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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission file number 000-21827
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (assuming for purposes of this calculation, without conceding, that
all executive officers and directors are "affiliates") at June 30, 2003, the
last business day of the registrant's most recently completed second fiscal
quarter, was $21,007,050.
As of March 26, 2004, 1,217.92 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 Business....................................................................... 3
ITEM 2 Properties..................................................................... 8
ITEM 3 Legal Proceedings.............................................................. 9
ITEM 4 Submission of Matters to a Vote of Security Holders............................ 9
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities........................... 9
ITEM 6 Selected Consolidated Financial Data........................................... 10
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 13
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk..................... 24
ITEM 8 Financial Statements and Supplementary Data.................................... 25
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 25
ITEM 9A Controls and Procedures........................................................ 25
PART III
ITEM 10 Directors and Executive Officers of the Registrant............................. 25
ITEM 11 Executive Compensation ........................................................ 27
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters................................................. 31
ITEM 13 Certain Relationships and Related Transactions................................. 33
ITEM 14 Principal Accountant Fees and Services......................................... 34
PART IV
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 35
Signatures..................................................................... 39
2
PART I
ITEM 1. BUSINESS
Amscan Holdings, Inc. ("Amscan" or the "Company") designs,
manufactures, contracts for manufacture and distributes party goods, including
paper and plastic tableware, metallic balloons, accessories, novelties, gifts
and stationery. We believe we are one of the largest manufacturers and
distributors of decorative party goods in the United States and the largest
manufacturer of metallic balloons in the world. We offer one of the broadest and
deepest product lines in the industry. Our gift and stationery product lines
encompass home, baby and wedding products for general gift giving or
self-purchase. We sell our products through party superstores, other party goods
retailers, independent card and gift stores, and other retailers and
distributors throughout the world, including North America, South America,
Europe, Asia and Australia. We believe we are the leading supplier to party
superstores in the United States and we have developed a specialty sales effort
to focus on card and gift stores and other independent retailers. We manufacture
items which represented approximately 65% of 2003 sales and purchase the
remainder from third-party manufacturers, many of whom are located in Asia.
We currently offer over 400 party ensembles, which range from
approximately 30 to 150 design-coordinated items spanning tableware,
accessories, novelties, decorations and gifts. The breadth of these ensembles
enables retailers to encourage additional sales for a single occasion.
We design, manufacture and market party goods for a wide variety of
occasions including seasonal and religious holidays, special events and themed
celebrations. Our seasonal and religious ensembles enhance holiday celebrations
throughout the year including New Year's, Valentine's Day, St. Patrick's Day,
Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and
Christmas. Our special event ensembles include birthdays, christenings, first
communions, bar mitzvahs, confirmations, graduations, bridal and baby showers
and anniversaries. Our theme-oriented ensembles include Hawaiian Luaus, Mardi
Gras, Fifties Rock-and-Roll Parties, Summer Fun and Patriotic. Approximately 80%
of our sales consist of products designed for non-seasonal occasions.
In addition to our long-standing relationships with independent card
and party retailers, we are a leading supplier to the party superstore
distribution channel. Party superstores provide consumers with a one-stop source
for all of their party needs, generally at discounted prices. Our sales to party
superstores represented approximately 41% of total sales in 2003 and have grown
at a 13.9% compound annual growth rate during the past five years. With our
products occupying an increasing share of party superstore shelf space in many
product categories, we believe we are well positioned to take advantage of
continued growth in the party superstore distribution channel.
To strengthen our position as a leader in the party goods industry and
to broaden our product line, we acquired Anagram International Inc. and certain
related companies ("Anagram") in 1998 and M&D Balloons, Inc. (since renamed M&D
Industries, Inc. ("M&D Industries")) in 2002, both of which manufacture metallic
balloons. We have leveraged their strong presence in the grocery, gift and
floral distribution channels to bring additional party goods to these markets.
Beginning in 1999, we realigned our sales force to create a specialty
sales effort which focuses more closely on card and gift stores and other
independent retailers. At December 31, 2003, the specialty sales force consisted
of 112 sales professionals. In order to further leverage our design, marketing
and distribution capabilities, we introduced an extensive gift line encompassing
home, wedding and baby products principally to service the independent retail
distribution channel's need for additional product lines and provide these
retailers with the opportunity to "one-stop shop."
3
SUMMARY FINANCIAL INFORMATION ABOUT THE COMPANY
Information about the Company's revenues, operating profits and assets
for the last five years is included in this report in Item 6, "Selected
Consolidated Financial Data." Despite a concentration of holidays in the fourth
quarter of the year, as a result of our expansive product lines and customer
base and increased promotional activities, the impact of seasonality on our
quarterly results of operations in recent years has been limited. Promotional
activities, including special dating terms, particularly with respect to
Halloween and Christmas products sold in the third quarter, and the introduction
of our new everyday products and designs during the fourth quarter result in
higher accounts receivables and inventory balances and higher interest costs to
support these balances.
The Company does business in the United States and in other geographic
areas of the world. Information about the Company's revenues, operating profits
and assets relating to geographic areas outside the United States for each of
the years in the three-year period ended December 31, 2003, is included in Note
16 to the Company's 2003 Consolidated Financial Statements which are included in
this report beginning on page F-2.
OUR STRATEGY
Our objective is to be the primary source for consumers' party goods
requirements, including a recognized supplier of quality stationery and gift
items. The key elements of our strategy are as follows:
- BUILD UPON OUR POSITION AS A LEADING PROVIDER TO PARTY GOODS RETAILERS.
We continue to offer convenient "one-stop shopping" for both large
party superstores and smaller party goods retailers. We seek to grow
our sales to existing stores by increasing our share of sales volume
and shelf space, continuing to develop innovative new products and by
helping retailers promote coordinated ensembles that boost average
purchase volume per consumer through "add-on" or impulse purchases.
Given our position in the party superstore distribution channel and the
strength of our relationships with major chains, we expect our sales
will continue to grow as new party superstores are opened.
- INCREASE PENETRATION IN INDEPENDENT RETAIL DISTRIBUTION CHANNEL. We
believe there is a significant opportunity to expand our sales to card
and gift stores and other independent retailers. We have made
significant investments by adding management and expanding our customer
service and marketing infrastructure to support the existing specialty
sales effort as well as additional sales representatives that we expect
to hire. As our existing sales representatives become more seasoned and
productive, and as we add new sales representatives, we expect to
increase sales and profitability from this distribution channel as
sales growth is achieved with relatively fixed support costs.
