-----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, O7RukfT0Q53zyreaILC66ZLD1LtncbYl2h6UqngPpJwUfDD8HUrZ0v5QsXFyHDVi VwVqWnXSn/wRukPqJp6cPQ== 0000950123-05-009982.txt : 20050815 0000950123-05-009982.hdr.sgml : 20050815 20050815171123 ACCESSION NUMBER: 0000950123-05-009982 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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: 051027836 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 y11967e10vq.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 June 30, 2005 [ ] 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 August 15, 2005, 1,000.00 shares of Registrant's common stock, par value $0.10, were outstanding. AMSCAN HOLDINGS, INC. FORM 10-Q JUNE 30, 2005 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1 FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets at June 30, 2005 and December 31, 2004......................................... 3 Consolidated Statements of Operations for the Three Months Ended June 30, 2005, Two Months Ended June 30, 2004, One Month Ended April 30, 2004 (Predecessor), Six Months Ended June 30, 2005, Two Months Ended June 30, 2004 and Four Months Ended April 30, 2004 (Predecessor)............................................. 4 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2005........................ 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005, Two Months Ended June 30, 2004, and Four Months Ended April 30, 2004 (Predecessor)............ 7 Notes to Consolidated Financial Statements................... 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 27 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 34 ITEM 4 CONTROLS AND PROCEDURES...................................... 34 PART II ITEM 6 EXHIBITS..................................................... 35 SIGNATURE................................................................ 36
2 AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2005 2004 ----------- ------------ (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents ........................................................ $ 2,052 $ 4,252 Accounts receivable, net of allowances ........................................... 84,199 83,968 Inventories, net of allowances ................................................... 96,205 88,159 Prepaid expenses and other current assets ........................................ 15,764 15,241 -------- -------- Total current assets .......................................................... 198,220 191,620 Property, plant and equipment, net .................................................. 97,736 96,134 Goodwill ............................................................................ 282,998 282,921 Tradenames .......................................................................... 33,500 33,500 Other intangible assets, net ........................................................ 21,118 23,289 Other assets, net ................................................................... 19,298 19,802 -------- -------- Total assets .................................................................. $652,870 $647,266 ======== ======== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable .......................................................... $ 1,700 $ 2,025 Accounts payable ................................................................. 38,339 36,842 Accrued expenses ................................................................. 21,128 20,980 Income taxes payable ............................................................. 1,934 2,594 Current portion of long-term obligations ......................................... 2,825 2,807 -------- -------- Total current liabilities ..................................................... 65,926 65,248 Long-term obligations, excluding current portion .................................... 383,714 384,993 Deferred income tax liabilities ..................................................... 42,409 43,175 Other ............................................................................... 3,416 3,417 -------- -------- Total liabilities ............................................................. 495,465 496,833 Redeemable common securities ........................................................ 3,601 3,705 Commitments and contingencies ....................................................... Stockholders' equity: Preferred Stock ($0.01 par value; 10,000.00 shares authorized; none issued and outstanding) .................................................................. -- -- Common Stock ($0.01 par value; 40,000.00 shares authorized; 13,951.98 and 13,962.38 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively) ........................................................... -- -- Additional paid-in capital ....................................................... 136,931 136,819 Retained earnings ................................................................ 16,191 8,564 Accumulated other comprehensive income ........................................... 682 1,345 -------- -------- Total stockholders' equity .................................................... 153,804 146,728 -------- -------- Total liabilities, redeemable common securities and stockholders' equity ...... $652,870 $647,266 ======== ========
Note: The balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date (see Note 3). See accompanying notes to consolidated financial statements. 3 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS TWO MONTHS ONE MONTH ENDED ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 APRIL 30, 2004 ------------- ------------- -------------- (PREDECESSOR) Net sales ...................................... $101,285 $63,181 $33,135 Cost of sales .................................. 68,762 43,424 22,166 -------- ------- ------- Gross profit ............................. 32,523 19,757 10,969 Operating expenses: Selling expenses ............................ 9,211 5,948 3,128 General and administrative expenses ......... 8,928 5,452 2,557 Art and development costs ................... 2,352 1,769 899 Provision for doubtful accounts ............. 430 326 188 Non-recurring expenses related to the Transactions (see Note 2) ................ 11,757 -------- ------- ------- Total operating expenses ................. 20,921 13,495 18,529 -------- ------- ------- Income (loss) from operations ............ 11,602 6,262 (7,560) Interest expense, net .......................... 7,704 4,760 2,023 Undistributed loss in unconsolidated joint venture ..................................... 369 312 56 Other income, net .............................. (6) (11) (10) -------- ------- ------- Income (loss) before income taxes and minority interest ..................... 3,535 1,201 (9,629) Income tax (benefit) expense ................... (132) 474 (3,803) Minority interest .............................. 46 25 3 -------- ------- ------- Net income (loss) ........................ 3,621 702 (5,829) Dividend on redeemable convertible preferred stock .................... 34 -------- ------- ------- Net income (loss) applicable to common stock .......................... $ 3,621 $ 702 $(5,863) ======== ======= =======
See accompanying notes to consolidated financial statements. 4 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED TWO MONTHS ENDED FOUR MONTHS ENDED JUNE 30, 2005 JUNE 30, 2004 APRIL 30, 2004 ---------------- ---------------- ----------------- (PREDECESSOR) Net sales............................................ $201,661 $63,181 $133,660 Cost of sales........................................ 135,563 43,424 88,247 -------- ------- -------- Gross profit................................... 66,098 19,757 45,413 Operating expenses: Selling expenses.................................. 18,195 5,948 12,430 General and administrative expenses............... 17,048 5,452 10,145 Art and development costs......................... 4,614 1,769 3,332 Provision for doubtful accounts................... 688 326 729 Non-recurring expenses related to the Transactions (see Note 2)...................... 11,757 -------- ------- -------- Total operating expenses....................... 40,545 13,495 38,393 -------- ------- -------- Income from operations......................... 25,553 6,262 7,020 Interest expense, net................................ 15,231 4,760 8,384 Undistributed loss in unconsolidated joint venture... 432 312 89 Other income, net.................................... (10) (11) (58) -------- ------- -------- Income (loss) before income taxes and minority interest.................................... 9,900 1,201 (1,395) Income tax expense (benefit)......................... 2,223 474 (551) Minority interest.................................... 50 25 46 -------- ------- -------- Net income (loss).............................. 7,627 702 (890) Dividend on redeemable convertible preferred stock.......................... 136 -------- ------- -------- Net income (loss) applicable to common stock... $ 7,627 $ 702 $ (1,026) ======== ======= ========
