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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
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 May 17, 2004, 1,000.00 shares of Registrant's common stock, par value
$0.10, were outstanding.
1
AMSCAN HOLDINGS, INC.
FORM 10-Q
March 31, 2004
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2004 and December 31,
2003................................................................ 3
Consolidated Statements of Income for the Three Months Ended
March 31, 2004 and 2003............................................. 4
Consolidated Statement of Stockholders' Deficit for the Three
Months Ended March 31, 2004......................................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003... ................................... 6
Notes to Consolidated Financial Statements............................... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk............ 24
Item 4 Controls and Procedures............................................... 25
Part II
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities............................................... 25
Item 6 Exhibits and Reports on Form 8-K...................................... 25
Signature ................................................................... 27
2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
March 31, December 31,
2004 2003
-------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 8,171 $ 31,462
Accounts receivable, net of allowances................................... 88,420 75,682
Inventories, net of allowances........................................... 80,695 85,137
Prepaid expenses and other current assets................................ 15,189 9,730
-------- --------
Total current assets ............................................... 192,475 202,011
Property, plant and equipment, net........................................... 95,436 96,494
Goodwill, net................................................................ 72,078 71,986
Other assets, net............................................................ 8,959 11,611
-------- --------
Total assets........................................................ $368,948 $382,102
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......................................................... $ 31,001 $ 34,916
Accrued expenses......................................................... 24,295 20,121
Income taxes payable..................................................... 5,264 3,178
Current portion of long-term obligations................................. 2,918 23,237
-------- --------
Total current liabilities........................................... 63,478 81,452
Long-term obligations, excluding current portion............................. 271,638 272,272
Deferred income tax liabilities.............................................. 18,210 18,040
Other........................................................................ 2,465 2,414
-------- --------
Total liabilities................................................... 355,791 374,178
Redeemable convertible preferred stock ($0.10 par value; 100.00
shares authorized; 47.64 and 44.94 shares issued
and outstanding, respectively)........................................... 7,147 7,045
Redeemable Common Stock...................................................... 9,498 9,498
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000.00 shares authorized;
1,217.92 shares issued and outstanding............................... - -
Additional paid-in capital............................................... 26,580 26,682
Unamortized restricted Common Stock award................................ (116) (155)
Notes receivable from stockholders....................................... (666) (680)
Deficit.................................................................. (29,081) (34,020)
Accumulated other comprehensive loss..................................... (205) (446)
-------- --------
Total stockholders' deficit......................................... (3,488) (8,619)
-------- --------
Total liabilities, redeemable convertible preferred and Common
Stock and stockholders' deficit................................... $368,948 $382,102
======== ========
Note: The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
2004 2003
---- ----
Net sales........................................................ $100,525 $99,844
Cost of sales.................................................... 66,081 66,969
-------- -------
Gross profit............................................ 34,444 32,875
Operating expenses:
Selling expenses.............................................. 9,302 9,142
General and administrative expenses........................... 8,129 8,506
Art and development costs..................................... 2,433 2,537
Restructuring charges......................................... 316
--------- --------
Total operating expenses................................ 19,864 20,501
-------- --------
Income from operations.................................. 14,580 12,374
Interest expense, net............................................ 6,361 6,644
Other income, net................................................ (15) (18)
-------- --------
Income before income taxes and minority interests....... 8,234 5,748
Income tax expense............................................... 3,252 2,271
Minority interests............................................... 43 15
-------- --------
Net income.............................................. 4,939 3,462
Dividend on redeemable convertible preferred stock...... 102 96
-------- --------
Net income applicable to common shares.................. $ 4,837 $ 3,366
======== ========
See accompanying notes to consolidated financial statements.
4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three Months Ended March 31, 2004
(Dollars in thousands)
(Unaudited)
Unamortized Notes Accumulated
Additional Restricted Receivable Other
Common Common Paid-in Common Stock from Comprehensive
Shares Stock Capital Award Stockholders Deficit Loss Total
------ ----- ------- ----- ------------ ------- ---- -----
Balance at December 31, 2003. 1,217.92 $ - $26,682 $(155) $(680) $(34,020) $(446) $(8,619)
Net income................ 4,939 4,939
Net change in cumulative
translation adjustment... 356 356
Change in fair value of
available-for-sale
securities, net of income
taxes..................... (23) (23)
Change in fair value of
interest rate swap and
foreign exchange contracts,
net of income taxes....... (92) (92)
------
Comprehensive income.. 5,180
Amortization of restricted
Common Stock award........ 39 39
Redeemable convertible
preferred stock dividend... (102) (102)
Repayment of note receivable
from stockholder........... 25 25
Accretion of interest income.. (11) (11)
-------- ------ ------- ----- ----- -------- ----- -------
Balance at March 31, 2004.... 1,217.92 $ - $26,580 $(116) $(666) $(29,081) $(205) $(3,488)
======== ====== ======= ===== ===== ======== ===== =======
See accompanying notes to consolidated financial statements.
