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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 000-21827
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 15, 2004, 1,000.00 shares of Registrant's common stock, par value
$0.10, were outstanding.
1
AMSCAN HOLDINGS, INC.
FORM 10-Q
SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets at September 30, 2004 and December 31, 2003..... 3
Consolidated Statements of Operations for the Three Months Ended
September 30, 2004 (Successor) and 2003 (Predecessor)................... 4
Consolidated Statements of Operations for the Four Months Ended April 30,
2004 (Predecessor), Five Months Ended September 30, 2004 (Successor)
and Nine Months Ended September 30, 2003 (Predecessor).................. 5
Consolidated Statements of Stockholders' (Deficit) Equity for the Four Months
Ended April 30, 2004 (Predecessor) and Five Months Ended September 30,
2004 (Successor) ......................................................... 6
Consolidated Statements of Cash Flows for the Four Months Ended April
30, 2004 (Predecessor), Five Months Ended September 30, 2004 (Successor)
and Nine Months Ended September 30, 2003 (Predecessor).................. 7
Notes to Consolidated Financial Statements.................................. 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 29
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................. 36
ITEM 4 CONTROLS AND PROCEDURES..................................................... 36
PART II
ITEM 6 EXHIBITS.................................................................... 37
SIGNATURE .............................................................................. 38
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(Successor) (Predecessor)
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 1,757 $ 31,462
Accounts receivable, net of allowances ........................................ 87,069 75,682
Inventories, net of allowances ................................................ 84,885 85,137
Prepaid expenses and other current assets ..................................... 17,029 9,730
------------- -------------
Total current assets ........................................................ 190,740 202,011
Property, plant and equipment, net ............................................. 100,094 96,494
Goodwill, net .................................................................. 313,126 71,986
Other assets, net .............................................................. 18,288 11,611
------------- -------------
Total assets ................................................................ $ 622,248 $ 382,102
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Loans and notes payable ....................................................... $ 11,310 $ -
Accounts payable .............................................................. 27,402 34,916
Accrued expenses .............................................................. 25,307 20,121
Income taxes payable .......................................................... 12 3,178
Current portion of long-term obligations ...................................... 2,773 23,237
------------- -------------
Total current liabilities ................................................... 66,804 81,452
Long-term obligations, excluding current portion ............................... 385,649 272,272
Deferred income tax liabilities ................................................ 22,765 18,040
Other .......................................................................... 2,475 2,414
------------- -------------
Total liabilities ........................................................... 477,693 374,178
Redeemable convertible preferred stock ($0.10 par value; 100.00 shares
authorized; 44.94 shares issued and outstanding at
December 31, 2003) ........................................................... 7,045
Redeemable common securities ................................................... 3,660 9,498
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock ($0.01 par value; 10,000.00 shares authorized;
none issued and outstanding at September 30, 2004) ........................... -
Common Stock ($0.01 par value; 40,000.00 shares authorized;
13,957.88 shares issued and outstanding at September 30, 2004) ............... -
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,217.92 shares issued and outstanding at December 31, 2003) ................. -
Additional paid-in capital .................................................... 136,819 26,682
Unamortized restricted Common Stock award ..................................... (155)
Notes receivable from stockholders ............................................ (680)
Retained earnings (deficit) ................................................. 3,517 (34,020)
Accumulated other comprehensive income (loss) ................................. 559 (446)
------------- -------------
Total stockholders' equity (deficit) ........................................ 140,895 (8,619)
------------- -------------
Total liabilities, redeemable convertible preferred stock and
common securities and stockholders' equity (deficit) ....................... $ 622,248 $ 382,102
============= =============
Note: The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements of the Predecessor at that date (see Note 2).
See accompanying notes to consolidated financial statements.
3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------- -------------
(SUCCESSOR) (PREDECESSOR)
Net sales .............................. $ 97,834 $ 103,220
Cost of sales .......................... 66,090 68,242
------------- -------------
Gross profit ...................... 31,744 34,978
Operating expenses:
Selling expenses ..................... 8,726 9,206
General and administrative expenses .. 7,644 8,067
Art and development costs ............ 2,358 2,322
Provision for doubtful accounts ...... 746 772
Restructuring charges ................ 233
------------- -------------
Total operating expenses .......... 19,474 20,600
------------- -------------
Income from operations ............ 12,270 14,378
Interest expense, net .................. 7,204 6,681
Undistributed loss in unconsolidated
joint venture ........................ 366
Gain on sale of available-for-sale
securities ........................... (1,022)
Other (income) expense, net ............ (42) 12
------------- -------------
Income before income taxes and
minority interests .............. 4,742 8,707
Income tax expense ..................... 1,874 3,439
Minority interests ..................... 53 42
------------- -------------
Net income ........................ 2,815 5,226
Dividend on redeemable
convertible preferred stock ... 102
------------- -------------
Net income applicable to common
stock............................ $ 2,815 $ 5,124
============= =============
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 2004 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
---------------- ------------------ ------------------
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
Net sales............................... $ 133,660 $ 161,015 $ 304,060
Cost of sales........................... 88,247 109,514 204,161
-------------- ------------- ------------
Gross profit....................... 45,413 51,501 99,899
Operating expenses:
Selling expenses...................... 12,430 14,674 27,322
General and administrative expenses... 10,145 13,096 23,896
Art and development costs............. 3,332 4,127 7,145
Provision for doubtful accounts....... 729 1,072 2,761
Non-recurring expenses related to the
Transactions (see Note 2)........... 11,757
Restructuring charges................. 1,007
-------------- ------------- ------------
Total operating expenses........... 38,393 32,969 62,131
-------------- ------------- ------------
Income from operations............. 7,020 18,532 37,768
Interest expense, net................... 8,384 11,964 19,877
Undistributed loss in unconsolidated
joint venture......................... 89 678
Gain on sale of available-for-sale
securities............................ (47) (1,022)
Other income, net....................... (11) (53) (45)
-------------- ------------- ------------
(Loss) income before income taxes
and minority interests........... (1,395) 5,943 18,958
Income tax (benefit) expense............ (551) 2,348 7,488
Minority interests...................... 46 78 76
-------------- ------------- ------------
Net (loss) income.................. (890) 3,517 11,394
Dividend on redeemable
convertible preferred stock.... 136 299
-------------- ------------- ------------
Net (loss) income applicable to
common stock..................... $ (1,026) $ 3,517 $ 11,095
============== ============= ============
See accompanying notes to consolidated financial statements.
5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOUR MONTHS ENDED APRIL 30, 2004 (PREDECESSOR) AND FIVE MONTHS ENDED SEPTEMBER
30, 2004 (SUCCESSOR)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
UNAMORTIZED NOTES
ADDITIONAL RESTRICTED RECEIVABLE
COMMON COMMON PAID-IN COMMON STOCK FROM
SHARES STOCK CAPITAL AWARD STOCKHOLDERS
--------- --------- ---------- ------------ -------------
PREDECESSOR
Balance at December 31, 2003............. 1,217.92 $ - $26,682 $(155) $ (680)
Net loss...............................
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.................................
Reclassification adjustment for
interest rate swap contract
terminated in connection with the
Transactions, net of income taxes.....
Change in fair value of interest rate
swap and foreign exchange
contracts, net of income taxes........
Comprehensive loss...............
Amortization of restricted Common
Stock award........................... 52
Redeemable convertible preferred
stock dividend........................ (136)
Repayment of note receivable from
stockholder......................... 25
Accretion of interest income........... (14)
--------- --------- -------- ------- ---------
Balance at April 30, 2004................ 1,217.92 $ - $ 26,546 $ (103) $ (669)
========= ========= ======== ======= =========
SUCCESSOR
Net income.............................
Net change in cumulative
translation adjustment...............
Change in fair value of interest rate
swaps and foreign exchange
contracts, net of income taxes........
Comprehensive income.............
Issuance of shares of Common Stock
in connection with the
Transactions.......................... 13,957.88 $140,479
Reclassification of common securities
to Redeemable common securities ...... (3,660)
--------- --------- -------- ------- ---------
Balance at September 30, 2004............ 13,957.88 $ - $136,819 $ - $ -
========= ========= ======== ======= =========
ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE
(DEFICIT) (LOSS) INCOME TOTAL
--------- -------------- ------
PREDECESSOR
Balance at December 31, 2003............. $(34,020) $ (446) $(8,619)
Net loss............................... (890) (890)
Net change in cumulative
translation adjustment................ (673) (673)
Change in fair value of
available-for-sale securities,
net of income taxes................... (22) (22)
Reclassification adjustment for
available-for-sale securities sold
during the period, net of income
taxes................................. (28) (28)
Reclassification adjustment for
interest rate swap contract
terminated in connection with the
Transactions, net of income taxes 408 408
Change in fair value of interest rate
swap and foreign exchange
contracts, net of income taxes........ 306 306
--------
Comprehensive loss............... (899)
Amortization of restricted Common
Stock award........................... 52
Redeemable convertible preferred
stock dividend........................ (136)
Repayment of note receivable from
stockholder........................... 25
Accretion of interest income........... (14)
-------- ---------- --------
Balance at April 30, 2004................ $(34,910) $ (455) $ (9,591)
======== ========== ========
SUCCESSOR
Net income............................. $ 3,517 $ 3,517
Net change in cumulative
translation adjustment............... $ 849 849
Change in fair value of interest rate
swaps and foreign exchange
contracts, net of income taxes....... (290) (290)
--------
Comprehensive income............. 4,076
Issuance of shares of Common Stock
in connection with the
Transactions.......................... 140,479
Reclassification of common securities
to Redeemable common securities ..... (3,660)
-------- ---------- --------
Balance at September 30, 2004............ $ 3,517 $ 559 $140,895
======== ========== ========
See accompanying notes to consolidated financial statements.
