the year ended December 31, 2002. Domestic net sales of metallic balloons and
flexible packaging during the year ended December 31, 2002 increased by 39.7%
when compared to 2001, principally as a result of the February 2002 acquisition
of M&D Industries (see Liquidity and Capital Resources).
Gross Profit
Gross profit margin for the year ended December 31, 2002 of 34.4% was
0.4% lower than in 2001 principally due to the impact of product mix
(particularly solid color tableware), start-up costs associated with the new
distribution facility which became fully operational during the fourth quarter
of 2002 and increased
16
insurance costs, much of which was a result of the events of September 11, 2001.
Operating Expenses
Selling expenses of $34.6 million for the year ended December 31, 2002
were $3.2 million higher than in 2001 principally due to the inclusion of the
operating results of M&D Industries and the continued expansion of our specialty
sales efforts. Selling expenses, as a percentage of net sales, decreased from
9.1% to 9.0%, as we continue to leverage our sales infrastructure.
General and administrative expenses of $32.1 million for the year ended
December 31, 2002 were $1.3 million lower than 2001. The net decrease in general
and administrative expenses principally reflects the elimination of goodwill
amortization in 2002, which totaled $1.6 million during the year ended December
31, 2001. The elimination of goodwill amortization was partially offset by the
inclusion of the operating results of M&D Industries and increased insurance
costs and employee wages. As a percentage of sales, general and administrative
expenses decreased by 1.4% to 8.3%.
The provision for doubtful accounts of $3.0 million for the year ended
December 31, 2002 decreased by $0.8 million and from 1.1% to 0.8% of net sales
compared to 2001. During the second half of 2001, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code and,
as a result, we charged $2.5 million to the provision for doubtful accounts to
fully provide for this customer's accounts receivable balance. The customer
accounted for 2.1% of our net sales in 2001.
Art and development costs of $10.3 million for the year ended December
31, 2002 were $1.5 million higher as compared to 2001, principally due to an
increase in staff and the inclusion of the operating results of M&D Industries.
As a percentage of sales, art and development costs increased by 0.2% to 2.7%.
During the fourth quarter of 2002, we amended and restated our existing
credit facility with various lenders which resulted in a $1.5 million write-off
of deferred financing costs associated with the facility. Additionally, during
the fourth quarter of 2002, we decided not to pursue an IPO, given the
valuations available in the equity markets at that time, which resulted in a
$0.8 million write-off of costs associated with the offering. On March 12, 2003,
we filed a Form RW with the Commission withdrawing our registration statement
for the IPO.
During 2002, we incurred charges of $0.6 million resulting from the
consolidation of the fabrication operations of M&D Industries. In addition, we
incurred charges of $0.4 million and $0.7 million relating to the consolidation
of certain domestic and foreign distribution operations, respectively.
Interest Expense, net
Interest expense, net, of $21.8 million for the year ended December 31,
2002 was $2.3 million lower than 2001 reflecting lower average interest rates
(7.2% in 2002 versus 8.4% in 2001), partially offset by higher average
borrowings.
Income Taxes
Income taxes for the years ended December 31, 2002 and 2001 were
provided for at a consolidated effective income tax rate of 39.5%. The effective
income tax rate exceeds the federal statutory income tax rate primarily due to
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL STRUCTURE
On March 26, 2004, the Company signed a definitive merger agreement
providing for a recapitalization of the Company in which the Company will merge
with AAH Acquisition Corporation ("AAH"), a newly-formed corporation affiliated
with AAH Holdings Corporation, an entity jointly controlled by affiliates of
Berkshire Partners LLC and Weston Presidio (see Note 20 to our 2003 Consolidated
Financial Statements which are included in this report beginning on page F-2).
On December 20, 2002, we amended and restated our 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 our bank credit agreements
in their entirety and to provide a $200.0 million senior secured facility
consisting of a $170.0 million term loan (the "Term Loan") and
17
up to $30.0 million aggregate principal amount of revolving loans (the
"Revolver"). The proceeds of the Term Loan were used to repay our 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 our option, 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 December
31, 2003, the Term Loan, net of unamortized discount, was $168,300,000 and the
floating interest rate on the Term Loan was 6.50%. We are 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 excess cash flows, as defined. We
were required to make a $20.2 million prepayment of the Term Loan in March 2004
based on our excess cash flows for the year ended December 31, 2003.
Our Revolver expires on June 15, 2007, and bears interest, at our
option, 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 December
31, 2003, we had no borrowings under the Revolver. Standby letters of credit
totaling $7.1 million were outstanding and we had borrowing capacity of
approximately $22.9 million under the terms of the Revolver at December 31,
2003.
The Term Loan and borrowings under the Revolver are secured by a first
priority lien on substantially all of our assets and are guaranteed by our
domestic subsidiaries. We are required to maintain certain financial ratios
during the term of the Credit Agreement, including leverage and interest
coverage ratios.
In addition to the Revolver, we have 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, 2004. We expect to renew these revolving credit facilities upon expiration.
No borrowings were outstanding under these revolving credit facilities at
December 31, 2003.
At December 31, 2003, we had $110.0 million 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 our option, in whole
or in part, at redemption prices ranging from 103.292% 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, we 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, we may not
have the financial resources to repay all of our obligations under the Credit
Agreement, the note indenture and the other indebtedness that would become
payable upon the occurrence of such Change of Control.
We 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 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, we have 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.
18
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP for
proceeds of $6.0 million. Dividends are cumulative and payable annually at 6%
per annum. 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 our option, either in cash or additional shares of Series A
Redeemable Convertible Preferred Stock. On March 30, 2003 and 2002, the annual
dividend was distributed in additional shares of Series A Redeemable Convertible
Preferred Stock. At December 31, 2003, 44.94 shares of Series A Redeemable
Convertible Preferred Stock were issued and outstanding.
On February 19, 2002, we 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 $27.5 million plus related costs.
We financed the acquisition by borrowing $13.5 million under our then existing
revolving credit facility and issuing 96.774 shares of our 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.
We have 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 us to pay real estate taxes, utilities and related insurance
costs. Rent expense for the years ended December 31, 2003 and 2002, totaled
$13.3 million and $12.7 million, respectively. The minimum lease payments
currently required under non-cancelable operating leases for the year ending
December 31, 2004 approximate $10.5 million.
On June 13, 2002, we filed a registration statement with the Commission
for an IPO of our Common Stock. However, during the fourth quarter of 2002, we
decided not to pursue the IPO, given the valuations available in the equity
markets at that time, which resulted in a $0.8 million write-off of costs
associated with the offering. On March 12, 2003, we filed a Form RW with the
Securities and Exchange Commission withdrawing our registration statement for
the IPO.
The Credit Agreement and the Notes may affect our ability to make
future capital expenditures and potential acquisitions. At December 31, 2003, we
did not have material commitments for capital expenditures or other
acquisitions. Based upon the current level of operations and anticipated growth,
we anticipate that our operating cash flow, together with available borrowings
under the Revolver will be adequate to meet anticipated future requirements for
working capital and operating expenses for at least the next 12 months. However,
our ability to make scheduled payments of principal of, or to pay interest on,
or to refinance our indebtedness and to satisfy our other obligations will
depend upon our future performance, which, to a certain extent, will be subject
to general economic, financial, competitive, business and other factors beyond
our control.
CASH FLOW DATA - YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER
31, 2002
Net cash provided by operating activities during the years ended
December 31, 2003 and 2002, totaled $42.1 million and $20.3 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2003 and 2002,
was $42.1 million and $40.9 million, respectively. Changes in operating assets
and liabilities for the year ended December 31, 2003 offset, principally
reflecting the Company's efforts to reduce its investment in working capital.
Changes in operating assets and liabilities, net of acquisition, for the year
ended December 31, 2002 resulted in the use of cash of $20.6 million.
Net cash used in investing activities during the year ended December
31, 2003 of $10.3 million consisted of additional investments in distribution
and manufacturing equipment and other assets partially offset by proceeds of
$2.2 million received from both the disposal of equipment and the sale of a
portion of our investment in the common stock of a customer received in
connection with the customer's reorganization
19
in bankruptcy. Net cash used in investing activities during the year ended
December 31, 2002 of $30.7 million consisted of $13.5 million relating to the
acquisition of M&D Industries, $17.7 million of capital expenditures, including
$3.1 million for equipment for the new domestic distribution facility, and $0.5
million of proceeds from disposal of property and equipment.
During the year ended December 31, 2003, net cash used in financing
activities of $4.2 million consisted of the scheduled payments on the Term Loan
and other long-term obligations and the purchase of Common Stock from both our
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 President. During the comparable period in 2002, net
cash provided by financing activities of $11.4 million consisted of net proceeds
from the Term Loan of $164.0 million, which were used to repay our AXEL term
loan and revolver borrowings at the closing date and to pay certain fees and
expenses associated with the refinancing, scheduled payments of other long-term
obligations totaling $3.1 million and loans to officers under notes totaling
$0.2 million.
CASH FLOW DATA - YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER
31, 2001
Net cash provided by operating activities during the years ended
December 31, 2002 and 2001, totaled $20.3 million and $26.3 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2002 and 2001,
was $40.9 million and $33.3 million, respectively. Changes in operating assets
and liabilities, net of acquisition, for the years ended December 31, 2002 and
2001 resulted in the use of cash of $20.6 million and $7.0 million,
respectively. The changes in operating assets and liabilities principally
reflect increased working capital requirements consistent with our sales growth
and, in 2002, increased inventory levels associated with our transition to our
new domestic distribution facility during the fourth quarter.
Net cash used in investing activities during the year ended December
31, 2002 of $30.7 million included $13.5 million relating to the acquisition of
M&D Balloons, $17.7 million of capital expenditures, including $3.1 million for
equipment for the new domestic distribution facility, and $0.5 million of
proceeds from disposal of property and equipment. Net cash used in investing
activities during the year ended December 31, 2001 consisted of $37.4 million of
capital expenditures, including $21.8 million of costs to complete the
construction of our new distribution facility and $6.3 million to acquire
related distribution equipment.
During the year ended December 31, 2002 net cash provided by financing
activities of $11.4 million consisted of net proceeds from the Term Loan of
$164.0 million, which were used to repay our AXEL term loan and revolver
borrowings at the closing date and to pay certain fees and expenses associated
with the refinancing, scheduled payments of other long-term obligations totaling
$3.1 million and loans to officers under notes totaling $0.2 million. During the
year ended December 31, 2001, net cash provided by financing activities of $11.0
million included the proceeds of $6.0 million from the issuance of 40 shares of
Series A Redeemable Convertible Preferred Stock to GSCP and the net proceeds
from the two $10.0 million mortgage loans noted above. During 2001, we also
repaid borrowings under our then existing revolving credit facility and AXEL
term loan and other obligations totaling $13.5 million and made loans to
officers under notes of $1.0 million.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Our contractual obligations at December 31, 2003 are summarized by the
year in which the payments
20
are due in the following table (dollars in thousands):
More than
Total 2004 2005 2006 2007 2008 5 years
-------- ------- ------- ------- -------- ------ ---------
Long-term debt obligations (a)....... $295,245 $23,141 $ 2,519 $83,742 $173,074 $1,288 $11,481
Capital lease obligations (a)........ 264 96 103 65
Operating lease obligations (b)...... 45,667 10,500 9,344 7,456 6,331 1,801 10,235
Open purchase obligations (c)........ 916 916
-------- ------- ------- ------- -------- ------ -------
Total contractual obligations ... $342,092 $34,653 $11,966 $91,263 $179,405 $3,089 $21,716
======== ======= ======= ======= ======== ====== =======
(a) In March 2004, we were required to make a $20.2 million prepayment of our
Term Loan based on our excess cash flows, as defined, for the year ended
December 31, 2003. See Note 6 to our 2003 Consolidated Financial Statements
which are included in this report beginning on page F-2.
(b) See Note 15 to our 2003 Consolidated Financial Statements which are included
in this report beginning on page F-2.
(c) Represent payments required by non-cancelable purchase orders related to
capital expenditures.
At December 31, 2003, we had no borrowings under our Revolver or other
bank credit facilities. Standby letters of credit totaling $7.1 million were
outstanding at December 31, 2003. See Note 5 to our 2003 Consolidated Financial
Statements which are included in this report beginning on page F-2.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements, as defined in Item
303(a) (4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as
amended.
EFFECTS OF INFLATION
Inflation has not had a material impact on our operations during the
past three years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that the following significant
accounting policies may involve a higher degree of judgment and complexity.
Revenue Recognition
Our terms of sale are principally F.O.B. shipping point and,
accordingly, title and the risks and rewards of ownership are transferred to the
customer, and revenue is recognized, when goods are shipped. We estimate
reductions to revenues for volume-based rebate programs at the time sales are
recognized. Should customers earn rebates higher than estimated by us,
additional reductions to revenues may be required.
Royalty Agreements
Commitments for minimum payments under royalty agreements, a portion of
which may be paid in advance, are charged to expense ratably, based on our
estimate of total sales of related products. If all or a portion of the minimum
guarantee subsequently appears not to be recoverable, the unrecoverable portion
is charged to expense at that time.
Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our
21
customers to make required payments. A considerable amount of judgment is
required in assessing the ultimate realization of these receivables, including
consideration of our history of receivable write-offs, the level of past due
accounts and the economic status of our customers. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Inventories
Our policy requires that we state our inventories at the lower of cost
or market. In assessing the ultimate realization of inventories, we are required
to make judgments regarding, among other things, future demand and market
conditions, current inventory levels and the impact of the possible
discontinuation of product designs. If actual conditions are less favorable than
those projected by us, additional inventory write-downs to market value may be
required.
Long-Lived and Intangible Assets
We review the recoverability of our long-lived assets, including
definite-lived intangible assets other than goodwill, whenever facts and
circumstances indicate that the carrying amount may not be fully recoverable.
For purposes of recognizing and measuring impairment, we evaluate long-lived
assets other than goodwill based upon the lowest level of independent cash flows
ascertainable to evaluate impairment. If the sum of the undiscounted future cash
flows expected over the remaining asset life is less than the carrying value of
the assets, we may recognize an impairment loss. The impairment related to
long-lived assets is measured as the amount by which the carrying amount of the
assets exceeds the fair value of the asset. When fair values are not readily
available, we estimate fair values using expected discounted future cash flows.
Goodwill is reviewed for potential impairment, on an annual basis or
more frequently if circumstances indicate a possible impairment, by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit exceeds its fair value, the excess,
if any, of the fair value of the reporting unit over amounts allocable to the
unit's other assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss will be recognized in an amount equal
to that excess. The fair value of a reporting unit refers to the amount at which
the unit as a whole could be sold in a current transaction between willing
parties.
LEGAL PROCEEDINGS
We are a party to certain claims and litigation in the ordinary course
of business. We do not believe any of these proceedings will result,
individually or in the aggregate, in a material adverse effect upon our
financial condition or future results of operations.
INCOME TAXES
For information regarding income tax matters, see Note 13 of the Notes
to Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 our consolidated financial statements.
22
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 the first interim
or annual period ended after March 15, 2004 (except for special purpose entities
for which the effective date is periods ended after December 31, 2003). We have
performed an evaluation to identify such entities and do not believe that any
entities fall within the scope of this standard.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not
applicable or not significant to our consolidated financial statements.
"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 we expect or anticipate
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
our 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 us in light of our experience and our
perception of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances. Actual results may differ materially from those discussed.
Whether actual results and developments will conform with our expectations and
predictions is subject to a number of risks and uncertainties, including, but
not limited to (1) the concentration of sales by us to party superstores where
the reduction of purchases by a small number of customers could materially
reduce our sales and profitability, (2) the concentration of our credit risk in
party superstores, several of which are privately held and have expanded rapidly
in recent years, (3) the failure by us to anticipate changes in tastes and
preferences of party goods retailers and consumers, (4) the introduction by us
of new product lines, (5) the introduction of new products by our competitors,
(6) the inability to increase prices to recover fully future increases in raw
material prices, especially increases in prices of paper and petroleum-based
resin, (7) the loss of key employees, (8) changes in general business
conditions, (9) other factors which might be described from time to time in our
filings with the Commission, and (10) other factors which are beyond our
control. 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 us may not be realized or, even if substantially
realized, may not have the expected consequences to or effects on our business
or operations. Although we believe that we have the product offerings and
resources needed for growth in revenues and margins, future revenue and margin
trends cannot be reliably predicted. Changes in such trends may cause us to
adjust our 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, our highly leveraged nature may impair our ability to
finance our future operations and capital needs and our flexibility to respond
to changing business and economic conditions and business opportunities.
QUARTERLY RESULTS (UNAUDITED)
Despite a concentration of holidays in the fourth quarter of the year,
as a result of our expansive product lines and customer base and increased
promotional activities, the impact of seasonality on our quarterly results of
operations in recent years has been limited. Promotional activities, including
special dating terms, particularly with respect to Halloween and Christmas
products sold in the third quarter, and the introduction of our new everyday
products and designs during the fourth quarter result in higher accounts
receivables and inventory balances and higher interest costs to support these
balances. The following table sets forth our historical net sales, gross profit,
income from operations and net income, by quarter, for 2003
23
and 2002.