5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Cash flows provided by (used in)operating activities:
Net income.......................................................................... $ 4,939 $ 3,462
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization expense............................................ 3,968 3,976
Amortization of deferred financing costs......................................... 537 479
Amortization of restricted Common Stock awards................................... 39 45
Provision for doubtful accounts.................................................. 541 604
Deferred income tax expense (benefit)............................................ 337 (402)
(Gain) loss on disposal of equipment............................................. (36) 22
Changes in operating assets and liabilities:
Increase in accounts receivable............................................... (13,279) (11,355)
Decrease in inventories....................................................... 4,442 2,250
Increase in prepaid expenses and other current assets......................... (6,386) (2,144)
Increase (decrease) in accounts payable, accrued expenses and income taxes
payable............................................................... 2,253 (2,932)
Other, net....................................................................... 2,910 23
------- -------
Net cash provided by (used in) operating activities........................... 265 (5,972)
Cash flows used in investing activities:
Capital expenditures................................................................ (2,787) (3,408)
Proceeds from disposal of property and equipment.................................... 53 3
-------- --------
Net cash used in investing activities......................................... (2,734) (3,405)
Cash flows (used in) provided by financing activities:
Repayment of loans, notes payable and long-term obligations......................... (21,094) (938)
Proceeds from short-term obligations................................................ 9,500
Repayment of note receivable from stockholder....................................... 25
-------- --------
Net cash (used in) provided by financing activities........................... (21,069) 8,562
Effect of exchange rate changes on cash and cash equivalents........................... 247 (74)
------- -------
Net decrease in cash and cash equivalents..................................... (23,291) (889)
Cash and cash equivalents at beginning of period....................................... 31,462 2,400
------- -------
Cash and cash equivalents at end of period............................................. $ 8,171 $ 1,511
======= =======
Supplemental Disclosures:
Interest paid................................................................. $ 3,350 $ 2,359
Income taxes paid............................................................. $ 893 $ 1,479
See accompanying notes to consolidated financial statements.
6
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and Description of Business
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, "Amscan," "AHI" or the "Company") was incorporated on October 3,
1996 for the purpose of becoming the holding company for Amscan Inc. and certain
affiliated entities. AHI designs, manufactures, contracts for manufacture and
distributes party goods, including metallic balloons, gifts and stationery,
principally in North America, South America, Europe, Asia and Australia.
Note 2 - The Acquisition
On March 26, 2004, Amscan signed an acquisition 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. 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 acquisition 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. The
acquisition was financed with initial borrowings consisting of a $205,000,000
Term Loan under a new senior secured credit facility and 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
(including employee stockholders) of $140,500,000 and approximately $2,900,000
of cash on hand. Certain employees of the Company purchased 86.2278 shares of
AAH Holdings Common Stock. The acquisition will be accounted for under the
purchase method of accounting in the Company's second quarter ending June 30,
2004, and requires that the Company adjust its assets and liabilities to their
relative fair values.
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 for
$87,200,000 of the $110,000,000 aggregate principal amount outstanding of our
9.875% senior subordinated notes due 2007 and the redemption of the remaining
senior subordinated notes; and repayment of a $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").
Following the purchase of the 9.875% senior subordinated notes due 2007
accepted in the tender offer, approximately $22,800,000 in aggregate principal
amount of the notes remained outstanding as of April 30, 2004. The aggregate
cost to purchase the Notes tendered pursuant to the tender offer was
approximately $93,500,000 or 103.542% of the principal amount of such notes plus
accrued and unpaid interest. On May 31, 2004, the remainder of the outstanding
notes will be 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
Company will finance the redemption with borrowings under its new revolving
credit facility
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 Ended,
2004 2003
---- ----
Net sales............................ $100,525 $99,844
Income from operations............... 14,107 11,913
Net income........................... 4,556 3,017
7
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The net income amounts reflect adjustments for interest expense from new
borrowings related to the Transactions, the elimination of historical interest
on debt repaid in the Transactions, management fees to be paid to our principal
investors, additional depreciation expense as a result of the write-up of
property, plant and equipment and amortization of other intangible assets, based
on a preliminary purchase price allocation that may be subject to change upon
completion for independent valuations completed on applicable assets and
liabilities, net of their related income tax effects based upon a pro forma
effective income tax rate of 39.5%. The unaudited pro forma information gives
effect only to adjustments described above and does not reflect management's
estimate of any anticipated cost savings or other benefits as a result of the
acquisition.
Note 3 - Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Amscan Holdings and its majority-owned and controlled entities. All
material intercompany balances and transactions have been eliminated in
consolidation. The unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the year 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):
March 31, December 31,
2004 2003
------- -------
Finished goods.......................... $69,931 $74,258
Raw materials........................... 8,501 8,842
Work-in-process......................... 5,276 4,762
------- -------
83,708 87,862
Less: reserve for slow moving and
obsolete inventory...................... (3,013) (2,725)
------- -------
$80,695 $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 months ended March 31,
2004 and 2003 was determined based upon estimates of the Company's consolidated
effective income tax rates for the years ending December 31, 2004 and 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.