- CAPITALIZE ON INVESTMENTS IN INFRASTRUCTURE. We intend to increase our
sales and profitability by leveraging the significant investments that
we have made in our infrastructure. In addition to developing our
specialty sales effort and expanding our gift product offerings, we
invested approximately $30 million to construct a new 544,000 square
foot distribution facility that was completed in the fourth quarter of
2002 and has enabled us to consolidate further our distribution
capabilities. We also intend to leverage our relationships with Asian
suppliers, utilizing them as a direct source for customers with the
internal infrastructure, global logistics and distribution capabilities
to deliver products to their retail outlets. During 2003 we opened
product showrooms in both New York and Hong Kong to support this
program. We expect these changes will enable us to support
substantially greater sales volume over the long term. We also expect
to realize additional savings from the recent integration of M&D
Industries.
- EXPAND INTERNATIONAL PRESENCE. We believe there is an opportunity to
expand our international business, which represented approximately 14%
of our sales in each of the years in the three-year period ended
December 31, 2003. We currently have a presence in Mexico, Canada,
Europe and Asia. We have our own sales force in Mexico, Canada, and the
United Kingdom, and operate through third-party sales representatives
elsewhere. The market for decorative party goods outside the U.S. is
less mature due to lower consumer awareness of party products and less
developed retail
4
distribution channels. Our strategy is to grow our international sales
by broadening our distribution network, increasing accessorization and
customization of our products to local tastes and holidays and
continuing to deepen retail penetration. In December 2003, we acquired
the balloon assets of a competitor, in exchange for 50.1% of the common
stock of our wholly-owned metallic balloon distribution subsidiary
located in Mexico, thereby creating a joint venture to distribute
certain metallic balloons principally in Mexico and Latin America.
- CONTINUED GROWTH THROUGH TARGETED ACQUISITIONS. We believe that there
will be from time to time opportunities to make acquisitions of
complementary businesses. Through such businesses, we can leverage our
existing marketing, distribution and production capabilities, expand
our presence in the various retail distribution channels, further
broaden and deepen our product lines and increase our penetration in
international markets.
INNOVATIVE PRODUCT DEVELOPMENT AND DESIGN CAPABILITIES
Our 119 person in-house design staff continuously develops fresh,
innovative and contemporary product designs and concepts. Our continued
investment in art and design results in a steady supply of fresh ideas and the
creation of complex, unique ensembles that appeal to consumers. In 2003, we
introduced over 5,000 new products and 42 new ensembles. Our proprietary designs
help us keep our products differentiated from the competition.
PARTY PRODUCT LINES
The percentage of sales for each product line for 2003, 2002 and 2001
are set forth in the following table:
2003 2002 2001
----- ----- -----
Party Goods................ 65% 65% 69%
Metallic Balloons.......... 24 23 21
Stationery................. 8 7 7
Gift....................... 3 5 3
---- ---- ----
100% 100% 100%
==== ==== ====
The following table sets forth the principal products in each of the
product lines, excluding metallic balloons:
PARTY GOODS STATIONERY GIFT
----------- ---------- ----
Decorative and Solid Color Baby and Wedding Memory Ceramic Giftware
Tableware Books Decorative Candles
Candles Decorative Tissues Decorative Frames
Cascades and Centerpieces Gift Wrap, Bows and Bags Mugs
Crepe Invitations, Notes and Plush Toys
Cutouts Stationery Wedding Accessories
Flags and Banners Photograph Albums and Cake Tops
Guest Towels Ribbons
Latex Balloons Stickers and Confetti
Party Favors
Party Hats
Pinatas
Our products span a wide range of lifestyle events from age-specific
birthdays to theme parties and sporting events, as well as holidays such as
Halloween and New Year's. Approximately 80% of our sales consist of items
designed for non-seasonal occasions, with the remaining 20% comprised of items
used for holidays and events throughout the year. Our product offerings cover
the following:
5
SEASONAL THEMES EVERYDAY
- ---------------- ------------------ ------------
New Year's Card Night Birthdays
Valentine's Day Fiesta Graduations
St. Patrick's Day Fifties Rock and Roll Weddings
Easter Hawaiian Luau Anniversaries
Passover Mardi Gras Showers
Fourth of July Masquerade First Communions
Halloween Patriotic Confirmations
Thanksgiving Religious Retirements
Hanukkah Sports Christenings
Christmas Summer Fun Bar Mitzvahs
Western
MANUFACTURED PRODUCTS
Our vertically integrated manufacturing capability (i.e., our ability
to perform each of the steps in the process of converting raw materials into our
finished products) enables us to control costs, monitor product quality and
manage inventory investment better and provide more efficient order fulfillment.
We manufacture items representing approximately 65% of our 2003 sales. Our
facilities in New York, Kentucky, Rhode Island, Minnesota and Mexico are highly
automated and produce paper and plastic plates and cups, napkins, metallic
balloons and other party and novelty items. State-of-the art printing, forming,
folding and packaging equipment support these manufacturing operations. Given
our size and sales volume, we are generally able to operate our manufacturing
equipment on the basis of at least two shifts per day thus lowering production
costs per unit. In addition, we manufacture products for third parties, which
allows us to maintain a satisfactory level of equipment utilization.
PURCHASED PRODUCTS
We purchase products created and designed by us, representing
approximately 35% of sales in 2003, from independently-owned manufacturers, many
of whom are located in Asia and with whom we have long-standing relationships.
We have relationships of over 15 years with our two largest suppliers. We
believe that the quality and price of the products manufactured by these
suppliers provide a significant competitive advantage. Our business, however, is
not dependent upon any single source of supply for these products.
RAW MATERIALS
The principal raw materials used in manufacturing our products are
paper and petroleum-based resin. While we currently purchase such raw material
from a relatively small number of sources, paper and resin are available from
numerous sources. Therefore, we believe our current suppliers could be replaced
without adversely affecting our manufacturing operations in any material
respect.
SALES AND MARKETING
Our principal sales and marketing efforts are conducted through a
domestic direct employee sales force of approximately 144 professionals
servicing over 40,000 retail accounts. Included in this sales force are
approximately 32 seasoned sales professionals who service the party superstore
and party specialty retailer distribution channel and who, on average, have been
affiliated with us for over 9 years. In addition to the employee sales team, a
select group of manufacturers' representatives handle specific account
situations. Employees of subsidiaries outside the United States generally
service international customers.
To focus more closely on the needs of the independent retail
distribution channel, we utilize a specialty sales force which currently totals
approximately 112 sales professionals. Our specialty sales force is unique in
the party goods industry in its ability to offer both gift products and a
comprehensive line of decorative party goods and accessories. Anagram and M&D
Industries utilize a group of approximately 40 independent distributors to bring
their metallic balloons to the grocery, gift and floral markets, as well as to
our party superstore and specialty retailer customers.
6
Our practice of including party goods retailers in all facets of our
product development is a key element of our sales and marketing efforts. We
target important consumer preferences by integrating our own market research
with the input of party goods retailers in the creation of our designs and
products. In addition, our sales force assists customers in the actual set-up
and layout of displays of our products and, from time to time, provides
customers with promotional displays.