6
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 2004 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
----------------- ----------------- -----------------
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
Cash flows provided by operating activities:
Net (loss) income .................................................. $ (890) $ 3,517 $ 11,394
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization expense .............................. 5,296 6,783 12,033
Amortization of deferred financing costs ........................... 709 648 1,570
Amortization of restricted Common Stock awards ..................... 52 129
Provision for doubtful accounts .................................... 729 1,072 2,761
Deferred income tax (benefit) expense .............................. (58) (438) 2,444
Gain on sale of available-for-sale securities ...................... (47) (1,022)
(Gain) loss on disposal of equipment .............................. (35) 118
Write-off of deferred financing costs in
connection with the Transactions .................................. 5,548
Debt retirement costs incurred in connection with
the Transactions ................................................... 6,209
Non-cash restructuring charges ..................................... 104
Undistributed loss in unconsolidated joint
venture ........................................................... 89 678
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ...................... (15,247) 2,564 (15,372)
Decrease (increase) in inventories, net ......................... 6,229 (3,320) 9,056
(Increase) decrease in prepaid expenses and
other current assets ........................................... (3,593) 905 970
Increase (decrease) in accounts payable,
accrued expenses
and income taxes payable ....................................... 3,991 (2,507) (6,112)
Other, net ........................................................... 430 (166) (297)
------------- ------------- -------------
Net cash provided by operating activities ....................... 9,412 9,736 17,776
Cash flows used in investing activities:
Cash paid to consummate the Transactions ........................... (529,982)
Capital expenditures ............................................... (3,726) (4,472) (10,081)
Proceeds from sale of available-for-sale
securities ........................................................ 65 1,443
Proceeds from disposal of property and equipment ................... 53 13 198
------------- ------------- -------------
Net cash used in investing activities .......................... (3,608) (534,441) (8,440)
Cash flows (used in) provided by financing activities:
Proceeds from loans, notes payable and long-term
obligations, net of
debt issuance costs of $12,705 .................................... 378,605
Repayment of loans, notes payable and
long-term obligations ............................................. (21,251) (1,070) (2,788)
Capital contributions in connection with the
Transactions ...................................................... 138,979
Debt retirement costs paid in connection with
the Transactions .................................................. (6,209)
Proceeds from exercise of stock options ............................ 831
Purchase of Common Stock from officer .............................. (3,300)
Repayment of note receivable from stockholder
and officer ....................................................... 25 1,990
------------- ------------- -------------
Net cash (used in) provided by financing
activities ................................................... (27,435) 516,514 (3,267)
Effect of exchange rate changes on cash and cash
equivalents .................................................. (594) 711 950
------------- ------------- -------------
Net (decrease) increase in cash and cash
equivalents .................................................. (22,225) (7,480) 7,019
Cash and cash equivalents at beginning of period ..................... 31,462 9,237 2,400
------------- ------------- -------------
Cash and cash equivalents at end of period ........................... $ 9,237 $ 1,757 $ 9,419
============= ============= =============
Supplemental disclosures:
Interest paid ...................................................... $ 6,531 $ 13,732 $ 14,451
Income taxes paid .................................................. $ 1,002 $ 3,287 $ 4,013
See accompanying notes to consolidated financial statements.
7
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Supplemental information on noncash activities:
In connection with the Transactions (see Note 2), certain officers of the
Company exchanged 8.2417 of their shares of common stock of the Predecessor (as
defined hereafter) for 150 shares of common stock of the Successor (as defined
hereafter) with an equivalent value of $1,500. In addition, the aforementioned
officers exchanged their vested options to purchase 8.411 shares of Predecessor
common stock, which had an intrinsic value of $900, for vested options under the
Successor equity incentive plan with an intrinsic value of $737 and a fair value
of $880.
In July 2003, the Predecessor purchased 6 shares of Common Stock from its
President at a price of $150 per share, for an aggregate cash purchase price of
$900. The President used a portion of the proceeds to repay his outstanding loan
balance of $402. The Company retired the 6 shares of Common Stock.
In June 2003, the Predecessor purchased 16 shares of Common Stock from the
Chief Executive Officer at a price of $150 per share, for an aggregate cash
purchase price $2,400. The Chief Executive Officer used a portion of the
proceeds to repay his outstanding loan balance of $1,588. The Company retired
the 16 shares of Common Stock.
In April 2003, a former officer's right to put 120 shares of Common Stock
back to the Predecessor expired and, as a result, the Predecessor recorded a
decrease in redeemable Common Securities and a decrease in stockholders' deficit
of $18,600 (a $12,600 increase in additional paid-in capital and a $6,000
decrease in accumulated deficit). The former officer's right to put an
additional 6.648 shares back to the Predecessor expired in July 2003 and, as a
result, the Predecessor recorded a decrease in redeemable Common Securities and
an increase in additional paid-in capital of $997.
8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, "Amscan," "AHI" or 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.
NOTE 2 - THE TRANSACTIONS
On March 26, 2004, Amscan signed an agreement providing for a merger of
Amscan with AAH Acquisition Corporation, or AAH Acquisition, a wholly-owned
subsidiary of AAH Holdings Corporation, or AAH Holdings, an entity jointly
controlled by funds affiliated with Berkshire Partners LLC and Weston Presidio
(together the "Principal Investors"). On April 30, 2004, the merger with AAH
Acquisition was consummated, with Amscan continuing as the surviving entity and
as a wholly owned subsidiary of AAH Holdings. Under the terms of the agreement,
the equity interests in Amscan of GS Capital Partners II, L.P. and certain other
private investment funds managed by Goldman, Sachs & Co., which are collectively
referred to as GSCP, and all other stockholders, other than certain management
investors, were cancelled in exchange for the right to receive cash. Cash paid
to consummate the acquisition totaled $529,982,000 and was financed with initial
borrowings (before deducting deferred financing costs of $12,705,000) consisting
of a $205,000,000 term loan under a new senior secured credit facility which
includes a $50,000,000 revolving loan facility, the proceeds from the issuance
of $175,000,000 of 8.75% senior subordinated notes due 2014, an equity
contribution, including the Principal Investors and employee stockholders, of
$140,479,000, borrowings under the revolver of $23,551,000 and available cash on
hand. Certain existing employee shareholders participated in the Transactions
(as defined hereafter) by purchasing approximately 292.41 shares of common
stock. The Chief Executive Officer and the President of the Company exchanged
5.4945 and 2.7472 of their shares of common stock of the Predecessor for 100 and
50 shares of common stock of the Successor with an equivalent value of
$1,000,000 and $500,000, respectively. In addition, the Chief Executive Officer
and President of the Company exchanged vested options to purchase 5.607 and
2.804 shares of Predecessor common stock, which had intrinsic values of $600,000
and $300,000, respectively, for vested options under the Successor's equity
incentive plan with intrinsic values of $492,000 and $245,000 and fair values of
$590,000 and $290,000, respectively. The acquisition has been accounted for
under the purchase method of accounting which required that the Successor adjust
its assets and liabilities to their relative fair values. The capital structure
disclosed in the Successor financial statements is the capital structure of AAH
Holdings in order to reflect the ultimate beneficial ownership of the Successor.
The purchase price has been allocated based upon preliminary estimates of
the fair value of net assets acquired at the date of acquisition. The final
allocations will be based on studies and valuations that have not yet been
completed and will be subject to change in future periods. The excess of the
purchase price over tangible net assets acquired has been allocated to
intangible assets consisting of licensing agreements in the amount of
$3,000,000, which are being amortized using the straight-line method over the
lives of the contracts (two to three years with an average life of 2.5 years),
and goodwill in the amount of $313,097,000, which is not being amortized. The
acquisition was structured as a purchase of common stock and, accordingly, the
amortization of intangible assets is not deductible for income tax purposes.
Concurrent with the acquisition, the following financing transactions were
also consummated: the repayment of $147,724,000 under our then existing senior
secured credit facility and the termination of all commitments under that
facility; the consummation of our tender offer and consent solicitation that
resulted in the tender offer of $87,200,000 of the $110,000,000 aggregate
principal amount outstanding of our 9.875% senior subordinated notes due 2007
for $93,500,000 or 103.542% of the principal amount of such notes plus accrued
and unpaid interest and the redemption of the remaining senior subordinated
notes for $23,551,000 or 103.292% of the principal amount of such notes plus
accrued and unpaid interest; and repayment of an $8,500,000 mortgage obligation
with a financial institution (the acquisition together with the foregoing
financing transactions are referred to herein collectively as the
"Transactions").
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
On May 31, 2004, the remaining outstanding 9.875% senior subordinated
notes due 2007 were redeemed pursuant to the redemption notice. The Company
financed the redemption with borrowings under its new revolving credit facility.
The new senior subordinated notes were sold to the initial purchasers by
the Company on April 30, 2004, and were subsequently resold to qualified
institutional buyers and non-U.S. persons in reliance upon Rule 144A and
Regulation S under the Securities Act of 1933 (the "Note Offering"). In
connection with the Note Offering, the Company entered into a Registration
Rights Agreement, which granted holders of the new notes certain exchange and
registration rights. In August 2004, the Company filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 offering to exchange
registered notes for the notes issued in connection with the Note Offering. The
terms of the notes and the exchange notes are substantially identical. The
exchange was completed in October 2004.
The Company's new term loan provides for amortization (in quarterly
installments) of 1.0% per annum through June 30, 2010, and will then amortize in
equal quarterly payments through June 30, 2012. The new term loan bears
interest, at the option of the Company, at the index rate plus 1.75% per annum
or at LIBOR plus 2.75% per annum. At September 30, 2004, the new term loan was
$204,487,500 and the floating interest rate on the new term loan was 4.53%. The
Company entered into two interest rate swap transactions with a financial
institution on June 25, 2004 and July 2, 2004, for an initial aggregate notional
amount of $17,425,000 increasing over three years to $62,597,000.
Revolving loans under the new senior credit facility expire on April 30,
2010 and bear interest, at the option of the Company, at the index rate plus,
based on performance, a margin ranging from 0.75% to 1.50% per annum, or at
LIBOR plus, based on performance, a margin ranging from 1.75% to 2.50% per
annum. At September 30, 2004, the Company had borrowings under the Revolver
totaling $11,310,000 at a floating interest rate of 4.98%.
Our new senior secured credit facility contains financial covenants and
maintenance tests, including a minimum interest coverage test and a maximum
total leverage test, and restrictive covenants, including restrictions on our
ability to make capital expenditures or pay dividends. Our new senior secured
credit facility is secured by substantially all of our assets and the assets of
some of our subsidiaries, and by a pledge of all of our domestic subsidiaries'
capital stock and a portion of our wholly owned foreign subsidiaries' capital
stock.
In connection with the Transactions, the Predecessor has recorded
non-recurring expenses of $11,757,000 comprised of $6,209,000 of debt retirement
costs and the write-off of $5,548,000 of deferred financing costs associated
with the repayment of debt in connection with the Transactions.