8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 6 - Comprehensive Income (Loss)
Comprehensive income consisted of the following (dollars in thousands):
Three Months Ended
March 31,
2004 2003
---- ----
Net income.............................................................................. $4,939 $3,462
Net change in cumulative translation adjustment......................................... 356 (123)
Change in fair value of available-for-sale securities, net of income taxes
of $(15) and $(53), respectively.................................................... (23) (81)
Change in fair value of the interest rate swap contract, net of income taxes
of $(55), and $6, respectively...................................................... (85) 9
Change in fair value of the foreign exchange contracts, net of
income taxes of $(4) and $4, respectively............................................ (7) 7
------ ------
$5,180 $3,274
====== ======
Accumulated other comprehensive loss consisted of the following (dollars in
thousands):
March 31, December 31,
2004 2003
---- ----
Cumulative translation adjustment...................................................... $1,042 $686
Unrealized gain on available-for-sale securities, net of income taxes of $18 and $33
respectively........................................................................ 27 50
Interest rate swap contract, net of income taxes of $(375) and $(320),
respectively........................................................................ (575) (490)
Foreign exchange contracts, net of income taxes of $(456) and $(452),
respectively......................................................................... (699) (692)
------ -----
$(205) $(446)
===== =====
Note 7 - Capital Stock
Under the terms of the stockholders' agreement in effect through the date
of the consummation of the Transactions (see Note 2) ("Stockholders'
Agreement"), the Company was required to purchase all of the shares held by an
employee stockholder for a period of one year after the employee's death or
three months after his disability, at a price determined by a market valuation,
and for a period of three months following termination of employment by the
Company, at the lower of the share's cost, as defined, or the market valuation.
At March 31, 2004 and December 31, 2003, there were 63.68 shares of fully paid
and vested Common Stock subject to such put provisions. The shares are recorded
as redeemable Common Stock, at their estimated market value, with a
corresponding adjustment to stockholders' deficit. In connection with the
Transactions on April 30, 2004, the Company redeemed all outstanding shares of
its redeemable Common Stock at $182,000 per share (see Note 2). The
Stockholders' Agreement was terminated in connection with the consummation of
the Transactions.
9
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
At March 31, 2004 and December 31, 2003, an officer of the Company held
3.00 shares of Common Stock (the "Restricted Stock"), subject to the vesting
provisions of his employment agreement. The 3.00 shares of Restricted Stock
outstanding at March 31, 2004 were to vest in December 2004. In connection with
the Transactions, the 3.00 shares of Restricted Stock vested immediately on
April 30, 2004 (see Note 2). During the three months ended March 31, 2004 and
2003, the Company recorded the amortization of Restricted Stock of $39,000 and
$45,000 respectively, as compensation expense, which is included in general and
administrative expenses in the Company's consolidated statements of income.
At March 31, 2004 and December 31, 2003, the Company held a note receivable
from a former officer for $666,000 and $655,000, respectively, which bore
interest at 6.65% and due in March 2009. 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 Common Stock and are
reported on the consolidated balance sheets as an increase in stockholders'
deficit. In connection with the Transactions, the note receivable from the
former officer was repaid on April 30, 2004.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GS
Capital Partners II, L.P. and certain other private investment funds managed by
Goldman, Sachs & Co. (collectively, "GSCP") for proceeds of $6.0 million.
Dividends are cumulative and payable annually at 6% per annum. On March 30,
2004, the annual dividend was distributed in additional shares of Series A
Redeemable Convertible Preferred Stock. At March 31, 2004, 47.64 shares of
Series A Redeemable Convertible Preferred Stock were issued and outstanding. 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.
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.
10
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Company's geographic area data are as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended March 31, 2004
Sales to unaffiliated customers........................... $ 87,282 $13,243 $100,525
Sales between geographic areas............................ 3,864 $(3,864) -
-------- ------- ------- --------
Net sales................................................. $ 91,146 $13,243 $(3,864) $100,525
======== ======= ======= ========
Income from operations.................................... $ 13,480 $ 829 $ 271 $ 14,580
======== ========= =======
Interest expense, net..................................... 6,361
Other income, net......................................... (15)
---------
Income before income taxes and minority interests......... $ 8,234
=========
Long-lived assets, net at March 31, 2004.................. $192,978 $ 9,353 $(25,858) $ 176,473
======== ======== ======== =========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
Three Months Ended March 31, 2003
Sales to unaffiliated customers........................... $ 87,054 $12,790 $ 99,844
Sales between geographic areas............................ 4,499 $(4,499) -
---------- ------- ------- ----------
Net sales................................................. $ 91,553 $12,790 $(4,499) $ 99,844
======== ======= ======= =========
Income from operations.................................... $ 11,983 $ 124 $ 267 $ 12,374
======== ======= =======
Interest expense, net..................................... 6,644
Other income, net......................................... (18)
---------
Income before income taxes and minority interests......... $ 5,748
=========
Long-lived assets, net at March 31, 2003 ................. $201,584 $ 8,218 $(26,467) $183,335
======== ======== ======== ========
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
During the three months ended March 31, 2004 and 2003, the Company sold
$600,000 and $615,000, 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 March 31, 2004 and December 31, 2003 were $1,430,000 and
$1,937,000, respectively.