See accompanying notes to consolidated financial statements. 5 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2005 (DOLLARS IN THOUSANDS) (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER COMMON COMMON PAID-IN RETAINED COMPREHENSIVE SHARES STOCK CAPITAL EARNINGS INCOME TOTAL --------- ------ ---------- -------- ------------- -------- Balance at December 31, 2004............ 13,962.38 $-- $136,819 $ 8,564 $ 1,345 $146,728 Net income........................... 7,627 7,627 Net change in cumulative translation adjustment............ (1,087) (1,087) Change in fair value of interest rate swap and foreign exchange contracts, net of income taxes.... 424 424 -------- Comprehensive income................. 6,964 Purchase and retirement of redeemable Common Stock held by a former employee................. (10.40) Stock option compensation............ 112 112 --------- --- -------- ------- ------- -------- Balance at June 30, 2005................ 13,951.98 $-- $136,931 $16,191 $ 682 $153,804 ========= === ======== ======= ======= ========
See accompanying notes to consolidated financial statements. 6 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED TWO MONTHS ENDED FOUR MONTHS ENDED JUNE 30, 2005 JUNE 30, 2004 APRIL 30, 2004 ---------------- ---------------- ----------------- (PREDECESSOR) Cash flows provided by operating activities: Net income (loss) ............................................. $ 7,627 $ 702 $ (890) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense ................... 7,348 2,767 5,296 Amortization of deferred financing costs ................ 738 262 709 Amortization of restricted Common Stock awards .......... 52 Provision for doubtful accounts ......................... 688 326 729 Deferred income tax expense (benefit) ................... 813 (484) (58) Gain on sale of available-for-sale securities ........... (47) Gain on disposal of equipment ........................... (35) Write-off of deferred financing costs in connection with the Transactions ................................ 5,548 Debt retirement costs incurred in connection with the Transactions ......................................... 6,209 Undistributed loss in unconsolidated joint venture ...... 432 312 89 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ........... (921) 8,746 (15,247) (Increase) decrease in inventories ................... (8,046) (768) 6,229 Increase in prepaid expenses and other current assets ............................................ (2,787) (437) (3,593) Increase (decrease) in accounts payable, accrued expenses and income taxes payable ................. 1,521 (6,397) 3,991 Other, net .............................................. (905) (13) 430 ------- --------- -------- Net cash provided by operating activities ............ 6,508 5,016 9,412 Cash flows used in investing activities: Cash paid to consummate the Transactions ...................... (529,982) Capital expenditures .......................................... (6,216) (1,056) (3,726) Proceeds from sale of available-for-sale securities ........... 65 Proceeds from disposal of property and equipment .............. 1 53 ------- --------- -------- Net cash used in investing activities ................ (6,216) (531,037) (3,608) Cash flows (used in) provided by financing activities: Proceeds from loans, notes payable and long-term obligations, net of debt issuance costs of $12,668 ......... 378,922 Repayment of loans, notes payable and long-term obligations ... (1,720) (224) (21,251) Capital contributions in connection with the Transactions ..... 138,979 Debt retirement costs paid in connection with the Transactions ............................................... (6,209) Purchase and retirement of redeemable Common Stock held by a former employee .................................. (104) Repayment of note receivable from stockholder and officer ..... 25 ------- --------- -------- Net cash (used in) provided by financing activities ........................................ (1,824) 517,677 (27,435) Effect of exchange rate changes on cash and cash equivalents ..... (668) 413 (594) ------- --------- -------- Net decrease in cash and cash equivalents ............ (2,200) (7,931) (22,225) Cash and cash equivalents at beginning of period ................. 4,252 9,237 31,462 ------- --------- -------- Cash and cash equivalents at end of period ....................... $ 2,052 $ 1,306 $ 9,237 ======= ========= ======== Supplemental Disclosures: Interest paid ........................................... $13,962 $ 4,695 $ 6,531 Income taxes paid ....................................... $ 2,361 $ 635 $ 1,002
See accompanying notes to consolidated financial statements. 7 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 April 30, 2004, Amscan and AAH Acquisition Corporation ("AAH Acquisition"), a wholly-owned subsidiary of AAH Holdings Corporation ("AAH Holdings"), a privately held corporation jointly controlled by funds affiliated with Berkshire Partners LLC and Weston Presidio (together the "Principal Investors"), entered into a merger agreement, 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., (collectively "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 $13,084,000) 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 from the Principal Investors and employee stockholders of $140,524,000, borrowings under the revolver of $23,551,000 and approximately $2,900,000 of cash on hand. Certain existing employee shareholders participated in the Transactions (as defined hereafter) by purchasing approximately 296.91 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 (as defined hereafter) for 100 and 50 shares of common stock of the Company with an equivalent value of $1,000,000 and $500,000, 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 $600,000 and $300,000, respectively, for vested options to purchase 65.455 and 32.727 shares of Common Stock, respectively, under the Company'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 Company adjust its assets and liabilities to their relative fair values. In order to reflect the ultimate beneficial ownership of the Company, the capital structure disclosed in the financial statements is the capital structure of AAH Holdings. The purchase price has been allocated based upon the fair value of net assets acquired at the date of acquisition. The allocations were based on independent valuations which were finalized during the second quarter of 2005. The purchase price was principally allocated to accounts receivable ($91,200,000), inventories ($81,600,000), property plant and equipment ($94,400,000), goodwill ($282,998,000), other intangible assets ($60,800,000), prepaid expenses and other current and non-current assets ($21,400,000), and accounts payable, accrued expenses and other current and non-current liabilities of ($102,333,000). As a result of the finalization of the independent valuations, during the six months ended June 30, 2005 the Company recorded additional non-current liabilities of approximately $583,000, with a corresponding increase to goodwill, other intangibles and deferred taxes. In addition, the Company recorded amortization of leasehold reserves of $479,000 and $348,000 during the three and six months ended June 30, 2005, respectively, relating to the eleven months ended March 31, 2005 and the eight months ended December 31, 2004, respectively. Goodwill and tradenames are not amortizable and the amortization of other intangible assets is not deductible for income tax purposes. Concurrent with the acquisition, on April 30, 2004, the following financing transactions were also consummated: the repayment of a term loan of $147,724,000 under the Company's then existing senior secured credit facility and the termination of all commitments thereunder; the redemption of $87,200,000 of the $110,000,000 aggregate principal amount outstanding of the Company's 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, following the Company's tender 8 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) offer and consent solicitation; 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"). As used herein, "Predecessor" refers to the Company prior to 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 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. In connection with the Transactions in April 2004, the Company 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. 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, nor is it necessarily indicative of the Company's future results (dollars in thousands):
Three Months Ended Six Months Ended June 30, 2004 June 30, 2004 ------------------ ---------------- Net sales............................... $96,316 $196,841 Net income.............................. $ 2,775 $ 7,552
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 arising from the revaluation of inventories as a result of purchase price allocation, (v) adjustments to depreciation and amortization expense arising from the valuation of property, plant and equipment and amortizable intangible assets, as a result of the 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 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 six months ended June 30, 2005 are not necessarily 9 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) indicative of the results to be expected for the year ending December 31, 2005. 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission. NOTE 4 - INVENTORIES Inventories consisted of the following (dollars in thousands):