The following unaudited pro forma information assumes the Transactions had
occurred on January 1, 2004 and 2003, respectively. The pro forma information,
as presented below, is not necessarily indicative of the results that would have
been obtained had the Transactions occurred on January 1, 2004 and 2003, nor is
it necessarily indicative of the Company's future results (dollars in
thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------------------
2003 2004 2003
------------------- ------------- -------------
Net sales .......... $ 103,220 $ 294,675 $ 304,060
Net income ......... 4,847 10,808 10,085
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The pro forma net income amounts reflect the following items: (i)
adjustments for interest expense from new borrowings related to the Transactions
and the elimination of historical interest on debt repaid in the Transactions,
(ii) management fees to be paid to our Principal Investors, (iii) the
elimination of non-recurring expenses related to the Transactions, (iv) the
elimination of the increase in cost of sales in 2004 as a result of the
increased valuation of inventories as a result of a purchase price allocation,
(v) additional depreciation expense as a result of the write-up of property,
plant and equipment and amortization of other intangible assets, as a result of
a preliminary purchase price allocation , and (vi) the related income tax
effects of the above items based upon a pro forma effective income tax rate of
39.5%.
NOTE 3 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the
periods prior to May 1, 2004 (the "Predecessor") and for the periods subsequent
to April 30, 2004 (the "Successor") include the accounts of Amscan Holdings and
its majority-owned and controlled entities. All material intercompany balances
and transactions have been eliminated in consolidation. The unaudited
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation have been
included. Operating results for the five months ended September 30, 2004 and
four months ended April 30, 2004 are not necessarily indicative of the results
to be expected for the twelve months ending December 31, 2004. The results of
operations may be affected by seasonal factors such as the timing of holidays or
industry factors that may be specific to a particular period, such as movement
in and the general level of raw material costs. For further information, see the
consolidated financial statements and notes thereto included in Amscan Holdings'
Annual Report on Form 10-K for the year ended December 31, 2003 as filed with
the Securities and Exchange Commission.
NOTE 4 - INVENTORIES
Inventories consisted of the following (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(Successor) (Predecessor)
Finished goods............................................... $66,593 $74,258
Raw materials................................................ 11,303 8,842
Work-in-process.............................................. 7,482 4,762
------- -------
85,378 87,862
Less: reserve for slow moving and obsolete inventory......... (493) (2,725)
------- -------
$84,885 $85,137
======= =======
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or market.
NOTE 5 - INCOME TAXES
The consolidated income tax expense for the three and five months ended
September 30, 2004, four months ended April 30, 2004, and three and nine months
ended September 30, 2003 was determined based upon estimates of
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
the Company's consolidated effective income tax rates for the four months ended
April 30, 2004, the eight months ending December 31, 2004 and the year ended
December 31, 2003, respectively. The differences between the consolidated
effective income tax rates and the U.S. federal statutory rate are primarily
attributable to state income taxes and the effects of foreign operations.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consisted of the following (dollars in
thousands):
THREE MONTHS THREE MONTHS FOUR MONTHS FIVE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2004 2003
------------- ------------- ------------- ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
Net income (loss) ...................... $ 2,815 $ 5,226 $ (890) $ 3,517 $ 11,394
Net change in cumulative
translation adjustment ............... 328 (44) (673) 849 1,232
Change in fair value of
available-for-sale securities,
net of income taxes of $558,
$(14) and $596, respectively ......... 854 (22) 912
Reclassification adjustment for
available-for-sale securities
sold during the period, net of
income taxes of $(404), $(19)
and $(404), respectively ............. (618) (28) (618)
Change in fair value of interest
rate swap contracts, net of
income taxes of $(203), $90,
$54, $(223) and $36, respectively .... (311) 138 82 (341) 55
Reclassification adjustment for
the interest rate swap contract
terminated in connection with
the Transactions, net of income
taxes of $266 ....................... 408
Change in fair value of the
foreign exchange contracts, net
of income taxes of $19, $173,
$146, $33 and $40, respectively ...... 29 264 224 51 61
------------- ------------- ------------- ------------- -------------
$ 2,861 $ 5,820 $ (899) $ 4,076 $ 13,036
============= ============= ============= ============= =============
Accumulated other comprehensive income (loss) consisted of the following
(dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(Successor) (Predecessor)
Cumulative translation adjustment .................................... $ 849 $ 686
Unrealized gain on available-for-sale securities, net of income
taxes of $33 ....................................................... 50
Interest rate swap contracts, net of income taxes of $(223) and
$(320), respectively ............................................... (341) (490)
Foreign exchange contracts, net of income taxes of $33 and $(305),
respectively ....................................................... 51 (692)
------------- -------------
$ 559 $ (446)
============= =============
12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 7 - CAPITAL STOCK
At September 30, 2004, the Successor's authorized capital stock consisted
of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were
issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of
which 13,957.88 shares were issued and outstanding.
In connection with the Transactions (see Note 2), certain existing
employee stockholders purchased 292.41 shares of Successor Common Stock based on
the same price and terms per share as paid by the other equity investors. Under
the terms of the Amscan Holdings, Inc. amended and restated stockholders'
agreement, which terminated on April 30, 2004, and the new AAH Holdings
Corporation stockholders' agreement dated April 30, 2004, the Company has an
option to purchase all of the shares of common stock held by a former employee
and, under certain circumstances, a former employee stockholder can require the
Company to purchase all of the shares held by the former employee. The purchase
price as prescribed in the stockholders' agreements 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
us to all employee stockholders based on fully paid and vested shares is
classified as redeemable common securities on the consolidated balance sheet at
the estimated fair market value of the stock, with a corresponding adjustment to
stockholders' equity. At September 30, 2004, the aggregate amount that may be
payable by the Company to employee stockholders and employee optionholders,
based on the estimated market value, was approximately $3,660,000. As there is
no active market for the Company's Common Stock, the Company estimated the fair
value of its Common Stock based on the valuation of Company Common Stock issued
in connection with the Transactions.
The Company's Chief Executive Officer and its President exchanged 5.4945
and 2.7472 of their shares of Predecessor Common Stock for 100 and 50 shares of
Successor Common Stock with an equivalent value of $1,000,000 and $500,000,
respectively. In addition, the Chief Executive Officer and the President
exchanged their 5.607 and 2.804 vested options to purchase shares of Predecessor
Common Stock, which had intrinsic values of $600,000 and $300,000, respectively,
for vested options to purchase 65.455 and 32.727 shares of Successor Common
Stock under the new equity incentive plan with intrinsic values of $492,000 and
$245,000 and estimated fair values of $590,000 and $290,000, respectively. The
fair value of the Successor options was included in the equity contribution
related to the Transactions, however as the Successor options are options to
purchase redeemable common stock their estimated redemption value is classified
as redeemable common securities on the consolidated balance sheet.
At December 31, 2003, an officer of the Company held 3.00 shares of Common
Stock (the "Restricted Stock"), which were to vest in December 2004 under the
terms of his employment agreement. In connection with the Transactions, the 3.00
shares of Restricted Stock vested immediately on April 30, 2004 (see Note 2).
During the four months ended April 30, 2004, and the three and nine months ended
September 30, 2003, the Company recorded the amortization of Restricted Stock of
$52,000, $39,000 and $129,000, respectively, as compensation expense, which is
included in general and administrative expenses in the Company's consolidated
statements of operations.
At December 31, 2003, the Company held a note receivable from a former
officer for $655,000, which bore interest at 6.65% and was to mature in March
2009. In connection with the Transactions, the note receivable from the former
officer was repaid on April 30, 2004. In addition, at December 31, 2003, the
Company held a note receivable from a former employee for $25,000, which bore
interest at Libor plus 2% and matured and was repaid in January 2004. These
notes arose in connection with the issuance of shares of Predecessor Common
Stock and were reported on the consolidated balance sheet at December 31, 2003,
as an increase in stockholders' deficit.
On March 30, 2001, the Company issued 40 shares of Series A Redeemable
Convertible Preferred Stock to GSCP for proceeds of $6,000,000. On March 30,
2004, the annual dividend was distributed in additional shares of Series A
Redeemable Convertible Preferred Stock. In connection with the Transactions on
April 30, 2004, the
13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Company redeemed all outstanding shares of Series A Redeemable Convertible
Preferred Stock at a redemption price per share equal to $182,000 in cash,
together with accrued and unpaid dividends.