Note 11 - Restructuring Charges
During the three months ended March 31, 2003, the Company incurred charges
of $316,000 resulting from the consolidation of domestic distribution operations
which may result in additional restructuring charges in subsequent periods.
11
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 12 - Stock Option Plan
The Company accounts for stock based awards in accordance with the
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." SFAS No. 123 permits entities
to recognize as expense, over the vesting period, the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to apply the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of compensation expense at the date of grant only if the current
market price of the underlying stock exceeds the exercise price, and to provide
pro forma net income disclosures for employee stock option grants as if the fair
value based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the intrinsic value method of APB No. 25 for awards
granted under its stock-based compensation plans and has provided the pro forma
disclosures required by SFAS No. 123. Accordingly, no compensation cost has been
recognized in connection with the issuance of options under the 1997 Stock
Incentive Plan as all options were granted with exercise prices equal to the
estimated fair market value of the Common Stock on the date of grant.
Had the Company determined stock-based compensation based on the fair
value of the options granted at the grant date, consistent with the method
prescribed under SFAS No. 123, the Company's net income would have been
reduced to amounts indicated below (dollars in thousands):
Three Months Ended March 31,
2004 2003
---- ----
Net income:
As reported.............................................. $4,939 $3,462
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of income taxes of
$95 and $30, respectively............................ 145 46
------ ------
SFAS No. 123 pro forma net income............................ $4,794 $3,416
====== ======
In connection with the Transactions, all options vested immediately on
April 30, 2004 (see Note 2).
Note 13 - Condensed Consolidating Financial Information
On December 20, 2002, Amscan amended and restated its credit facility with
various lenders (the "Lenders"), and with Goldman Sachs Credit Partners L.P. as
sole lead arranger, sole bookrunner and syndication agent. Under the terms of
the Second Amended and Restated Credit and Guaranty Agreement (the "Credit
Agreement"), the Lenders agreed to amend and restate the Company's then existing
bank credit agreements (the "Bank Credit Facilities") in their entirety and to
provide a $200,000,000 senior secured facility consisting of a $170,000,000 term
loan (the "Term Loan") and up to $30,000,000 aggregate principal amount of
revolving loans (the "Revolver"). The proceeds of the Term Loan were used to
redesignate and replace the Company's AXEL term loan and revolver borrowings
existing under the Bank Credit Facilities at the closing date and to pay certain
fees and expenses associated with the refinancing.
On December 19, 1997, the Company also issued $110,000,000 aggregate
principal amount of 9.875% senior subordinated notes (the "Notes") due in
December 2007.
12
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On April 30, 2004, in connection with the consummation of the Transactions,
all borrowings under the Credit Agreement were repaid and the facility was
terminated, $87,200,000 in aggregate principal amount of the Notes were
accepted in the tender offer and a redemption notice was issued for the
remaining $22,800,000 in aggregate principal amount of the Notes (see Note 2).
The aggregate cost to purchase the Notes tendered pursuant to the tender offer
was approximately $93,500,000, or 103.542% of the principal amount of such
Notes plus accrued and unpaid interest. On May 31, 2004, the remainder of the
outstanding Notes will be redeemed pursuant to the redemption notice at a price
of 103.292% of the principal amount of such Notes plus accrued and unpaid
interest.
Borrowings under the Credit Agreement and Notes were guaranteed jointly and
severally, fully and unconditionally, by the following wholly-owned domestic
subsidiaries of the Company (the "Guarantors"):
o Amscan Inc.
o Trisar, Inc.
o Am-Source, LLC
o Anagram International, Inc.
o Anagram International Holdings, Inc.
o Anagram International, LLC
o M&D Industries, Inc.
o SSY Realty Corp.
o JCS Realty Corp.
o Anagram Eden Prairie Property Holdings LLC
Non-guarantor subsidiaries ("Non-guarantors") include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan de Mexico, S.A. de C.V.
o Anagram International (Japan) Co., Ltd.
o Anagram Espana, S.A.
o Anagram France S.C.S.
The following information presents consolidating balance sheets as of March
31, 2004 and December 31, 2003, and the related consolidating statements of
income for the three months ended March 31, 2004 and 2003 and consolidating
statements of cash flows for the three months ended March 31, 2004 and 2003 for
the combined Guarantors and the combined Non-guarantors and elimination entries
necessary to consolidate the entities comprising the combined companies.