To support our sales and marketing efforts, we produce four main
decorative party product catalogues annually (three catalogues for seasonal
products and one catalogue for everyday products), with additional catalogues to
market our metallic balloons and gift and stationery products. We have also
developed a website which displays and describes our product assortment and
capabilities. This website enables our key customers to access real time
information regarding the status of existing orders and stock availability and
to place new orders. In the future, we plan to utilize this website as a vital
marketing tool, providing us with the ability to announce special product
promotions and other information in an expeditious manner and to make the
website available to all of our customers.
DISTRIBUTION AND SYSTEMS
We ship our products directly to customers throughout the United States
and Canada from distribution facilities that employ computer assisted systems.
Our electronic-order entry and information systems allow us to manage our
inventory with minimal waste, achieve average fill rates in excess of 90% and
provide quick order turnaround times of generally between 24 to 48 hours.
Our distribution facilities for paper party items are principally
located in New York; represent more than 1,000,000 square feet in the aggregate
and include a new 544,000 square foot facility which became fully operational
during the fourth quarter of 2002. We distribute our metallic balloons
domestically from facilities in Minnesota and New York. Products for markets
outside the United States are also shipped from our distribution facilities in
Mexico, United Kingdom and Australia.
CUSTOMERS
Our customers are principally party superstores, other party goods
retailers, independent card and gift retailers and other distributors. We have
also expanded our presence in the gift shop, supermarket and other smaller
independent retail distribution channels. In the aggregate, we supply more than
40,000 retail outlets both domestically and internationally.
We have a diverse customer base with only one customer, Party City, the
nation's largest party goods retailer, accounting for more than 10% of our sales
in 2003. For each of the years ended December 31, 2003, 2002 and 2001, sales to
Party City's corporate-owned and operated stores represented 12%, 13%, and 13%
of consolidated net sales, respectively. For the years ended December 31, 2003,
2002 and 2001, sales to Party City's franchise-owned and operated stores
represented 13%, 14% and 15% of consolidated net sales, respectively.
Franchisees are financially independent from Party City and diversify our credit
exposure.
COMPETITION
We compete on the basis of diversity and quality of our product
designs, breadth of product line, product availability, price, reputation and
customer service. Although we have many competitors with respect to one or more
of our products, we believe that there are few competitors who manufacture and
distribute products with the complexity of design and breadth of product lines
that we do. Furthermore, our design and manufacturing processes create
efficiencies in manufacturing that few of our competitors achieve in the
production of numerous coordinated products in multiple design types.
Competitors include smaller independent specialty manufacturers, as
well as divisions or subsidiaries of large companies with greater financial and
other resources than ourselves. Certain of these competitors control various
product licenses for widely recognized images, such as cartoon or motion picture
characters, which could provide them with a competitive advantage. However,
through the acquisitions of Anagram and
7
M&D Industries, we have acquired a strong portfolio of character licenses for
use in the design and production of our metallic balloons.
COPYRIGHTS
We own copyrights on the designs we create and use on our products and
trademarks on the words and designs used on or in connection with our products.
It is our practice to register our copyrights with the United States Copyright
Office to the extent we deem reasonable. We do not believe that the loss of
copyrights or trademarks with respect to any particular product or products
would have a material adverse effect on our business. We hold over 150 licenses,
allowing us to use various cartoon and other characters and designs principally
on our metallic balloons. None of these licenses is individually material to our
aggregate business and we do not incur any material licensing expenses.
EMPLOYEES
As of December 31, 2003, the Company had approximately 1,900 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Elmsford, New York
and conducts its principal design, manufacturing and distribution operations at
the following facilities:
OWNED OR LEASED
LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE)
- ------------------------- ---------------------------------- ------------------- ------------------------
Elmsford, New York Executive Offices; showrooms; 109,000 square feet Leased (expiration date:
design and art production of party December 31, 2007)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 2006)
Providence, Rhode Island Manufacture and distribution 277,700 square feet Leased (expiration date:
of plastic plates, cups and bowls April 26, 2006)
Louisville, Kentucky Manufacture and distribution 189,000 square feet Leased (expiration date:
of paper plates March 31, 2010)
Newburgh, New York Manufacture of paper napkins 53,000 square feet Leased (expiration date:
and cups May 31, 2008)
Eden Prairie, Minnesota Manufacture and distribution 115,600 square feet Owned
of balloons and accessories
Tijuana, Mexico Manufacture and distribution 75,000 square feet Leased (expiration date:
of party products May 16, 2007)
Chester, New York (1) Distribution of decorative party 287,000 square feet Owned
products
Chester, New York (2) Distribution of decorative party 544,000 square feet Owned
and gift products
Goshen, New York Warehousing of decorative 130,000 square feet Leased (expiration date:
party products October 31, 2006)
Milton Keynes, England Distribution of party products 110,000 square feet Leased (expiration date:
throughout United Kingdom June 30, 2017)
and Europe
Chanhassen, Minnesota Distribution of balloons and 62,200 square feet Leased (expiration date:
accessories October 14, 2004)
(1) Property subject to a ten-year mortgage securing a loan in the original
principal amount of $5.9
8
million and bearing interest at a rate of 8.51%. The loan matures in
September 2004. The principal amount outstanding as of December 31,
2003 was approximately $445,000.
(2) Property subject to first and second lien mortgage loans in the
original principal amount of $10.0 million each with a financial
institution and the New York State Job Development Authority,
respectively. The first lien mortgage note bears interest at LIBOR plus
2.75%. However, we have utilized an interest rate swap agreement to
effectively fix the loan rate at 8.40% for the term of the loan. The
second lien mortgage note bears interest at a rate of 3.31%, subject to
change under certain conditions. Both notes are for a term of 96 months
and require monthly payments based on a 180-month amortization period
with balloon payments upon maturity in January 2010. At December 31,
2003, the principal amounts outstanding under the first and second lien
mortgage notes were approximately $8.7 million and $9.0 million,
respectively.
Additionally, we maintain smaller distribution facilities in Australia,
Canada and Mexico. We also maintain sales offices in Australia, Canada, Hong
Kong and Japan and showrooms in New York, California, Georgia, Texas, Canada and
Hong Kong.
We believe that our properties have been adequately maintained, are in
generally good condition and are suitable for our business as presently
conducted. We believe our existing facilities provide sufficient production
capacity for our present needs and for our anticipated needs in the foreseeable
future. To the extent such capacity is not needed for the manufacture of our
products, we generally use such capacity for the manufacture of products for
others pursuant to terminable agreements. All properties generally are used on a
basis of two shifts per day. We also believe that upon the expiration of our
current leases, we will be able either to secure renewal terms or to enter into
leases for alternative locations at market terms.