NOTE 8 - SEGMENT INFORMATION
Industry Segment
The Company manages its operations as one industry segment which involves
the design, manufacture, contract for manufacture and distribution of party
goods, including 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 are as follows (dollars in thousands):
SUCCESSOR: DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 2004
Sales to unaffiliated customers ....................... $ 83,013 $ 14,821 $ 97,834
Sales between geographic areas ........................ 3,907 $ (3,907) -
------------ ------------ ------------ ------------
Net sales ............................................. $ 86,920 $ 14,821 $ (3,907) $ 97,834
============ ============ ============ ============
Income from operations ................................ $ 10,483 $ 1,429 $ 358 $ 12,270
============ ============ ============
Interest expense, net ................................. 7,204
Undistributed loss in unconsolidated joint
venture .............................................. 366
Other income, net ..................................... (42)
------------
Income before income taxes and minority interests ..... $ 4,742
============
Long-lived assets, net at September 30, 2004 .......... $ 448,883 $ 8,924 $ (26,299) $ 431,508
============ ============ ============ ============
PREDECESSOR: DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 2003
Sales to unaffiliated customers ....................... $ 87,431 $ 15,789 $ 103,220
Sales between geographic areas ........................ 5,450 $ (5,450) -
------------ ------------ ------------ ------------
Net sales ............................................. $ 92,881 $ 15,789 $ (5,450) $ 103,220
============ ============ ============ ============
Income from operations ................................ $ 12,566 $ 1,546 $ 266 $ 14,378
============ ============ ============
Interest expense, net ................................. 6,681
Gain on sale of available-for-sale securities ......... (1,022)
Other expense, net .................................... 12
------------
Income before income taxes and minority interests ..... $ 8,707
============
Long-lived assets, net at September 30, 2003 .......... $ 200,353 $ 8,737 $ (28,739) $ 180,351
============ ============ ============ ============
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
PREDECESSOR: DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
FOUR MONTHS ENDED APRIL 30, 2004
Sales to unaffiliated customers ....................... $ 115,939 $ 17,721 $ 133,660
Sales between geographic areas ........................ 5,487 $ (5,487) -
------------- ------------- ------------- -------------
Net sales ............................................. $ 121,426 $ 17,721 $ (5,487) $ 133,660
============= ============= ============= =============
Income from operations ................................ $ 5,517 $ 1,156 $ 347 $ 7,020
============= ============= =============
Interest expense, net ................................. 8,384
Undistributed loss in unconsolidated joint
venture ............................................. 89
Gain on sale of available-for-sale securities ......... (47)
Other income, net ..................................... (11)
-------------
Loss before income taxes and minority interests ....... $ (1,395)
=============
Long-lived assets, net at April 30, 2004 .............. $ 187,796 $ 8,473 $ (25,224) $ 171,045
============= ============= ============= =============
SUCCESSOR: DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
FIVE MONTHS ENDED SEPTEMBER 30, 2004
Sales to unaffiliated customers ....................... $ 137,071 $ 23,944 $ 161,015
Sales between geographic areas ........................ 7,700 $ (7,700) -
------------- ------------- ------------- -------------
Net sales ............................................. $ 144,771 $ 23,944 $ (7,700) $ 161,015
============= ============= ============= =============
Income from operations ................................ $ 16,011 $ 1,969 $ 552 $ 18,532
============= ============= =============
Interest expense, net ................................. 11,964
Undistributed loss in unconsolidated joint
venture ............................................. 678
Other income, net ..................................... (53)
-------------
Income before income taxes and minority interests ..... $ 5,943
=============
PREDECESSOR: DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
Sales to unaffiliated customers ....................... $ 262,031 $ 42,029 $ 304,060
Sales between geographic areas ........................ 15,063 $ (15,063) -
------------- ------------- ------------- -------------
Net sales ............................................. $ 277,094 $ 42,029 $ (15,063) $ 304,060
============= ============= ============= =============
Income from operations ................................ $ 34,525 $ 2,326 $ 917 $ 37,768
============= ============= =============
Interest expense, net ................................. 19,877
Gain on sale of available-for-sale securities ......... (1,022)
Other income, net ..................................... (45)
-------------
Income before income taxes and minority interests ..... $ 18,958
=============
NOTE 9 - LEGAL PROCEEDINGS
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe these proceedings will result,
individually or in the aggregate, in a material adverse effect on its financial
condition or future results of operations.
NOTE 10 - RELATED PARTY TRANSACTIONS
GSCP received fees totaling $8,123,000 for services provided in connection
with the Transactions.
15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In connection with the Transactions, the Company executed a management
agreement with Berkshire Partners LLC and Weston Presidio. Pursuant to the
management agreement, Berkshire Partners LLC and Weston Presidio will be paid
annual management fees of $833,333 and $416,667, respectively. At September 30,
2004, accrued management fees payable to Berkshire Partners LLC and Weston
Presidio totaled $137,000 and $175,000, respectively. Although the indenture
governing the 8.75% senior subordinated notes will permit the payments under the
management agreement, such payments will be restricted during an event of
default under the notes and will be subordinated in right of payment to all
obligations due with respect to the notes in the event of a bankruptcy or
similar proceeding of Amscan.
During the four months ended April 30, 2004, and three and nine months
ended September 30, 2003, the Company sold $836,000, $2,387,000, and $4,636,000
respectively, of metallic balloons and other party goods to American Greetings
Corporation, a minority stockholder from February 2002 through the date of the
Transactions. Trade accounts receivable from American Greetings at December 31,
2003 was $1,937,000.
In June 2003, the Company purchased 16 shares of Predecessor Common Stock
from its Chief Executive Officer at a price of $150,000 per share, or for an
aggregate cash purchase price of $2,400,000, of which $2,115,000 was paid in
June 2003 and $285,000 was paid in July 2003. The Chief Executive Officer used a
portion of the proceeds to repay an outstanding loan balance of $1,588,000. The
Company retired the 16 shares of Predecessor Common Stock.
In July 2003, the Company purchased 6 shares of Predecessor Common Stock
from its President at a price of $150,000 per share, or for an aggregate cash
purchase price of $900,000. The President used a portion of the proceeds to
repay an outstanding loan balance of $402,000. The Company retired the 6 shares
of Predecessor Common Stock.
NOTE 11 - RESTRUCTURING CHARGES
During the three and nine months ended September 30, 2003, the Predecessor
incurred charges of $233,000 and $1,007,000, respectively, resulting from the
consolidation of certain domestic and foreign distribution operations and the
integration of M&D Industries, Inc. into its balloon operations.
NOTE 12 - GAIN ON SALE OF AVAILABLE-FOR-SALE SECURITIES
During the three months ended September 30, 2003, the Predecessor sold
common stock of a customer which it had received in connection with the
customer's reorganization in bankruptcy. The Predecessor received net proceeds
of $1,443,000 and recognized a gain of $1,022,000. In April 2004, the
Predecessor sold the remainder of the common stock and received net proceeds of
$65,000 and a recognized a gain of $47,000.
NOTE 13 - STOCK OPTION PLAN
Effective May 1, 2004, the Successor has elected to apply the fair value
method of SFAS No. 123 as amended by Financial Accounting Standards No. 148
("SFAS 148"), Accounting for Stock-Based Compensation -- Transition and
Disclosure which amends Statement of Financial Accounting Standards No. 123
("SFAS No. 123"). 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
16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
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. SFAS No. 148 provides alternative methods of
transition to FAS 123's fair value method of accounting for stock-based employee
compensation and amends the disclosure provisions of FAS 123. Effective with the
consummation of the Transactions (see Note 2), effective May 1, 2004, the
Successor adopted SFAS No. 123 and will expense stock options issued after such
date using the fair value method as provided for in SFAS No. 148.
Prior to the Transactions, the Predecessor elected to apply the intrinsic
value method of APB No. 25 for awards granted under its stock-based compensation
plans and to provide the pro forma disclosures required by SFAS No. 123.
Accordingly, no compensation cost has been recognized in connection with the
issuance of options under the Amscan Holdings, Inc. 1997 Stock Incentive Plan,
the Predecessor's prior plan, through April 30, 2004 as all options were granted
with exercise prices equal to the estimated fair market value of the Common
Stock on the date of grant.
Had the Company determined stock-based compensation based on the fair
value of the options granted at the grant date, consistent with the method
prescribed under SFAS No. 123, the Company's net income would have been reduced
(or the net loss would have been increased) to amounts indicated below (dollars
in thousands):
THREE MONTHS FOUR MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2003 2004 2003
------------- ----------- -------------
(Predecessor) (Predecessor) (Predecessor)
Net income (loss):
As reported ...................... $5,226 $ (890) $11,394
Less: Total stock-based
employee compensation expense
determined under the fair
value based method for all
awards, net of income taxes of
$69, $125 and $139, respectively.. 106 192 213
------ ------- -------
SFAS No. 123 pro forma net income
(loss)............................. $5,120 $(1,082) $11,181
====== ======= =======
In connection with the Transactions, all options granted vested
immediately on April 30, 2004 and, except for those held by the Chief Executive
Officer and the President (see Note 7), all were exercised. The Chief Executive
Officer and the President exchanged 5.607 and 2.804 vested options to purchase
shares of Predecessor Common Stock, which had intrinsic values of $600,000 and
$300,000, respectively, for vested options to purchase 65.455 and 32.727 shares
of Successor Common Stock under the new equity incentive plan with intrinsic
values of $492,000 and $245,000 and estimated fair values of $590,000 and
$290,000, respectively. Such options were recorded as part of the purchase price
allocations and have been classified as redeemable common securities on the
Company's consolidated balance sheet. No additional options have been granted by
the Successor.
NOTE 14 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On April 30, 2004, in connection with the consummation of the
Transactions, all borrowings under the then existing credit agreement were
repaid and the facility was terminated. In addition, $87,200,000 in aggregate
principal amount of the 9.875% senior subordinated notes due 2007 were accepted
in a tender offer and a redemption notice was issued for the remaining senior
subordinated notes (see Note 2). The aggregate cost to purchase the 9.875%
senior
17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
subordinated notes due 2007 tendered pursuant to the tender offer was
approximately $93,500,000, or 103.542% of the principal amount of such 9.875%
senior subordinated notes plus accrued and unpaid interest. On May 31, 2004, the
remaining $22,800,000 in aggregate principal amount of the outstanding 9.875%
senior subordinated notes were redeemed pursuant to the redemption notice at a
price of 103.292% of the principal amount of such notes plus accrued and unpaid
interest.
The acquisition was financed with initial borrowings consisting of a
$205,000,000 term loan under a new senior secured credit facility, which
includes a $50,000,000 revolving loan facility, the proceeds from the issuance
of $175,000,000 of 8.75% senior subordinated notes due 2014, the equity
contribution by our Principal Investors and employee stockholders of
$140,479,000, borrowings under the revolver of $23,551,000 and approximately
$2,900,000 of cash on hand.
Borrowings under the new senior secured credit facility, the revolving
loan facility and the $175,000,000 of 8.75% senior subordinated notes due 2014
are guaranteed jointly and severally, fully and unconditionally, by the
following wholly-owned domestic subsidiaries of the Company (the "Guarantors"):
- Amscan Inc.
- Am-Source, LLC
- Anagram International, Inc.
- Anagram International Holdings, Inc.
- Anagram International, LLC
- M&D Industries, Inc.
- SSY Realty Corp.
- JCS Packaging Inc. (formerly JCS Realty Corp.)
- Anagram Eden Prairie Property Holdings LLC
- Trisar, Inc.
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.
- JCS Hong Kong Ltd.
The following information presents consolidating balance sheets as of
September 30, 2004 and December 31, 2003, and the related consolidating
statements of income for the three months ended September 30, 2004 and 2003,
four months ended April 30, 2004, five months ended September 30, 2004 and nine
months ended September 30, 2003 and consolidating statements of cash flows for
the four months ended April 30, 2004, five months ended September 30, 2004 and
nine months ended September 30, 2003, for the combined Guarantors and the
combined Non-guarantors and elimination entries necessary to consolidate the
entities comprising the combined companies.