JUNE 30, DECEMBER 31, 2005 2004 ------- ------------ Finished goods........................................ $80,086 $70,896 Raw materials......................................... 10,885 11,080 Work-in-process....................................... 6,650 7,167 ------- ------- 97,621 89,143 Less: reserve for slow moving and obsolete inventory.. (1,416) (984) ------- ------- $96,205 $88,159 ======= =======
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 six months ended June 30, 2005, the two months ended June 30, 2004 and the one and four months ended April 30, 2004 (Predecessor) was determined based upon estimates of the Company's consolidated effective income tax rates for the year ending December 31, 2005, the eight months ended December 31, 2004 and the four months ended April 30, 2004 (Predecessor), 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, including available foreign tax credits. In addition, during the three months ended June 30, 2005, the Company recorded a $1,400,000 reduction to its income tax expense and net deferred income tax liability to reflect a change in its estimated state income tax rate. The tax rate change results from a change in New York State tax law governing the apportionment of income. 10 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) NOTE 6 - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consisted of the following (dollars in thousands):
THREE MONTHS TWO MONTHS ONE MONTH SIX MONTHS FOUR MONTHS ENDED ENDED ENDED ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 APRIL 30 2004 JUNE 30, 2005 APRIL 30, 2004 ------------- ------------- ------------- ------------- -------------- (PREDECESSOR) (PREDECESSOR) Net income (loss).............................. $3,621 $ 702 $(5,829) $7,627 $(890) Net change in cumulative translation adjustment.................................. (386) 521 (1,029) (1087) (673) Change in fair value of available-for-sale securities, net of income taxes of $1 and $(14), respectively......................... 1 (22) Reclassification adjustment for available-for-sale securities sold during the period, net of income taxes of $(19).... (28) (28) Change in fair value of the interest rate swap contract, net of income taxes of $(113), $(20), $109, $109 and $54, respectively..... (193) (30) 167 165 82 Reclassification adjustment for the interest rate swap contract terminated in connection with the Transactions, net of income taxes of $266..................................... 408 408 Change in fair value of the foreign exchange contracts, net of income taxes of $(31), $14, $151, $194 and $146, respectively...... (53) 22 231 259 224 ------ ------ ------- ------ ----- $2,989 $1,215 $(6,079) $6,964 $(899) ====== ====== ======= ====== =====
NOTE 7 - CAPITAL STOCK At June 30, 2005 and December 31, 2004, the Company'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 13,951.98 and 13,962.38 shares were issued and outstanding, respectively. During the first quarter of 2005, the Company purchased and retired 10.4 shares of redeemable Common Stock held by a former employee for $104,000. In connection with the Transactions (see Note 2), certain existing employee stockholders purchased 296.91 shares of AAH Holdings Common Stock based on the same price and terms per share as paid by the other equity investors. Under the terms of the AAH Holdings stockholders' agreement dated April 30, 2004, the Company has an option to purchase all of the shares of Common Stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of the shares held by the former employee. The purchase price as prescribed in the stockholders' agreement is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may 11 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) be payable to all employee stockholders based on the fully paid and vested common securities is classified as redeemable common securities on the consolidated balance sheet at the estimated fair market value of the common stock, with a corresponding adjustment to stockholders' equity. At June 30, 2005, the aggregate amount that may be payable to employee stockholders and employee option holders was approximately $3,601,000. As there is no active market for the Company's Common Stock, the Company estimated the fair value based on the valuation of Common Stock issued in connection with the Transactions. In connection with the Transactions, the Company's Chief Executive Officer and its President exchanged 5.4945 and 2.7472 of their shares of Amscan Holdings Common Stock for 100 and 50 shares of AAH Common Stock with an equivalent value of $1,000,000 and $500,000, respectively. In addition, the Chief Executive Officer and the President exchanged 5.607 and 2.804 vested options to purchase shares of Amscan Holdings 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 AAH 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 (see Note 10). The fair value of the AAH options was included in the equity contribution related to the Transactions; however as the options are options to purchase redeemable common stock, their estimated redemption value is classified as redeemable common securities on the consolidated balance sheet. On March 30, 2001, the Predecessor issued 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP for proceeds of $6,000,000. Dividends were cumulative and payable annually, at 6% per annum. On March 30, 2004, the annual dividends were distributed in additional shares of Series A Redeemable Convertible Preferred Stock. In connection with the Transactions, on April 30, 2004, the Company redeemed all outstanding shares of Series A Redeemable Convertible Preferred Stock, including accrued dividends of $34,000. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain its earnings for working capital, repayment of indebtedness, capital expenditures and general corporate purposes. In addition, the Company's current credit facility and the indenture governing its senior subordinated notes contain restrictive covenants which have the effect of limiting the Company's ability to pay dividends or distributions to its stockholders. NOTE 8 - LEGAL PROCEEDINGS The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe the outcome of these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations. NOTE 9 - RELATED PARTY TRANSACTIONS 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 June 30, 2005, accrued management fees payable to Berkshire Partners LLC and Weston Presidio totaled $138,889 and $69,445, respectively. Although the indenture governing our 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. In April 2004, Goldman Sachs and its affiliates received fees totaling $8,123,000 for services provided in connection with the Transactions. 12 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) During the one and four months ended April 30, 2004, the Company sold $235,000 and $836,000 of metallic balloons and other party goods to American Greetings Corporation, a minority stockholder from February 2002 through the date of the Transactions. NOTE 10 - STOCK OPTION PLAN Effective May 1, 2004, the Company elected to apply the fair value method of Statement of Financial Accounting Standards ("SFAS") No. 123, as amended by SFAS No.148, Accounting for Stock-Based Compensation -- Transition and Disclosure. SFAS No. 123 permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to apply the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," which requires the recognition of compensation expense at the date of grant only if the current market price of the underlying stock exceeds the exercise price, and to provide pro forma net income disclosures for employee stock option grants as if the fair value based method defined in SFAS No. 123 had been applied. SFAS No. 148 provides alternative methods of transition to SFAS No.123's fair value method of accounting for stock-based employee compensation and amends the disclosure provisions of SFAS No.123. In April 2005, the SEC deferred the implementation date of SFAS No. 123(R), Share-Based Payment. As a result, we plan to adopt SFAS No. 123(R) effective January 1, 2006 rather than the initial implementation date of July 2005. The Company is evaluating the requirements of SFAS No. 123(R), including the valuation methods, the support for the assumptions that underlie the valuation of awards and the transition methods. During the three months ended June 30, 2005, the Company granted 727 basic stock options and 770 performance stock options to purchase shares of the Company's common stock to certain employees and two directors under the terms of the AAH Holdings Corporation 2004 Equity Incentive Plan. The basic and performance stock options were granted at an exercise price equal to the common stock's estimated fair value of $10,000 per share and generally vest 20% at each anniversary date of issuance. The performance options are earned based on the Company achieving certain financial thresholds upon the occurrence of certain determination dates. The Company used a minimum value method to determine the fair value of the options granted and recorded approximately $112,000 in compensation expense, in general and administrative expenses during the three and six month periods ended June 30, 2005. 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. No compensation cost was recognized in connection with the issuance of options under the Amscan Holdings, Inc. 1997 Stock Incentive Plan, (the "Predecessor 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. 13 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Had the Predecessor 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 Predecessor's net loss would have increased to the amounts indicated below (dollars in thousands):