13
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
March 31, 2004
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,270 $ 901 $ 8,171
Accounts receivable, net of allowances.............. 75,235 13,185 88,420
Inventories, net of allowances...................... 71,718 9,247 $ (270) 80,695
Prepaid expenses and other current assets........... 13,110 2,199 (120) 15,189
--------- ---------- -------- ---------
Total current assets.............................. 167,333 25,532 (390) 192,475
Property, plant and equipment, net..................... 93,466 1,970 95,436
Goodwill, net.......................................... 66,453 5,625 72,078
Other assets, net...................................... 33,059 1,758 (25,858) 8,959
--------- ---------- -------- ---------
Total assets...................................... $360,311 $ 34,885 $(26,248) $ 368,948
========= ========== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................... $ 29,081 $ 1,920 $ 31,001
Accrued expenses ................................... 17,594 6,701 24,295
Income taxes payable ............................... 5,407 $ (143) 5,264
Current portion of long-term obligations............ 2,810 108 2,918
--------- --------- -------- ---------
Total current liabilities......................... 54,892 8,729 (143) 63,478
Long-term obligations, excluding current portion....... 271,474 164 271,638
Deferred income tax liabilities........................ 18,210 18,210
Other. ................................................ 2,331 13,501 (13,367) 2,465
--------- ---------- -------- ---------
Total liabilities................................. 346,907 22,394 (13,510) 355,791
Redeemable convertible preferred stock................. 7,147 7,147
Redeemable Common Stock................................ 9,498 9,498
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock...................................... 339 (339) -
Additional paid-in capital........................ 26,580 658 (658) 26,580
Unamortized restricted Common Stock
award.......................................... (116) (116)
Note receivable from stockholder.................. (666) (666)
(Deficit) retained earnings....................... (28,834) 11,283 (11,530) (29,081)
Accumulated other comprehensive loss.............. (205) 211 (211) (205)
--------- --------- -------- ----------
Total stockholders' (deficit) equity.......... (3,241) 12,491 (12,738) (3,488)
--------- --------- -------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity............ $360,311 $34,885 $(26,248) $ 368,948
======== ======= ======== =========
14
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING BALANCE SHEET
December 31, 2003
(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 AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................. $ 33,221 $ 1,695 $ 34,916
Accrued expenses ................................. 14,156 5,965 20,121
Income taxes payable ............................. 3,307 $ (129) 3,178
Current portion of long-term obligations.......... 23,110 127 23,237
--------- --------- ------- --------
Total current liabilities ....................... 73,794 7,787 (129) 81,452
Long-term obligations, excluding current portion....... 272,104 168 272,272
Deferred income tax liabilities........................ 18,040 18,040
Other. ................................................ 1,083 13,133 (11,802) 2,414
--------- --------- ------- -------
Total liabilities................................. 365,021 21,088 (11,931) 374,178
Redeemable convertible preferred stock................. 7,045 7,045
Redeemable Common Stock................................ 9,498 9,498
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock...................................... 339 (339) -
Additional paid-in capital.......................... 26,682 658 (658) 26,682
Unamortized restricted Common Stock
award.......................................... (155) (155)
Notes receivable from stockholders................ (680) (680)
(Deficit) retained earnings....................... (33,809) 10,292 (10,503) (34,020)
Accumulated other comprehensive loss.............. (446) (192) 192 (446)
--------- --------- ------- -------
Total stockholders' (deficit) equity.......... (8,408) 11,097 (11,308) (8,619)
--------- --------- ------- -------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity................ $373,156 $32,185 $(23,239) $382,102
======== ======= ========== ========
15
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2004
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales.............................................. $91,146 $13,243 $(3,864) $100,525
Cost of sales.......................................... 61,084 8,802 (3,805) 66,081
-------- --------- -------- --------
Gross profit.................................. 30,062 4,441 (59) 34,444
Operating expenses:
Selling expenses................................... 7,528 1,774 9,302
General and administrative expenses................ 6,621 1,838 (330) 8,129
Art and development costs.......................... 2,433 2,433
-------- --------- -------- --------
Total operating expenses...................... 16,582 3,612 (330) 19,864
Income from operations........................ 13,480 829 271 14,580
Interest expense, net ................................. 6,313 48 6,361
Other (income) expense, net............................ (841) (42) 868 (15)
-------- --------- -------- --------
Income before income taxes and
minority interests.......................... 8,008 823 (597) 8,234
Income tax expense..................................... 3,033 242 (23) 3,252
Minority interests..................................... 43 43
-------- --------- -------- --------
Net income.................................... 4,975 538 (574) 4,939
Dividend on redeemable convertible
preferred stock............................ 102 102
-------- --------- --------- --------
Net income applicable to common shares........ $ 4,873 $ 538 $ (574) $ 4,837
======== ========== ==========- ========
16
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 2003
(Dollars in thousands)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales.............................................. $ 91,553 $ 12,790 $ (4,499) $ 99,844
Cost of sales.......................................... 62,187 9,248 (4,466) 66,969
-------- --------- --------- --------
Gross profit.................................. 29,366 3,542 (33) 32,875
Operating expenses:
Selling expenses................................... 7,590 1,552 9,142
General and administrative expenses................ 6,940 1,866 (300) 8,506
