-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EvUe0rffT4npVWXuS+o4RYvBF8JNA9EJetpd5KaopjQhSiqZT+OhBfFJwHLXQPgm uJ6DTC6LhX9hxrgvTdNAsg== 0000950123-04-013632.txt : 20041115 0000950123-04-013632.hdr.sgml : 20041115 20041115160804 ACCESSION NUMBER: 0000950123-04-013632 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-14107 FILM NUMBER: 041145310 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 10-Q 1 y68823e10vq.txt FORM 10-Q 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 EX-31.1 2 y68823exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) Or Rule 15d-14(a) under the Securities Exchange Act, as amended I, Gerald C. Rittenberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted as permitted; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 /s/ Gerald C. Rittenberg ----------------------------------- Gerald C. Rittenberg Chief Executive Officer (Principal executive officer) EX-31.2 3 y68823exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) Or Rule 15d-14(a) under the Securities Exchange Act, as amended I, Michael A. Correale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Omitted as permitted; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 /s/ Michael A. Correale ----------------------------------- Michael A. Correale Chief Financial Officer EX-32 4 y68823exv32.txt CERTIFICATION Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Amscan Holdings, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Gerald C. Rittenberg, Chief Executive Officer, and Michael A. Correale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gerald C. Rittenberg ---------------------------------- Gerald C. Rittenberg Chief Executive Officer /s/ Michael A. Correale ---------------------------------- Michael A. Correale Chief Financial Officer November 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----