FOUR MONTHS ONE MONTH ENDED ENDED APRIL 30, 2004 APRIL 30, 2004 --------------- -------------- Net loss as reported.................... $(5,829) $ (890) Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of income taxes of $31 and $125, respectively........ 47 192 ------- ------- SFAS No. 123 pro forma net loss......... $(5,876) $(1,082) ======= =======
In connection with the Transactions, all options granted under the Predecessor Plan vested immediately on April 30, 2004 and, except for those held by the Chief Executive Officer and the President (see Note 7), all options 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 Company 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. NOTE 11 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION In connection with the consummation of the Transactions, on April 30, 2004, 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 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 $140,524,000, 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"): 14 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) - 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 June 30, 2005 and December 31, 2004, and the related consolidating statements of operations and consolidating statements of cash flows for the three months ended June 30, 2005, the two months ended June 30, 2004, the month ended April 30, 2004 (Predecessor), the six months ended June 30, 2005, the two months ended June 30, 2004 and the four months ended April 30, 2004 (Predecessor) for the combined Guarantors and the combined Non-guarantors and elimination entries necessary to consolidate the entities comprising the combined companies. 15 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING BALANCE SHEET JUNE 30, 2005 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents....................... $ 987 $ 1,065 $ 2,052 Accounts receivable, net of allowances.......... 70,642 13,557 84,199 Inventories, net of allowances.................. 84,387 12,419 $ (601) 96,205 Prepaid expenses and other current assets....... 13,653 2,111 15,764 -------- ------- -------- -------- Total current assets......................... 169,669 29,152 (601) 198,220 Property, plant and equipment, net................. 95,650 2,086 97,736 Goodwill .......................................... 279,060 3,938 282,998 Tradenames......................................... 33,500 33,500 Other intangible assets, net....................... 21,118 21,118 Other assets, net.................................. 45,540 2,662 (28,904) 19,298 -------- ------- -------- -------- Total assets................................. $644,537 $37,838 $(29,505) $652,870 ======== ======= ======== ======== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable......................... $ 1,700 $ 1,700 Accounts payable................................ 35,638 $ 2,701 38,339 Accrued expenses ............................... 15,637 5,491 21,128 Income taxes payable ........................... 1,515 538 $ (119) 1,934 Current portion of long-term obligations........ 2,603 222 2,825 -------- ------- -------- -------- Total current liabilities.................... 57,093 8,952 (119) 65,926 Long-term obligations, excluding current portion... 383,531 183 383,714 Deferred income tax liabilities.................... 41,774 635 42,409 Other.............................................. 4,252 24,049 (24,885) 3,416 -------- ------- -------- -------- Total liabilities............................ 486,650 33,819 (25,004) 495,465 Redeemable common securities....................... 3,601 3,601 Commitments and contingencies Stockholders' equity: Preferred Stock................................. -- Common Stock.................................... 339 (339) -- Additional paid-in capital...................... 136,931 136,931 Retained earnings............................... 16,673 3,172 (3,654) 16,191 Accumulated other comprehensive income.......... 682 508 (508) 682 -------- ------- -------- -------- Total stockholders' equity................... 154,286 4,019 (4,501) 153,804 -------- ------- -------- -------- Total liabilities, redeemable common securities and stockholders' equity....... $644,537 $37,838 $(29,505) $652,870 ======== ======= ======== ========
16 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 2004 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents....................... $ 3,153 $ 1,099 $ 4,252 Accounts receivable, net of allowances.......... 72,353 11,615 83,968 Inventories, net of allowances.................. 77,386 11,052 $ (279) 88,159 Prepaid expenses and other current assets....... 13,914 1,327 15,241 -------- ------- -------- -------- Total current assets......................... 166,806 25,093 (279) 191,620 Property, plant and equipment, net................. 94,179 1,955 96,134 Goodwill .......................................... 277,699 5,222 282,921 Tradenames......................................... 33,500 33,500 Other intangible assets, net....................... 23,289 23,289 Other assets, net.................................. 41,875 3,331 (25,404) 19,802 -------- ------- -------- -------- Total assets................................. $637,348 $35,601 $(25,683) $647,266 ======== ======= ======== ======== LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable......................... $ 2,025 $ 2,025 Accounts payable................................ 34,918 $ 1,924 36,842 Accrued expenses................................ 14,425 6,555 20,980 Income taxes payable ........................... 2,319 302 $ (27) 2,594 Current portion of long-term obligations........ 2,627 180 2,807 -------- ------- -------- -------- Total current liabilities.................... 56,314 8,961 (27) 65,248 Long-term obligations, excluding current portion... 384,802 191 384,993 Deferred income tax liabilities.................... 43,175 43,175 Other.............................................. 2,372 23,310 (22,265) 3,417 -------- ------- -------- -------- Total liabilities............................ 486,663 32,462 (22,292) 496,833 Redeemable common securities....................... 3,705 3,705 Commitments and contingencies Stockholders' equity: Preferred Stock................................. -- Common Stock.................................... 339 (339) -- Additional paid-in capital...................... 136,819 136,819 Retained earnings............................... 8,816 1,384 (1,636) 8,564 Accumulated other comprehensive income.......... 1,345 1,416 (1,416) 1,345 -------- ------- -------- -------- Total stockholders' equity................... 146,980 3,139 (3,391) 146,728 -------- ------- -------- -------- Total liabilities, redeemable common securities and stockholders' equity....... $637,348 $35,601 $(25,683) $647,266 ======== ======= ======== ========
17 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales............................................ $91,198 $15,542 $(5,455) $101,285 Cost of sales........................................ 63,692 10,295 (5,225) 68,762 ------- ------- ------- -------- Gross profit................................... 27,506 5,247 (230) 32,523 Operating expenses: Selling expenses.................................. 7,330 1,881 9,211 General and administrative expenses............... 7,399 1,859 (330) 8,928 Art and development costs......................... 2,352 2,352 Provision for doubtful accounts................... 321 109 430 ------- ------- ------- -------- Total operating expenses....................... 17,402 3,849 (330) 20,921 ------- ------- ------- -------- Income from operations......................... 10,104 1,398 100 11,602 Interest expense, net................................ 7,676 28 7,704 Undistributed loss in unconsolidated joint venture... 369 369 Other income, net.................................... (1,278) (2) 1,274 (6) ------- ------- ------- -------- Income before income taxes and minority interest........................... 3,337 1,372 (1,174) 3,535 Income tax expense................................... (431) 382 (83) (132) Minority interest.................................... 46 46 ------- ------- ------- -------- Net income..................................... $ 3,768 $ 944 $(1,091) $ 3,621 ======= ======= ======= ========