FOR THE THREE MONTHS ENDED,
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- --------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
2003
Net sales.............................. $99,844 $100,996 $103,220 $98,756
Gross profit........................... 32,875 32,046 34,978 33,792
Income from operations................. 12,374 (a) 11,016 (a)(b) 14,378 (a)(b) 14,493
Net income............................. 3,462 (a) 2,706 (a)(b) 5,226 (a)(b)(c) 5,769 (c)
2002
Net sales.............................. $95,908 $ 94,129 $100,226 $95,340
Gross profit........................... 34,232 32,150 34,465 31,776
Income from operations................. 15,626 11,847 (a) 14,137 (a) 7,105 (a)(b)(d)
Net income............................. 6,231 3,940 (a) 5,436 (a) 858 (a)(b)(d)
(a) We incurred restructuring charges of $0.3 million, $0.5 million, and $0.2
million during the first, second, and third quarters of 2003, respectively,
and $0.2 million, $0.6 million, and $0.9 million during the second, third
and fourth quarters of 2002, respectively. These charges resulted from the
consolidation of certain domestic and foreign distribution operations, in
addition to the ongoing integration of M&D Industries.
(b) 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, we charged a total of $3.3 million to the provision for doubtful
accounts, of which approximately $1.5 million, $1.6 million and $0.2 million
were charged during the fourth quarter of 2002 and the second and third
quarters of 2003, respectively. This customer accounted for approximately
2.1% of our net sales for the year ended December 31, 2003. We do not
believe the potential loss of this customer will have a material adverse
effect on our future results of operations or our financial condition.
(c) We recognized gains of $1.0 million and $0.5 million during the third and
fourth quarter of 2003, respectively, from the sale of shares of common
stock of a customer which we had received in connection with the customer's
reorganization in bankruptcy.
(d) During the fourth quarter of 2002, we amended and restated our credit
facility with various lenders which resulted in a write-off of $1.5 million
of deferred financing costs associated with the facility at that time.
Additionally, during the fourth quarter of 2002, we decided not to pursue an
IPO of shares of our Common Stock, given the valuations available in the
equity markets at that time, which resulted in a $0.8 million write-off of
costs associated with the offering. On March 12, 2003, we filed a Form RW
with the Commission withdrawing our registration statement for the IPO.
ITEM 7A. 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 years ended December 31, 2003,
2002 and 2001, our interest expense, after considering the effects of our
interest rate swap agreements, would have increased, and income before income
taxes would have decreased, by $2.1 million, $3.4 million and $2.2 million,
respectively. These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowings and interest rate swap agreements.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the uncertainty of the
specific actions that we would take and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
24
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $1.7 million, $1.5 million
and $1.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. These calculations assume that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, which could change the U.S. dollar value
of the resulting sales, changes in exchange rates may also affect the volume of
sales or the foreign currency sales price as competitors' products become more
or less attractive. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and supplementary data
listed in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of December 31, 2003.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2003. There were no material
changes to the Company's internal controls over financial reporting during the
fourth quarter of 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions with the Company of
the persons who are serving as directors and executive officers of the Company
at December 31, 2003.
NAME AGE POSITION
Terence M. O'Toole 45 Director, Chairman of the Board
Sanjeev K. Mehra 45 Director
Joseph P. DiSabato 37 Director
Gerald C. Rittenberg 51 Chief Executive Officer and Director
James M. Harrison 52 President, Chief Operating Officer, and Director
James F. Flanagan 52 Executive Vice President
Michael A. Correale 46 Chief Financial Officer
Terence M. O'Toole has been a Managing Director of Goldman, Sachs & Co.
("Goldman Sachs") in the Principal Investment Area since 1992. He is a member of
Goldman Sachs' Principal Investment Area Investment Committee. Mr. O'Toole
serves on the Boards of Directors of Western Wireless Corporation, R.H.
Donnelley Corporation and several privately held companies on behalf of Goldman
Sachs.
Sanjeev K. Mehra has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 1996. He is a member of Goldman Sachs' Principal
Investment Area Investment Committee. Mr. Mehra serves on the Boards of
Directors of Hexcel Corporation, Madison River Telephone Company, LLC and
25
several privately held companies on behalf of Goldman Sachs.
Joseph P. DiSabato has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 2000. Mr. DiSabato serves on the Boards of
Directors of Madison River Telephone Company, LLC and several privately held
companies on behalf of Goldman Sachs.
Gerald C. Rittenberg became Chief Executive Officer in December 1997.
From May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of
the Board. Prior to that time, Mr. Rittenberg served as the President of the
predecessor to the Company, Amscan Inc., from April 1996 to October 1996, and as
President of the Company from the time of its formation in October 1996.
James M. Harrison became President in December 1997 and Chief Operating
Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also
served as Chief Financial Officer and Treasurer. From February 1997 to December
1997, Mr. Harrison served as our Chief Financial Officer and Secretary. Prior to
that time, Mr. Harrison served as the Chief Financial Officer of the predecessor
to the Company, Amscan Inc., from August 1996 to February 1997.
James F. Flanagan became a Senior Vice President of the Company in July
2001 and became an Executive Vice President in January 2002. From 1975 to July
2001, Mr. Flanagan was employed at Hallmark Cards, Inc. where he most recently
served as Vice President - Sales.
Michael A. Correale became Chief Financial Officer in March 2002. Prior
to that time, Mr. Correale served as Vice President -- Finance, from May 1997 to
March 2002.
BOARD OF DIRECTORS
The Board of Directors of the Company does not have any committees,
including an audit committee. All decisions relating to the selection,
compensation and oversight of the Company's independent auditors are made by the
Company's Board of Directors. The functions of an audit committee are carried
out by the full Board of Directors of the Company. The Board of Directors has
determined that James M. Harrison is an "audit committee financial expert"
within the meaning of Item 301(b)(2) of Regulation S-K of the Securities and
Exchange Commission. Because of his roles as an executive officer of the
Company, Mr. Harrison is not "independent," as used in Item 7(d)(iv) of Schedule
14A under the Securities Exchange Act of 1934. Other directors may also qualify
as "audit committee financial experts."
CODE OF ETHICS
The Company has adopted a Code of Business Conduct, a copy of which is
filed with the Securities and Exchange Commission as an exhibit to this report.
The Company's Code of Business Conduct is a "code of ethics," as defined in Item
406(b) of Regulation S-K of the Securities and Exchange Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because the Company Common Stock is not registered under the Exchange
Act, none of the Company's directors, officers or stockholders is obligated to
file reports of beneficial ownership of Company Common Stock pursuant to Section
16 of the Exchange Act.
26
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned for the past three years by the Company's Chief Executive Officer and all
other executive officers of the Company as of December 31, 2003 whose aggregate
salary and bonus for 2003 exceeded $100,000. The amounts shown include
compensation for services in all capacities that were provided to the Company or
its subsidiaries. Amounts shown were paid by the Company's principal subsidiary,
Amscan Inc. Prior to the Company's recapitalization on December 19, 1997 (the
"Merger") the Company granted stock options on shares of Company Common Stock
("Company Stock Options") pursuant to the 1996 Stock Option Plan for Key
Employees (the "Prior Stock Plan"). Following the Merger, Company stock options
("Options") were granted pursuant to a new stock incentive plan and related
option agreement (together, the "Option Documents") adopted by the Company. At
the time of the Merger, certain employees converted Company Stock Options into
options to purchase shares of Common Stock ("Rollover Options").
Long-Term Compensation
No. of Securities Under- All Other
Name and Principal Position Year Salary Bonus (a) lying Options Granted Compensation (b)
- --------------------------- ---- -------- --------- ------------------------ ----------------
Gerald C. Rittenberg 2003 $500,000 $766,263 25(c) $7,694
Chief Executive Officer 2002 325,328 722,000 9,115
2001 309,750 500,000 7,249
James M. Harrison 2003 $450,000 $689,058 25(c) $7,694
President and Chief 2002 303,188 649,000 9,115
Operating Officer 2001 288,750 450,000 7,382
James F. Flanagan 2003 $250,000 $150,000 $7,694
Executive Vice President 2002 250,000 150,000 2.5(e) 3,615
2001 74,000 (d) 125,000 2.5(e) --
Michael A. Correale 2003 $193,269 $ 75,000 4(c) $7,544
Chief Financial Officer 2002 183,100 75,000 9,115
2001 168,300 40,000 7,381
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
(b) Represents contributions by the Company under a profit sharing and savings
plan, as well as insurance premiums paid by the Company with respect to term
life insurance for the benefit of the named executive officer.
(c) Represents Options granted to named executive officer in 2003.
(d) Mr. Flanagan became an employee of the Company on July 16, 2001.
(e) Represents Options granted to Mr. Flanagan in 2002 and 2001, respectively.
OPTION GRANTS TABLE
The following table sets forth information concerning options which
were granted during 2003 to the executive officers named in the Summary
Compensation Table.
27
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS MARKET STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE AT OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE DATE OF EXPIRATION ------------------------------
NAME GRANTED (1) FISCAL YEAR PRICE GRANT (2) DATE 5% 10%
---- ----------- ----------- ----- --------- ---- -- ---
Gerald C. Rittenberg 25 31.25% $150,000 $150,000 June 19, $591,095 $1,241,253
2006
James M. Harrison 25 31.25% $150,000 $150,000 June 19, $591,095 $1,241,253
2006
Michael A. Correale 4 5.00% $150,000 $150,000 December 1, $377,337 $ 956,246
2013
(1) All options granted to Messrs. Rittenberg and Harrison listed in this column
become exercisable on December 19, 2005 and expire three years after the
date of grant. The options granted to Mr. Correale become exercisable
ratably over five years beginning one year from the date of grant and expire
ten years after the date of grant.
(2) Assumes a fair market value of the Company Common Stock underlying the
options of $150,000 based on the value of Company Common Stock at December
31, 2003.
FISCAL 2003 YEAR END OPTION VALUES
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
Gerald C. Rittenberg 16.648 25.000 $1,248,600 $ -
James M. Harrison 16.268 25.000 1,269,069 -
James F. Flanagan 1.500 3.500 - -
Michael A. Correale 2.570 4.000 198,703 -
The value of unexercised in the money options is based on the value of
Company Common Stock of $150,000 per share at December 31, 2003. No Options or
Rollover Options were exercised by the executive officers in the most recent
fiscal year.
EMPLOYMENT ARRANGEMENTS
Employment Agreement with Gerald C. Rittenberg. Gerald C. Rittenberg
has an employment agreement with us, dated June 19, 2003, (the "Rittenberg
Employment Agreement"), pursuant to which Mr. Rittenberg serves as Chief
Executive Officer for a term expiring December 31, 2005 which term will be
extended automatically for successive additional one-year periods, unless either
the Company gives Mr. Rittenberg, or Mr. Rittenberg gives the Company, written
notice of the intention not to extend the term no less than twelve months prior
to the end of the term, whichever is then in effect. During 2003, Mr. Rittenberg
received an annual base salary of $500,000, which will increase by 5% annually
for the term of the Rittenberg Employment Agreement. Mr. Rittenberg will be
eligible for an annual bonus for each calendar year if certain operational and
financial targets are attained as determined by the board of directors in
consultation with Mr. Rittenberg and a discretionary bonus may be awarded in the
sole discretion of the board of directors. The Rittenberg Employment Agreement
also provides for other customary benefits including incentive, savings and
retirement plans, paid vacation, health care and life insurance plans and
expense reimbursement.
28
Under the Rittenberg Employment Agreement, if we terminate Mr.
Rittenberg's employment other than for cause, death or disability, we would be
obligated to pay Mr. Rittenberg a lump sum cash payment in an amount equal to
the sum of (1) accrued unpaid salary, earned but unpaid bonus for any prior
year, any deferred compensation and accrued but unpaid vacation pay
(collectively, "Accrued Obligations") plus (2) severance pay equal to his annual
base salary, provided, however, that in connection with a termination by the
Company other than for cause or due to the his death or disability, such
severance pay will be equal to Mr. Rittenberg's annual base salary multiplied by
the number of years we elect as the Restriction Period (as defined below). Upon
termination of Mr. Rittenberg's employment by the Company for cause, death or
disability or if he terminates his employment, Mr. Rittenberg will be entitled
to his unpaid Accrued Obligations. Additionally, upon termination of Mr.
Rittenberg's employment during the current term or any additional term (1) by
the Company other than for cause or (2) by reason of his death or disability, or
if the current term or any additional term is not renewed at its expiration
(other than for cause), the Rittenberg Employment Agreement provides for payment
of a prorated portion of the bonus to which Mr. Rittenberg would otherwise have
been entitled.
The Rittenberg Employment Agreement also provides that during his
current term, any additional term and during the three-year period following any
termination of his employment (the "Restriction Period"), Mr. Rittenberg will
not participate in or permit his name to be used or become associated with any
person or entity that is or intends to be engaged in any business which is in
competition with our business, or any of our subsidiaries or controlled
affiliates, in any country in which we or any of our subsidiaries or controlled
affiliates operate, compete or are engaged in such business or at such time
intend to so operate, compete or become engaged in such business (a
"Competitor"), provided, however, that if we terminate Mr. Rittenberg's
employment other than for cause or due to the executive's death or disability,
the Restriction Period will be instead a one, two or three-year period at our
election. If all or substantially all of the stock or assets of the Company is
sold or otherwise disposed of to a third party not affiliated with the Company,
and Mr. Rittenberg is not offered employment on substantially similar terms by
the Company or one of its continuing affiliates immediately thereafter, then for
all purposes of the Rittenberg Employment Agreement, Mr. Rittenberg's employment
shall be deemed to have been terminated by the Company other than for cause
effective as of the date of such sale or disposition, provided however that the
Company shall have no obligations to Mr. Rittenberg if he is hired or offered
employment on substantially similar terms by the purchaser of the stock or
assets of the Company. The Rittenberg Employment Agreement also provides for
certain other restrictions during the Restriction Period in connection with (a)
the solicitation of persons or entities with whom we have business relationships
and (b) inducing any of our employees to terminate their employment or offering
employment to such persons, in each case subject to certain conditions.
Employment Agreement with James M. Harrison. James M. Harrison has an
employment agreement with us, dated June 19, 2003, (the "Harrison Employment
Agreement"), pursuant to which Mr. Harrison serves as our President for a term
expiring December 31, 2005. During 2003, Mr. Harrison received an annual base
salary of $450,000, which will increase by 5% annually during the term of the
Harrison Employment Agreement. The Harrison Employment Agreement contains
provisions for additional terms, salary increases during additional terms,
non-discretionary and discretionary bonus payments, severance, other benefits,
definitions of cause and disability, and provisions for non-competition and
non-solicitation similar to those in the Rittenberg Employment Agreement.
Employment Agreement with James F. Flanagan. James F. Flanagan has an
employment agreement with us, dated July 1, 2001, as amended (the "Flanagan
Employment Agreement"), pursuant to which Mr. Flanagan serves as our Executive
Vice President for a term expiring December 31, 2004. For the term of the
agreement, Mr. Flanagan will receive an annual salary of $250,000. The Flanagan
Employment Agreement contains provisions for additional terms, severance and
other benefits, and definitions of cause and disability. The Flanagan Employment
Agreement also provides that upon termination of employment he may not, for a
period of one year, be employed by, or associated in any manner with, any
business that is in competition with us. We may terminate the Flanagan
Employment Agreement upon the permanent disability of Mr. Flanagan or with or
without cause.
29
AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN
In 1997, the Company adopted the Amscan Holdings, Inc. 1997 Stock
Incentive Plan (the "Stock Incentive Plan") under which the Company may grant
incentive awards in the form of shares of Company Common Stock, options to
purchase shares of Company Common Stock ("Company Stock Options") and stock
appreciation rights ("Stock Appreciation Rights") to certain directors,
officers, employees and consultants ("Participants") of the Company and its
affiliates. 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. A committee of the Company's board of
directors (the "Committee"), or the board itself in the absence of a Committee,
is authorized to make grants and various other decisions under the Stock
Incentive Plan. Unless otherwise determined by the Committee, any Participant
granted an award under the Stock Incentive Plan must become a party to, and
agree to be bound by, the Stockholders' Agreement.
Company Stock Option awards under the Stock Incentive Plan may include
incentive stock options, nonqualified stock options, or both types of Company
Stock Options, in each case with or without Stock Appreciation Rights. Company
Stock Options are nontransferable (except under certain limited circumstances)
and, unless otherwise determined by the Committee, have a term of ten years.
Upon a Participant's death or when the Participant's employment with the Company
or the applicable affiliate of the Company is terminated for any reason, such
Participant's previously unvested Company Stock Options are forfeited and the
Participant or his or her legal representative may, within three months (if
termination of employment is for any reason other than death) or one year (in
the case of the Participant's death), exercise any previously vested Company
Stock Options. Stock Appreciation Rights may be granted in conjunction with all
or part of any Company Stock Option award, and are exercisable, subject to
certain limitations, only in connection with the exercise of the related Company
Stock Option. Upon termination or exercise of a Company Stock Option, any
related Stock Appreciation Rights terminate and are no longer exercisable. Stock
Appreciation Rights are transferable only with the related Company Stock
Options.