18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2004
(SUCCESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 1,360 $ 397 $ 1,757
Accounts receivable, net of allowances .............. 72,005 15,064 87,069
Inventories, net of allowances ...................... 74,088 11,099 $ (302) 84,885
Prepaid expenses and other current assets ........... 15,579 1,450 17,029
------------ ------------ ------------ ------------
Total current assets .............................. 163,032 28,010 (302) 190,740
Property, plant and equipment, net .................... 98,086 2,008 100,094
Goodwill, net ......................................... 307,528 5,598 313,126
Other assets, net ..................................... 43,269 1,318 (26,299) 18,288
------------ ------------ ------------ ------------
Total assets ...................................... $ 611,915 $ 36,934 $ (26,601) $ 622,248
============ ============ ============ ============
LIABILITIES, REDEEMABLE COMMON SECURITIES
AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans and notes payable ............................. $ 11,310 $ 11,310
Accounts payable .................................... 25,173 $ 2,229 27,402
Accrued expenses .................................... 18,409 6,898 25,307
Income taxes payable ................................ 48 $ (36) 12
Current portion of long-term obligations ............ 2,619 154 2,773
------------ ------------ ------------ ------------
Total current liabilities ......................... 57,559 9,281 (36) 66,804
Long-term obligations, excluding current portion ...... 385,464 185 385,649
Deferred income tax liabilities ....................... 22,765 22,765
Other ................................................. 1,306 25,110 (23,941) 2,475
------------ ------------ ------------ ------------
Total liabilities ................................. 467,094 34,576 (23,977) 477,693
Redeemable common securities .......................... 3,660 3,660
Commitments and contingencies
Stockholders' equity:
Preferred Stock ..................................... -
Common Stock ........................................ 339 (339) -
Additional paid-in capital .......................... 136,819 136,819
Retained earnings ................................... 3,783 1,243 (1,509) 3,517
Accumulated other comprehensive income .............. 559 776 (776) 559
------------ ------------ ------------ ------------
Total stockholders' equity .................... 141,161 2,358 (2,624) 140,895
------------ ------------ ------------ ------------
Total liabilities, redeemable common
securities and stockholders' equity ...... $ 611,915 $ 36,934 $ (26,601) $ 622,248
============ ============ ============ ============
19
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
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 of allowances ............ 63,553 12,129 75,682
Inventories, net of allowances .................... 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 STOCK AND COMMON SECURITIES 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 securities .......................... 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 .......................................... (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 Stock and common securities and
stockholders' (deficit) equity ................ $ 373,156 $ 32,185 $ (23,239) $ 382,102
============ ============ ============ ============
20
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(SUCCESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net sales ............................................. $ 86,920 $ 14,821 $ (3,907) $ 97,834
Cost of sales ......................................... 60,208 9,817 (3,935) 66,090
------------ ------------ ------------ ------------
Gross profit .................................. 26,712 5,004 28 31,744
Operating expenses:
Selling expenses ................................... 6,992 1,734 8,726
General and administrative expenses ................ 6,305 1,669 (330) 7,644
Art and development costs .......................... 2,358 2,358
Provision for doubtful accounts ................... 574 172 746
------------ ------------ ------------ ------------
Total operating expenses ...................... 16,229 3,575 (330) 19,474
------------ ------------ ------------ ------------
Income from operations ........................ 10,483 1,429 358 12,270
Interest expense, net ................................. 7,165 39 7,204
Undistributed loss in unconsolidated joint venture .... 366 366
Other income, net ..................................... (1,271) (1) 1,230 (42)
------------ ------------ ------------ ------------
Income before income taxes and
minority interests .......................... 4,223 1,391 (872) 4,742
Income tax expense .................................... 1,425 438 11 1,874
Minority interests .................................... 53 53
------------ ------------ ------------ ------------
Net income .................................... $ 2,798 $ 900 $ (883) $ 2,815
============ ============ ============ ============
21
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ -----------
Net sales........................................ $92,881 $15,789 $(5,450) $103,220
Cost of sales.................................... 62,861 10,797 (5,416) 68,242
------- ------- ------- --------
Gross profit............................. 30,020 4,992 (34) 34,978
Operating expenses:
Selling expenses.............................. 7,578 1,628 9,206
General and administrative expenses........... 6,729 1,638 (300) 8,067
Art and development costs..................... 2,322 2,322
Provision for doubtful accounts............... 592 180 772
Restructuring charges......................... 233 233
------- ------- ------- --------
Total operating expenses................. 17,454 3,446 (300) 20,600
------- ------- ------- --------
Income from operations................... 12,566 1,546 266 14,378
Interest expense, net ........................... 6,494 187 6,681
Gain on sale of available-for-sale securities.... (1,022) (1,022)
Other (income) expense, net...................... (1,082) (23) 1,117 12
------- ------- ------- --------
Income before income taxes and
minority interests..................... 8,176 1,382 (851) 8,707
Income tax expense............................... 2,929 523 (13) 3,439
Minority interests............................... 42 42
------- ------- ------- --------
Net income............................... 5,247 817 (838) 5,226
Dividend on redeemable convertible
preferred stock....................... 102 102
------- ------- ------- --------
Net income applicable to common shares... $ 5,145 $ 817 $ (838) $ 5,124
======= ======= ======= ========
22
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 2004
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net sales ................................................ $ 121,426 $ 17,721 $ (5,487) $ 133,660
Cost of sales ............................................ 81,845 11,796 (5,394) 88,247
------------ ------------ ------------ ------------
Gross profit ..................................... 39,581 5,925 (93) 45,413
Operating expenses:
Selling expenses ...................................... 10,095 2,335 12,430
General and administrative expenses ................... 8,280 2,305 (440) 10,145
Art and development costs ............................. 3,332 3,332
Provision for doubtful accounts ....................... 600 129 729
Non-recurring expenses related to the Transactions..... 11,757 11,757
------------ ------------ ------------ ------------
Total operating expenses ......................... 34,064 4,769 (440) 38,393
------------ ------------ ------------ ------------
Income from operations ........................... 5,517 1,156 347 7,020
Interest expense, net .................................... 8,320 64 8,384
Undistributed loss in unconsolidated joint venture ....... 89 89
Gain on sale of available-for-sale securities ............ (47) (47)
Other income, net ........................................ (1,147) (39) 1,175 (11)
------------ ------------ ------------ ------------
(Loss) income before income taxes and
minority interests ............................. (1,698) 1,131 (828) (1,395)
Income tax (benefit) expense ............................. (864) 350 (37) (551)
Minority interests ....................................... 46 46
------------ ------------ ------------ ------------
Net (loss) income ................................ (834) 735 (791) (890)
Dividend on redeemable convertible
preferred stock ............................... 136 136
------------ ------------ ------------ ------------
Net (loss) income applicable to common shares..... $ (970) $ 735 $ (791) $ (1,026)
============ ============ ============ ============
23
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FIVE MONTHS ENDED SEPTEMBER 30, 2004
(SUCCESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net sales ............................................. $ 144,771 $ 23,944 $ (7,700) $ 161,015
Cost of sales ......................................... 101,162 16,054 (7,702) 109,514
------------ ------------ ------------ ------------
Gross profit .................................. 43,609 7,890 2 51,501
Operating expenses:
Selling expenses ................................... 11,821 2,853 14,674
General and administrative expenses ................ 10,835 2,811 (550) 13,096
Art and development costs .......................... 4,127 4,127
Provision for doubtful accounts ................... 815 257 1,072
------------ ------------ ------------ ------------
Total operating expenses ...................... 27,598 5,921 (550) 32,969
------------ ------------ ------------ ------------
Income from operations ........................ 16,011 1,969 552 18,532
Interest expense, net ................................. 11,899 65 11,964
Undistributed loss in unconsolidated joint venture .... 678 678
Other income, net ..................................... (1,845) (1) 1,793 (53)
------------ ------------ ------------ ------------
Income before income taxes and
minority interests .......................... 5,279 1,905 (1,241) 5,943
Income tax expense .................................... 1,763 584 1 2,348
Minority interests .................................... 78 78
------------ ------------ ------------ ------------
Net income .................................... $ 3,516 $ 1,243 $ (1,242) $ 3,517
============ ============ ============ ============
24
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net sales ............................................. $ 277,094 $ 42,029 $ (15,063) $ 304,060
Cost of sales ......................................... 189,805 29,436 (15,080) 204,161
------------ ------------ ------------ ------------
Gross profit .................................. 87,289 12,593 17 99,899
Operating expenses:
Selling expenses ................................... 22,649 4,673 27,322
General and administrative expenses ................ 19,710 5,086 (900) 23,896
Art and development costs .......................... 7,145 7,145
Provision for doubtful accounts .................... 2,280 481 2,761
Restructuring charges .............................. 980 27 1,007
------------ ------------ ------------ ------------
Total operating expenses ...................... 52,764 10,267 (900) 62,131
------------ ------------ ------------ ------------
Income from operations ........................ 34,525 2,326 917 37,768
Interest expense, net ................................. 19,375 502 19,877
Gain on sale of available-for-sale securities ......... (1,022) (1,022)
Other (income) expense, net ........................... (1,912) 4 1,863 (45)
------------ ------------ ------------ ------------
Income before income taxes
and minority interests ...................... 18,084 1,820 (946) 18,958
Income tax expense .................................... 6,700 781 7 7,488
Minority interests .................................... 76 76
------------ ------------ ------------ ------------
Net income .................................... 11,384 963 (953) 11,394
Dividend on redeemable convertible
preferred stock ............................ 299 299
------------ ------------ ------------ ------------
Net income applicable to common shares ........ $ 11,085 $ 963 $ (953) $ 11,095
============ ============ ============ ============
25
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 2004
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash flows provided by operating activities:
Net (loss) income .......................................... $ (834) $ 735 $ (791) $ (890)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization expense .................... 5,076 220 5,296
Amortization of deferred financing costs ................. 709 709
Amortization of restricted Common Stock award ............ 52 52
Provision for doubtful accounts .......................... 600 129 729
Deferred income tax benefit .............................. (58) (58)
Gain on sale of available-for-sale securities ............ (47) (47)
Gain on disposal of equipment ............................ (35) (35)
Write-off of deferred financing costs in connection
with the Transactions ............................... 5,548 5,548
Debt retirement costs incurred in connection with