18 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE TWO MONTHS ENDED JUNE 30, 2004 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales............................................ $57,851 $9,123 $(3,793) $63,181 Cost of sales........................................ 40,954 6,237 (3,767) 43,424 ------- ------ ------- ------- Gross profit................................... 16,897 2,886 (26) 19,757 Operating expenses: Selling expenses.................................. 4,829 1,119 5,948 General and administrative expenses............... 4,530 1,142 (220) 5,452 Art and development costs......................... 1,769 1,769 Provision for doubtful accounts................... 241 85 326 ------- ------ ------- ------- Total operating expenses....................... 11,369 2,346 (220) 13,495 ------- ------ ------- ------- Income from operations......................... 5,528 540 194 6,262 Interest expense, net ............................... 4,734 26 4,760 Undistributed loss in unconsolidated joint venture... 312 312 Other income, net.................................... (574) 563 (11) ------- ------ ------- ------- Income before income taxes and minority interest........................... 1,056 514 (369) 1,201 Income tax expense................................... 338 146 (10) 474 Minority interest.................................... 25 25 ------- ------ ------- ------- Net income..................................... $ 718 $ 343 $ (359) $ 702 ======= ====== ======= =======
19 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE ONE MONTH ENDED APRIL 30, 2004 (PREDECESSOR) (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales............................................... $30,280 $4,478 $(1,623) $33,135 Cost of sales........................................... 20,761 2,994 (1,589) 22,166 ------- ------ ------- ------- Gross profit...................................... 9,519 1,484 (34) 10,969 Operating expenses: Selling expenses..................................... 2,567 561 3,128 General and administrative expenses.................. 2,107 560 (110) 2,557 Art and development costs............................ 899 899 Provision for doubtful accounts...................... 152 36 188 Non-recurring expenses related to the Transactions... 11,757 11,757 ------- ------ ------- ------- Total operating expenses.......................... 17,482 1,157 (110) 18,529 ------- ------ ------- ------- (Loss) income from operations..................... (7,963) 327 76 (7,560) Interest expense, net .................................. 2,007 16 2,023 Undistributed loss in unconsolidated joint venture ..... 56 56 Other (income) expense, net............................. (320) 3 307 (10) ------- ------ ------- ------- (Loss) income before income taxes and minority interest.............................. (9,706) 308 (231) (9,629) Income tax (benefit) expense............................ (3,897) 108 (14) (3,803) Minority interest....................................... 3 3 ------- ------ ------- ------- Net (loss) income................................. (5,809) 197 (217) (5,829) Dividend on redeemable convertible preferred stock................................ 34 34 ------- ------ ------- ------- Net (loss) income applicable to common stock...... $(5,843) $ 197 $ (217) $(5,863) ======= ====== ======= =======
20 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales............................................ $182,298 $29,354 $(9,991) $201,661 Cost of sales........................................ 125,972 19,260 (9,669) 135,563 -------- ------- ------- -------- Gross profit................................... 56,326 10,094 (322) 66,098 Operating expenses: Selling expenses.................................. 14,329 3,866 18,195 General and administrative expenses............... 14,004 3,704 (660) 17,048 Art and development costs......................... 4,614 4,614 Provision for doubtful accounts................... 524 164 688 -------- ------- ------- -------- Total operating expenses....................... 33,471 7,734 (660) 40,545 -------- ------- ------- -------- Income from operations......................... 22,855 2,360 338 25,553 Interest expense, net ............................... 15,174 57 15,231 Undistributed loss in unconsolidated joint venture... 432 432 Other income, net.................................... (2,357) (16) 2,363 (10) -------- ------- ------- -------- Income before income taxes and minority interest........................... 9,606 2,319 (2,025) 9,900 Income tax expense................................... 1,776 566 (119) 2,223 Minority interest.................................... 50 50 -------- ------- ------- -------- Net income..................................... $ 7,830 $ 1,703 $(1,906) $ 7,627 ======== ======= ======= ========
21 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE TWO MONTHS ENDED JUNE 30, 2004 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS AND COMBINED COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ---------- ------------ ------------ Net sales................................................ $57,851 $9,123 $(3,793) $63,181 Cost of sales............................................ 40,954 6,237 (3,767) 43,424 ------- ------ ------- ------- Gross profit....................................... 16,897 2,886 (26) 19,757 Operating expenses: Selling expenses...................................... 4,829 1,119 5,948 General and administrative expenses................... 4,530 1,142 (220) 5,452 Art and development costs............................. 1,769 1,769 Provision for doubtful accounts....................... 241 85 326 ------- ------ ------- ------- Total operating expenses........................... 11,369 2,346 (220) 13,495 ------- ------ ------- ------- Income from operations............................. 5,528 540 194 6,262 Interest expense, net.................................... 4,734 26 4,760 Undistributed loss in unconsolidated joint venture....... 312 312 Other income, net........................................ (574) 563 (11) ------- ------ ------- ------- Income before income taxes and minority interest... 1,056 514 (369) 1,201 Income tax expense....................................... 338 146 (10) 474 Minority interest........................................ 25 25 ------- ------ ------- ------- Net income......................................... $ 718 $ 343 $ (359) $ 702 ======= ====== ======= =======
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 Other income, net........................................ (1,194) (39) 1,175 (58) -------- ------- ------- -------- (Loss) income before income taxes and minority interest............................... (1,698) 1,131 (828) (1,395) Income tax (benefit) expense............................. (864) 350 (37) (551) Minority interest........................................ 46 46 -------- ------- ------- -------- Net (loss) income.................................. (834) 735 (791) (890) Dividend on redeemable convertible preferred stock................................. 136 136 -------- ------- ------- -------- Net (loss) income applicable to common stock....... $ (970) $ 735 $ (791) $ (1,026) ======== ======= ======= ========
23 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS COMBINED AND COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Cash flows provided by operating activities: Net income............................................... $ 7,830 $ 1,703 $(1,906) $ 7,627 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense................. 7,017 331 7,348 Amortization of deferred financing costs.............. 738 738 Provision for doubtful accounts....................... 524 164 688 Deferred income tax expense........................... 813 813 Undistributed loss in unconsolidated joint venture.... 432 432 Changes in operating assets and liabilities: (Increase), decrease in accounts receivable........ 1,146 (2,067) (921) Increase in inventories............................ (7,001) (1,367) 322 (8,046) Increase in prepaid expenses and other current assets.................................. (2,003) (784) (2,787) Increase in accounts payable, accrued expenses and income taxes payable....... 1,402 238 (119) 1,521 Other, net............................................ (5,557) 2,949 1,703 (905) ------- ------- ------- ------- Net cash provided by operating activities.......... 5,341 1,167 6,508 Cash flows used in investing activities: Capital expenditures..................................... (5,856) (360) (6,216) ------- ------- ------- Net cash used in investing activities.............. (5,856) (360) (6,216) Cash flows used in financing activities: Repayment of loans, notes payable and long-term obligations........................................... (1,620) (100) (1,720) Purchase and retirement of redeemable Common Stock held by a former employee....................... (104) (104) ------- ------- ------- ------- Net cash used in financing activities.............. (1,724) (100) -- (1,824) Effect of exchange rate changes on cash and cash equivalents..................................... 73 (741) (668) ------- ------- ------- ------- Net decrease in cash and cash equivalents..................................... (2,166) (34) (2,200) Cash and cash equivalents at beginning of period............ 3,153 1,099 4,252 ------- ------- ------- ------- Cash and cash equivalents at end of period.................. $ 987 $ 1,065 $ -- $ 2,052 ======= ======= ======= =======