ITEM 3. LEGAL PROCEEDINGS
We are a party to certain claims and litigation in the ordinary course
of business. We do not believe any of these proceedings will have, individually
or in the aggregate, a material adverse effect on our financial condition or
future results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no public trading market for the Company Common Stock.
As of the close of business on March 26, 2004, there were 27 holders of
record of the Company Common Stock.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Convertible
Preferred Stock"). Also on March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible Preferred Stock to GS Capital Partners II, L.P.
and certain other private investment funds managed by Goldman, Sachs & Co.
(collectively, "GSCP") for proceeds of $6.0 million. Dividends are cumulative
and payable annually, at 6% per annum. Dividends payable on or prior to March
30, 2004, are payable in additional shares of Series A Redeemable Convertible
Preferred Stock. Subsequent to March 30, 2004, dividends are payable, at the
option of the Company, either in cash or additional shares of Series A
Redeemable Convertible Preferred Stock. On March 30, 2003, the annual dividend
was distributed in additional shares of Series A Redeemable Convertible
Preferred Stock. See Note 14 to the Company's
9
2003 Consolidated Financial Statements which are included in this report
beginning on page F-2.
The Company has not paid any dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay cash dividends or distributions to its stockholders.
EQUITY COMPENSATION PLAN INFORMATION
(c)
Number of securities
(a) (b) remaining available for
Number of securities to be Weighted - average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------------- ------------------- ---------------------------
Equity compensation plans
approved by security holders 186.485 $113,715 13.515
Equity compensation plans not
approved by security holders - - -
------- -------- ------
Total 186.485 $113,715 13.515
======= ======== ======
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Income Data," and "Balance Sheet Data" as of the end of
and for each of the years in the five-year period ended December 31, 2003, are
derived from the consolidated financial statements of Amscan Holdings, Inc. The
consolidated financial statements as of December 31, 2003 and 2002 and for each
of the years in the three-year period ended December 31, 2003 and the report
thereon, are included in this report under Item 8, "Financial Statements and
Supplementary Data." The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
10
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
STATEMENT OF INCOME DATA:
Net sales .................................................... $ 402,816 $ 385,603 $ 345,183 $ 323,484 $ 304,892
Cost of sales ................................................ 269,125 252,980 225,036 206,872 194,632
--------- --------- --------- --------- ---------
Gross profit ................................................. 133,691 132,623 120,147 116,612 110,260
Selling expenses ............................................. 36,515 34,619 31,414 28,578 23,235
General and administrative expenses .......................... 31,925 32,056 33,317 31,958 30,694
Provision for doubtful accounts .............................. 2,588 3,008 3,758 7,133 2,906
Art and development costs .................................... 9,395 10,301 8,772 8,453 8,650
Write-off of deferred financing and IPO-related costs (1) .... 2,261
Restructuring charges (2) .................................... 1,007 1,663 500 995
--------- --------- --------- --------- ---------
Income from operations ....................................... 52,261 48,715 42,886 39,990 43,780
Interest expense, net ........................................ 26,368 21,792 24,069 26,355 26,365
Gain on sale of available-for-sale securities (3) ............ (1,486)
Other expense (income), net .................................. 52 (311) 24 96 35
--------- --------- --------- --------- ---------
Income before income taxes and minority interests ............ 27,327 27,234 18,793 13,539 17,380
Income tax expense ........................................... 10,065 10,757 7,423 5,348 7,100
Minority interests ........................................... 99 12 68 75 73
--------- --------- --------- --------- ---------
Net income ................................................... 17,163 16,465 11,302 8,116 10,207
Dividend on redeemable convertible preferred stock ........... 399 376 270
--------- --------- --------- --------- ---------
Net income applicable to common shares ....................... $ 16,764 $ 16,089 $ 11,032 $ 8,116 $ 10,207
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Gross margin percentage ...................................... 33.2% 34.4% 34.8% 36.0% 36.2%
Capital expenditures, including assets under capital leases .. $ 12,668 $ 17,765 $ 37,623 $ 18,576 $ 12,283
Depreciation and amortization (4) ............................ 16,119 13,962 15,468 14,487 12,931
Ratio of earnings to fixed charges (5) ....................... 1.9x 2.0x 1.6x 1.4x 1.6x
AT DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
BALANCE SHEET DATA:
Working capital .............................................. $ 120,559 $ 119,256 $ 96,713 $ 83,760 $ 82,228
Total assets ................................................. 382,102 372,497 310,474 280,627 263,487
Short-term obligations (6) ................................... $ 23,237 $ 3,220 $ 4,155 $ 14,089 $ 8,250
Long-term obligations ........................................ 272,272 295,420 278,443 261,815 266,891
------- --------- --------- --------- ---------
Total obligations ............................................ $ 295,509 $ 298,640 $ 282,598 $ 275,904 $ 275,141
======== ======== ======== ======== ========
Redeemable convertible preferred stock (7) ................... $ 7,045 $ 6,646 $ 6,270
Redeemable Common Stock (8) .................................. 9,498 30,523 29,949 $ 28,768 $ 23,582
Stockholders' deficit (8) .................................... (8,619) (46,283) (77,305) (86,881) (88,529)
(1) During the fourth quarter of 2002, we amended and restated our
credit facility with various lenders which resulted in a $1.5
million write-off of deferred financing costs associated with
the facility. Additionally, during the fourth quarter of 2002,
we decided not to pursue an initial public offering ("IPO") of
shares of our Common Stock given valuations available in the
equity markets at that time, which resulted in a $0.8 million
write-off of costs associated with the offering. On March 12,
2003, we filed a Form RW with the Commission withdrawing our
registration statement for the IPO.
(2) During 2003 and 2002, we incurred restructuring charges of
$1.0 million and $1.7 million, respectively, resulting from
the consolidation of certain domestic and foreign distribution
operations, and during 2003, the ongoing integration of M&D
Industries.
We recorded charges of $0.5 million in 2000 in connection with
the restructuring of our distribution
11
operations and consolidation of certain manufacturing
operations.
During the fourth quarter of 1999, we recorded restructuring
charges of $1.0 million in association with the proposed
construction of a new distribution facility. The charges
represented building costs written-off due to the relocation
of the proposed site.
(3) During 2003, the Company sold shares of common stock of a
customer that it received in connection with the customer's
reorganization in bankruptcy. The Company received net
proceeds of approximately $2.0 million and recognized a gain
of approximately $1.5 million.
(4) Depreciation and amortization includes amortization of
goodwill of $2.6 million, $2.6 million, and $2.7 million in
2001, 2000, and 1999, respectively.
(5) For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as earnings before income taxes
and minority interests plus fixed charges. Fixed charges
consist of interest expense on all obligations, amortization
of deferred financing costs and an estimate of the rental
expense on operating leases representing that portion of
rental expense deemed by the Company to be attributable to
interest.