the Transactions .................................... 6,209 6,209
Undistributed loss in unconsolidated joint venture ....... 89 89
Changes in operating assets and liabilities:
Increase in accounts receivable ..................... (13,843) (1,404) (15,247)
Decrease in inventories, net ........................ 5,833 303 93 6,229
Increase in prepaid expenses and other
current assets ................................... (3,017) (576) (3,593)
Increase in accounts payable, accrued expenses
and income taxes payable ......................... 3,663 365 (37) 3,991
Other, net .............................................. (1,545) 1,240 735 430
------------ ------------ ------------ ------------
Net cash provided by operating activities ........... 8,435 977 - 9,412
Cash flows used in investing activities:
Capital expenditures ....................................... (3,205) (521) (3,726)
Proceeds from sale of available-for-sale securities ........ 65 65
Proceeds from disposal of property and equipment ........... 53 53
------------ ------------ ------------ ------------
Net cash used in investing activities ............... (3,140) (468) - (3,608)
Cash flows used in financing activities:
Repayment of loans, notes payable and long-term
obligations ............................................. (21,184) (67) (21,251)
Debt retirement costs paid in connection with the
Transactions ............................................ (6,209) (6,209)
Repayment of note receivable from stockholder .............. 25 25
------------ ------------ ------------ ------------
Net cash used in financing activities ............... (27,368) (67) - (27,435)
Effect of exchange rate changes on cash and cash equivalents... (21) (573) (594)
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents ........... (22,094) (131) (22,225)
Cash and cash equivalents at beginning of period .............. 30,740 722 31,462
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period .................... $ 8,646 $ 591 $ - $ 9,237
============ ============ ============ ============
26
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FIVE MONTHS ENDED SEPTEMBER 30, 2004
(SUCCESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS COMBINED
AND COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- ----------- ------------ ------------
Cash flows provided by (used in) operating activities:
Net income .................................................. $ 3,516 $ 1,243 $ (1,242) $ 3,517
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization expense ..................... 6,505 278 6,783
Amortization of deferred financing costs .................. 648 648
Provision for doubtful accounts ........................... 815 257 1,072
Deferred income tax benefit ............................... (438) (438)
Undistributed loss in unconsolidated joint venture ........ 678 678
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ........... 4,481 (1,917) 2,564
(Increase) in inventories, net ....................... (1,273) (2,045) (2) (3,320)
Decrease in prepaid expenses and other current
assets ............................................ 660 245 905
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable ................. (4,014) 1,506 1 (2,507)
Other, net ............................................... (1,170) (239) 1,243 (166)
------------ ----------- ------------ -----------
Net cash provided by (used in) operating activities... 10,408 (672) - 9,736
Cash flows used in investing activities:
Cash paid to consummate the Transactions .................... (529,982) (529,982)
Capital expenditures ........................................ (4,344) (128) (4,472)
Proceeds from disposal of property and equipment ............ 13 13
------------ ----------- ------------ -----------
Net cash used in investing activities ................ (534,326) (115) - (534,441)
Cash flows provided by (used in) financing activities:
Proceeds from loans, notes payable and long-term
obligations, net of debt issuance costs of $ 12,705 ....... 378,605 378,605
Repayment of loans, notes payable and long-term
obligations ............................................... (997) (73) (1,070)
Capital contributions in connection with the Transactions.... 138,979 138,979
------------ ----------- ------------ -----------
Net cash provided by (used in) financing activities... 516,587 (73) - 516,514
Effect of exchange rate changes on cash and cash equivalents.... 45 666 711
------------ ----------- ------------ -----------
Net decrease in cash and cash equivalents ............ (7,286) (194) (7,480)
Cash and cash equivalents at beginning of period ............... 8,646 591 9,237
------------ ----------- ------------ -----------
Cash and cash equivalents at end of period ..................... $ 1,360 $ 397 $ - $ 1,757
============ =========== ============ ===========
27
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(PREDECESSOR)
(DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS COMBINED
AND COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- ------------ ------------ ------------
Cash flows from operating activities:
Net income ..................................................... $ 11,384 $ 963 $ (953) $ 11,394
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization expense......................... 11,630 403 12,033
Amortization of deferred financing costs ..................... 1,570 1,570
Amortization of restricted Common Stock awards ............... 129 129
Provision for doubtful accounts .............................. 2,280 481 2,761
Deferred income tax expense .................................. 2,444 2,444
Gain on sale of available-for-sale securities ................ (1,022) (1,022)
Loss on disposal of property and equipment ................... 110 8 118
Non-cash restructuring charges ............................... 104 104
Changes in operating assets and liabilities, net of
acquisition:
Increase in accounts receivable ......................... (10,774) (4,598) (15,372)
Decrease (increase) in inventories, net ................. 9,583 (510) (17) 9,056
Decrease in prepaid expenses and other current
assets ............................................... 937 33 970
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable .................... (8,039) 1,920 7 (6,112)
Other, net .............................................. (1,830) 570 963 (297)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities ..... 18,506 (730) - 17,776
Cash flows from investing activities:
Capital expenditures ........................................... (9,444) (637) (10,081)
Proceeds from sale of available-for-sale securities ............ 1,443 1,443
Proceeds from disposal of property and equipment ............... 128 70 198
------------ ------------ ------------ ------------
Net cash used in investing activities ................... (7,873) (567) - (8,440)
Cash flows from financing activities:
Repayment of loans, notes payable and long-term
obligations .................................................. (2,655) (133) (2,788)
Proceeds from exercise of stock options ........................ 831 831
Purchase of Common Stock from officers ......................... (3,300) (3,300)
Repayment of notes receivable from officers .................... 1,990 1,990
------------ ------------ ------------ ------------
Net cash used in financing activities ................... (3,134) (133) - (3,267)
Effect of exchange rate changes on cash and cash equivalents ...... (12) 962 950
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ........................................... 7,487 (468) 7,019
Cash and cash equivalents at beginning of period .................. 1,483 917 2,400
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ........................ $ 8,970 $ 449 $ - $ 9,419
============ ============ ============ ============
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE TRANSACTIONS
On March 26, 2004, Amscan signed an agreement providing for a merger of
Amscan with AAH Acquisition Corporation, or AAH Acquisition, a wholly-owned
subsidiary of AAH Holdings Corporation, or AAH Holdings, an entity jointly
controlled by funds affiliated with Berkshire Partners LLC and Weston Presidio
(together the "Principal Investors"). On April 30, 2004, the merger with AAH
Acquisition was consummated, with Amscan continuing as the surviving entity and
as a wholly owned subsidiary of AAH Holdings. Under the terms of the agreement,
the equity interests in Amscan of GS Capital Partners II, L.P. and certain other
private investment funds managed by Goldman, Sachs & Co., which are collectively
referred to as GSCP, and all other stockholders, other than certain management
investors, were cancelled in exchange for the right to receive cash. Cash paid
to consummate the acquisition totaled $530.0 million and was financed with
initial borrowings (before deducting deferred financing costs of $12.7 million)
consisting of a $205.0 million term loan under a new senior secured credit
facility which includes a $50.0 million revolving loan facility, the proceeds
from the issuance of $175.0 million of 8.75% senior subordinated notes due 2014,
the equity contribution, including the Principal Investors and employee
stockholders, of $140.5 million, borrowings under the revolver of $23.6 million
and available cash on hand. Certain existing employee shareholders participated
in the Transactions (as defined hereafter) by purchasing approximately 292.41
shares of common stock. The Chief Executive Officer and the President of the
Company exchanged 5.4945 and 2.7472 of their shares of common stock of the
Predecessor for 100 and 50 shares of common stock of the Successor with an
equivalent value of $1.0 million and $0.5 million, respectively. In addition,
the Chief Executive Officer and the President of the Company exchanged vested
options to purchase 5.607 and 2.804 shares of Predecessor common stock, which
had intrinsic values of $0.6 million and $0.3 million, respectively, for vested
options under the Successor's equity incentive plan with intrinsic values of
$0.5 million and $0.2 million and fair values of $0.6 million and $0.3 million,
respectively. The acquisition has been accounted for under the purchase method
of accounting which required that the Successor adjust its assets and
liabilities to their relative fair values. The capital structure disclosed in
the Successor financial statements reflects the capital structure of AAH
Holdings.
The purchase price has been allocated based upon preliminary estimates of
the fair value of net assets acquired at the date of acquisition. The final
allocations will be based on studies and valuations that have not yet been
completed and will be subject to change in future periods. The excess of the
purchase price over tangible net assets acquired has been allocated to
intangible assets consisting of licensing agreements in the amount of $3.0
million, which are being amortized using the straight-line method over the lives
of the contracts (two to three years with an average life of 2.5 years), and
goodwill in the amount of $313.0 million, which is not being amortized. The
acquisition was structured as a purchase of common stock and, accordingly, the
amortization of intangible assets is not deductible for income tax purposes.
Concurrent with the acquisition, the following financing transactions were
also consummated: the repayment of $147.7 million under our then existing senior
secured credit facility and the termination of all commitments under that
facility; the consummation of our tender offer and consent solicitation that
resulted in the tender offer of $87.2 million of the $110.0 million aggregate
principal amount outstanding of our 9.875% senior subordinated notes due 2007
for $93.5 million or 103.542% of the principal amount of such notes plus accrued
and unpaid interest and the redemption of the remaining senior subordinated
notes for $23.6 million or 103.292% of the principal amount of such notes plus
accrued and unpaid interest; and repayment of a $8.5 million mortgage obligation
with a financial institution (the acquisition together with the foregoing
financing transactions are referred to herein collectively as the
"Transactions").
On May 31, 2004, the remaining outstanding 9.875% senior subordinated
notes due 2007 were redeemed pursuant to the redemption notice. The Company
financed the redemption with borrowings under its new revolving credit facility.
The new senior subordinated notes were sold to the initial purchasers by
the Company on April 30, 2004, and were subsequently resold to qualified
institutional buyers and non-U.S. persons in reliance upon Rule 144A and
Regulation S under the Securities Act of 1933 (the "Note Offering"). In
connection with the Note Offering, the
29
Company entered into a Registration Rights Agreement, which granted holders of
the new notes certain exchange and registration rights. In August 2004, the
Company filed with the Securities and Exchange Commission a Registration
Statement on Form S-4 offering to exchange registered notes for the notes issued
in connection with the Note Offering. The terms of the notes and the exchange
notes are substantially identical. The exchange was completed in October 2004.