Unless otherwise provided in the related award agreement or, if
applicable, the Stockholders' Agreement, immediately prior to certain change of
control transactions described in the Stock Incentive Plan, all outstanding
Company Stock Options and Stock Appreciation Rights will, subject to certain
limitations, become fully exercisable and vested and any restrictions and
deferral limitations applicable to any restricted stock awards will lapse.
The Stock Incentive Plan will terminate ten years after its effective
date; however, awards outstanding as of such date will not be affected or
impaired by such termination. The Company's board of directors and the Committee
has authority to amend the Stock Incentive Plan and awards granted thereunder,
subject to the terms of the Stock Incentive Plan.
COMPENSATION OF DIRECTORS
The Company currently does not compensate its directors other than for
expense reimbursement.
STOCK PERFORMANCE GRAPH
The Company's Common Stock has not traded publicly during the past five
years. For this reason a graph indicating the relative performance of the
Company Common Stock price to other standard measures has not been included
since it would provide no meaningful information.
COMPENSATION COMMITTEE POLICIES
During 2003, the compensation of executive officers of the Company,
with the exception of Mr. Correale, was paid pursuant to the terms of existing
employment agreements. The compensation paid to Mr. Correale was based on
competitive salaries observed within the labor market.
30
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To the knowledge of the Company, no relationship of the type described
in Item 402(j)(3) of Regulation S-K existed during 2003 with respect to the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning ownership
of shares of Company Common Stock by: (i) persons who are known by the Company
to own beneficially more than 5% of the outstanding shares of Company Common
Stock; (ii) each director of the Company; (iii) each executive officer of the
Company named in the Summary Compensation table; and (iv) all directors and
executive officers of the Company named in the Summary Compensation table as a
group.
SHARES OF COMPANY PERCENTAGE
COMMON STOCK OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (a) OUTSTANDING (a)
- ------------------------ --------------------- ---------------
Gerald C. Rittenberg (b)....................... 64.442 5.2%
James M. Harrison (c).......................... 26.044 2.1
James F. Flanagan (d).......................... 4.500 0.4
Garry Kieves, Garry Kieves Retained
Annuity Trust and Garry Kieves
Irrevocable Trust, in aggregate (e)......... 147.520 12.0
2610 East 32nd Street
Minneapolis, Minnesota 55406
Michael C. Correale (f)........................ 2.669 0.2
Terence M. O'Toole (g)......................... -- --
Sanjeev K. Mehra (h)........................... -- --
Joseph P. DiSabato (i)......................... -- --
American Greetings Corporation (j)............. 105.082 8.6
One American Road
Cleveland, Ohio 44144-2398
The Goldman Sachs Group, Inc.
and affiliates (k).......................... 945.144 74.8
85 Broad Street
New York, New York 10004
All directors and executive officers
as a group (7 persons) (l)..................... 97.654 7.8
(a) The amounts and percentages of Company Common Stock beneficially owned
are reported on the basis of regulations of the Commission governing
the determination of beneficial ownership of securities. Under the
rules of the Commission, a person is deemed to be a "beneficial owner"
of a security if that person has or shares "voting power," which
includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to
acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities
and a person may be deemed to be a beneficial owner of securities as to
which he has no economic interest.
(b) Includes 16.648 shares which could be acquired by Mr. Rittenberg within
60 days upon exercise of options.
31
(c) Includes 16.268 shares which could be acquired by Mr. Harrison within
60 days upon exercise of options.
(d) Includes 1.5 shares which could be acquired by Mr. Flanagan within 60
days upon exercise of options.
(e) Includes 10 shares which could be acquired by Mr. Kieves within 60 days
upon exercise of warrants.
(f) Includes 2.570 shares which could be acquired by Mr. Correale within 60
days upon exercise of options.
(g) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are
owned by The Goldman Sachs Group, Inc. and its affiliates, except to
the extent of his pecuniary interest therein, if any.
(h) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are
owned by The Goldman Sachs Group, Inc. and its affiliates, except to
the extent of his pecuniary interest therein, if any.
(i) Mr. DiSabato, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are
owned by The Goldman Sachs Group, Inc. and its affiliates, except to
the extent of his pecuniary interest therein, if any.
(j) On February 19, 2002, the Company issued 96.774 shares of its Common
Stock, at a value of $155,000 per share, to American Greetings in
connection with the acquisition of M&D Industries.
(k) The Goldman Sachs Group, Inc. may be deemed to own beneficially in the
aggregate 900.20 shares of Company Common Stock and 44.94 shares of
Series A Redeemable Convertible Preferred Stock through the investment
partnerships GS Capital Partners II, L.P. (which owns approximately
564.811 shares of Company Common Stock and 28.202 shares of Series A
Redeemable Convertible Preferred Stock), GS Capital Partners II
Offshore, L.P. (which owns approximately 224.536 shares of Company
Common Stock and 11.209 shares of Series A Redeemable Convertible
Preferred Stock), Goldman Sachs & Co. Verwaltungs GmbH as nominee for
GS Capital Partners II (Germany) C.L.P. (which owns approximately
20.833 shares of Company Common Stock and 1.038 shares of Series A
Redeemable Convertible Preferred Stock), Stone Street Fund 1997, L.P.
(which owns approximately 60.597 shares of Company Common Stock and
3.025 shares of Series A Redeemable Convertible Preferred Stock) and
Bridge Street Fund 1997, L.P. (which owns approximately 29.423 shares
of Company Common Stock and 1.470 shares of Series A Redeemable
Convertible Preferred Stock) (collectively the "Limited Partnerships"),
of each of which affiliates of The Goldman Sachs Group, Inc. are the
general partner or managing general partner. Each share of Series A
Redeemable Convertible Preferred Stock is convertible at any time at
the option of the holder into one share of Company Common Stock. The
Goldman Sachs Group, Inc. disclaims beneficial ownership of the shares
reported herein as beneficially owned by the Limited Partnerships
except to the extent of its pecuniary interest therein. The Limited
Partnerships share voting and investment power with The Goldman Sachs
Group, Inc.
(l) Includes 36.986 shares which could be acquired by the executive
officers within 60 days upon exercise of options.
In December 2003 and January 2004, the Estate of John A. Svenningsen
sold its shares of Common Stock to Goldman Sachs and other current shareholders,
including employees of the Company.
STOCKHOLDERS' AGREEMENT
As of December 19, 1997, the Company entered into a Stockholders'
Agreement with GSCP and certain employees of the Company listed as parties
thereto (including American Greetings, the "Non-GSCP Investors"). The
Stockholders' Agreement was subsequently amended in connection with the
Company's acquisitions of Anagram in 1998 and M&D Industries in 2002 and the
issuance of Series A Redeemable Convertible Preferred Stock in 2001. The
following discussion summarizes the terms of the Stockholders'
32
Agreement which the Company believes are material to an investor in the debt or
equity securities of the Company. The Stockholders' Agreement provides, among
other things, for (i) the right of the Non-GSCP Investors to participate in, and
the right of GSCP to require the Non-GSCP Investors to participate in, certain
sales of Company Common Stock by GSCP, (ii) prior to an initial public offering
of the stock of the Company (as defined in the Stockholders' Agreement), certain
rights of the Company to purchase, and certain rights of the Non-GSCP Investors
to require the Company to purchase (except in the case of termination of
employment by such Non-GSCP Investors) all, but not less than all, of the shares
of Company Common Stock owned by a Non-GSCP Investor upon the termination of
employment or death of such Non-GSCP Investor, at prices determined in
accordance with the Stockholders' Agreement and (iii) certain additional
restrictions on the rights of the Non-GSCP Investors to transfer shares of
Company Common Stock. The Stockholders' Agreement also contains certain
provisions granting GSCP and the Non-GSCP Investors certain rights in connection
with registrations of Company Common Stock in certain offerings and provides for
indemnification and certain other rights, restrictions and obligations in
connection with such registrations. The Stockholders' Agreement will terminate
(i) with respect to the rights and obligations of and restrictions on GSCP and
the Non-GSCP Investors in connection with certain restrictions on the transfer
of shares of Company Common Stock, when GSCP and its affiliates no longer hold
at least 40% of the outstanding shares of Company Common Stock, on a fully
diluted basis; provided that the Stockholders' Agreement will terminate in such
respect in any event if the Company enters into certain transactions resulting
in GSCP, its affiliates, the Non-GSCP Investors, and each of their respective
permitted transferees, owning less than a majority of the outstanding voting
power of the entity surviving such transaction; and (ii) with respect to the
registration of Company Common Stock in certain offerings, with certain
exceptions, on the earlier of (1) the date on which there are no longer any
registrable securities outstanding (as determined under the Stockholders'
Agreement) and (2) the twentieth anniversary of the Stockholders' Agreement.
For information concerning our equity compensation plans, see "Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2003 and 2002, the Company sold $7.4
million and $7.5 million of metallic balloons and other party goods to American
Greetings. Trade accounts receivable from American Greetings at December 31,
2003 was $1.9 million.
During 2001, the Company amended a line of credit granted to the Chief
Executive Officer, increasing the line from $1,000,000 to $1,400,000. Borrowings
under the line bore interest at the Company's incremental borrowing rate in
effect during the time such loan was outstanding. The interest was payable
annually or, at the option of the Chief Executive Officer, accrued to the
principal balance. Amounts borrowed under the line were evidenced by a limited
recourse secured promissory note, secured by a lien on the equity interests that
the Chief Executive Officer had in the Company. The note required that all
principal payments be made only from the equity pledged as collateral. In June
2003, the Company purchased 16 shares of Common Stock from the 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. At December 31, 2002, borrowings,
including accrued interest, under this line totaled $1,551,000.
On June 15, 2001, the Company entered into a limited recourse secured
promissory note with the President of the Company. The note evidenced loans made
or to be made to the President at his request, in connection with the payment of
any personal federal, state or local income taxes due and payable upon and in
respect of the vesting of the President's Restricted Stock. The Company's
obligation to extend loans under the note was limited to the amount of income
taxes the President was actually required to pay subsequent to June 15, 2001.
Amounts borrowed under the note and any interest thereon was secured by a lien
on the equity interests that the President has in the Company. The note bore
interest at 5.43% per annum. The note required that all payments of principal
and interest due thereunder be made only from the equity pledged as collateral.
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
33
his outstanding loan balance of $402,000. At December 31, 2002, the amount
borrowed under the note totaled $391,300.
During the first quarter of 2001, 100 shares of the authorized shares
of preferred stock, $0.10 par value, were designated as Series A Redeemable
Convertible Preferred Stock. On March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible Preferred Stock for proceeds of $6.0 million, to
Goldman Sachs and its affiliates. 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. 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 and 2002, the annual dividend was distributed in additional
shares of Series A Redeemable Convertible Preferred Stock. At December 31, 2003,
44.94 shares of Series A Redeemable Convertible Preferred Stock were issued and
outstanding and accrued dividends aggregated $303,372.
Goldman Sachs and its affiliates have certain interests in the Company.
Messrs. O'Toole, Mehra and DiSabato are Managing Directors of Goldman Sachs, and
each of them is a director of the Company. GSCP currently owns approximately
73.9% of the outstanding shares of Company Common Stock (excluding the potential
impact of the conversion of the redeemable convertible preferred stock).
Accordingly, the general and managing partners of each of the GSCP Fund
Partners, which are affiliates of Goldman Sachs and The Goldman Sachs Group,
Inc. may each be deemed to be an "affiliate" of GSCP and the Company. See
"Ownership of Capital Stock." Pursuant to the Stockholder's Agreement, Goldman
Sachs has the exclusive right (if it so elects) to perform certain investment
banking and similar services for the Company on customary terms. Goldman Sachs
may from time to time receive customary fees for services rendered to the
Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Fees for audit services totaled $555,000 and $787,000 for the fiscal
years ended December 31, 2003 and 2002, respectively. These fees included the
audit of the consolidated financial statements; reviews of financial statements
included in the Company's Quarterly Reports on Form 10-Q; assistance with SEC
filings, including comfort letters, consents and comment letters; and accounting
consultations on matters addressed during the audit or interim reviews.
AUDIT-RELATED FEES
Fees for audit-related services totaled $128,000 and $80,000 for the
fiscal years ended December 31, 2003 and 2002, respectively. Such fees related
to the audits of the Company's employee benefit plans; due diligence services;
statutory audits incremental to the audit of the consolidated financial
statements; and general assistance with implementation of the requirements of
SEC rules pursuant to the Sarbanes-Oxley Act of 2002.
TAX FEES
Fees for tax services, including tax compliance, tax advice and tax
planning, totaled $81,000 and $80,000 for the fiscal years ended December 31,
2003 and 2002, respectively.
ALL OTHER FEES
All other fees totaled $1,500 for each of the fiscal years ended
December 31, 2003 and 2002, respectively, and related to a subscription to the
Ernst & Young Global Accounting and Auditing Information Tool.
The Company's Board of Directors appoints the independent auditors and
pre-approves the fee arrangements with respect to the above accounting fees and
services.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Schedule.
See Index to Consolidated Financial Statements and Financial Statement
Schedule which appears on page F-1 herein.
3. Exhibits
Exhibit
Number Description
- ------- -----------
2(a) Agreement and Plan Merger, by and among Amscan Holdings, Inc.
and Confetti Acquisition, Inc., dated as of August 10, 1997
(incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-45457))
2(b) Stock Purchase Agreement, dated as of August 6, 1998, by and
among Amscan Holdings, Inc. and certain stockholders of
Anagram International, Inc. and certain related companies
(incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
3(a) Certificate of Incorporation of Amscan Holdings, Inc., dated
October 3, 1996, as amended to March 30, 2001 (incorporated by
reference to Exhibit 3(a) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000 (Commission
File No. 000-21827))
3(b) Amended By-Laws of Amscan Holdings, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
3(c) Amended Articles of Incorporation of Anagram International,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(d) By-laws of Anagram International, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Current Report on
Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(e) Articles of Incorporation of Anagram International Holdings,
Inc. (incorporated by reference to Exhibit 3.3 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(f) By-laws of Anagram International Holdings, Inc. (incorporated
by reference to Exhibit 3.4 to the Registrant's Current Report
on Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(g) Articles of Organization of Anagram International, LLC
(incorporated by reference to Exhibit 3.5 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
3(h) Operating Agreement of Anagram International, LLC
(incorporated by reference to Exhibit 3.6 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
35
3(i) Certificate of Formation of Anagram Eden Prairie Property
Holdings LLC (incorporated by reference to Exhibit 3.7 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
4(a) Indenture, dated as of December 19, 1997, by and among the
Company, the Guarantors named therein and IBJ Schroder Bank &
Trust Company with respect to the Senior Subordinated Notes
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-45457))
4(b) Supplemental Indenture, dated as of September 17, 1998, by and
among Anagram International, Inc., Anagram International
Holdings, Inc., Anagram International, LLC, Anagram Eden
Prairie Property Holdings LLC and IBJ Schroder Bank & Trust
Company, as Trustee (incorporated by reference to Exhibit 4.1
to the Registrant's Current Report on Form 8-K dated September
17, 1998 (Commission File No. 000-21827))
4(c) Warrant Agreement, dated as of August 6, 1998, by and between
Amscan Holdings, Inc. and Garry Kieves Retained Annuity Trust
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
4(d) Senior Subordinated Guarantee, dated as of September 17, 1998,
by Anagram International, Inc., Anagram International
Holdings, Inc., Anagram International, LLC, and Anagram Eden
Prairie Property Holdings LLC (incorporated by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
10(a) Tax Indemnification Agreement between Amscan Holdings, Inc.,
and John A. Svenningsen, dated as of December 18, 1996
(incorporated by reference to Exhibit 10(j) to the
Registrant's 1996 Annual Report on Form 10-K (Commission File
No. 000-21827))
10(b) Tax Indemnification Agreement between Amscan Holdings, Inc.,
Christine Svenningsen and the Estate of John A. Svenningsen,
dated as of August 10, 1997 (incorporated by reference to
Exhibit 10.17 to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-40235))
10(c) The MetLife Capital Corporation Master Lease Purchase
Agreement between MetLife Capital Corporation and Amscan Inc.,
Deco Paper Products, Inc., Kookaburra USA Ltd., and Trisar,
Inc., dated November 21, 1991, as amended (incorporated by
reference to Exhibit 10(n) to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 333-14107))
10(d) Form of Indemnification Agreement between the Company and each
of the directors of the Company (incorporated by reference to
Exhibit 10(o) to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14107))
10(e) Exchange and Registration Agreement, dated as of December 19,
1997, by and among the Company and Goldman, Sachs & Co.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 (Registration No.
333-45457))
10(f) Stockholders' Agreement, dated as of December 19, 1997, by and
among the Company and the Stockholders thereto (incorporated
by reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(g) Amscan Holdings, Inc. 1997 Stock Incentive Plan (incorporated
by reference to Exhibit 10.7 Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
36
10(h) Amendment No. 1 to the Stockholders' Agreement, dated as of
August 6, 1998 by and among Amscan Holdings, Inc. and certain
stockholders of Amscan Holdings, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated August 6, 1998 (Commission File No.