(6) Short-term obligations consists primarily of borrowings under
bank lines of credit and the current portion of long-term
debt. At December 31, 2003, the current portion of long-term
debt includes a $20.2 million prepayment of the Company's Term
Loan which was paid in March 2004 and was required based on
the Company's excess cash flows, as defined, for the year
ended December 31, 2003.
(7) On March 30, 2001, the Board of Directors authorized 500
shares of our preferred stock, $0.10 par value, and designated
100 shares as Series A Redeemable Convertible Preferred Stock.
Also on March 30, 2001, the Company issued 40 shares of Series
A Redeemable Convertible Preferred Stock to GSCP, for proceeds
of $6.0 million. Dividends are cumulative and payable
annually, at 6% per annum. Dividends payable on or prior to
March 30, 2004, are payable in additional shares of Series A
Redeemable Convertible Preferred Stock. Subsequent to March
30, 2004, dividends are payable, at the option of the Company,
either in cash or additional shares of Series A Redeemable
Convertible Preferred Stock. On March 30, 2003 and 2002, the
annual dividend was distributed in additional shares of Series
A Redeemable Convertible Preferred Stock. As of December 31,
2003, accrued dividends aggregated approximately $0.3 million,
and are included in redeemable convertible preferred stock on
the consolidated balance sheet. At December 31, 2003, 44.94
shares of our preferred stock were issued and outstanding.
Each share of Series A Redeemable Convertible Preferred Stock
is convertible at the option of the holder at any time into
shares of Common Stock of the Company, $0.10 par value, at a
conversion rate of 1.0 share of Common Stock for each share of
Series A Redeemable Convertible Preferred Stock, subject to
adjustment under certain conditions.
(8) Under the terms of the Company's amended and restated
stockholders' agreement dated February 20, 2002 (the
"Stockholders' Agreement"), the Company can purchase all of
the shares held by an employee stockholder and, under certain
circumstances, an employee stockholder can require the Company
to purchase all of the shares held by the employee. The
purchase price as prescribed in the Stockholders' Agreement is
to be determined through a market valuation of the
minority-held shares or, under certain circumstances, based on
cost, as defined therein. The aggregate amount that may be
payable by the Company to employee stockholders based on fully
paid and vested shares has been classified as redeemable
Common Stock.
During 2003, the redemption feature on 126.65 shares of Common
Stock held by a former officer expired, resulting in a $19.6
million reduction in redeemable Common Stock and a
corresponding decrease in stockholders' deficit. In addition,
during 2003, the Company purchased and retired 22 shares of
redeemable Common Stock held by officers of the Company at a
fair value of $150,000 per share, resulting in a reduction in
redeemable Common Stock of $3.3 million.
During 2002, as partial consideration for the acquisition of
M&D Industries, the Company issued
12
96.774 shares of Common Stock to American Greetings
Corporation ("American Greetings") at a fair value of $155,000
per share, or an aggregate value of $15.0 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the past several years, the party goods industry has experienced
significant changes in both distribution channels and product offerings.
Although there has been consolidation in the party superstore distribution
channel in the past five years, the number of party superstores continues to
increase. Due, in part, to the success of the party superstore distribution
channel, party goods manufacturers have broadened their product offerings to
support the celebration of a greater number of occasions. The industry's growth
has been directly affected by these changes. To achieve further sales growth and
expansion, we utilize a specialty sales effort to focus more closely on card and
gift stores and other independent retailers and have created expansive gift
lines encompassing home, baby and wedding products for general gift giving or
self-purchase, principally for this distribution channel.
Our revenues are generated from sales of approximately 38,000 SKU's
consisting of party goods for all occasions, including paper and plastic
tableware, accessories and novelties, metallic balloons, stationery and gift
items. Tableware (plates, cups, cutlery, napkins and tablecovers) is our core
product category, with coordinating accessories (e.g., balloons, banners, gifts
and stationery) and novelties (e.g., party favors) being offered to complement
these tableware products. As a metallic balloon manufacturer, we have a strong
presence in grocery, gifts and floral distribution channels, and have leveraged
our strong presence to bring additional party goods to these markets. In
February 2002, we completed the strategic acquisition of M&D Industries, a
metallic balloon manufacturer with a strong portfolio of character licenses that
complement those of our previously existing portfolio.
FACTORS WHICH AFFECT OUR FINANCIAL PERFORMANCE
Sales Concentration
Our sales volume is concentrated with several important customers,
generally party superstores. Our sales concentration also causes our receivables
to be concentrated within the party superstore channel. From time to time, we
have made significant additional provisions for credit losses and have
restructured the terms of accounts receivable because of changes in the credit
condition of certain superstore customers. Economic difficulties experienced in
this channel have affected and may continue to affect the Company's financial
results.
Design Trends and Customer Preferences
Our strategy and our relationships with our customers are dependent on
our regular introduction of new designs that are attractive and distinctive. We
must anticipate the tastes and preferences of party goods retailers and
consumers in order to compete for their business successfully. Our failure to
anticipate, identify or react appropriately to changes in consumer tastes could,
among other things, lead to excess inventories, a shortage of products and lost
sales.
Competition
The party goods industry is highly competitive. We compete with many
other companies, including smaller, independent specialty manufacturers and
divisions or subsidiaries of larger companies with greater financial and other
resources than we have. Some of our competitors control licenses for widely
recognized images, such as cartoon or motion picture characters, and have
broader access to mass market retailers which could provide them with a
competitive advantage
13
Raw Material and Production Costs
The costs of our key raw materials (paper and petroleum-based resin)
fluctuate. Generally, the Company absorbs movements in raw material costs it
considers temporary or insignificant. However, cost increases that are
considered other than temporary may require the Company to increase its prices
to maintain its margins. Customers may resist such price increases.
Products we manufacture, primarily tableware and metallic balloons,
represented approximately 65% of our sales in 2003. During the past three years,
we have invested approximately $26.0 million in printing, fabrication, packaging
and other manufacturing equipment, which has allowed us to increase productivity
rates, thereby lowering labor and overhead as a percentage of manufacturing
costs and increasing manufacturing margins. We believe our ability to
manufacture approximately 65% of our products enables us to lower production
costs by optimizing production while minimizing inventory investment, to ensure
product quality through rigid quality control procedures during production and
to be responsive to our customers' product design demands.
Interest Rates
Although we may utilize interest rate swap agreements to manage the
market risk associated with fluctuations in interest rates, we are exposed to
fluctuations in interest rates on a significant portion of our variable rate
debt.