Art and development costs.......................... 2,537 2,537
Restructuring charges.............................. 316 316
-------- --------- --------- --------
Total operating expenses...................... 17,383 3,418 (300) 20,501
-------- --------- --------- --------
Income from operations........................ 11,983 124 267 12,374
Interest expense, net ................................. 6,483 161 6,644
Other (income) expense, net............................ (225) 4 203 (18)
-------- --------- --------- --------
Income (loss) before income taxes and
minority interests.......................... 5,725 (41) 64 5,748
Income tax expense .................................... 2,243 41 (13) 2,271
Minority interests..................................... 15 15
-------- --------- --------- --------
Net income (loss)............................. 3,482 (97) 77 3,462
Dividend on redeemable convertible
preferred stock............................ 96 96
-------- --------- --------- --------
Net income (loss) applicable to common
shares..................................... $ 3,386 $ (97) $ 77 $ 3,366
======== ========= =========== ===========
17
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2004
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows (used in) provided by operating activities:
Net income............................................... $ 4,975 $ 538 $ (574) $ 4,939
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization expense................. 3,810 158 3,968
Amortization of deferred financing costs.............. 537 537
Amortization of restricted Common Stock award......... 39 39
Provision for doubtful accounts....................... 448 93 541
Deferred income tax expense........................... 337 337
Gain on disposal of property and equipment............ (36) (36)
Changes in operating assets and liabilities:
Increase in accounts receivable................. (12,130) (1,149) (13,279)
Decrease in inventories......................... 4,273 110 59 4,442
Increase in prepaid expenses and other
current assets............................... (5,426) (960) (6,386)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable............ 1,313 963 (23) 2,253
Other, net....................................... 1,820 552 538 2,910
------- ------ ------ -------
Net cash (used in) provided by operating activities (4) 269 - 265
Cash flows used in investing activities:
Capital expenditures..................................... (2,403) (384) (2,787)
Proceeds from disposal of property and equipment......... 53 53
-------- ------ ------ -------
Net cash used in investing activities........... (2,403) (331) - (2,734)
Cash flows used in financing activities:
Repayment of loans, notes payable and long-term
obligations........................................ (21,034) (60) (21,094)
Repayment of note receivable from stockholder.... 25 25
-------- ------ ------ -------
Net cash used in financing activities........... (21,009) (60) - (21,069)
Effect of exchange rate changes on cash and cash equivalents (54) 301 247
-------- ------ ------ -------
Net (decrease) increase in cash and cash
equivalents........................... (23,470) 179 (23,291)
Cash and cash equivalents at beginning of period............ 30,740 722 31,462
-------- ------ ------ -------
Cash and cash equivalents at end of period.................. $ 7,270 $ 901 $ - $ 8,171
======= ====== ====== ======
18
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
(Dollars in thousands)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows (used in) provided by operating activities:
Net income (loss)........................................ $3,482 $ (97) $ 77 $3,462
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization expense................. 3,855 121 3,976
Amortization of deferred financing costs.............. 479 479
Amortization of restricted Common Stock awards........ 45 45
Provision for doubtful accounts....................... 457 147 604
Deferred income tax benefit........................... (402) (402)
Loss on disposal of equipment......................... 15 7 22
Changes in operating assets and liabilities:
Increase in accounts receivable................. (10,359) (996) (11,355)
Decrease (increase) in inventories.............. 2,338 (121) 33 2,250
Increase in prepaid expenses and other current
assets....................................... (1,561) (583) (2,144)
(Decrease) increase in accounts payable,
accrued expenses and income taxes payable.... (3,768) 849 (13) (2,932)
Other, net........................................... (903) 1,023 (97) 23
-------- ------ ------ -------
Net cash (used in) provided by operating activities (6,322) 350 - (5,972)
Cash flows used in investing activities:
Capital expenditures..................................... (3,028) (380) (3,408)
Proceeds from disposal of property and equipment......... 3 3
-------- ------ ------ -------
Net cash used in investing activities........... (3,028) (377) - (3,405)
Cash flows provided by (used in) financing activities:
Repayment of loans, notes payable and long-term
obligations................................ (895) (43) (938)
Proceeds from short-term obligations................... 9,500 9,500
-------- ------ ------ -------
Net cash provided by (used in) financing activities 8,605 (43) - 8,562
Effect of exchange rate changes on cash and cash equivalents 14 (88) (74)
-------- ------ ------ -------
Net decrease in cash and cash equivalents....... (731) (158) (889)
Cash and cash equivalents at beginning of period............ 1,483 917 2,400
-------- ------ ------ -------
Cash and cash equivalents at end of period.................. $ 752 $ 759 $ - $ 1,511
======= ======= ======== =======
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Transactions
On March 26, 2004, Amscan signed an acquisition 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. 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 acquisition agreement, the equity
interests 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. The acquisition was
financed with initial borrowings consisting of a $205.0 million Term Loan under
a new senior secured credit facility and 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 by our principal investors
(including employee stockholders) of $140.5 million and approximately $2.9
million of cash on hand. Certain employees of the Company purchased 86.2278
shares of AAH Holdings Common Stock. The acquisition will be accounted for under
the purchase method of accounting, which requires that the Company revalue or
adjust its assets and liabilities to their fair values.