000-21827))
10(i) Amendment No. 2 to the Stockholders' Agreement, dated as of
March 30, 2001 by and among Amscan Holdings, Inc. and certain
stockholders of Amscan Holdings, Inc. (incorporated by
reference to Exhibit 10(o) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2000 (Commission
File No. 000-21827))
10(j) Employment Agreement, dated as of January 1, 2002, by and
among the Company and James F. Flanagan (incorporated by
reference to Exhibit 10(p) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001 (Commission
File No. 000-21827))
10(k) Second Amended and Restated Credit and Guaranty Loan
Agreement, dated as of December 20, 2002, by and among Amscan
Holdings, Inc., the financial institutions parties thereto,
Goldman Sachs Credit Partners L.P., as arranger and
syndication agent, and General Electric Capital Corporation,
as administrative and collateral agent, and Fleet National
Bank, as documentation agent (incorporated by reference to
Exhibit 4 to the Registrant's Current Report on Form 8-K dated
December 20, 2002 (Commission File No.000-21827))
10(l) Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended to
June 2003 (incorporated by reference to Exhibit 10(a)
to the Registrant's Current Report on Form 10-Q for the quarter
ended September 30, 2003 (Commission File No.000-21827)).
10(m) Employment Agreement, dated as of June 19, 2003, by and
among the Company and Gerald C. Rittenberg (incorporated by
reference to Exhibit 10(b) to the Registrant's Current Report
on Form 10-Q for the quarter ended September 30, 2003
(Commission File No.000-21827)).
10(n) Employment Agreement, dated as of June 19, 2003, by and among
the Company and James M. Harrison (incorporated by reference
to Exhibit 10(c) to the Registrant's Current Report on Form
10-Q for the quarter ended September 30, 2003 (Commission File
No.000-21827)).
10(o) Agreement and Plan of Merger, dated as of March 26, 2004, by
and among Amscan Holdings, Inc., AAH Holdings Corporation and
AAH Acquisition Corporation (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated March 29, 2004 (Commission File No. 000-21827)).
10(p) Form of Support Agreement, dated as of March 26, 2004, by and
among AAH Holdings Inc. and Stockholder (incorporated by
reference to Exhibit 2.2 to the Registrant's Current Report on
Form 8-K dated March 29, 2004 (Commission File No.
000-21827)).
10(q) Press Release, dated as of March 29, 2004, jointly issued by
Amscan Holdings, Inc., Berkshire Partners LLC and Weston
Presidio (incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated March 29, 2004
(Commission File No. 000-21827)).
12 Statement re: computation of ratio of earnings to fixed
charges
14 Code of Business Conduct
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-90404))
23 Consent of Ernst & Young LLP
31.1 Certification by Chief Executive Officer Pursuant to Rule
15d-14 (a)
31.2 Certification by Chief Financial Officer Pursuant to Rule
15d-14 (a)
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
37
(b) Reports on Form 8-K.
None
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Company will not send to its security holders an annual report for
the year ended December 31, 2003 nor did it send any proxy statement or other
proxy soliciting material with respect to any annual or other meeting of
security holders during such year.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
- ---------------------- Chairman of the Board of March 29, 2004
Terence M. O'Toole Directors
- ----------------------
Sanjeev K. Mehra Director March 29, 2004
/s/ Joseph P. DiSabato Director March 29, 2004
- -----------------------
Joseph P. DiSabato
/s/ Gerald C. Rittenberg Chief Executive Officer and March 29, 2004
- ------------------------ Director
Gerald C. Rittenberg
/s/ James M. Harrison President, Chief Operating Officer March 29, 2004
- --------------------- and Director
James M. Harrison
/s/ Michael A. Correale Chief Financial Officer March 29, 2004
- ----------------------- (principal financial and
Michael A. Correale accounting officer)
39
FORM 10-K
ITEM 8, ITEM 15(a) 1 AND 2
AMSCAN HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
DECEMBER 31, 2003
Consolidated Financial Statements as of December 31, 2003 and 2002 and for each
of the years in the three-year period ended December 31, 2003:
Page
----
Report of Independent Auditors............................................................... F-2
Consolidated Balance Sheets.................................................................. F-3
Consolidated Statements of Income............................................................ F-4
Consolidated Statements of Stockholders' Deficit............................................. F-5
Consolidated Statements of Cash Flows........................................................ F-7
Notes to Consolidated Financial Statements................................................... F-9
Financial Statement Schedule for the three years ended December 31, 2003:
Schedule II - Valuation and Qualifying Accounts.............................................. F-39
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Amscan Holdings,
Inc. as of December 31, 2003 and 2002, and the related consolidated statements
of income, stockholders' deficit, and cash flows for each of the three years in
the period ended December 31, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amscan Holdings,
Inc. at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets.
Stamford, Connecticut /s/ ERNST & YOUNG LLP
February 23, 2004,
except for Note 20,
as to which the date
is March 26,2004
F-2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------
2003 2002
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 31,462 $ 2,400
Accounts receivable, net of allowances of $2,825 and $5,127, respectively.............. 75,682 74,247
Inventories............................................................................ 85,137 93,890
Prepaid expenses and other current assets.............................................. 9,730 15,233
--------- ----------
Total current assets............................................................. 202,011 185,770
Property, plant and equipment, net........................................................ 96,494 100,304
Goodwill, net............................................................................. 71,986 74,251
Notes receivable from officers............................................................ - 1,942
Other assets, net......................................................................... 11,611 10,230
--------- ----------
Total assets..................................................................... $ 382,102 $ 372,497
========= ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................................... $ 34,916 $ 39,245
Accrued expenses....................................................................... 20,121 21,524
Income taxes payable................................................................... 3,178 2,525
Current portion of long-term obligations............................................... 23,237 3,220
--------- ----------
Total current liabilities........................................................ 81,452 66,514
Long-term obligations, excluding current portion.......................................... 272,272 295,420
Deferred income tax liabilities........................................................... 18,040 17,360
Other..................................................................................... 2,414 2,317
--------- ----------
Total liabilities................................................................ 374,178 381,611
Redeemable convertible preferred stock ($0.10 par value; 100 shares authorized;
44.94 shares and 42.40 shares issued and outstanding, respectively).............. 7,045 6,646
Redeemable Common Stock................................................................... 9,498 30,523
Commitments and Contingencies.............................................................
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000 shares authorized; 1,217.92 and 1,233.27
shares issued and outstanding, respectively)..................................... - -
Additional paid-in capital............................................................. 26,682 14,814
Unamortized restricted Common Stock awards, net........................................ (155) (323)
Notes receivable from stockholders..................................................... (680) (638)
Deficit................................................................................ (34,020) (57,551)
Accumulated other comprehensive loss................................................... (446) (2,585)
--------- ----------
Total stockholders' deficit...................................................... (8,619) (46,283)
--------- ----------
Total liabilities, redeemable convertible preferred and Common Stock
and stockholders' deficit...................................................... $ 382,102 $ 372,497
========= ==========
See accompanying notes to consolidated financial statements.
F-3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
---- ---- ----
Net sales ........................................................... $ 402,816 $ 385,603 $ 345,183
Cost of sales ....................................................... 269,125 252,980 225,036
--------- --------- ---------
Gross profit ............................................... 133,691 132,623 120,147
Operating expenses:
Selling expenses ................................................. 36,515 34,619 31,414
General and administrative expenses .............................. 31,925 32,056 33,317
Provision for doubtful accounts .................................. 2,588 3,008 3,758
Art and development costs ........................................ 9,395 10,301 8,772
Write-off of deferred financing and IPO-related costs ............ 2,261
Restructuring charges ............................................ 1,007 1,663
--------- --------- ---------
Total operating expenses ................................... 81,430 83,908 77,261
--------- --------- ---------
Income from operations ..................................... 52,261 48,715 42,886
Interest expense, net ............................................... 26,368 21,792 24,069
Gain on sale of available-for-sale securities ....................... (1,486)
Other expense (income), net ......................................... 52 (311) 24
--------- --------- ---------
Income before income taxes and minority interests.......... 27,327 27,234 18,793
Income tax expense .................................................. 10,065 10,757 7,423
Minority interests .................................................. 99 12 68
--------- --------- ---------
Net income ................................................. 17,163 16,465 11,302
Dividend on redeemable convertible preferred stock.......... 399 376 270
--------- --------- ---------
Net income applicable to common shares ..................... $ 16,764 $ 16,089 $ 11,032
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)
UNAMORTIZED
RESTRICTED NOTES
ADDITIONAL COMMON RECEIVABLE
COMMON COMMON PAID-IN STOCK AWARDS, FROM
SHARES STOCK CAPITAL NET STOCKHOLDERS DEFICIT
------ ----- ------- --- ------------ -------
Balance at December 31, 2000 ..................... 1,132.54 $ - $ 233 $(354) $(548) $(83,867)
Net income .................................... 11,302
Net change in cumulative
translation adjustment ....................
Cumulative effect of a change in
accounting principle, net of
taxes (see Notes 18 and 19) ...............
Change in fair value of interest rate
swaps and foreign exchange
contracts, net of income taxes ............
Comprehensive income ..................
Exercise of stock options ..................... 0.95 66 (25)
Increase in redeemable Common
Stock due to accretion of market
value and vesting of restricted
Common Stock award ........................ (1,181)
Amortization of restricted
Common Stock award ........................ 260
Accretion of interest income .................. (37)
Payments received on notes
receivable from stockholders .............. 9
Redeemable convertible preferred
stock dividends ........................... (270)
-------- ------ ------- ----- ----- --------
Balance at December 31, 2001 ..................... 1,133.49 - 299 (94) (601) (74,016)
Net income .................................... 16,465
Net change in cumulative
translation adjustment ....................
Change in fair value of interest
rate swaps and foreign exchange
contracts, net of taxes ...................
Comprehensive income ..................
Grant of restricted Common
Stock award ............................... 3.00 465 (465)
Issuance of Common Stock in
connection with acquisition ............... 96.78 15,000
Increase in redeemable Common
Stock due to vesting of restricted
Common Stock award ........................ (574)
Amortization of restricted
Common Stock awards ....................... 236
Accretion of interest income .................. (37)
Redeemable convertible
preferred stock dividends ................. (376)
-------- ------ ------- ----- ----- --------
Balance at December 31, 2002 ..................... 1,233.27 $ - $14,814 $(323) $(638) $(57,551)
======== ====== ======= ===== ===== ========
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS TOTAL
---- -----
Balance at December 31, 2000 ..................... $(2,345) $(86,881)
Net income .................................... 11,302
Net change in cumulative
translation adjustment .................... (434) (434)
Cumulative effect of a change in
accounting principle, net of
taxes (see Notes 18 and 19) ............... (227) (227)
Change in fair value of interest rate
swaps and foreign exchange
contracts, net of income taxes ............ 113 113
--------
Comprehensive income .................. 10,754
Exercise of stock options ..................... 41
Increase in redeemable Common
Stock due to accretion of market
value and vesting of restricted
Common Stock award ........................ (1,181)
Amortization of restricted
Common Stock award ........................ 260
Accretion of interest income .................. (37)
Payments received on notes
receivable from stockholders .............. 9
Redeemable convertible preferred
stock dividends ........................... (270)
------- --------
Balance at December 31, 2001 ..................... (2,893) (77,305)
Net income .................................... 16,465
Net change in cumulative
translation adjustment .................... 1,304 1,304
Change in fair value of interest
rate swaps and foreign exchange
contracts, net of taxes ................... (996) (996)
--------
Comprehensive income .................. 16,773
Grant of restricted Common
Stock award ...................... -
Issuance of Common Stock in
connection with acquisition ............... 15,000
Increase in redeemable Common
Stock due to vesting of restricted
Common Stock award ........................ (574)
Amortization of restricted
Common Stock awards ....................... 236
Accretion of interest income .................. (37)
Redeemable convertible
preferred stock dividends ................. (376)
------- --------
Balance at December 31, 2002 ..................... $(2,585) $(46,283)
======= ========
-Continued-
F-5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)
UNAMORTIZED NOTES
ADDITIONAL RESTRICTED RECEIVABLE
COMMON COMMON PAID-IN COMMON STOCK FROM
SHARES STOCK CAPITAL AWARDS, NET STOCKHOLDERS DEFICIT
------ ----- ------- ----------- ------------ -------
Balance at December 31, 2002 ............ 1,233.27 $ - $14,814 $(323) $(638) $(57,551)
Net income ........................... 17,163
Net change in cumulative
translation adjustment ............
Change in fair value of
available-for-sale securities,
net of income taxes ...............
Reclassification adjustment for
available-for-sale securities
sold during the period, net of
income taxes ......................
Change in fair value of interest
rate swap and foreign exchange
contracts, net of income taxes ....
Comprehensive income .........
Exercise of stock options, including
income tax benefits ............... 6.65 910
Amortization of restricted Common
Stock awards ...................... 168
Increase in redeemable Common
Stock due to exercise of stock
options and vesting of restricted
Common Stock award ................ (1,537)
Decrease in redeemable Common
Stock due to the expiration of
redemption feature ................ 13,597 6,000
Decrease in redeemable Common
Stock due to change in market value
of Common Stock ................... 50 368
Increase in redeemable Common
Stock due to employee purchases of
Common Stock ...................... (753)
Purchase and retirement of redeemable
Common Stock held by officers ..... (22.0)
Accretion of interest income ......... (42)
Redeemable convertible preferred
stock dividend .................... (399)
-------- ------ ------- ----- ----- --------
Balance at December 31, 2003 ............ 1,217.92 $ - $26,682 $(155) $(680) $(34,020)
======== ====== ======= ===== ===== ========
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS TOTAL
---- -----
Balance at December 31, 2002 ............ $(2,585) $(46,283)
Net income ........................... 17,163
Net change in cumulative
translation adjustment ............ 2,161 2,161
Change in fair value of
available-for-sale securities,
net of income taxes ............... 949 949
Reclassification adjustment for
available-for-sale securities
sold during the period, net of
income taxes ...................... (899) (899)
Change in fair value of interest
rate swap and foreign exchange
contracts, net of income taxes .... (72) (72)
--------
Comprehensive income ......... 19,302
Exercise of stock options, including
income tax benefits ............... 910
Amortization of restricted Common
Stock awards ...................... 168
Increase in redeemable Common
Stock due to exercise of stock
options and vesting of restricted
Common Stock award ................ (1,537)
Decrease in redeemable Common
Stock due to the expiration of
redemption feature ................ 19,597
Decrease in redeemable Common
Stock due to change in market value
of Common Stock ................... 418
Increase in redeemable Common
Stock due to employee purchases of
Common Stock ...................... (753)
Purchase and retirement of redeemable
Common Stock held by officers
Accretion of interest income ......... (42)
Redeemable convertible preferred
stock dividend .................... (399)
------- --------
Balance at December 31, 2003 ............ $ (446) $ (8,619)
======= ========
See accompanying notes to consolidated financial statements.
F-6
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income ............................................................... $ 17,163 $ 16,465 $ 11,302
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense .................................. 16,119 13,962 15,468
Amortization of deferred financing costs ............................... 2,131 1,202 998
Loss (gain) on disposal of property, plant and equipment ............... 122 (254) (13)
Provision for doubtful accounts ........................................ 2,588 3,008 3,758
Write-off of deferred financing costs .................................. 1,460
Amortization of restricted Common Stock awards ......................... 168 236 260
Gain on sale of available-for-sale securities .......................... (1,486)
Non-cash restructuring charges ......................................... 104
Deferred income tax provision .......................................... 5,231 4,869 1,620
Changes in operating assets and liabilities, net of acquisition in 2002:
Increase in accounts receivable ...................................... (3,628) (7,934) (6,162)
Decrease (increase) in inventories ................................... 7,113 (15,391) (1,234)
Decrease (increase) in prepaid expenses, other current assets
and other, net ..................................................... 2,250 (2,027) (4,188)
(Decrease) increase in accounts payable, accrued expenses
and income taxes payable ........................................... (5,713) 4,733 4,443
--------- --------- ---------
Net cash provided by operating activities ........................ 42,162 20,329 26,252
Cash flows from investing activities:
Cash paid in connection with acquisition ................................. (13,548)
Capital expenditures ..................................................... (12,525) (17,712) (37,479)
Proceeds from sale of available-for-sale securities ...................... 2,005
Proceeds from disposal of property, plant and equipment .................. 204 530 55
--------- --------- ---------
Net cash used in investing activities ............................ (10,316) (30,730) (37,424)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock ......... 6,000
Proceeds from the exercise of Common Stock options ....................... 831 41
Proceeds from loans, notes payable and long-term obligations, net of debt
issuance costs (including original issue discount in 2002) of $6,032
and $557, in 2002 and 2001, respectively ............................... 163,968 19,443
Repayment of loans, notes payable and long-term obligations .............. (3,723) (152,351) (13,495)
Loans to officers under notes ............................................ (200) (953)
Purchase of Common Stock from officers ................................... (3,300)
Repayment of notes receivable from officers .............................. 1,990
Other .................................................................... (66)
--------- --------- ---------
Net cash (used in) provided by financing activities .............. (4,202) 11,417 10,970
Effect of exchange rate changes on cash and cash equivalents ................ 1,418 368 (251)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. 29,062 1,384 (453)
Cash and cash equivalents at beginning of year .............................. 2,400 1,016 1,469
--------- --------- ---------
Cash and cash equivalents at end of year .................................... $ 31,462 $ 2,400 $ 1,016
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 22,982 $ 20,506 $ 25,189
Income taxes ..................................................... 4,395 6,158 6,020
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(DOLLARS IN THOUSANDS)
Supplemental information on non-cash activities (dollars in thousands):
Capital lease obligations of $143, $53 and $144 were incurred in 2003, 2002 and
2001, respectively.