Exchange Rates
We are exposed to foreign currency risk, predominately in European
countries, principally from fluctuations in the Euro and British Pound and their
impact on sales of our products in foreign markets. Although we periodically
enter into foreign currency forward contracts to hedge against the earnings
effects of such fluctuations, we may not be able to hedge such risks completely
or permanently.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
------ ------
Net sales ................................................... 100.0% 100.0%
Cost of sales ............................................... 66.8 65.6
----- -----
Gross profit ............................................ 33.2 34.4
Operating expenses:
Selling expenses ........................................ 9.1 9.0
General and administrative expenses ..................... 7.9 8.3
Provision for doubtful accounts ......................... 0.6 0.8
Art and development costs ............................... 2.3 2.7
Write-off of deferred financing and IPO-related costs ... 0.6
Restructuring charges ................................... 0.3 0.4
----- -----
Total operating expenses .................................... 20.2 21.8
----- -----
Income from operations .................................. 13.0 12.6
Interest expense, net ....................................... 6.5 5.6
Gain on sale of available-for-sale securities ............... (0.3)
Other income, net ........................................... (0.1)
----- -----
Income before income taxes and minority interests ....... 6.8 7.1
Income tax expense .......................................... 2.5 2.8
Minority interests
----- -----
Net income .............................................. 4.3% 4.3%
===== =====
Net Sales
14
Net sales of $402.8 million for the year ended December 31, 2003 were
$17.2 million or 4.5% higher than net sales for the year ended December 31,
2002. During the year ended December 31, 2003, our domestic sales of party
goods, including metallic balloons, grew by 3.1% over 2002. Contract
manufacturing increased by 17.5% during 2003, as compared to 2002. International
net sales reported for the year ended December 31, 2003 increased by 5.3%,
principally as a result of favorable foreign currency exchange fluctuations.
Domestic sales performance during 2003 was adversely affected by general
economic conditions which resulted in a weak retail environment and, during the
first quarter of 2003, severe weather conditions.
Gross Profit
Gross profit margin for the year ended December 31, 2003, of 33.2% was
1.2% lower than the corresponding period in 2002. Gross profit margin for the
year ended December 31, 2003 reflects the impact of product sales and customer
mix (particularly solid color tableware and contract manufacturing) and
additional depreciation and amortization and equipment rental costs associated
with the new distribution facility that became operational in the fourth quarter
of 2002. Gross profit margin for the year ended December 31, 2003 also reflects
additional production costs incurred during the first and second quarters of
2003 in connection with the integration of M&D Industries, redundant costs
arising from the Company's transition from four to three east coast distribution
facilities and additional distribution costs incurred as a result of severe
weather conditions during the first quarter of 2003, partially offset by
operating efficiencies from the transition to the new distribution facility.
Operating Expenses
Selling expenses of $36.5 million for the year ended December 31, 2003
were $1.9 million higher than in the corresponding period in 2002 principally
due to the inclusion of the operating results of M&D Industries for two
additional months in 2003 and the continued development of our specialty sales
effort. Selling expenses, as a percentage of net sales, increased from 9.0% to
9.1%.
General and administrative expenses of $31.9 million for the year ended
December 31, 2003 were relatively consistent with the corresponding period in
2002 as increased insurance and occupancy costs were offset by synergies
realized from the consolidation of M&D Industries' administrative functions into
our existing operations. As a percentage of sales, general and administrative
expenses decreased by 0.4% to 7.9% for the year ended December 31, 2003.
During the second quarter of 2003, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code and,
as a result, we charged $1.8 million to the provision for doubtful accounts
during the year ended December 31, 2003. This customer accounted for
approximately 2.1% of our net sales for the year ended December 31, 2003. We do
not believe the potential loss of this customer will have a material adverse
effect on our future results of operations or our financial condition.
Art and development costs of $9.4 million for the year ended December
31, 2003 were $0.9 million lower than for the corresponding period in 2002,
principally due to synergies realized from the integration of M&D Industries'
art and development departments into our existing operations. As a percentage of
sales, art and development costs decreased by 0.4% to 2.3% for the year ended
December 31, 2003.
During the fourth quarter of 2002, we amended and restated our credit
facility with various lenders which resulted in a $1.5 million write-off of
deferred financing costs associated with the facility. Additionally, during the
fourth quarter of 2002, we decided not to pursue an initial public offering of
our Common Stock, given the valuations available in the equity markets at that
time, which resulted in a $0.8 million write-off of costs associated with the
offering. On March 12, 2003, we filed a Form RW with the Commission withdrawing
our registration statement for the IPO.
During the years ended December 31, 2003 and 2002, we incurred
restructuring charges of $1.0 million and $1.7 million, respectively, resulting
from the consolidation of certain domestic and foreign distribution operations,
in addition to the ongoing integration of M&D Industries. The further
consolidation of domestic distribution operations may result in additional
restructuring charges in subsequent periods.
15
Interest Expense, net
Interest expense, net, of $26.4 million for the year ended December 31,
2003 was $4.6 million higher than for the year ended December 31, 2002 and
reflects the impact of higher average borrowings and a higher average effective
interest rate (8.8% in 2003 versus 7.2% in 2002). We incurred a higher average
effective interest rate in 2003 as a result of the amortization of the original
issue discount and the 2% LIBOR floor required by our Second Amended and
Restated Credit and Guaranty Agreement dated December 20, 2002.
Gain on sale of available-for-sale securities
During the year ended December 31, 2003, we sold shares of common stock
of a customer which we received in connection with the customer's reorganization
in bankruptcy. We received net proceeds of approximately $2.0 million and
recognized a gain of $1.5 million.
Income Taxes
Income taxes for the years ended December 31, 2003 and 2002 were
provided for at consolidated effective income tax rates of 36.8% and 39.5%,
respectively. Our effective income tax rates exceed the federal statutory income
tax rate primarily due to state income taxes, partially offset, for the year
ended December 31, 2003, by the benefit of foreign tax credits.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
-------- -------
Net sales ........................................................ 100.0% 100.0%
Cost of sales .................................................... 65.6 65.2
----- -----
Gross profit ................................................. 34.4 34.8
Operating expenses:
Selling expenses ............................................. 9.0 9.1
General and administrative expenses .......................... 8.3 9.7
Provision for doubtful accounts .............................. 0.8 1.1
Art and development costs .................................... 2.7 2.5
Write-off of deferred financing and IPO-related costs ........ 0.6
Restructuring charges ........................................ 0.4
----- -----
Total operating expenses ......................................... 21.8 22.4
----- -----
Income from operations ....................................... 12.6 12.4
Interest expense, net ............................................ 5.6 7.0
Other income, net ................................................ (0.1)
----- -----
Income before income taxes and minority interests ............ 7.1 5.4
Income tax expense ............................................... 2.8 2.1
Minority interests ...............................................