24 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWO MONTHS ENDED JUNE 30, 2004 (DOLLARS IN THOUSANDS)
AMSCAN HOLDINGS COMBINED AND COMBINED NON- GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Cash flows provided by (used in) operating activities: Net income............................................... $ 718 $ 343 $(359) $ 702 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization expense................. 2,654 113 2,767 Amortization of deferred financing costs.............. 262 262 Provision for doubtful accounts....................... 241 85 326 Deferred income tax benefit........................... (484) (484) Undistributed loss in unconsolidated joint venture.... 312 312 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable......... 8,875 (129) 8,746 Decrease (increase) in inventories................. 826 (1,620) 26 (768) Decrease in prepaid expenses and other current assets.......................................... (465) 28 (437) (Decrease) increase in accounts payable, accrued expenses and income taxes payable............... (6,675) 288 (10) (6,397) Other, net............................................ (860) 504 343 (13) --------- ------- ----- --------- Net cash provided by (used in) operating activities...................................... 5,404 (388) -- 5,016 Cash flows used in investing activities: Cash paid to consummate the Transactions................. (529,982) (529,982) Capital expenditures..................................... (1,006) (50) (1,056) Proceeds from disposal of property and equipment......... 1 1 --------- ------- ----- --------- Net cash used in investing activities.............. (530,988) (49) -- (531,037) Cash flows provided by (used in) financing activities: Proceeds from loans, notes payable and long-term obligations, net of debt issuance costs of $12,668.... 378,922 378,922 Repayment of loans, notes payable and long-term obligations........................................... (195) (29) (224) Capital contributions in connection with the Transactions.......................................... 138,979 138,979 --------- ------- ----- --------- Net cash provided by (used in) financing activities...................................... 517,706 (29) -- 517,677 Effect of exchange rate changes on cash and cash equivalents.............................................. 9 404 413 --------- ------- ----- --------- Net decrease in cash and cash equivalents.......... (7,869) (62) (7,931) Cash and cash equivalents at beginning of period............ 8,646 591 9,237 --------- ------- ----- --------- Cash and cash equivalents at end of period.................. $ 777 $ 529 $ -- $ 1,306 ========= ======= ===== =========
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 COMBINED AND 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......................... 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 and officer............................................... 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE TRANSACTIONS On April 30, 2004, Amscan and AAH Acquisition Corporation ("AAH Acquisition"), a wholly-owned subsidiary of AAH Holdings Corporation ("AAH Holdings"), a privately held corporation jointly controlled by funds affiliated with Berkshire Partners LLC and Weston Presidio (together the "Principal Investors") entered into a merger agreement, 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., (collectively "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 $13.1 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, an equity contribution from the Principal Investors and employee stockholders of $140.5 million, borrowings under the revolver of $23.6 million and approximately $2.9 million of cash on hand. Certain existing employee shareholders participated in the Transactions (as defined hereafter) by purchasing 296.91 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 (as defined hereafter) for 100 and 50 shares of common stock of the Company 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 to purchase 65.455 and 32.727 shares of Common Stock, respectively, under the Company'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 Company adjust its assets and liabilities to their relative fair values. In order to reflect the ultimate beneficial ownership of the Company, the capital structure disclosed in the Company's financial statements is the capital structure of AAH Holdings. The purchase price has been allocated based upon the fair value of net assets acquired at the date of acquisition. The final allocation was based on independent valuations that were completed during the second quarter of 2005. The purchase price was principally allocated to accounts receivable ($91.2 million), inventories ($81.6 million), property plant and equipment ($94.4 million), goodwill ($283.0 million), other intangible assets ($60.8 million), prepaid expenses and other current and non-current assets ($21.4 million), and accounts payable, accrued expenses and other current and non-current liabilities ($102.3 million). Goodwill and tradenames are not amortizable and the amortization of other intangible assets is not deductible for income tax purposes. Concurrent with the acquisition, the following financing transactions were also consummated: the repayment of a term loan of $147.7 million under our then existing senior secured credit facility and the termination of all commitments thereunder; the redemption 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 following our tender offer and consent solicitation; 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"). As used herein, Predecessor refers to the Company prior to 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 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 27 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. In connection with the Transactions in April 2004, the Company recorded non-recurring expenses of $11.8 million comprised of $6.2 million of debt retirement costs and the write-off of $5.6 million of deferred financing costs associated with the repayment of debt in connection with the Transactions. THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 The following table sets forth the statement of operations data for the three months ended June 30, 2005 and 2004. In order to facilitate the comparison between the two periods, the results for the three months ended June 30, 2004 were obtained by combining the results for the Predecessor Company for the one month ended April 30, 2004 with the results for the Successor Company for the two months ended June 30, 2004. This presentation is not in accordance with generally accepted accounting principles but is presented to provide the ability to compare the results of operations in 2004 to the current year. PERCENTAGE OF NET SALES
THREE MONTHS ENDED JUNE 30, ------------------ 2005 2004 ----- ----- Net sales.................................................. 100.0% 100.0% Cost of sales.............................................. 67.9 68.1 ----- ----- Gross profit......................................... 32.1 31.9 Operating expenses: Selling expenses........................................ 9.1 9.4 General and administrative expenses..................... 8.8 8.3 Art and development costs............................... 2.3 2.8 Provision for doubtful accounts......................... 0.4 0.5 Non-recurring expenses related to the Transactions...... 12.2 ----- ----- Total operating expenses............................. 20.6 33.2 ----- ----- Income (loss) from operations........................ 11.5 (1.3) Interest expense, net...................................... 7.6 7.0 Undistributed loss in unconsolidated joint venture......... 0.4 0.4 Other income, net.......................................... ----- ----- Income (loss) before income taxes and minority interest... 3.5 (8.8) Income tax benefit......................................... (0.1) (3.5) Minority interest.......................................... ----- ----- Net income (loss).................................... 3.6% (5.3)% ===== =====