In December 2003, the Company acquired the balloon assets of a competitor, in
exchange for 50.1% of the common stock of its wholly-owned metallic balloon
distribution subsidiary located in Mexico, thereby creating a joint venture to
distribute certain metallic balloons principally in Mexico and Latin America.
The Company has accounted for its investment in the joint venture using the
equity method.
See accompanying notes to consolidated financial statements.
F-8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings" or the "Company") was
incorporated on October 3, 1996 for the purpose of becoming the holding company
for Amscan Inc. and certain affiliated entities in connection with an initial
public offering of its Common Stock.
On December 19, 1997, Amscan Holdings and Confetti Acquisition, Inc.
("Confetti"), a newly formed Delaware corporation affiliated with GS Capital
Partners II, L.P. and certain other private investment funds managed by Goldman,
Sachs & Co. ("Goldman Sachs") (collectively, "GSCP"), entered into a merger
pursuant to an agreement (the "Merger Agreement") providing for a
recapitalization of Amscan Holdings in which Confetti was merged with and into
Amscan Holdings (the "Merger"), with Amscan Holdings as the surviving
privately-held corporation. Pursuant to certain employment arrangements, certain
employees of the Company, at that time, purchased an aggregate of 10 shares of
Company Common Stock following the Merger (see Note 14). The Merger was
accounted for as a recapitalization and, accordingly, the historical basis of
the Company's assets and liabilities was not impacted by the Merger.
The Company 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.
Basis of Presentation
The consolidated financial statements include the accounts of Amscan
Holdings and all majority-owned and controlled entities. All material
intercompany balances and transactions have been eliminated in consolidation.
Acquisition
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Balloons, Inc. (since renamed M&D Industries, Inc. ("M&D
Industries")), a Manteno, Illinois-based manufacturer of metallic and plastic
balloons, from American Greetings Corporation ("American Greetings") for
$27,500,000 plus certain other related costs of $1,048,000. The Company financed
the acquisition by borrowing $13,548,000 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 was 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 was 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 January 1, 2002 and 2001, respectively.
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 and 2001, nor is it necessarily indicative of the Company's
future results (dollars in thousands):
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
---- ----
Net sales.................................... $389,710 $370,807
Net income................................... 16,858 12,528
The net income amounts reflect adjustments for interest expense from
additional borrowings necessary to finance the acquisition and amortization of
other intangible assets and, in 2001, goodwill, net of their related income
F-9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
tax effects based upon a pro forma effective tax rate of 39.5%. The unaudited
pro forma information gives effect only to adjustments described above and does
not reflect management's estimate of any anticipated cost savings or other
benefits as a result of the acquisition.
During the years ended December 31, 2003 and 2002, respectively, the
Company sold $7,383,000 and $7,475,000 of metallic balloons and other party
goods to American Greetings. Trade accounts receivable from American Greetings
at December 31, 2003 and 2002, were $1,937,000 and $2,632,000, respectively.
Joint Venture
In December 2003, the Company acquired the balloon assets of a
competitor, in exchange for 50.1% of the common stock of our wholly-owned
metallic balloon distribution subsidiary located in Mexico, thereby creating a
joint venture to distribute certain metallic balloons principally in Mexico and
Latin America. The Company has accounted for its investment in the joint venture
using the equity method. The Company's investment in the joint venture totaled
$2.5 million on the date of exchange. The results of operations for the
investment in the joint venture are included in the accompanying consolidated
financial statements from the date of exchange and are not material to the
consolidated financial statements. Prior to the date of transfer, the Company's
consolidated financial statements included the accounts of its wholly-owned
Mexican balloon distribution subsidiary.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Substantially all inventories of the Company are valued at the lower of
cost (principally on the first-in, first-out method) or market.
Long-Lived and Intangible Assets
Property, plant and equipment are stated at cost. Machinery and
equipment under capital leases are stated at the present value of the minimum
lease payments at the inception of the lease. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the
assets. Machinery and equipment held under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the asset.
Goodwill, net of amortization was $71,986,000 and $74,251,000 at
December 31, 2003 and 2002, respectively. Goodwill represents the excess of the
purchase price of acquired companies over the estimated fair value of the net
assets acquired. Effective January 1, 2002, the Company adopted SFAS No. 141 and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 revises the accounting
treatment for business combinations to require the use of purchase accounting
and prohibit the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 revises the
accounting for goodwill to eliminate the amortization of goodwill on
transactions consummated after June 30, 2001 and of all other goodwill as of
January 1, 2002. As a result, the Company stopped recording goodwill
amortization as of January 1, 2002. Intangible assets with definite lives will
continue to be amortized over their useful lives. SFAS No. 142 also requires
goodwill and other intangible assets with indefinite lives to be reviewed for
impairment each year and more frequently if circumstances indicate a possible
impairment. During 2003, the Company completed its review and determined that
goodwill was not impaired. Had SFAS No. 142 been effective in 2001, net income
would have been reported as the following (dollars in thousands):
F-10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
YEARS ENDED DECEMBER 31,
------------------------
2003 2002 2001
---- ---- ----
Reported net income.............................. $17,163 $16,465 $11,302
Add back goodwill amortization, net of
income taxes.................................. 1,572
------- ------- -------
Adjusted net income.............................. $17,163 $16,465 $12,874
======= ======= =======
Other intangible assets, net of amortization, of $333,000 and $695,000
at December 31, 2003 and 2002, respectively, were comprised of licensing
agreements which are being amortized using the straight-line method over the
lives of the contracts (one to three years with an average life of 2.7 years).
Accumulated amortization was $3,737,000 and $3,375,000 at December 31, 2003 and
2002, respectively. Amortization of other intangible assets for the three years
ended December 31, 2003, 2002 and 2001 was $362,000, $375,000, and $705,000,
respectively. Estimated amortization expense for the year ending December 31,
2004 is $333,000.
The Company reviews the recoverability of its long-lived assets,
including definite-lived intangible assets other than goodwill, whenever facts
and circumstances indicate that the carrying amount may not be fully
recoverable. For purposes of recognizing and measuring impairment, the Company
evaluates long-lived assets other than goodwill based upon the lowest level of
independent cash flows ascertainable to evaluate impairment. If the sum of the
undiscounted future cash flows expected over the remaining asset life is less
than the carrying value of the assets, the Company may recognize an impairment
loss. The impairment related to long-lived assets is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the asset.
When fair values are not readily available, the Company estimates fair values
using expected discounted future cash flows.
Goodwill is reviewed for potential impairment, on an annual basis or
more frequently if circumstances indicate a possible impairment, by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit exceeds its fair value, the excess,
if any, of the fair value of the reporting unit over amounts allocable to the
unit's other assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss will be recognized in an amount equal
to that excess. The fair value of a reporting unit refers to the amount at which
the unit as a whole could be sold in a current transaction between willing
parties.
Deferred Financing Costs and Original Issue Discount
Deferred financing costs (included in other assets) and original issue
discount (netted against the related debt) are both amortized to interest
expense using the interest method over the lives of the related debt.
Revenue Recognition
The Company's terms of sale are generally F.O.B. shipping point and,
accordingly, title and the risks and rewards of ownership are generally
transferred to the customer, and revenue is recognized, when goods are shipped.
The Company estimates reductions to revenues for volume-based rebate programs at
the time sales are recognized.
Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of the Company's customers to make required
payments. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables including consideration of our history
of receivable write-offs, the level of past due accounts and the economic status
of our customers. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Shipping and Handling
Outbound shipping and handling costs billed to customers are included
in revenue. The costs of shipping and handling incurred by the Company are
included in cost of sales.
F-11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Royalty Agreements
The Company enters into royalty agreements that allow the Company to
use licensed designs on certain of its products. These contracts require the
Company to pay royalties, generally based on the sales of such product, and may
require guaranteed minimum royalties, a portion of which may be paid in advance.
The Company matches royalty expense with revenue by recording royalties at the
time of sale, at the greater of the contractual rate or an effective rate
calculated based on the guaranteed minimum royalty and the Company's estimate of
sales during the contract period. If a portion of the guaranteed minimum royalty
is determined not to be recoverable, the unrecoverable portion is charged to
expense at that time. Guaranteed minimum royalties paid in advance are recorded
in the consolidated balance sheets as other assets.
Catalogue Costs
The Company expenses costs associated with the production of annual
catalogues when incurred.
Art and Development Costs
Art and development costs are primarily internal costs that are not
easily associated with specific designs, some of which may not reach commercial
production. Accordingly, the Company expenses these costs as incurred.
Derivative Financial Instruments
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") as amended and
interpreted, effective January 1, 2001. This statement, as amended and
interpreted, requires that all derivative financial instruments be recognized on
the balance sheet at fair value and establish criteria for both the designation
and effectiveness of hedging activities. The Company may use derivatives in the
management of interest rate and foreign currency exposure. These statements
require the Company to formally document the assets, liabilities or other
transaction the Company designates as hedged items, the risk being hedged and
the relationship between the hedged items and the hedging instruments. The
Company must measure the effectiveness of the hedging relationship at the
inception of the hedge and on an on-going basis.
For derivative financial instruments that qualify as fair value hedges,
the gain or loss on the instrument and the offsetting loss or gain on the hedged
item attributable to the hedged risk are recognized in current earnings during
the period of the change in fair values. For derivative financial instruments
that qualify as cash flow hedges (i.e., hedging the exposure to variability in
expected future cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
The ineffective portion of a cash flow hedge, if any, is determined based on the
dollar-offset method (i.e., the gain or loss on the derivative financial
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item) and is recognized in current earnings during the
period of change. As long as hedge effectiveness is maintained, the Company's
interest rate swap arrangements and foreign currency exchange agreements qualify
for hedge accounting as cash flow hedges. The adoption of SFAS No. 133, as
amended and interpreted, did not have a significant effect on the Company's
consolidated financial statements, but did reduce comprehensive income in 2001
by $114,000 (see Notes 18 and 19).
Marketable Securities
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company classifies its
marketable securities as available-for-sale securities. Such securities are
stated at fair value based on quoted market prices and consist of shares of
common stock of a customer that the Company received in connection with the
customer's reorganization in bankruptcy. Unrealized holding gains or losses are
included in stockholders' deficit as a separate component of accumulated other
comprehensive loss. The specific identification method is used to compute
realized gains or losses on marketable securities.
The Company regularly reviews its marketable securities for impairment
based on criteria that include the extent to which the investment's carrying
value exceeds its related market value, the duration of the market decline,
F-12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
the ability to hold to recovery and the financial strength and specific
prospects of the issuer of the security. Unrealized losses that are other than
temporary, if any, are recognized in earnings.
Income Taxes
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities and
operating loss and tax credit carryforwards applying enacted statutory tax rates
in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, in the judgment
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Stock-Based Compensation
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.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No.
148") was issued. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The amendments to SFAS No. 123 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company adopted the disclosure provisions of SFAS No. 148 on December 31, 2002
and continues to account for its stock-based compensation under APB No. 25.
Accordingly, no compensation cost has been recognized in connection with the
issuance of options under the 1997 Stock Incentive Plan as all options were
granted with exercise prices equal to the estimated fair market value of the
Common Stock on the date of grant. The adoption of SFAS No. 148 had no impact on
the Company's financial position or results of operations. See Note 12 for
further discussion regarding the Company's stock-based compensation plans and
related accounting matters.
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):
YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
---- ---- ----
Net income:
As reported ............................................. $17,163 $16,465 $11,302
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of income taxes .......... 296 517 508
------- ------- -------
SFAS No. 123 pro forma net income ....................... $16,867 $15,948 $10,794
======= ======= =======
F-13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
It has been assumed that the estimated fair value of the options
granted in 2003, 2002 and 2001 under the 1997 Stock Incentive Plan is amortized
on a straight line basis to compensation expense, net of taxes, over the vesting
period of the grant, ranging from 2.5 to 5.0 years. The estimated fair value of
each option on the date of grant was determined using the minimum value method
with the following assumptions: dividend yield of 0%, risk-free interest rate of
3.9% and expected lives of 2.5 and 7.0 years.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31, 2003 and 2002
consisted of the Company's foreign currency translation adjustment, the fair
value of interest rate swap and foreign exchange contracts qualifying as hedges
(see Note 19) and unrealized holding gains on marketable securities (see Note
10).
Foreign Currency Transactions and Translation
The functional currencies of the Company's foreign operations are the
local currencies in which they operate. Realized foreign currency exchange gains
or losses resulting from the settlement of receivables or payables in currencies
other than the functional currencies are credited or charged to operations.
Unrealized gains or losses on foreign currency transactions are insignificant.
The balance sheets of foreign subsidiaries are translated into U.S. dollars at
the exchange rates in effect on the balance sheet date. The results of
operations of foreign subsidiaries are translated into U.S. dollars at the
average exchange rates effective for the periods presented. The differences from
historical exchange rates are recorded as comprehensive income (loss) and are
included as a component of accumulated other comprehensive loss.
Concentration of Credit Risk
While the Company's customers are geographically dispersed throughout
North America, South America, Europe, Asia and Australia, there is a
concentration of sales made to and accounts receivable from the stores that
operate in the party superstore distribution channel. At December 31, 2003 and
2002, Party City Corporation ("Party City"), the Company's largest customer with
250 corporate-owned and operated stores currently, accounted for 13% and 20%,
respectively, of consolidated accounts receivable, net. For each of the years
ended December 31, 2003, 2002 and 2001, sales to Party City's corporate-owned
and operated stores represented 12%, 13%, and 13% of consolidated net sales,
respectively. For the years ended December 31, 2003, 2002 and 2001, sales to
Party City's franchise-owned and operated stores (currently totaling 250 stores)
represented 13%, 14% and 15% of consolidated net sales, respectively. No other
group or combination of customers subjected the Company to a concentration of
credit risk. Although the Company believes its relationships with Party City and
its franchisees are good, if they were to reduce their volume of purchases from
the Company significantly, the Company's financial condition and results of
operations could be materially adversely affected.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Recently Issued Accounting Standards
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No.
146") was issued. SFAS No. 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3 (" EITF No. 94-3"), "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date an entity committed to an exit plan. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002.
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
F-14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
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
the first interim or annual period ended after March 15, 2004 (except for
special purpose entities for which the effective date is periods ended after
December 31, 2003). The Company has performed an evaluation to identify such
entities and does not believe that any entities fall within the scope of this
standard.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not
applicable or not significant to the financial statements of the Company.
NOTE 3 - INVENTORIES
Inventories at December 31, 2003 and 2002 consisted of the following
(dollars in thousands):
2003 2002
---- ----
Finished goods ...................................... $ 74,258 $ 80,783
Raw materials ....................................... 8,842 8,763
Work-in process ..................................... 4,762 7,722
-------- --------
87,862 97,268
Less: reserve for slow moving and obsolete inventory (2,725) (3,378)
-------- --------
$ 85,137 $ 93,890
======== ========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, 2003 and 2002
consisted of the following (dollars in thousands):
ESTIMATED
2003 2002 USEFUL LIVES
---- ---- ------------
Machinery and equipment ........................ $ 100,357 $ 93,159 3-15
Buildings ...................................... 38,676 37,356 31-40
Data processing equipment ...................... 22,057 23,691 3-5
Leasehold improvements ......................... 11,032 10,859 2-20
Furniture and fixtures ......................... 4,778 5,361 10
Land ........................................... 7,144 7,134
--------- ---------
184,044 177,560
Less: accumulated depreciation and amortization (87,550) (77,256)
--------- ---------
$ 96,494 $ 100,304
========= =========
Depreciation and amortization expense related to property, plant and
equipment was $15,757,000, $13,587,000, and $12,164,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
NOTE 5 - LOANS AND NOTES PAYABLE
On December 20, 2002, the Company 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")
F-15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(see Note 6) 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 repay borrowings under the Bank Credit
Facilities and to pay certain fees and expenses associated with the refinancing.
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
December 31, 2003 and 2002, the Company had no borrowings under the Revolver.