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 for
$87.2 million of the $110.0 million aggregate principal amount outstanding of
our 9.875% senior subordinated notes due 2007 and the redemption of the
remaining senior subordinated notes and the 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").
Following the purchase of the 9.875% senior subordinated notes due 2007
accepted in the tender offer, approximately $22.8 million in aggregate principal
amount of the notes remained outstanding as of April 30, 2004. The aggregate
cost to purchase the Notes tendered pursuant to the tender offer was
approximately $93.5 million, or 103.542% of the principal amount of such notes
plus accrued and unpaid interest. On May 31, 2004, the remainder of the
outstanding notes will be 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 Company will finance the redemption with borrowings under its new
revolving credit facility.
20
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Percentage of Net Sales
Three Months Ended
March 31,
2004 2003
---- ----
Net sales................................... 100.0% 100.0%
Cost of sales............................... 65.7 67.1
------ ------
Gross profit......................... 34.3 32.9
Operating expenses:
Selling expenses........................ 9.3 9.2
General and administrative expenses..... 8.1 8.5
Art and development costs............... 2.4 2.5
Restructuring charges................... 0.3
------ ------
Total operating expenses............. 19.8 20.5
------ ------
Income from operations............... 14.5 12.4
Interest expense, net....................... 6.3 6.6
------ ------
8.2 5.8
Income tax expense.......................... 3.3 2.3
Minority interests..........................
------ ------
Net income........................... 4.9% 3.5%
====== ======
Net Sales. Net sales of $100.5 million for the quarter ended March 31, 2004
were $0.7 million or 0.7% higher than net sales for the quarter ended March 31,
2003 principally due to higher international and contract manufacturing net
sales, partially offset by slightly lower net sales to party superstores, as
certain national chains rationalized inventories during the first quarter of
2004.
Gross Profit. Gross profit margin for the first quarter of 2004 was 34.3%
or 140 basis points higher than for the first quarter of 2003. The improvement
in gross profit margin principally reflects additional manufacturing,
distribution and other synergies arising from the completion of integration of
M&D Industries, Inc. ("M&D"), our 2002 balloon business acquisition and the
rationalization of our metallic balloon operations and the elimination of
redundant distribution costs incurred in the first quarter of 2003 arising from
the transition from four to three east coast distribution facilities.
Operating Expenses. Selling expenses of $9.3 million for the quarter ended
March 31, 2004 were $0.2 million higher than for first quarter of 2003, and as a
percent of net sales, selling expenses were 9.3%, or 0.1% higher than in 2003.
General and administrative expenses of $8.1 million for the quarter ended
March 31, 2004 were $0.4 million lower than for the first quarter of 2003. As a
percentage of net sales, general and administrative expenses were 8.1% for the
first quarter of 2004, or 0.4% lower than in 2003. The net decrease in general
and administrative expenses principally reflects lower consulting fees and
depreciation and amortization as well as the elimination of expenses as a result
of the closure in 2003 of certain international facilities.
Art and development costs of $2.4 million for the quarter ended March 31,
2004 were $0.1 million lower as compared to 2003. As a percentage of net sales,
art and development costs were 2.4% for the first quarter of 2004 or 0.1% lower
than the first quarter of 2003.
During the three months ended March 31, 2003, the Company incurred a
restructuring charge of $0.3 million resulting from the consolidation of its
domestic distribution operations.
21
Interest Expense. Interest expense, net, of $6.4 million for the three
months ended March 31, 2004 was $0.3 million lower than for the three months
ended March 31, 2003, principally due to the impact of lower average borrowings.
Income Taxes. Income taxes for the first 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.
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. Revolving loans under the new senior credit
facility will 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.
The Company's prior senior secured facility consisted of a $170.0 million
term loan (the" Term Loan") and up to $30.0 million aggregate principal amount
of revolving loans (the "Revolver"). The Term Loan bore interest, at
the option of the Company, at the index rate plus 3.50% per annum or at LIBOR
plus 4.50% per annum, with a LIBOR floor of 2.0%. At March 31, 2004, the Term
Loan, net of unamortized discount, was $146.6 million and the floating interest
rate on the Term Loan was 6.50%.
The Revolver would have expired on June 15, 2007, and bore interest, at the
option of the Company, at the index rate plus, based on performance, a margin
ranging from 2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a
margin ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At
March 31, 2004, the Company had no borrowings under the Revolver. Standby
letters of credit totaling $7.1 million were outstanding and the Company had
borrowing capacity of approximately $22.9 million under the terms of the
Revolver at March 31, 2004. At April 30, 2004, the outstanding standby letters
of credit were replaced with new standby letters of credit issued under the new
revolving loan facility.