NET SALES. Net sales of $101.3 million for the quarter ended June 30, 2005 were $5.0 million or 5.2% higher than the net sales for the quarter ended June 30, 2004, principally due to higher sales to party superstores. Sales for the second quarter of 2004 were adversely affected by a general softness in retail markets, the rationalization of inventories by certain national superstore chains and inventory shortages of certain products as a result of a production disruption at one of our foreign vendors. International sales were $1.9 million higher than in the second quarter of 2004 (including the effects of foreign exchange fluctuations) which was partially offset by lower domestic balloon and contract manufacturing sales. GROSS PROFIT. Gross profit margin for the second quarter of 2005 of 32.1% was comparable to the gross profit margin for the second quarter of 2004 and reflects the impact of higher raw material and freight costs as well as product sales mix. Gross profit margin for the three months ended June 30, 2005 also reflects the amortization of certain leasehold reserves established upon finalization of purchase accounting, including approximately $0.5 million related to the eleven months ended March 31, 2005. 28 OPERATING EXPENSES. Selling expenses of $9.2 million for the quarter ended June 30, 2005 were comparable to the selling expenses for the second quarter of 2004. As a percent of net sales, selling expenses were 9.1% for the quarter ended June 30, 2005, or 30 basis points lower than for the second quarter of 2004, principally due to the higher level of sales to existing superstores customers and a reduction in sales force during the second half of 2004. General and administrative expenses of $8.9 million for the second quarter ended June 30, 2005 were $0.9 million higher than for the second quarter of 2004. As a percentage of net sales, general and administrative expenses were 8.8% for the second quarter of 2005, or 30 basis points higher than in 2004. The net increase in general and administrative expenses principally reflects higher depreciation and amortization expense (arising from changes in asset valuations and useful lives as a result of the Transactions) and management fees to our Principal Investors. Art and development costs of $2.4 million for the second quarter ended June 30, 2005, were $0.3 million lower than costs for the second quarter of 2004, reflecting reduced development of custom product lines. As a percentage of net sales, art and development costs were 2.3% for the second quarter of 2005 or 30 basis points lower than the second quarter of 2004. Provision for doubtful accounts for the three months ended June 30, 2005 was $0.4 million or 0.4% of net sales, as compared to $0.5 million or 0.5% of net sales for the three months ended June 30, 2004. In connection with the Transactions in April 2004, the Company recorded non-recurring expenses of $11.8 million comprised of $6.2 million of debt retirement costs and the write-off of $5.6 million of deferred financing costs associated with the repayment of debt in connection with the Transactions. INTEREST EXPENSE, NET. Interest expense of $7.7 million for the three months ended June 30, 2005 was $0.9 million higher than for the three months ended June 30, 2004, due to the impact of higher average borrowings following the Transactions and higher variable interest rates. UNDISTRIBUTED LOSS IN UNCONSOLIDATED JOINT VENTURE. Undistributed loss in unconsolidated joint venture represents our share of the loss from our Mexican balloon distribution joint venture, including the elimination of intercompany profit in the joint venture's inventory at June 30, 2005. INCOME TAXES. Income taxes for the second quarter of 2005 and 2004 was based upon estimated consolidated effective income tax rates of 37.0% and 39.5% for the years ending December 31, 2005 and 2004, respectively. The reduction in the effective tax rate reflects the estimated benefit of the Domestic Production Activities deduction in 2005 as well as additional tax items required in 2004. In addition, during the three months ended June 30, 2005, the Company recorded a $1.4 million reduction of its income tax expense and its net deferred income tax liability to reflect a change in its estimated state income tax rates. The tax rate change results from a change in New York State tax law governing the apportionment of income. 29 SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 The following table sets forth the statement of operations data for the six months ended June 30, 2005 and 2004. In order to facilitate the comparison between the two periods, the results for the for the six months ended June 30, 2004 were obtained by combining the results for the Predecessor Company for the four months ended April 30, 2004 with the results for the Successor Company for the two months ended June 30, 2004. This presentation is not in accordance with generally accepted accounting principles but is presented to provide the ability to compare the results of operations in 2004 to the current year. PERCENTAGE OF NET SALES
SIX MONTHS ENDED JUNE 30, ---------------- 2005 2004 ----- ----- Net sales.................................................... 100.0% 100.0% Cost of sales................................................ 67.2 66.9 ----- ----- Gross profit........................................... 32.8 33.1 Operating expenses: Selling expenses.......................................... 9.0 9.3 General and administrative expenses....................... 8.5 7.9 Art and development costs................................. 2.3 2.6 Provision for doubtful accounts........................... 0.3 0.5 Non-recurring expenses related to the Transactions........ 6.0 ----- ----- Total operating expenses............................... 20.1 26.3 ----- ----- Income from operations................................. 12.7 6.8 Interest expense, net........................................ 7.6 6.7 Undistributed loss in unconsolidated joint venture........... 0.2 0.2 Other income, net............................................ ----- ----- Income (loss) before income taxes and minority interest..... 4.9 (0.1) Income tax expense........................................... 1.1 Minority interest............................................ ----- ----- Net income (loss)...................................... 3.8% (0.1)% ===== =====
NET SALES. Net sales of $201.7 million for the six months ended June 30, 2005 were $4.8 million or 2.4% higher than the net sales for the six months ended June 30, 2004, principally due to higher sales to party superstores. Sales for the first six months of 2004 were adversely affected by a general softness in retail markets, the rationalization of inventories by certain national superstore chains and inventory shortages on certain products as a result of a production disruption at one of our foreign vendors. International sales were $2.5 million higher than in the first six months of 2004 (including the effects of foreign exchange fluctuations) which was partially offset lower domestic balloon and contract manufacturing sales. GROSS PROFIT. Gross profit margin for the first six months of 2005 was 32.8%, or 30 basis points lower than during the first six months of 2004. The decrease in gross profit margin principally reflects the impact of higher raw material and freight costs as well as product sales mix. Gross profit margin for the six months ended June 30, 2005 also reflects the amortization of certain leasehold reserves established upon finalization of purchase accounting, including approximately $0.3 million related to the eight months ended December 31, 2004. OPERATING EXPENSES. Selling expenses of $18.2 million for the six months ended June 30, 2005 were $0.1 million lower than for the first six months of 2004. As a percent of net sales, selling expenses were 9.0% for the six months ended June 30, 2005, or 30 basis points lower than in 2004 principally due to the higher level of sales to existing superstore customers and a reduction in sales force during the second half of 2004. General and administrative expenses of $17.0 million for the six months ended June 30, 2005 were $1.5 million higher than for the first six months of 2004. As a percentage of net sales, general and administrative expenses were 8.5% for the first six months of 2005, or 60 basis points higher than in 2004. The net increase in general and administrative expenses principally reflects higher professional fees and management fees to our Principal Investors, 30 higher depreciation and amortization expense (arising from changes in asset valuations and useful lives as a result of the Transactions). Art and development costs of $4.6 million for the six months ended June 30, 2005 were $0.5 million lower than costs for the first six months of 2004, reflecting reduced development of custom product lines. As a percentage of net sales, art and development costs were 2.3% for the first six months of 2005 or 30 basis points lower than the first six months of 2004. In connection with the Transactions in April 2004, the Company recorded non-recurring expenses of $11.8 million comprised of $6.2 million of debt retirement costs and the write-off of $5.6 million of deferred financing costs associated with the repayment of debt in connection with the Transactions. INTEREST EXPENSE, NET. Interest expense of $15.2 million for the six months ended June 30, 2005 was $2.1 million higher than for the six months ended June 30, 2004, due to the impact of higher average borrowings following the Transactions. UNDISTRIBUTED LOSS IN UNCONSOLIDATED JOINT VENTURE. Undistributed loss in unconsolidated joint venture represents our share of the loss from our Mexican balloon distribution joint venture, including the elimination of intercompany profit in the joint venture's inventory at June 30, 2005. INCOME TAXES. Income taxes for the first six months of 2005 and 2004 were based upon estimated consolidated effective income tax rates of 37.0% and 39.5% for the years ending December 31, 2005 and 2004, respectively. The reduction in the effective tax rate reflects the estimated benefit of the Domestic Production Activities deduction in 2005 as well as additional tax items required in 2004. In addition, during the three months ended June 30, 2005, the Company recorded a $1.4 million reduction of its income tax expense and its net deferred income tax liability to reflect a change in its estimated state income tax rates. The tax rate change results from a change in New York State tax law governing the apportionment of income. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE Our 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. The 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 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 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 June 30, 2005, the term loan balance was $203.0 million, with a floating interest rate of 5.65%. To hedge the risk associated with fluctuations in interest rates, the Company entered into two interest rate swap transactions with a financial institution during 2004, for an initial aggregate notional amount of $17.4 million, increasing over three years to $62.6 million. Revolving loans under the 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 June 30, 2005, the Company had borrowings under the revolver totaling $1.7 million at a floating interest rate of 7.50%. Standby letters of credit totaling $8.0 million were outstanding and the Company had borrowing capacity of $40.3 million under the terms of the revolver at June 30, 2005. 31 At June 30, 2005, we had a 400,000 Canadian dollar denominated revolving credit facility which bears interest at the Canadian prime rate plus 0.6% and expires in September 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, 2006, and a $1.0 million revolving credit facility which bears interest at LIBOR plus 1.0% and expires on December 31, 2005. No borrowings were outstanding under these revolving credit facilities at June 30, 2005. We expect to renew these revolving credit facilities upon expiration. Long-term borrowings at June 30, 2005 include a mortgage note with the New York State Job Development Authority of $8.2 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 4.86%, 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 first lien 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. The related interest rate swap agreement was terminated on April 30, 2004 in connection with the Transactions at a cost of $0.7 million. 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. Our 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 senior subordinated notes due 2014 bear interest at a rate of 8.75% per annum. Interest is payable semi-annually on May 1 and November 1 of each year. We have entered into various capital leases for machinery and equipment with implicit interest rates ranging from 7.70% to 8.80% which extend to 2008. 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 six months ended June 30, 2005 and 2004, was $6.0 million and $5.9 million, respectively. The minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2005 approximate $12.3 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 senior subordinated notes in the event of a bankruptcy or similar proceeding of Amscan. We expect that cash generated from operating activities and availability under our 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 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 senior secured credit 32 facility in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs. During the three months ended June 30, 2005, the Company issued 727 basic stock options and 770 performance stock options to purchase shares of the Company's common stock to certain employees and its two outside directors, under the terms of the AAH Holdings Corporation 2004 Equity Incentive Plan. The basic and performance stock options were granted at a strike price equal to the common stock's estimated fair value of $10,000 per share and generally vest 20% at each anniversary date of issuance. The performance options are earned based on the Company achieving certain financial thresholds upon the occurrence of certain measurement dates. The Company used a minimum value method to determine the fair value of the options granted and recorded approximately $0.1 million in compensation expense during the three and six month periods ended June 30, 2005. CASH FLOW DATA - SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Net cash provided by operating activities during the six months ended June 30, 2005 and 2004, totaled $6.5 million and $14.4 million, respectively. Net cash flow provided by operating activities before changes in operating assets and liabilities for the six months ended June 30, 2005 and 2004, was $17.6 million and $21.5 million, respectively. Changes in operating assets and liabilities for the six months ended June 30, 2005 and 2004, resulted in the use of cash of $11.1 million and $7.1 million, respectively, with the increased use of cash during the six months ended June 30, 2005 reflecting higher levels of custom inventory and the replenishment of general inventory levels following the disruption in supply from a foreign vendor which began in the second quarter of 2004. During the six months ended June 30, 2005, net cash used in investing activities of $6.2 million, consisted principally of additional investments in distribution and manufacturing equipment. During the six months ended June 30, 2004, net cash used in investing activities of $534.6 million consisted of cash paid of $530.0 million to consummate the Transactions on April 30, 2004 and $4.8 million additional investments in distribution and manufacturing equipment, partially offset by proceeds from the sales of equipment and available-for-sale securities. During the six months ended June 30, 2005, net cash used in financing activities of $1.8 million included proceeds of $0.3 million from net short-term borrowings under the revolver, partially offset by scheduled payments of $1.4 million on the term loan and other long-term obligations, as well as the purchase of redeemable Common Stock held by a former employee totaling $0.1 million. During the six months ended June 30, 2004, net cash provided by financing activities of $490.2 million included proceeds totaling $378.9 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 six months ended June 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. LEGAL PROCEEDINGS The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains "forward-looking statements." Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project" or "continue" or the negative thereof and similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this quarterly report and in any public statements we make may turn out to be wrong. They can be 33 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, 2004. 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 June 30, 2005 and 2004, 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 $1.0 million and $0.9 million, respectively. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the six months ended June 30, 2005 and 2004, 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 $2.0 million and $1.3 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 and $0.4 million for the three months ended June 30, 2005 and 2004, respectively. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $1.0 million and $0.9 million for the six months ended June 30, 2005 and 2004, 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 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 34 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 June 30, 2005 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 Officers pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMSCAN HOLDINGS, INC. By: /s/ Michael A. Correale ------------------------------------ Michael A. Correale Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer) Date: August 15, 2005 36 EX-31.1 2 y11967exv31w1.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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: August 15, 2005 /s/ Gerald C. Rittenberg ---------------------------------------- Gerald C. Rittenberg Chief Executive Officer (Principal executive officer) EX-31.2 3 y11967exv31w2.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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: August 15, 2005 /s/ Michael A. Correale ---------------------------------------- Michael A. Correale Chief Financial Officer EX-32 4 y11967exv32.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 June 30, 2005 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. ss. 1350, as adopted pursuant to ss. 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 August 15, 2005 -----END PRIVACY-ENHANCED MESSAGE-----