Standby letters of credit of $7,077,000 and $6,500,000, respectively, were
outstanding and the Company had borrowing capacity of approximately $22,923,000
and $23,500,000, respectively, under the terms of the Revolver at December 31,
2003 and 2002. Amounts drawn on the Revolver are also subject to an agreed upon
borrowing base. All borrowings under the Revolver are secured by a first
priority lien on substantially all of the Company's assets, are guaranteed by
the Company's domestic subsidiaries and are subject to mandatory prepayments
upon the occurrence of certain events (see Note 6). The Company is required to
maintain certain financial ratios throughout the term of the Credit Agreement,
including leverage and interest coverage ratios.
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, 2004. We expect to renew these revolving credit facilities upon expiration.
No borrowings were outstanding under these revolving credit facilities at
December 31, 2003 and 2002.
NOTE 6 - LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 2003 and 2002 consisted of the
following (dollars in thousands):
2003 2002
---- ----
Senior subordinated notes (a) ....................................................... $ 110,000 $ 110,000
Term Loan, net of unamortized discount of $1,274 and $1,692, respectively (b) ....... 167,026 168,308
Mortgage obligations (c) ............................................................ 18,188 19,981
Note payable (d) .................................................................... 31 140
Capital lease obligations (e) ....................................................... 264 211
--------- ---------
Total long-term obligations ................................................ 295,509 298,640
Less: current portion ............................................................... (23,237) (3,220)
--------- ---------
Long-term obligations, excluding current portion .................................... $ 272,272 $ 295,420
========= =========
On December 19, 1997, the Company issued $110,000,000 aggregate
principal amount of 9 7/8% senior subordinated notes due in 2007 (the "Notes")
and entered into the Bank Credit Facilities which provided for borrowings under
an AXEL term loan and revolving loan borrowings under a revolving credit
facility. On December 20, 2002, the Company used the proceeds from its Term Loan
(see Note 5) to repay its 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.
The Company is required to make prepayments under the terms of the
Credit Agreement under certain circumstances, including upon certain asset sales
and certain issuances of debt or equity securities. Such mandatory prepayments
will be applied to prepay the Term Loan first (on a pro rata basis) and
thereafter to prepay the Revolver and to reduce the commitments thereunder. The
Company may prepay, in whole or in part, borrowings under the Term Loan. Call
protection provisions apply to certain prepayments of borrowings under the Term
Loan. The Company may prepay borrowings under or reduce commitments for the
Revolver, in whole or in part, without penalty. The Credit Agreement is
guaranteed by the Company's domestic subsidiaries (the "Guarantors") (see Note
21). Subject to certain exceptions, all borrowings under the Credit Agreement,
and all guarantees are secured by all
F-16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
existing and after-acquired personal property of the Company and the Guarantors,
including, subject to certain exceptions, a pledge of all the stock of domestic
subsidiaries owned by the Company or any of the Guarantors and first priority
liens on after-acquired real property and leasehold interests of the Company and
the Guarantors. The guarantees are joint and several guarantees, and are
irrevocable, full and unconditional.
(a) The Notes bear interest at a rate equal to 9 7/8% per annum. 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 103.292% 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.
(b) The Term Loan of $170,000,000 was funded at a 1% original issue
discount and provides for amortization (in quarterly installments) of
1% of the principal amount thereof 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 December 31, 2003, the interest rate on
the Term Loan was 6.50%. The original issue discount is being
amortized to interest expense using the interest method over the life
of the Term Loan. In March of 2004, the Company was required to make a
$20.2 million prepayment of the Term Loan based on the Company's
excess cash flows, as defined, for the year ended December 31, 2003.
(c) In conjunction with the construction of a new distribution facility,
on December 21, 2001, the Company borrowed $10,000,000 each from a
financial institution and the New York State Job Development
Authority, pursuant to the terms of a first and second lien mortgage
note, 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 interest rate swap contract requires the Company to
settle the difference in interest obligations monthly. Net payments to
the counterparty under the swap contracts for the years ended December
31, 2003 and 2002, respectively, which have been recorded as
additional interest expense, were $404,000 and $343,000. The second
lien mortgage note bears interest at a rate of 3.31% and 3.77% at
December 31, 2003 and 2002, respectively, and is subject to review and
adjustment semi-annually based on the New York State Job Development
Authority's confidential internal protocols. Both loans are for a term
of 96 months and require monthly payments based on a 180-month
amortization period with balloon payments upon maturity in January
2010. The principal amounts outstanding under the first lien mortgage
as of December 31, 2003 and 2002, were $9,021,000 and $9,389,000,
respectively. The principal amounts outstanding under the second lien
mortgage as of December 31, 2003 and 2002, were $8,722,000 and
$9,555,000, respectively. At December 31, 2003, the new facility had a
carrying value of $29,437,000 (including capitalized interest of
$1,204,000, of which $981,000 was incurred in 2001).
At December 31, 2003 and 2002, the Company had a mortgage obligation
payable to a financial institution of $445,000 and $1,037,000,
respectively, due September 13, 2004. The mortgage obligation relates
to a distribution facility, is collateralized by the related real
estate asset ($4,109,000 carrying value at December 31, 2003) and
bears interest at 8.51%.
(d) In conjunction with the 1998 acquisition of the remaining 25% interest
in its subsidiary, Amscan Holdings Limited, the Company issued a
non-interest bearing note to the former shareholder which is payable
through April 2004. At December 31, 2003 and 2002, the note to the
former shareholder was $31,000 and $140,000, respectively.
F-17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(e) The Company has entered into various capital leases for machinery and
equipment with implicit interest rates ranging from 4.85% to 9.20%
which extend to 2006.
At December 31, 2003, maturities of long-term obligations consisted of
the following (dollars in thousands):
MORTGAGE, NOTES CAPITAL
AND LOANS LEASE OBLIGATIONS TOTAL
--------------- ----------------- ---------
2004.......................................... $ 23,141 $ 96 $ 23,237
2005.......................................... 2,519 103 2,622
2006.......................................... 83,742 65 83,807
2007.......................................... 173,074 - 173,074
2008.......................................... 1,288 - 1,288
Thereafter.................................... 11,481 - 11,481
--------- -------- ---------
Long-term obligations......................... $ 295,245 $ 264 $ 295,509
========= ======== =========
NOTE 7 - 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 and as
a result, the Company charged a total of $3.3 million to the provision for
doubtful accounts, of which approximately $1,800,000 and $1,500,000 were charged
during 2003 and 2002, respectively. This customer accounted for approximately
2.1% of the Company's consolidated net sales for the year ended December 31,
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 third quarter of 2001, one of the Company's customers filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code and, as a result, the Company charged $2,500,000 to the provision for
doubtful accounts in 2001 to fully provide for the accounts receivable balances
due to the Company. This customer accounted for approximately 2.1% of the
Company's consolidated net sales for the year ended December 31, 2001.
NOTE 8 - WRITE-OFF OF DEFERRED FINANCING AND IPO-RELATED COSTS
During the fourth quarter of 2002, the Company amended and restated its
Bank Credit Facilities with various lenders (see Notes 5 and 6) which resulted
in a $1,460,000 write-off of deferred financing costs associated with the
previous facility.
On June 13, 2002, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering ("IPO") of its
Common Stock. However, during the fourth quarter of 2002, the Company decided
not to pursue the IPO of shares of its Common Stock, given the valuations
available in the equity markets at that time, which resulted in a $801,000
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.
NOTE 9 - RESTRUCTURING CHARGES
During the years ended December 31, 2003 and 2002, the Company incurred
restructuring charges of $1,007,000 and $1,663,000, respectively, resulting from
the consolidation of certain domestic and foreign distribution operations, and
the ongoing integration of M&D Industries.
NOTE 10 - MARKETABLE SECURITIES
Marketable securities with fair value of $102,000 are included in other
current assets on the consolidated balance sheet at December 31, 2003.
Marketable securities consist of shares of common stock of a customer that the
F-18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Company received in connection with the customer's reorganization in bankruptcy.
A gross unrealized gain of $83,000 has been recorded, net of income taxes of
$33,000, in stockholders' deficit as a component of accumulated other
comprehensive loss.
During the year ended December 31, 2003, the Company sold shares of
these marketable securities and received net proceeds of approximately
$2,005,000 and recognized a gain of $1,486,000. For the purpose of computing the
gain, cost was based on the fair value of the shares on the initial date
received by the Company.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company maintain profit-sharing plans for
eligible employees providing for annual discretionary contributions to a trust.
Eligible employees are full-time domestic employees who have completed a certain
length of service, as defined, and attained a certain age, as defined. The plans
require the subsidiaries to match 25% to 100% of voluntary employee
contributions to the plan, up to the first 6% of an employee's annual salary.
Profit sharing expense for the years ended December 31, 2003, 2002 and 2001
totaled $2,943,000, $3,054,000 and $2,462,000, respectively.
NOTE 12 - STOCK OPTION PLAN
The Company adopted the Amscan Holdings, Inc. Stock Incentive Plan (the
"1997 Stock Incentive Plan") in 1997. The 1997 Stock Incentive Plan is
administered by the Board of Directors. Under the terms of the 1997 Stock
Incentive Plan, as amended, the Board may award Company Common Stock, stock
options and stock appreciation rights to certain directors, officers, employees
and consultants of the Company and its affiliates. The vesting periods for
awards are determined by the Board at the time of grant. 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. The
1997 Stock Incentive Plan will terminate ten years after its effective date;
however, awards outstanding as of such date will not be affected or impaired by
such termination.
In June 2003, the Company granted 25 options to each of the Chief
Executive Officer and the President that vest and become exercisable upon the
expiration of two and one-half years from the date of grant and shall expire on
the third anniversary of the date of grant. All other options granted under the
1997 Stock Incentive Plan vest in equal installments on each of the first five
anniversaries of the grant date and have a term of ten years. The options are
non-transferable (except under certain limited circumstances).
The following table summarizes the changes in outstanding options under
the 1997 Stock Incentive Plan for
F-19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
the years ended December 31, 2003, 2002 and 2001:
Average Fair Market
Average Value of Options
Options Exercise Price at Grant Date
------- -------------- -------------------
Outstanding at December 31, 2000......... 136.967
Granted......................... 2.500 $150,000 $53,474
Exercised....................... (0.666) 75,000
Exercised....................... (0.287) 55,102
Canceled........................ (0.191) 55,102
Canceled........................ (0.444) 75,000
Canceled........................ (4.500) 125,000
-------
Outstanding at December 31, 2001......... 133.379
Granted......................... 2.500 155,000 55,257
Canceled........................ (1.000) 150,000
Canceled........................ (2.805) 75,000
-------
Outstanding at December 31, 2002......... 132.074
Granted......................... 50.000 150,000 21,850
Granted......................... 30.000 150,000 53,474
Exercised....................... (6.648) 125,000
Canceled........................ (18.941) 79,730
-------
Outstanding at December 31, 2003......... 186.485
=======
Exercisable at December 31, 2001......... 91.290 78,977
Exercisable at December 31, 2002......... 115.210 80,611
Exercisable at December 31, 2003......... 98.147 82,086
The average exercise price for options outstanding as of December 31,
2003 was $113,715 with exercise prices ranging from $54,545 to $155,000. The
average remaining contractual life of those options was 4.8 years.
NOTE 13- INCOME TAXES
A summary of domestic and foreign pre-tax income (loss) follows
(dollars in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Domestic.......................................................... $24,974 $28,172 $17,350
Foreign........................................................... 2,353 (938) 1,443
------- ------- -------
Total............................................................. $27,327 $27,234 $18,793
======= ======= =======
The provision (benefit) for income taxes consisted of the following
(dollars in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Current:
Federal................................................... $ 3,368 $ 5,452 $ 4,266
State..................................................... 709 993 1,101
Foreign................................................... 757 (557) 436
------- ------- -------
Total current provision................................. 4,834 5,888 5,803
Deferred:
Federal................................................... 4,531 4,422 1,400
State..................................................... 700 591 143
Foreign................................................... - (144) 77
------- ------- -------
Total deferred provision................................ 5,231 4,869 1,620
------- ------- -------
Income tax expense............................................... $10,065 $10,757 $ 7,423
======= ======= =======
F-20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred income
tax assets and liabilities from domestic jurisdictions consisted of the
following at December 31 (dollars in thousands):
2003 2002
---- ----
Current deferred income tax assets:
Inventory valuation.......................................................... $ 1,862 $ 2,999
Allowance for doubtful accounts.............................................. 798 1,871
Accrued liabilities.......................................................... 156 153
Charitable contributions carryforward........................................ 73 -
Other........................................................................ - 18
------- -------
Current deferred income tax assets (included in prepaid expenses and
other current assets)................................................. $ 2,889 $ 5,041
======= =======
2003 2002
---- ----
Non-current deferred income tax liabilities, net:
Property, plant and equipment................................................ $17,950 $16,885
Amortization of goodwill and other intangibles............................... 1,165 2,076
Royalty reserves............................................................. (297) (455)
Foreign tax credits.......................................................... - (308)
Interest rate swap and foreign exchange contracts............................ (714) (726)
Other........................................................................ (64) (112)
------- -------
Non-current deferred income tax liabilities, net........................ $18,040 $17,360
======= =======
A non-current foreign deferred income tax asset of $733,000 and
$600,000 at December 31, 2003 and 2002, respectively, is primarily attributable
to non-current obligations recognized in connection with the acquisition of
Anagram International Inc. and certain related companies ("Anagram") in 1998 and
is included in non-current assets, net.
The difference between the Company's effective income tax rate and the
federal statutory income tax rate is reconciled below:
YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
---- ---- ----
Provision at federal statutory income tax rate.................. 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit............. 3.6 3.8 4.7
Other........................................................... (1.8) 0.7 (0.2)
---- ---- ----
Effective income tax rate....................................... 36.8% 39.5% 39.5%
==== ==== ====
At December 31, 2003, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $14,041,000. No
provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations. It is
not practical to estimate the amount of additional tax that might be payable on
these foreign earnings in the event of distribution or sale; however, under
existing law, foreign tax credits would be available to substantially reduce
incremental U.S. taxes payable on amounts repatriated.
NOTE 14- CAPITAL STOCK
At December 31, 2003 and 2002, employee stockholders held 63.33 and
196.92 shares, respectively, of fully paid and vested Common Stock. Under the
terms of its stockholders' agreement (the "Stockholders' Agreement"), the
Company can purchase all of the shares held by the employee stockholders. The
purchase price as prescribed in the Stockholders' Agreement is to be determined
through a market valuation of the minority-held shares. In addition, under the
terms of the Stockholders' Agreement, the Company can be required to purchase
all of the shares held by an
F-21
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
employee stockholder in the case of death or disability, at a price determined
by a market valuation and, in all other instances, at the lower of the share's
cost, as defined, or the market valuation. All common shares held by employees
are recorded as redeemable Common Stock, at the estimated fair market value of
the stock, with a corresponding adjustment to stockholders' deficit. At December
31, 2003 and 2002, the aggregate amount that may be payable by the Company to
employee stockholders, based on the then estimated market value for fully paid
and vested shares, was approximately $9,498,000 and $30,523,000, respectively,
and has been classified as redeemable Common Stock on the consolidated balance
sheets. As there is no active market for the Company's Common Stock, the Company
estimates the fair value of its Common Stock using various valuation techniques
including recent third party transactions.
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 (exclusive of an income tax benefit of
$79,000). The former officer's right to put 126.648 shares of Common Stock back
to the Company expired during 2003, and, as a result, the Company recorded a
decrease in redeemable Common Stock and a decrease in stockholders' deficit of
$19,597,000 (a $13,597,000 increase in additional paid-in capital and a
$6,000,000 decrease in deficit).
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 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 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 December 2003 and January 2004, the estate of John A. Svenningsen
(the "Estate") sold its shares of Common Stock to Goldman Sachs and other
current shareholders, including 5.02 shares to employees of the Company. In
December 2003, the sale of 5.02 shares to employees increased redeemable Common
Stock by $753,000.
At December 31, 2003 and 2002, there were 3.00 and 6.38 shares,
respectively, of Common Stock (the "Restricted Stock") subject to the vesting
provisions of employment agreements with the President and Executive Vice
President of the Company. On January 1, 2002, the Company issued 3.0 shares of
Restricted Stock, with an aggregate value of $465,000 to its Executive Vice
President, vesting on December 31, 2004. During the years ended December 31,
2003, 2002 and 2001, the Company recorded the amortization of Restricted Stock
of $168,000, $236,000 and $260,000, respectively, as compensation expense, which
is included in general and administrative expenses in the Company's consolidated
statements of income.
At December 31, 2003, the Company held notes receivable from a former
officer and an employee in the amounts of $655,000 and $25,000, respectively. At
December 31, 2002, the Company held notes receivable from a former officer and
an employee in the amounts of $613,000 and $25,000, respectively. These notes
arose in connection with the issuance of shares of Common Stock. The notes held
at December 31, 2003 bear interest at 6.65% and LIBOR plus 2% and mature in
March 2009 and January 2004, respectively. The notes receivable are shown on the
consolidated balance sheets as an increase in stockholders' deficit. The note
for $25,000 was repaid in January 2004.
In February 2002, the Company issued 96.774 shares of its Common Stock,
at a value of $155,000 per share, to American Greetings in connection with the
acquisition of M&D Industries (see Note 1).