----- -----
Net income ................................................... 4.3% 3.3%
===== =====
Net Sales
Net sales of $385.6 million for the year ended December 31, 2002 were
$40.4 million or 11.7% higher than net sales for the year ended December 31,
2001. During the year ended December 31, 2002, our net sales of party goods to
the party superstore distribution channel grew by 5.3%. Our specialty sales
effort, which brings party goods and related gift products to card and gift
stores and other independent retailers, achieved 42.1% net sales growth during
the year ended December 31, 2002. Domestic net sales of metallic balloons and
flexible packaging during the year ended December 31, 2002 increased by 39.7%
when compared to 2001, principally as a result of the February 2002 acquisition
of M&D Industries (see Liquidity and Capital Resources).
Gross Profit
Gross profit margin for the year ended December 31, 2002 of 34.4% was
0.4% lower than in 2001 principally due to the impact of product mix
(particularly solid color tableware), start-up costs associated with the new
distribution facility which became fully operational during the fourth quarter
of 2002 and increased
16
insurance costs, much of which was a result of the events of September 11, 2001.
Operating Expenses
Selling expenses of $34.6 million for the year ended December 31, 2002
were $3.2 million higher than in 2001 principally due to the inclusion of the
operating results of M&D Industries and the continued expansion of our specialty
sales efforts. Selling expenses, as a percentage of net sales, decreased from
9.1% to 9.0%, as we continue to leverage our sales infrastructure.
General and administrative expenses of $32.1 million for the year ended
December 31, 2002 were $1.3 million lower than 2001. The net decrease in general
and administrative expenses principally reflects the elimination of goodwill
amortization in 2002, which totaled $1.6 million during the year ended December
31, 2001. The elimination of goodwill amortization was partially offset by the
inclusion of the operating results of M&D Industries and increased insurance
costs and employee wages. As a percentage of sales, general and administrative
expenses decreased by 1.4% to 8.3%.
The provision for doubtful accounts of $3.0 million for the year ended
December 31, 2002 decreased by $0.8 million and from 1.1% to 0.8% of net sales
compared to 2001. During the second half of 2001, a customer filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code and,
as a result, we charged $2.5 million to the provision for doubtful accounts to
fully provide for this customer's accounts receivable balance. The customer
accounted for 2.1% of our net sales in 2001.
Art and development costs of $10.3 million for the year ended December
31, 2002 were $1.5 million higher as compared to 2001, principally due to an
increase in staff and the inclusion of the operating results of M&D Industries.
As a percentage of sales, art and development costs increased by 0.2% to 2.7%.
During the fourth quarter of 2002, we amended and restated our existing
credit facility with various lenders which resulted in a $1.5 million write-off
of deferred financing costs associated with the facility. Additionally, during
the fourth quarter of 2002, we decided not to pursue an IPO, given the
valuations available in the equity markets at that time, which resulted in a
$0.8 million write-off of costs associated with the offering. On March 12, 2003,
we filed a Form RW with the Commission withdrawing our registration statement
for the IPO.
During 2002, we incurred charges of $0.6 million resulting from the
consolidation of the fabrication operations of M&D Industries. In addition, we
incurred charges of $0.4 million and $0.7 million relating to the consolidation
of certain domestic and foreign distribution operations, respectively.
Interest Expense, net
Interest expense, net, of $21.8 million for the year ended December 31,
2002 was $2.3 million lower than 2001 reflecting lower average interest rates
(7.2% in 2002 versus 8.4% in 2001), partially offset by higher average
borrowings.
Income Taxes
Income taxes for the years ended December 31, 2002 and 2001 were
provided for at a consolidated effective income tax rate of 39.5%. The effective
income tax rate exceeds the federal statutory income tax rate primarily due to
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL STRUCTURE
On March 26, 2004, the Company signed a definitive merger agreement
providing for a recapitalization of the Company in which the Company will merge
with AAH Acquisition Corporation ("AAH"), a newly-formed corporation affiliated
with AAH Holdings Corporation, an entity jointly controlled by affiliates of
Berkshire Partners LLC and Weston Presidio (see Note 20 to our 2003 Consolidated
Financial Statements which are included in this report beginning on page F-2).
On December 20, 2002, we amended and restated our credit facility with
various lenders (the "Lenders"), with Goldman Sachs Credit Partners L.P. as sole
lead arranger, sole bookrunner and syndication agent. Under the terms of the
Second Amended and Restated Credit and Guaranty Agreement (the "Credit
Agreement"), the Lenders agreed to amend and restate our bank credit agreements
in their entirety and to provide a $200.0 million senior secured facility
consisting of a $170.0 million term loan (the "Term Loan") and
17
up to $30.0 million aggregate principal amount of revolving loans (the
"Revolver"). The proceeds of the Term Loan were used to repay our AXEL term loan
of $148.5 million and revolver borrowings of $16.0 million existing at the
closing date and to pay certain fees and expenses associated with the
refinancing.
The Term Loan was funded at a 1.0% original issue discount and provides
for amortization (in quarterly installments) of 1.0% per annum through June 15,
2006, and will then amortize in equal quarterly payments through June 15, 2007.
The Term Loan bears interest, at our option, at the index rate plus 3.50% per
annum or at LIBOR plus 4.50% per annum, with a LIBOR floor of 2.0%. At December
31, 2003, the Term Loan, net of unamortized discount, was $168,300,000 and the
floating interest rate on the Term Loan was 6.50%. We are required to make
prepayments under the Credit Agreement based upon the net proceeds from certain
asset sales and insurance or condemnation awards, the issuances of certain debt
and equity securities, and based on annual excess cash flows, as defined. We
were required to make a $20.2 million prepayment of the Term Loan in March 2004
based on our excess cash flows for the year ended December 31, 2003.
Our Revolver expires on June 15, 2007, and bears interest, at our
option, at the index rate plus, based on performance, a margin ranging from
2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a margin
ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At December
31, 2003, we had no borrowings under the Revolver. Standby letters of credit
totaling $7.1 million were outstanding and we had borrowing capacity of
approximately $22.9 million under the terms of the Revolver at December 31,
2003.
The Term Loan and borrowings under the Revolver are secured by a first
priority lien on substantially all of our assets and are guaranteed by our
domestic subsidiaries. We are required to maintain certain financial ratios
during the term of the Credit Agreement, including leverage and interest
coverage ratios.
In addition to the Revolver, we have a 400,000 Canadian dollar
denominated revolving credit facility which bears interest at the Canadian prime
rate plus 0.6% and expires on April 30, 2004, a 1.0 million British Pound
Sterling denominated revolving credit facility which bears interest at the U.K.
base rate plus 1.75% and expires on June 1, 2004 and a $1.0 million revolving
credit facility which bears interest at LIBOR plus 1.0% and expires on December
31, 2004. We expect to renew these revolving credit facilities upon expiration.
No borrowings were outstanding under these revolving credit facilities at
December 31, 2003.