The accompanying unaudited consolidated financial statements for the
periods prior to May 1, 2004 (the "Predecessor") and for the period subsequent
to April 30, 2004 (the "Successor") include the accounts of Amscan Holdings and
its majority-owned and controlled entities. For the purposes of management's
discussion and analysis of financial condition and results of operations,
financial information for the Predecessor and the Successor have been combined
to compare quarterly and year to date information and therefore the term
"Company" refers to Amscan Holdings, Inc. and its subsidiaries for all periods
presented.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
PERCENTAGE OF NET SALES
THREE MONTHS ENDED
--------------------------
SEPTEMBER 30,
--------------------------
2004 2003
-------- --------
Net sales ............................................. 100.0% 100.0%
Cost of sales ......................................... 67.6 66.1
-------- --------
Gross profit .................................... 32.4 33.9
Operating expenses:
Selling expenses ................................... 8.9 8.9
General and administrative expenses ................ 7.8 7.8
Art and development costs .......................... 2.4 2.3
Provision for doubtful accounts .................... 0.8 0.7
Restructuring charges .............................. 0.3
-------- --------
Total operating expenses ........................ 19.9 20.0
-------- --------
Income from operations .......................... 12.5 13.9
Interest expense, net ................................. 7.4 6.5
Undistributed loss in unconsolidated joint venture .... 0.3
Gain on sale of available-for-sale securities ......... (1.0)
Other income, net
-------- --------
Income before income taxes and minority interests ..... 4.8 8.4
Income tax expense .................................... 1.9 3.3
Minority interests
-------- --------
Net income ...................................... 2.9% 5.1%
======== ========
NET SALES. Net sales of $97.8 million for the quarter ended September 30,
2004 were $5.4 million or 5.2% lower than net sales for the quarter ended
September 30, 2003. The decrease in sales reflects a general softness in retail
markets, the continued impact of inventory shortages on certain products as a
result of a production disruption at one of the Company's foreign vendors and
changes in the promotional pricing activities at certain national chains. These
decreases in sales were partially offset by higher net international sales,
principally as a result of foreign currency exchange fluctuations.
GROSS PROFIT. Gross profit margin for the third quarter of 2004 was 32.4%,
or 150 basis points lower as compared to the third quarter of 2003. The decrease
in gross profit margin principally reflects higher inventory costs from the
write-up of finished goods inventories as a result of purchase accounting for
the Transactions and certain increased raw material costs.
OPERATING EXPENSES. Selling expenses of $8.7 million for the quarter ended
September 30, 2004 were $0.5 million lower than for the third quarter of 2003
primarily as a result of a consolidation of sales territories. As a percent of
net sales, selling expenses were 8.9% in both 2004 and 2003.
30
General and administrative expenses of $7.7 million for the quarter ended
September 30, 2004 were $0.4 million lower than for the third quarter of 2003.
As a percentage of net sales, general and administrative expenses were 7.8% for
the third quarter of 2004 and 2003. The net decrease in general and
administrative expenses principally reflects the elimination of certain general
and administrative expenses, as a result of the Company's having contributed its
metallic balloon distribution operations located in Mexico to a newly created
joint venture in December 2003. These decreases were partially offset by
management fees to our Principal Investors and higher amortization of other
intangible assets, based on our preliminary purchase price allocation. The new
joint venture distributes certain metallic balloons principally in Mexico and
Latin America.
Art and development costs of $2.4 million for the quarter ended September
30, 2004 were comparable to the third quarter of 2003. As a percentage of net
sales, art and development costs were 2.4% for the third quarter of 2004 or 0.1%
higher than the third quarter of 2003.
Provision for doubtful accounts for the quarter ended September 30, 2004
was $0.7 million or 0.8% of net sales, as compared to $0.8 million or 0.7% of
net sales for the quarter ended September 30, 2003. During the third quarter of
2003, the Company charged an additional $0.2 million to the provision for
doubtful accounts to adjust the reserve for a customer that had filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code during the second quarter. This customer accounted for approximately 1.5%
of the Company's consolidated net sales for the three months ended September 30,
2003.
During the three months ended September 30, 2003, the Company incurred
restructuring charges of $0.2 million, resulting from the consolidation of
certain domestic and foreign distribution operations and the integration of M&D
Industries into its balloon operations.
INTEREST EXPENSE. Interest expense, net, of $7.2 million for the three
months ended September 30, 2004 was $0.5 million higher than for the three
months ended September 30, 2003, due to the impact of higher average borrowings
partially offset by lower interest rates.
GAIN ON SALE OF AVAILABLE-FOR-SALE SECURITIES. During the three months
ended September 30, 2003, the Company sold common stock of a customer that it
had received in connection with the customer's reorganization in bankruptcy. The
Company received net proceeds of approximately $1.4 million and recognized a
gain of approximately $1.0 million.
UNDISTRIBUTED LOSS IN UNCONSOLIDATED JOINT VENTURE. Undistributed loss in
unconsolidated joint venture represents our share of the joint venture's losses,
including the elimination of intercompany profit in the joint venture's
inventory at September 30, 2004.
INCOME TAXES. Income taxes for the third quarter of 2004 and 2003 were
based upon estimated consolidated effective income tax rates of 39.5% for the
years ending December 31, 2004 and 2003.
31
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
PERCENTAGE OF NET SALES
NINE MONTHS ENDED
------------------------
SEPTEMBER 30,
------------------------
2004 2003
------- -------
Net sales .................................................. 100.0% 100.0%
Cost of sales .............................................. 67.1 67.1
------- -------
Gross profit ......................................... 32.9 32.9
Operating expenses:
Selling expenses ........................................ 9.2 9.0
General and administrative expenses ..................... 7.9 7.9
Art and development costs ............................... 2.5 2.4
Provision for doubtful accounts ......................... 0.6 0.9
Non-recurring expenses related to the Transactions ...... 4.0
Restructuring charges ................................... 0.3
------- -------
Total operating expenses ............................. 24.2 20.5
------- -------
Income from operations ............................... 8.7 12.4
Interest expense, net ...................................... 6.9 6.5
Undistributed loss in unconsolidated joint venture ......... 0.3
Gain on sale of available-for-sale securities .............. (0.3)
Other (income) expense, net
------- -------
Income before income taxes and minority interests .......... 1.5 6.2
Income tax expense ......................................... 0.6 2.5
Minority interests .........................................
------- -------
Net income ........................................... 0.9% 3.7%
======= =======
NET SALES. Net sales of $294.7 million for the nine months ended September
30, 2004 were $9.4 million or 3.1% lower than net sales for the nine months
ended September 30, 2003. The decrease in sales reflects a general softness in
retail markets, the impact of inventory shortages on certain products as a
result of a production disruption at one of the Company's foreign vendors and
the rationalization of inventories and changes in the promotional pricing
activities at certain national chains. These decreases in sales were partially
offset by higher net international sales, principally as a result of foreign
currency exchange fluctuations.
GROSS PROFIT. Gross profit margin for the nine months ended September 30,
2004 and 2003 was 32.9%. The comparability of current year and prior year margin
principally reflects the favorable impact of manufacturing, distribution and
other synergies arising from the completion of the integration of M&D
Industries, Inc., our 2002 balloon business acquisition, the rationalization of
our metallic balloon operations and the elimination of redundant distribution
costs incurred in 2003 arising from the transition from four to three east coast
distribution facilities partially offset by an increase in inventory costs
principally as a result of the write-up of inventories in purchase accounting
and increases in certain raw material costs.
OPERATING EXPENSES. Selling expenses of $27.1 million for the nine months
ended September 30, 2004 were $0.2 million lower than for the nine months ended
September 30, 2003 primarily as a result of a consolidation of sales
territories. As a percentage of net sales, selling expenses were 9.2%, or 0.2%
higher than in 2003, as the decrease in sales during the first half of 2004
occurred principally in non-commissioned sales.
General and administrative expenses of $23.2 million for the nine months
ended September 30, 2004 were $0.7 million lower than for the nine months ended
September 30, 2004. As a percentage of net sales, general and administrative
expenses were 7.9% for each of the nine months ended September 30, 2004 and
2003, respectively. The net decrease in general and administrative expenses
principally reflects the elimination of general and administrative expenses as a
result of the closure in 2003 of certain international facilities and the
contribution, in December 2003, of our metallic balloon distribution operations
located in Mexico to a newly created joint venture. The joint venture
32
distributes certain metallic balloons principally in Mexico and Latin America.
These decreases in general and administrative expenses were partially offset by
management fees to our Principal Investors and higher amortization of other
intangible assets, based on a preliminary purchase price allocation.
Art and development costs of $7.5 million for the nine months ended
September 30, 2004 were $0.3 million higher as compared to 2003 principally due
to increased development of custom product lines. As a percentage of net sales,
art and development costs were 2.5% for the nine months ended September 30, 2004
or 0.1% higher than in 2003.
Provision for doubtful accounts for the nine months ended September 30,
2004 was $1.8 million or 0.6% of net sales, as compared to $2.8 million or 0.9%
of net sales for nine months ended September 30, 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, the Company charged $1.8
million to the provision for doubtful accounts during the nine months ended
September 30, 2003. This customer accounted for approximately 2.6% of the
Company's consolidated net sales for the nine months ended September 30, 2003.
In connection with the Transactions in April 2004, the Company has
recorded non-recurring expenses of $11.8 million comprised of $6.2 million of
debt retirement costs and the write-off of $5.5 million of deferred financing
costs associated with the repayment of debt in connection with the Transactions.
During the nine months ended September 30, 2003, the Company incurred
restructuring charges of $1.0 million resulting from the consolidation of
certain domestic and foreign distribution operations and the integration of M&D
Industries, Inc. into our balloon operations.
INTEREST EXPENSE. Interest expense, net, of $20.3 million for the nine
months ended September 30, 2004 was $0.5 million higher than for the nine months
ended September 30, 2003, due to the impact of higher average borrowings
partially offset by lower interest rates.
GAIN ON SALE OF AVAILABLE-FOR-SALE SECURITIES. During the nine months
ended September 30, 2003, the Company sold common stock of a customer that it
had received in connection with the customer's reorganization in bankruptcy. The
Company received net proceeds of approximately $1.4 million and recognized a
gain of approximately $1.0 million. In April 2004, the Company sold the
remainder of the common stock and received net proceeds of $65 thousand and a
recognized a gain of $47 thousand.