In September 1998, the Company issued warrants to purchase 10.0 shares
of Common Stock at $125,000 per
F-22
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
share in connection with the acquisition of all the capital stock of Anagram.
The warrants, which were valued at $225,000 and were fully exercisable upon
issuance, expire on September 17, 2008 and were included as a cost of the
acquisition of Anagram.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Convertible
Preferred Stock"). Also on March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible Preferred Stock to GSCP for proceeds of $6.0
million. Dividends are cumulative and payable annually, at 6% per annum. On
March 30, 2002 and 2003, the annual dividends were distributed in additional
shares of Series A Redeemable Convertible Preferred Stock. Dividends payable on
or prior to March 30, 2004, are payable in additional shares of Series A
Redeemable Convertible Preferred Stock. Subsequent to March 30, 2004, dividends
are payable, at the option of the Company, either in cash or additional shares
of Series A Redeemable Convertible Preferred Stock. At December 31, 2003 and
2002, respectively, accrued dividends aggregated $303,372 and $286,200, and are
included in redeemable convertible preferred stock on the consolidated balance
sheets.
Each share of the 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. At December 31, 2003, the redeemable
convertible preferred stock was convertible into Common Stock at a price of
$150,000 per common share. As of December 31, 2003, there were 46.97 shares of
Common Stock reserved for such conversion.
The Series A Redeemable Convertible Preferred Stock is not redeemable
on or prior to March 30, 2004. To the extent the Company shall have funds
legally available to redeem these shares, the Company may redeem these shares,
in whole or, with the consent of the holders of a majority of the outstanding
Series A Redeemable Convertible Preferred Stock, in part, at a redemption price
of $150,000 per share, in cash, together with accrued and unpaid dividends. To
the extent the Company shall have funds legally available to redeem these shares
on March 30, 2008, the Company is required to redeem all outstanding shares of
Series A Redeemable Convertible Preferred Stock at a redemption price per share
equal to $150,000 in cash, together with accrued and unpaid dividends. The
holders of the Series A Redeemable Convertible Preferred Stock have liquidation
rights equal to their original investment plus accrued and unpaid dividends.
The Company has not paid any dividends on the Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay dividends or distributions to its stockholders.
NOTE 15- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Lease Agreements
The Company is obligated under various capital leases for certain
machinery and equipment which expire on various dates through 2006 (see Note 6).
At December 31, 2003 and 2002, the amount of machinery and equipment and related
accumulated amortization recorded under capital leases and included with
property, plant and equipment, net consisted of the following (dollars in
thousands):
2003 2002
---- ----
Machinery and equipment ..................................................... $ 4,427 $ 4,343
Less: accumulated amortization .............................................. (3,747) (3,382)
------- --------
$ 680 $ 961
======= ========
Amortization of assets held under capitalized leases is included in
depreciation expense.
F-23
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms, and warehouse
equipment that expire on various dates through 2017. These leases generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance.
At December 31, 2003, future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
2004..................................................... $10,500
2005..................................................... 9,344
2006..................................................... 7,456
2007..................................................... 6,331
2008..................................................... 1,801
Thereafter............................................... 10,235
-------
$45,667
=======
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$13,267,000, $12,705,000 and $9,450,000, respectively.
Royalty Agreements
The Company has entered into royalty agreements with various licensors
of copyrighted and trademarked characters and designs used on the Company's
products which require royalty payments based on sales of the Company's
products, or in some cases, annual minimum royalties.
At December 31, 2003, the Company's commitment to pay future minimum
royalties was as follows (dollars in thousands):
2004..................................................... $2,048
2005..................................................... 2,453
2006..................................................... 2,395
2007..................................................... 155
2008..................................................... 155
------
$7,206
======
Royalty expense for the years ended December 31, 2003, 2002 and 2001
was $6,522,000, $6,192,000 and $4,494,000 respectively.
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 upon its
financial condition or future results of operations.
Related Party Transactions
During the years ended December 31, 2003 and 2002, the Company sold
$7,400,000 and $7,500,000 of metallic balloons and other party goods to American
Greetings. Trade accounts receivable from American Greetings at December 31,
2003 were $1.9 million.
During 2001, the Company amended a line of credit granted to the Chief
Executive Officer, increasing the line from $1,000,000 to $1,400,000. Borrowings
under the line bore interest at the Company's incremental borrowing rate in
effect during the time such loan was outstanding. The interest was payable
annually or, at the option of the Chief Executive Officer, accrued to the
principal balance. Amounts borrowed under the line were evidenced by a limited
recourse secured promissory note, secured by a lien on the equity interests that
the Chief Executive Officer had in the Company. The note required that all
principal payments be made only from the equity
F-24
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
pledged as collateral. In June 2003, the Company purchased 16 shares of Common
Stock from the 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 (see Note 14). At
December 31, 2002, borrowings, including accrued interest, under this line
totaled $1,551,000.
On June 15, 2001, the Company entered into a limited recourse secured
promissory note with the President of the Company. The note evidenced loans made
or to be made to the President at his request, in connection with the payment of
any personal federal, state or local income taxes due and payable upon and in
respect of the vesting of the President's Restricted Stock (see Note 14). The
Company's obligation to extend loans under the note was limited to the amount of
income taxes the President was actually required to pay subsequent to June 15,
2001. Amounts borrowed under the note and any interest thereon was secured by a
lien on the equity interests that the President has in the Company. The note
bore interest at 5.43% per annum. The note required that all payments of
principal and interest due thereunder be made only from the equity pledged as
collateral. 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 (see Note 14). The President used a portion of the proceeds to repay
his outstanding loan balance of $402,000. At December 31, 2002, the amount
borrowed under the note totaled $391,300.
Pursuant to the Stockholders' Agreement, Goldman Sachs, an affiliate of
GSCP which owned approximately 73.9% of the Company's Common Stock (excluding
the potential impact of the conversion of the redeemable convertible preferred
stock) at December 31, 2003, has the exclusive right (if it so elects) to
perform, through its various affiliated companies, certain investment banking
and similar services for the Company on customary terms. Goldman Sachs may from
time to time receive customary fees for services rendered to the Company.
Goldman Sachs Credit Partners L.P., an affiliate of Goldman Sachs and GSCP, has
served as the arranger and syndication agent for the Company's term loans and
revolving credit facilities since December 1997. On December 20, 2002, the
Company amended and restated its existing credit facility, with Goldman Sachs
Credit Partners L.P. as sole lead arranger, sole bookrunner and syndication
agent. For the year ended December 31, 2002, the Company paid Goldman Sachs and
its affiliates fees for services of $3,231,572. No fees were paid to Goldman
Sachs and its affiliates in 2003 and 2001.
On March 30, 2001, the Company issued 40 shares of Series A Redeemable
Convertible Preferred Stock to GSCP, for proceeds of $6.0 million (see Note 14).
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. 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. At December 31, 2003, 44.94
shares of Series A Redeemable Convertible Preferred Stock were issued and
outstanding and accrued dividends aggregated $303,372.
NOTE 16 - 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 decorative party goods, metallic balloons, stationery and
gift items.
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 for each of the three years ended
December 31, 2003, 2002 and 2001
F-25
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
were as follows (dollars in thousands):
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
2003
Sales to unaffiliated customers .................... $ 346,575 $ 56,241 $ 402,816
Sales between geographic areas ..................... 20,533 $ (20,533)
--------- --------- --------- ---------
Net sales .......................................... $ 367,108 $ 56,241 $ (20,533) $ 402,816
========= ========= ========= =========
Income from operations ............................. $ 47,341 $ 3,680 $ 1,240 $ 52,261
========= ========= =========
Interest expense, net .............................. 26,368
Gain on sale of available-for-sale securities ...... (1,486)
Other expense, net ................................. 52
---------
Income before income taxes and minority interests .. $ 27,327
=========
Long-lived assets .................................. $ 194,261 $ 8,729 $ (22,899) $ 180,091
========= ========= ========= =========
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
2002
Sales to unaffiliated customers ................. $ 332,187 $ 53,416 $ 385,603
Sales between geographic areas .................. 18,398 $ (18,398)
--------- --------- --------- ---------
Net sales ....................................... $ 350,585 $ 53,416 $ (18,398) $ 385,603
========= ========= ========= =========
Income from operations .......................... $ 46,481 $ 1,410 $ 824 $ 48,715
========= ========= =========
Interest expense, net ........................... 21,792
Other income, net ............................... (311)
---------
Income before income taxes and minority interests $ 27,234
=========
Long-lived assets ............................... $ 204,292 $ 7,620 $ (25,185) $ 186,727
========= ========= ========= =========
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------
2001
Sales to unaffiliated customers ................. $ 299,803 $ 45,380 $ 345,183
Sales between geographic areas .................. 21,524 $ (21,524)
--------- --------- --------- ---------
Net sales ....................................... $ 321,327 $ 45,380 $ (21,524) $ 345,183
========= ========= ========= =========
Income from operations .......................... $ 39,385 $ 2,422 $ 1,079 $ 42,886
========= ========= =========
Interest expense, net ........................... 24,069
Other expense, net .............................. 24
---------
Income before income taxes and minority interests $ 18,793
=========
Long-lived assets ............................... $ 169,055 $ 10,898 $ (21,775) $ 158,178
========= ========= ========= =========
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts
receivables, prepaid expenses and other current assets, accounts payable,
accrued expenses and other current liabilities approximate fair value at
December 31, 2003 and 2002 because of the short-term maturity of those
instruments or their variable rates of interest.
The estimated fair value of the Company's $110,000,000 Notes at
December 31, 2003 and 2002 was $111,100,000 and $101,772,000, respectively. The
carrying amounts of the Company's borrowings under its Credit Agreement and
other revolving credit facilities approximate fair value because such
obligations generally bear interest at floating rates. The carrying amounts for
other long-term debt approximate fair value at December 31, 2003 and 2002, based
on the discounted future cash flow of each instrument at rates currently offered
for similar debt
F-26
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
instruments of comparable maturity.
NOTE 18 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
All derivative financial instruments that qualify for hedge accounting,
such as interest rate swaps and foreign currency exchange agreements, are
recognized on the consolidated balance sheets at fair value and changes in fair
value are recognized periodically in either income or shareholders' deficit (as
a component of other comprehensive income). For derivative financial instruments
that are designated and qualify as a cash flow hedge (i.e., hedging the exposure
to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a cash flow hedge, if
any, is determined based on the dollar-offset method (i.e., the gain or loss on
the derivative financial instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item) and is recognized in
current earnings during the period of change. As long as hedge effectiveness is
maintained, the Company's interest rate swap arrangements and foreign currency
exchange agreements qualify for hedge accounting as cash flow hedges.
Interest Rate Risk Management
As part of the Company's risk management strategy, the Company
periodically uses interest rate swap agreements to hedge the variability of cash
flows on floating rate debt obligations (see Note 6). Accordingly, the interest
rate swap agreements are reflected in the consolidated balance sheets at fair
value and the related gains and losses on these contracts are deferred in
stockholders' deficit and recognized in interest expense over the same period in
which the related interest payments being hedged are recognized in income. To
effectively fix the interest rate of its $10,000,000 original mortgage note (see
Note 6), the Company entered into an interest rate swap agreement with a
financial institution for a notional amount of $10,000,000, agreeing to receive
30-day LIBOR and to pay 5.65%. The fair value of interest rate swap is the
estimated amount that the counterparty would receive or pay to terminate the
swap agreement at the reporting date, taking into account current interest rates
and the current creditworthiness of the swap counterparty. At December 31, 2003
and 2002 respectively, this hedge had an unrealized net loss of $490,000 and
$644,000, which have been included in accumulated other comprehensive loss (see
Note 19). As this hedge is 100% effective, there is no current impact on
earnings due to hedge ineffectiveness.
During 2001, the Company was involved in two interest rate swap
transactions with Goldman Sachs Capital Markets, L.P. ("GSCM") and a financial
institution which covered a portion of the outstanding borrowings under the AXEL
term loan (see Note 6), all of which expired in 2001. The interest rate swap
contracts required the Company to settle the difference in interest obligations
quarterly. Net payments (receipts) to (from) the counterparty under the swap
contracts for the year ended December 31, 2001, which have been recorded as
(reduction of) additional interest expense, were as follows (dollars in
thousands):
(REDUCTION OF) ADDITIONAL
INTEREST EXPENSE
NOTIONAL -------------------------
DATE OF CONTRACT AMOUNT TERM FIXED RATE 2001
- ---------------- ------ ----------- ---------- ----
September 30, 1998....... $35,000 3 years 7.68% $ 56
September 17, 1999....... $31,000 2 years 9.30% (308)
January 3, 2001.......... $10,000 9 months 6.03% (76)
--------
$ (328)
========
Foreign Exchange Risk Management
A portion of the Company's cash flows is derived from transactions
denominated in foreign currencies. The United States dollar value of
transactions denominated in foreign currencies fluctuates as the United States
dollar strengthens or weakens relative to these foreign currencies. In order to
reduce the uncertainty of foreign exchange rate movements on transactions
denominated in foreign currencies, including the British Pound Sterling and the
Euro, the Company enters into foreign exchange contracts with major
international financial institutions. These forward contracts, which typically
mature within one year, are designed to hedge anticipated foreign currency
transactions,
F-27
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
primarily inter-company inventory purchases and trade receivables. No components
of the contracts are excluded in the measurement of hedge effectiveness. The
critical terms of the foreign exchange contracts are the same as the underlying
forecasted transactions; therefore, changes in the fair value of foreign
exchange contracts should be highly effective in offsetting changes in the
expected cash flows from the forecasted transactions. At December 31, 2003 and
2002, the Company had contracts in the notional amounts of $12.1 million and
$20.4 million of foreign currency exchange contracts. The foreign currency
exchange contracts are reflected in the consolidated balance sheets at fair
value and the related gains and losses on these contracts are deferred in
stockholders' deficit. The fair value adjustment at December 31, 2003 and 2002
are unrealized net losses of $692,000, and $466,000, respectively, which have
been included in accumulated other comprehensive loss. The Company anticipates
that all gains and losses in accumulated other comprehensive loss related to
foreign exchange contracts will be reclassified into earnings by April 2005.
NOTE 19 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income consisted of the following (dollars in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
-------- -------- --------
Net income .................................................. $ 17,163 $ 16,465 $ 11,302
Net change in cumulative translation adjustment ............. 2,161 1,304 (434)
Cumulative effect of a change in accounting principle
to recognize the fair value of the Company's interest
rate swap contracts, net of income taxes of $148 (see
Note 18) ................................................. (227)
Change in fair value of available-for-sale securities,
net of income taxes of $(620) ....................... 949
Reclassification adjustment for available-for-sale
securities sold during the period, net of income
taxes of $587 ....................................... (899)
Change in fair value of the Company's interest rate swap
contracts, net of income taxes of $(101), $421 and
$(148), respectively (see Note 18) ....................... 154 (644) 227
Change in fair value of the Company's foreign exchange
contracts, net of income taxes of $148, $229 and $76,
respectively (see Note 18) ............................... (226) (352) (114)
-------- -------- --------
$ 19,302 $ 16,773 $ 10,754
======== ======== ========
Accumulated other comprehensive loss consisted of the following at December 31
(dollars in thousands):
2003 2002
------ --------
Cumulative translation adjustment ........................... $ 686 $(1,475)
Unrealized gain on available-for-sale securities, net
of income taxes of $(33) ............................... 50
Interest rate swap contract qualifying as a hedge, net of
income taxes of $320 and $421, respectively ............ (490) (644)
Foreign exchange contracts qualifying as hedges,
net of income taxes of $305 and $76, respectively ...... (692) (466)
------ -------
$ (446) $(2,585)
====== =======
F-28
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
NOTE 20 - SUBSEQUENT EVENT
On March 26, 2004, the Company signed a definitive merger agreement
providing for a recapitalization of the Company in which the Company will merger
with AAH Acquisition Corporation ("AAH"), a newly-formed corporation affiliated
with AAH Holdings Corporation, an entity jointly controlled by affiliates of
Berkshire Partners LLC and Weston Presidio. Under the terms of the agreement,
GSCP, certain other funds managed by or otherwise affiliated with Goldman Sachs
and all other stockholders, other than certain management investors, will
transfer all of their equity interests in the Company to AAH in exchange for
cash. Certain management investors will be required to roll over a portion of
their redeemable Common Stock and stock options ("roll over shares") into common
stock and stock options of AAH.
The total value of the transaction is estimated at approximately
$540,000,000, including the repayment of debt, which totaled $295,000,000 at
December 31, 2003, and the payment of approximately $245,000,000 for all of the
Company's redeemable preferred and common equity interests, excluding roll over
shares.
Berkshire Partners LLC and Weston Presidio have received a commitment
from Goldman Sachs for a senior debt facility and a bridge financing facility
for its senior subordinated debt financing. In connection with the transaction,
the Company intends to commence a cash tender offer to purchase any and all of
its outstanding 9.875% Senior Subordinated Notes due 2007. The offer will be
conditioned upon the closing of the merger and will be subject to other terms
and conditions.