At March 31, 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, 2004, a 1.0 million British Pound Sterling denominated
revolving credit facility which bears interest at the U.K. base rate plus 1.75%
and expires on June 1, 2004, and a $1.0 million revolving credit facility which
bears interest at LIBOR plus 1.0% and expires on December 31, 2004. We expect to
renew these revolving credit facilities upon expiration. No borrowings were
outstanding under these revolving credit facilities at March 31, 2004.
Long-term borrowings at March 31, 2004 include a first lien mortgage note
with a financial institution and second lien mortgage note with the New York
State Job Development Authority in the original principal amounts of $10.0
million each. The first lien 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. On April 30, 2004, in connection with
the Transactions, the first lien mortgage note was paid in full and, a result,
the related interest rate swap agreement was terminated at a cost of $0.7
million. The second lien mortgage note bears interest at the rate of 3.31%, and
is subject to review and adjustment semi-annually based on the New York State
Job Development Authority's confidential internal protocols. Both mortgage notes
are for a term of 96 months and require monthly payments based on a 180-month
amortization period with balloon payments upon maturity in January 2010.
22
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GS
Capital Partners II, L.P. and certain other private investment funds managed by
Goldman, Sachs & Co. (collectively, "GSCP") for proceeds of $6.0 million.
Dividends are cumulative and payable annually at 6% per annum. On March 30,
2004, the annual dividend was distributed in additional shares of Series A
Redeemable Convertible Preferred Stock. At March 31, 2004, 47.64 shares of
Series A Redeemable Convertible Preferred Stock were issued and outstanding. 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 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 three months ended
March 31, 2004 and 2003, totaled $2.9 million and $3.3 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 Berkshire Partners LLC and Weston Presidio. Pursuant to this management
agreement, Berkshire Partners LLC and Weston Presidio will be paid an annual
management fee of $833,333 and $416,667, 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.
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 out 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 - Three Months Ended March 31, 2004 Compared to Three Months
Ended March 31, 2003
Net cash provided by (used in) operating activities during the three months
ended March 31, 2004 and 2003, totaled $0.3 million and $(6.0) million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the three months ended March 31, 2004 and
2003, was $10.3 million and $8.2 million, respectively. Changes in operating
assets and liabilities for the three months ended March 31, 2004 and 2003,
resulted in the use of cash of $10.0 million and $14.2 million, respectively.
The $4.2 million reduction in the use of cash in 2004 principally reflects the
Company's efforts to reduce its investment in working capital.
During the three months ended March 31, 2004 and 2003, net cash used in
investing activities of $2.7 million and $3.4 million, respectively, consisted
principally of additional investments in distribution and manufacturing
equipment.
During the three months ended March 31, 2004, net cash used in financing
activities of $21.1 million consisted of scheduled payments on the Term Loan and
other long-term obligations as well as a required prepayment of the Term Loan of
$20.2 million based on our excess cash flows for the year ended December 31,
2003, partially offset by proceeds from the repayment of a note receivable by an
employee. During the three months ended March 31, 2003, net cash provided by
financing activities of $8.6 million consisted of proceeds from short-term
borrowings of $9.5 million, partially offset by the scheduled payment of the
Term Loan and other long-term obligations.
23
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
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 March 31,
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 $0.4 million and $0.6
million, respectively. These amounts are determined by considering the impact of
the hypothetical interest rates on our borrowings and interest rate swap
agreements. This analysis does not consider the effects of the reduced level of
overall economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management would likely take actions to
further mitigate our exposure to the change. However, due to the uncertainty of
the specific actions that we would take and their possible effects, the
sensitivity analysis assumes no changes in our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the U.S.
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $0.4 million for the three
months ended March 31, 2004 and 2003. 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.
24
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 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
March 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Part II
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
a) Not applicable.
b) Not applicable.
c) On April 30, 2004, the Company issued 1,000 shares of its Common
Stock, par value $.10, upon consummation of the merger included in the
Transactions. These shares were not publicly offered and were issued
to AAH Acquisition Corporation for an aggregate purchase price of $551
million. The Company's offering of these shares was exempt from
registration under the Securities Act of 1933 pursuant to Rule 506 of
Regulation D thereunder.
d) Not applicable.
e) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) 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.
25
b) Reports on Form 8-K
On March 29, 2004, the Company filed a Current Report on Form 8-K dated
March 29, 2004 (File No. 000-21827) under Item 5 and reporting that the Company
and AAH Holdings Corporation had entered into a merger agreement.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ MICHAEL A. CORREALE
----------------------------
Michael A. Correale
Chief Financial Officer
(on behalf of the registrant
and as principal financial
Date: May 17, 2004 and accounting officer)
------------
27
EXHIBIT INDEX
Number Description
------ -----------
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.