UNDISTRIBUTED LOSS IN UNCONSOLIDATED JOINT VENTURE. Undistributed loss in
unconsolidated joint venture represents our share of the joint venture's
start-up losses, including the elimination of intercompany profit in the joint
venture's inventory on hand at September 30, 2004.
INCOME TAXES. Income taxes for the nine months ended September 30, 2004
and 2003 were based upon estimated consolidated effective income tax rates of
39.5% for the years ending December 31, 2004 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our new senior secured credit facility contains financial covenants and
maintenance tests, including a minimum interest coverage test and a maximum
total leverage test, and restrictive covenants, including restrictions on our
ability to make capital expenditures or pay dividends. Our new senior secured
credit facility is secured by substantially all of our assets and the assets of
some of our subsidiaries, and by a pledge of all of our domestic subsidiaries'
capital stock and a portion of our wholly owned foreign subsidiaries' capital
stock.
The Company's new term loan provides for amortization (in quarterly
installments) of 1.0% per annum through June 30, 2010, and will then amortize in
equal quarterly payments through June 30, 2012. The new term loan bears
interest, at the option of the Company, at the index rate plus 1.75% per annum
or at LIBOR plus 2.75% per annum. At September 30, 2004, the new term loan was
$204.5 million and the floating interest rate on the new term loan was
33
4.53%. The Company entered into two interest rate swap transactions with a
financial institution on June 25, 2004 and July 2, 2004, for an initial
aggregate notional amount of $17.4 million increasing over three years to $62.6
million.
Revolving loans under the new senior credit facility expire on April 30,
2010 and bear interest, at the option of the Company, at the index rate plus,
based on performance, a margin ranging from 0.75% to 1.50% per annum, or at
LIBOR plus, based on performance, a margin ranging from 1.75% to 2.50% per
annum. At September 30, 2004, the Company had borrowings under the new revolver
totaling $11.3 million at a floating interest rate of 4.98%. Standby letters of
credit totaling $7.1 million were outstanding and the Company had borrowing
capacity of approximately $31.6 million under the terms of the revolver at
September 30, 2004.
On April 30, 2004, in connection with the Transactions, the then existing
senior secured credit facility of $147.7 million was repaid in addition to the
termination of all commitments under that facility.
At September 30, 2004 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 June 30, 2005, 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 May 31, 2005, 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 September
30, 2004.
Long-term borrowings at September 30, 2004 include a mortgage note with
the New York State Job Development Authority of $8.7 million which requires
monthly payments based on a 180-month amortization period with a balloon payment
upon maturity in January 2010. The mortgage note bears interest at the rate of
3.41%, and is subject to review and adjustment semi-annually based on the New
York State Job Development Authority's confidential internal protocols. The
mortgage note is collateralized by a distribution facility located in Chester,
New York. On April 30, 2004, in connection with the Transactions, a mortgage
note of $8.5 million was paid in full. The mortgage note bore interest at LIBOR
plus 2.75%. However, we utilized an interest rate swap agreement to effectively
fix the loan rate at 8.40% for the term of the loan and the related interest
rate swap agreement was terminated at a cost of $0.7 million on April 30, 2004
in connection with the Transactions.
In connection with the Transactions on April 30, 2004, the Company
redeemed all outstanding shares of Series A Redeemable Convertible Preferred
Stock at a redemption price per share equal to $182,000 in cash, together with
accrued and unpaid dividends.
The new senior subordinated notes totaling $175 million were sold to the
initial purchasers by the Company in the Note Offering. In connection with the
Note Offering, the Company entered into a Registration Rights Agreement, which
granted holders of the new notes certain exchange and registration rights. In
August 2004, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 offering to exchange registered notes for the
notes issued in connection with the Note Offering. The terms of the notes and
the exchange notes are substantially identical. The exchange was completed in
October 2004.
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms and warehouse
equipment. These leases expire on various dates through 2017 and generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance costs. Rent expense for the nine months ended
September 30, 2004 and 2003, totaled $8.6 million and $9.4 million,
respectively. The minimum lease payments currently required under non-cancelable
operating leases for the year ending December 31, 2004 approximate $12.5
million.
In connection with the Transactions, we executed a management agreement
with our Principal Investors, Berkshire Partners LLC and Weston Presidio.
Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio
will be paid annual management fees of $0.8 million and $0.4 million,
respectively. Although the indenture governing the 8.75% senior subordinated
notes will permit the payments under the management agreement, such payments
will be restricted during an event of default under the notes and will be
subordinated in right of payment to all obligations due with respect to the
notes in the event of a bankruptcy or similar proceeding of Amscan.
34
We expect that cash generated from operating activities and availability
under our new senior secured credit facility will be our principal sources of
liquidity. Based on our current level of operations, we believe our cash flow
from operations and available cash and available borrowings under our new senior
secured credit facility will be adequate to meet our liquidity needs for at
least the next twelve months. We cannot assure you, however, that our business
will generate sufficient cash flow from operations or that future borrowings
will be available to us under our new senior secured credit facility in an
amount sufficient to enable us to repay our indebtedness, including the notes,
or to fund our other liquidity needs.
CASH FLOW DATA - NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2003
Net cash provided by operating activities during the nine months ended
September 30, 2004 and 2003, totaled $19.2 million and $17.8 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the nine months ended September 30, 2004
and 2003, was $29.9 million and $29.5 million, respectively. Changes in
operating assets and liabilities for the nine months ended September 30, 2004
and 2003, resulted in the use of cash of $10.7 million and $11.7 million,
respectively.
During the nine months ended September 30, 2004, net cash used in
investing activities of $538.0 million consisted of cash paid of $530.0 million
to consummate the Transactions in connection with the merger on April 30, 2004
and $8.2 million additional investments in distribution and manufacturing
equipment, partially offset by proceeds from the sales of equipment and
available-for-sale securities. Net cash used in investing activities during the
nine months ended September 30, 2003 of $8.4 million consisted principally of
additional investments in distribution and manufacturing equipment and other
assets, partially offset by proceeds received from the disposal of equipment and
the sale of a portion of the Company's investment in the common stock of a
customer received in connection with the customer's reorganization in
bankruptcy.
During the nine months ended September 30, 2004, net cash provided by
financing activities of $489.1 million included proceeds totaling $378.6 million
from short-term borrowings under the revolver and debt issued in connection with
the Transactions, net of deferred financing costs of $12.7 million. Net cash
provided by financing activities for the nine months ended September 30, 2004,
also included capital contributions in connection with the merger and the
repayment of a note receivable by an employee partially offset by scheduled
payments on the then existing term loan and other long-term obligations, a
required prepayment of the then existing term loan of $20.2 million based on our
excess cash flows for the year ended December 31, 2003 and debt retirement costs
totaling $6.2 million paid in connection with the Transactions. During the nine
months ended September 30, 2003, net cash used in financing activities of $3.3
million consisted of the scheduled payments on the Term Loan and other long-term
obligations and the purchase of Common Stock from both the Company's Chief
Executive Officer and its 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 the President.
LEGAL PROCEEDINGS
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect on its
financial condition or future results of operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements."
Forward-looking statements give our current expectations or forecasts of future
events. Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," "project" or "continue" or the negative
thereof and similar words. From time to time, we also may provide oral or
35
written forward-looking statements in other materials we release to the public.
Any or all of our forward-looking statements in this quarterly report and in any
public statements we make may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks or
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual results may vary materially. Investors are cautioned not to place undue
reliance on any forward-looking statements. Important factors that could cause
actual results to differ materially from the forward-looking statements,
include, but are not limited to: our inability to satisfy our debt obligations,
the reduction of volume of purchases by one or more of our large customers, our
inability to collect receivables from our customers, the termination of our
licenses, our inability to identify and capitalize on changing design trends and
customer preferences, changes in the competitive environment, increases in the
costs of raw materials and the possible risks and uncertainties that have been
noted in reports filed by us with the Securities and Exchange Commission,
including our annual report on Form 10-K for the year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates as a result of our
variable rate indebtedness. However, we have utilized interest rate swap
agreements to manage the market risk associated with fluctuations in interest
rates. If market interest rates for our variable rate indebtedness averaged 2%
more than the interest rate actually paid for the three months ended September
30, 2004 and 2003, our interest expense, after considering the effects of our
interest rate swap agreements, would have increased, and income before income
taxes and minority interest would have decreased, by $0.9 million and $0.5
million, respectively. If market interest rates for our variable rate
indebtedness averaged 2% more than the interest rate actually paid for the nine
months ended September 30, 2004 and 2003, our interest expense, after
considering the effects of our interest rate swap agreements, would have
increased, and income before income taxes and minority interest would have
decreased, by $2.3 million and $1.7 million, respectively. These amounts are
determined by considering the impact of the hypothetical interest rates on our
borrowings and interest rate swap agreements. This analysis does not consider
the effects of the reduced level of overall economic activity that could exist
in such an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate our exposure to the
change. However, due to the uncertainty of the specific actions that we would
take and their possible effects, the sensitivity analysis assumes no changes in
our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the U.S.
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $0.5 million for the three
months ended September 30, 2004 and 2003. A uniform 10% strengthening in the
value of the U.S. dollar relative to the currencies in which our foreign sales
are denominated would have resulted in a decrease in gross profit of $1.4
million and $1.3 million for the nine months ended September 30, 2004 and 2003,
respectively. These calculations assume that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, which could change the U.S. dollar value
of the resulting sales, changes in exchange rates may also affect the volume of
sales or the foreign currency sales price as competitors' products become more
or less attractive. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels or local currency prices.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of the Company's disclosure
controls and procedures performed by the Company's management, with the
participation of the Company's Chief Executive Officer and its Chief Financial
Officer, as of the end of the period covered by this report, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective.
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under
36
the Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation described in the
preceding paragraph that occurred during the Company's fiscal quarter ended
September 30, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II
ITEM 6. EXHIBITS
31(1) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
31(2) Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
32 Certification of Chief Executive and Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
---------------------------------------------
Michael A. Correale
Chief Financial Officer
(on behalf of the registrant and as principal
Date: November 15, 2004 financial and accounting officer)
38