The merger is subject to customary conditions including the approval of
the Company's stockholders, the availability of the contemplated financing, the
expiration of antitrust waiting periods and certain other conditions. A majority
of the Company's stockholders have agreed to vote in favor of the transaction.
The transaction is expected to close in mid-2004. Goldman Sachs advised the
Company on the transaction.
NOTE 21 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
On December 20, 2002, the Company amended and restated its existing
credit facility (see Notes 5 and 6). Under the terms of 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 and up to $30,000,000 aggregate
principal amount of revolving loans under 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 due in December 2007 (see
Note 6). The repayment of the Notes and borrowings under the Credit Agreement
are guaranteed jointly and severally, fully and unconditionally, by the
following wholly-owned Guarantor subsidiaries:
- Amscan Inc.
- Trisar, Inc.
- Am-Source, LLC
- Anagram International, Inc.
- Anagram International Holdings, Inc.
- Anagram International, LLC
- M&D Industries, Inc.
- SSY Realty Corp.
- JCS Realty Corp.
- Anagram Eden Prairie Property Holdings LLC
F-29
Non-guarantor subsidiaries ("Non-guarantors") include the following:
- Amscan Distributors (Canada) Ltd.
- Amscan Holdings Limited
- Amscan (Asia-Pacific) Pty. Ltd.
- Amscan Partyartikel GmbH
- Amscan de Mexico, S.A. de C.V.
- Anagram International (Japan) Co., Ltd.
- Anagram Espana, S.A.
- Anagram France S.C.S.
The following consolidating information presents consolidating balance
sheets as of December 31, 2003 and 2002, and the related consolidating
statements of income and cash flows for each of the three years in the period
ended December 31, 2003 for the combined Guarantors and the combined
Non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
F-30
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 30,740 $ 722 $ 31,462
Accounts receivable, net.......................... 63,553 12,129 75,682
Inventories....................................... 75,991 9,357 $ (211) 85,137
Prepaid expenses and other current assets......... 8,611 1,248 (129) 9,730
--------- -------- -------- --------
Total current assets.............................. 178,895 23,456 (340) 202,011
Property, plant and equipment, net..................... 94,789 1,705 96,494
Goodwill, net.......................................... 66,453 5,533 71,986
Other assets, net...................................... 33,019 1,491 (22,899) 11,611
--------- -------- -------- --------
Total assets...................................... $ 373,156 $ 32,185 $(23,239) $382,102
========= ======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................. $ 33,221 $ 1,695 $ 34,916
Accrued expenses ................................. 14,156 5,965 20,121
Income taxes payable ............................. 3,307 $ (129) 3,178
Current portion of long-term obligations.......... 23,110 127 23,237
--------- -------- -------- --------
Total current liabilities ....................... 73,794 7,787 (129) 81,452
Long-term obligations, excluding current portion....... 272,104 168 272,272
Deferred income tax liabilities........................ 18,040 18,040
Other. ................................................ 1,083 13,133 (11,802) 2,414
--------- -------- -------- --------
Total liabilities................................. 365,021 21,088 (11,931) 374,178
Redeemable convertible preferred stock................. 7,045 7,045
Redeemable Common Stock................................ 9,498 9,498
Commitments and Contingencies..........................
Stockholders' (deficit) equity:
Common Stock...................................... 339 (339) -
Additional paid-in capital........................ 26,682 658 (658) 26,682
Unamortized restricted Common Stock
award, net..................................... (155) (155)
Notes receivable from stockholders................ (680) (680)
(Deficit) retained earnings....................... (33,809) 10,292 (10,503) (34,020)
Accumulated other comprehensive loss.............. (446) (192) 192 (446)
--------- -------- -------- --------
Total stockholders' (deficit) equity.......... (8,408) 11,097 (11,308) (8,619)
--------- -------- -------- --------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity............ $ 373,156 $ 32,185 $(23,239) $382,102
========= ======== ======== ========
F-31
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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 ................................ 62,520 11,727 74,247
Inventories ............................................. 83,659 11,138 $ (907) 93,890
Prepaid expenses and other current assets ............... 13,411 2,280 (458) 15,233
--------- --------- --------- ---------
Total current assets .................................... 161,073 26,062 (1,365) 185,770
Property, plant and equipment, net ........................... 98,951 1,353 100,304
Goodwill, net ................................................ 68,611 5,640 74,251
Notes receivable from officers ............................... 1,942 1,942
Other assets, net ............................................ 34,788 627 (25,185) 10,230
--------- --------- --------- ---------
Total assets ............................................ $ 365,365 $ 33,682 $ (26,550) $ 372,497
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ........................................ $ 37,813 $ 1,432 $ 39,245
Accrued expenses ........................................ 15,937 5,587 21,524
Income taxes payable .................................... 3,037 $ (512) 2,525
Current portion of long-term obligations ................ 3,052 168 3,220
--------- --------- --------- ---------
Total current liabilities ............................... 59,839 7,187 (512) 66,514
Long-term obligations, excluding current portion ............. 295,274 146 295,420
Deferred income tax liabilities .............................. 17,360 17,360
Other ........................................................ 1,153 16,052 (14,888) 2,317
--------- --------- --------- ---------
Total liabilities ....................................... 373,626 23,385 (15,400) 381,611
Redeemable convertible preferred stock ....................... 6,646 6,646
Redeemable Common Stock ...................................... 30,523 30,523
Commitments and Contingencies ................................
Stockholders' (deficit) equity:
Common Stock ............................................ 339 (339) -
Additional paid-in capital .............................. 14,814 658 (658) 14,814
Unamortized restricted Common Stock
awards, net .......................................... (323) (323)
Notes receivable from stockholders ...................... (638) (638)
(Deficit) retained earnings ............................. (56,698) 11,198 (12,051) (57,551)
Accumulated other comprehensive loss .................... (2,585) (1,898) 1,898 (2,585)
--------- --------- --------- ---------
Total stockholders' (deficit) equity ................ (45,430) 10,297 (11,150) (46,283)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ............... $ 365,365 $ 33,682 $ (26,550) $ 372,497
========= ========= ========= =========
F-32
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Net sales.............................................. $367,108 $56,241 $ (20,533) $402,816
Cost of sales.......................................... 250,242 39,456 (20,573) 269,125
-------- ------- --------- --------
Gross profit.................................. 116,866 16,785 40 133,691
Operating expenses:
Selling expenses................................... 30,296 6,219 36,515
General and administrative expenses................ 26,339 6,786 (1,200) 31,925
Provision for doubtful accounts.................... 2,515 73 2,588
Art and development costs.......................... 9,395 9,395
Restructuring charges.............................. 980 27 1,007
-------- ------- --------- --------
Total operating expenses...................... 69,525 13,105 (1,200) 81,430
-------- ------- --------- --------
Income from operations........................ 47,341 3,680 1,240 52,261
Interest expense, net.................................. 25,610 758 26,368
Gain on sale of available-for-sale securities.......... (1,486) (1,486)
Other (income) expense, net............................ (2,928) 136 2,844 52
-------- ------- --------- --------
Income before income taxes and
minority interests.......................... 26,145 2,786 (1,604) 27,327
Income tax expense..................................... 9,022 1,043 10,065
Minority interests..................................... 99 99
-------- ------- --------- --------
Net income.................................... 17,123 1,644 (1,604) 17,163
Dividend on redeemable convertible
preferred stock........................... 399 399
-------- ------- --------- --------
Net income applicable to common shares........ $ 16,724 $ 1,644 $ (1,604) $ 16,764
======== ======= ========= ========
F-33
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Net sales.............................................. $350,585 $53,416 $(18,398) $385,603
Cost of sales.......................................... 233,112 38,130 (18,262) 252,980
-------- ------- -------- --------
Gross profit.................................. 117,473 15,286 (136) 132,623
Operating expenses:
Selling expenses................................... 28,586 6,033 34,619
General and administrative expenses................ 26,764 6,252 (960) 32,056
Provision for doubtful accounts.................... 2,147 861 3,008
Art and development costs.......................... 10,301 10,301
Write-off of deferred financing and IPO-related
costs............................................ 2,261 2,261
Restructuring charges.............................. 933 730 1,663
-------- ------- -------- --------
Total operating expenses...................... 70,992 13,876 (960) 83,908
-------- ------- -------- --------
Income from operations........................ 46,481 1,410 824 48,715
Interest expense, net ................................. 21,121 671 21,792
Other (income) expense, net............................ (2,182) 2,327 (456) (311)
-------- ------- -------- --------
Income (loss) before income taxes and
minority interests.......................... 27,542 (1,588) 1,280 27,234
Income tax expense (benefit)........................... 10,995 (184) (54) 10,757
Minority interests..................................... 12 12
-------- ------- -------- --------
Net income (loss)............................. 16,547 (1,416) 1,334 16,465
Dividend on redeemable convertible
preferred stock........................... 376 376
-------- ------- -------- --------
Net income (loss) applicable to common
shares.................................... $ 16,171 $(1,416) $ 1,334 $ 16,089
======== ======= ======== ========
F-34
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Net sales.............................................. $321,327 $45,380 $(21,524) $345,183
Cost of sales.......................................... 214,505 31,751 (21,220) 225,036
-------- ------- -------- --------
Gross profit.................................. 106,822 13,629 (304) 120,147
Operating expenses:
Selling expenses................................... 26,355 5,059 31,414
General and administrative expenses................ 28,728 5,972 (1,383) 33,317
Provision for doubtful accounts.................... 3,582 176 3,758
Art and development costs.......................... 8,772 8,772
-------- ------- -------- --------
Total operating expenses...................... 67,437 11,207 (1,383) 77,261
-------- ------- -------- --------
Income from operations........................ 39,385 2,422 1,079 42,886
Interest expense, net ................................. 23,442 627 24,069
Other (income) expense, net............................ (2,611) 61 2,574 24
-------- ------- -------- --------
Income before income taxes and
minority interests.......................... 18,554 1,734 (1,495) 18,793
Income tax expense..................................... 6,948 475 7,423
Minority interests..................................... 68 68
-------- ------- -------- --------
Net income.................................... 11,606 1,191 (1,495) 11,302
Dividend on redeemable convertible
preferred stock............................. 270 270
-------- ------- -------- --------
Net income applicable to common shares........ $ 11,336 $ 1,191 $ (1,495) $ 11,032
======== ======= ======== ========
F-35
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN HOLDINGS COMBINED
AND COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income..................................................... $ 17,123 $ 1,644 $(1,604) $ 17,163
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................... 15,540 579 16,119
Amortization of deferred financing costs.................... 2,131 2,131
Loss on disposal of property, plant and equipment .......... 109 13 122
Provision for doubtful accounts............................. 2,515 73 2,588
Amortization of restricted Common Stock awards.............. 168 168
Gain on sale of available-for-sale securities............... (1,486) (1,486)
Non-cash restructuring charges.............................. 104 104
Deferred income tax provision............................... 5,231 5,231
Changes in operating assets and liabilities:
Increase in accounts receivable....................... (972) (2,656) (3,628)
Decrease (increase) in inventories.................... 7,553 (400) (40) 7,113
Decrease (increase) in prepaid expenses, other
current assets and other, net...................... 1,337 (731) 1,644 2,250
(Increase) decrease in accounts payable, accrued
expenses and income taxes payable.................. (6,547) 834 (5,713)
-------- ------- ------- ---------
Net cash provided by (used in) operating activities .. 42,806 (644) - 42,162
Cash flows from investing activities:
Capital expenditures........................................... (11,660) (865) (12,525)
Proceeds from sale of available-for-sale securities ........... 2,005 2,005
Proceeds from disposal of property, plant and equipment........ 117 87 204
-------- ------- ------- ---------
Net cash used in investing activities................. (9,538) (778) (10,316)
Cash flows from financing activities:
Proceeds from exercise of Common Stock options................. 831 831
Repayment of loans, notes payable and long-term obligations ... (3,530) (193) (3,723)
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................. (4,009) (193) (4,202)
Effect of exchange rate changes on cash and cash equivalents ..... (2) 1,420 1,418
-------- ------- ------- ---------
Net increase (decrease) in cash and cash equivalents.. 29,257 (195) 29,062
Cash and cash equivalents at beginning of year.................... 1,483 917 2,400
-------- ------- ------- ---------
Cash and cash equivalents at end of year.......................... $ 30,740 $ 722 $ - $ 31,462
======== ======= ======= =========
F-36
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN HOLDINGS COMBINED
AND COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income (loss) .............................................. $ 16,547 $ (1,416) $ 1,334 $ 16,465
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ............................... 13,443 519 13,962
Amortization of deferred financing costs .................... 1,202 1,202
(Gain) loss on disposal of property, plant and equipment .... (348) 94 (254)
Provision for doubtful accounts ............................. 2,147 861 3,008
Write-off of deferred financing costs ....................... 1,460 1,460
Amortization of restricted Common Stock awards .............. 236 236
Deferred income tax provision (benefit) ..................... 5,013 (144) 4,869
Changes in operating assets and liabilities, net of
acquisition:
Increase in accounts receivable ....................... (4,528) (3,406) (7,934)
(Increase) decrease in inventories .................... (13,710) (1,817) 136 (15,391)
(Increase) decrease in prepaid expenses, other
current assets and other, net ...................... (4,949) 4,338 (1,416) (2,027)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable .................. 3,665 1,122 (54) 4,733
--------- --------- --------- ---------
Net cash provided by operating activities ............. 20,178 151 - 20,329
Cash flows from investing activities:
Cash paid in connection with acquisition ....................... (13,548) (13,548)
Capital expenditures ........................................... (17,248) (464) (17,712)
Proceeds from disposal of property, plant and equipment ........ 481 49 530
--------- --------- --------- ---------
Net cash used in investing activities ................. (30,315) (415) (30,730)
Cash flows from financing activities:
Proceeds from loans, notes payable and long-term obligations,
net of debt issuance costs (including original issue discount)
of $6,032 ..................................................... 163,968 163,968
Repayment of loans, notes payable and long-term obligations..... (152,198) (153) (152,351)
Loans to officers under notes .................................. (200) (200)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities.... 11,570 (153) 11,417
Effect of exchange rate changes on cash and cash equivalents ...... (10) 378 368
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents... 1,423 (39) 1,384
Cash and cash equivalents at beginning of year .................... 60 956 1,016
--------- --------- --------- ---------
Cash and cash equivalents at end of year .......................... $ 1,483 $ 917 $ - $ 2,400
========= ========= ========= =========
F-37
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
AMSCAN HOLDINGS COMBINED
AND COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income .................................................... $ 11,606 $ 1,191 $ (1,495) $ 11,302
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............................. 14,863 605 15,468
Amortization of deferred financing costs ................... 998 998
Loss (gain) on disposal of property, plant and equipment ... 7 (20) (13)
Provision for doubtful accounts ............................ 3,582 176 3,758
Amortization of restricted Common Stock award .............. 260 260
Deferred income tax provision .............................. 1,543 77 1,620
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........... (6,165) 3 (6,162)
(Increase) decrease in inventories ................... (142) (1,396) 304 (1,234)
(Increase) decrease in prepaid expenses, other
current assets and other, net ..................... (5,967) 588 1,191 (4,188)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable ................. 4,801 (358) 4,443
-------- -------- -------- --------
Net cash provided by operating activities ............ 25,386 866 - 26,252
Cash flows from investing activities:
Capital expenditures .......................................... (37,033) (446) (37,479)
Proceeds from disposal of property, plant and equipment ....... 3 52 55
-------- -------- -------- --------
Net cash used in investing activities ................ (37,030) (394) (37,424)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred
stock ..................................................... 6,000 6,000
Proceeds from the exercise of Common Stock options ............ 41 41
Proceeds from loans, notes payable and long-term obligations,
net of debt issuance costs of $557 ......................... 19,443 19,443
Repayment of loans, notes payable and long-term obligations.... (13,341) (154) (13,495)
Loans to officers under notes ................................. (953) (953)
Other ......................................................... (42) (24) (66)
-------- -------- -------- --------
Net cash provided by (used in) financing activities... 11,148 (178) 10,970
Effect of exchange rate changes on cash and cash equivalents ..... (48) (203) (251)
-------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents.. (544) 91 (453)
Cash and cash equivalents at beginning of year ................... 604 865 1,469
-------- -------- -------- --------
Cash and cash equivalents at end of year ......................... $ 60 $ 956 $ - $ 1,016
======== ======== ======== ========
F-38
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
------- ---------- --------- -------
Allowance for Doubtful Accounts:
For the year ended:
December 31, 2001.................................... $5,246 $5,067 $3,758 $3,937
December 31, 2002.................................... 3,937 1,818 3,008 5,127
December 31, 2003.................................... 5,127 4,890 2,588 2,825
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
------- ---------- --------- -------
Inventory Reserves:
For the year ended:
December 31, 2001.................................... $2,432 $ 722 $1,596 $3,306
December 31, 2002.................................... 3,306 1,187 1,259 3,378
December 31, 2003.................................... 3,378 2,267 1,614 2,725
F-39