At December 31, 2003, we had $110.0 million of senior subordinated
notes (the "Notes") outstanding. The Notes bear interest at a rate of 9.875% per
annum and mature in December 2007. Interest is payable semi-annually on June 15
and December 15 of each year. The Notes are redeemable at our option, in whole
or in part, at redemption prices ranging from 103.292% to 100%, plus accrued and
unpaid interest to the date of redemption. Upon the occurrence of a Change of
Control, as defined in the note indenture, we will be obligated to make an offer
to purchase the Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount of the Notes, plus accrued and unpaid interest, if
any, to the date of purchase. If a Change of Control were to occur, we may not
have the financial resources to repay all of our obligations under the Credit
Agreement, the note indenture and the other indebtedness that would become
payable upon the occurrence of such Change of Control.
We financed the cost to purchase property in 2000 and to construct a
new domestic distribution facility completed in 2001 (total cost of $30.2
million) using borrowings under the then existing revolving credit facility and,
in 2001, the proceeds from the issuance of Series A Redeemable Convertible
Preferred Stock of $6.0 million (noted below) and long-term borrowings
consisting of a first and second lien mortgage note in the original principal
amount of $10.0 million each with a financial institution and the New York State
Job Development Authority, respectively. The first lien mortgage note bears
interest at LIBOR plus 2.75%. However, we have utilized an interest rate swap
agreement to effectively fix the loan rate at 8.40% for the term of the loan.
The second lien mortgage note bears interest at the rate of 3.31%, and is
subject to review and adjustment semi-annually based on the New York State Job
Development Authority's confidential internal protocols. Both notes are for a
term of 96 months and require monthly payments based on a 180-month amortization
period with balloon payments upon maturity in January 2010.
18
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP for
proceeds of $6.0 million. Dividends are cumulative and payable annually at 6%
per annum. Dividends payable on or prior to March 30, 2004, are payable in
additional shares of Series A Redeemable Convertible Preferred Stock based on a
value of $150,000 per share. Subsequent to March 30, 2004, dividends are
payable, at our option, either in cash or additional shares of Series A
Redeemable Convertible Preferred Stock. On March 30, 2003 and 2002, the annual
dividend was distributed in additional shares of Series A Redeemable Convertible
Preferred Stock. At December 31, 2003, 44.94 shares of Series A Redeemable
Convertible Preferred Stock were issued and outstanding.
On February 19, 2002, we purchased all of the outstanding common stock
of M&D Industries, a Manteno, Illinois-based manufacturer of metallic and
plastic balloons, from American Greetings for $27.5 million plus related costs.
We financed the acquisition by borrowing $13.5 million under our then existing
revolving credit facility and issuing 96.774 shares of our Common Stock to
American Greetings, at a value of $155,000 per share. American Greetings
continues to distribute metallic balloons under a supply agreement with the
Company.
We have several non-cancelable operating leases principally for office,
distribution and manufacturing facilities, showrooms and warehouse equipment.
These leases expire on various dates through 2017 and generally contain renewal
options and require us to pay real estate taxes, utilities and related insurance
costs. Rent expense for the years ended December 31, 2003 and 2002, totaled
$13.3 million and $12.7 million, respectively. The minimum lease payments
currently required under non-cancelable operating leases for the year ending
December 31, 2004 approximate $10.5 million.
On June 13, 2002, we filed a registration statement with the Commission
for an IPO of our Common Stock. However, during the fourth quarter of 2002, we
decided not to pursue the IPO, given the valuations available in the equity
markets at that time, which resulted in a $0.8 million write-off of costs
associated with the offering. On March 12, 2003, we filed a Form RW with the
Securities and Exchange Commission withdrawing our registration statement for
the IPO.
The Credit Agreement and the Notes may affect our ability to make
future capital expenditures and potential acquisitions. At December 31, 2003, we
did not have material commitments for capital expenditures or other
acquisitions. Based upon the current level of operations and anticipated growth,
we anticipate that our operating cash flow, together with available borrowings
under the Revolver will be adequate to meet anticipated future requirements for
working capital and operating expenses for at least the next 12 months. However,
our ability to make scheduled payments of principal of, or to pay interest on,
or to refinance our indebtedness and to satisfy our other obligations will
depend upon our future performance, which, to a certain extent, will be subject
to general economic, financial, competitive, business and other factors beyond
our control.
CASH FLOW DATA - YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER
31, 2002
Net cash provided by operating activities during the years ended
December 31, 2003 and 2002, totaled $42.1 million and $20.3 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2003 and 2002,
was $42.1 million and $40.9 million, respectively. Changes in operating assets
and liabilities for the year ended December 31, 2003 offset, principally
reflecting the Company's efforts to reduce its investment in working capital.
Changes in operating assets and liabilities, net of acquisition, for the year
ended December 31, 2002 resulted in the use of cash of $20.6 million.
Net cash used in investing activities during the year ended December
31, 2003 of $10.3 million consisted of additional investments in distribution
and manufacturing equipment and other assets partially offset by proceeds of
$2.2 million received from both the disposal of equipment and the sale of a
portion of our investment in the common stock of a customer received in
connection with the customer's reorganization
19
in bankruptcy. Net cash used in investing activities during the year ended
December 31, 2002 of $30.7 million consisted of $13.5 million relating to the
acquisition of M&D Industries, $17.7 million of capital expenditures, including
$3.1 million for equipment for the new domestic distribution facility, and $0.5
million of proceeds from disposal of property and equipment.
During the year ended December 31, 2003, net cash used in financing
activities of $4.2 million consisted of the scheduled payments on the Term Loan
and other long-term obligations and the purchase of Common Stock from both our
Chief Executive Officer and President, partially offset by proceeds from the
exercise of stock options and the repayment of the notes receivable by both the
Chief Executive Officer and President. During the comparable period in 2002, net
cash provided by financing activities of $11.4 million consisted of net proceeds
from the Term Loan of $164.0 million, which were used to repay our AXEL term
loan and revolver borrowings at the closing date and to pay certain fees and
expenses associated with the refinancing, scheduled payments of other long-term
obligations totaling $3.1 million and loans to officers under notes totaling
$0.2 million.
CASH FLOW DATA - YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER
31, 2001
Net cash provided by operating activities during the years ended
December 31, 2002 and 2001, totaled $20.3 million and $26.3 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2002 and 2001,
was $40.9 million and $33.3 million, respectively. Changes in operating assets
and liabilities, net of acquisition, for the years ended December 31, 2002 and
2001 resulted in the use of cash of $20.6 million and $7.0 million,
respectively. The changes in operating assets and liabilities principally
reflect increased working capital requirements consistent with our sales growth
and, in 2002, increased inventory levels associated with our transition to our
new domestic distribution facility during the fourth quarter.
Net cash used in investing activities during the year ended December
31, 2002 of $30.7 million included $13.5 million relating to the acquisition of
M&D Balloons, $17.7 million of capital expenditures, including $3.1 million for
equipment for the new domestic distribution facility, and $0.5 million of
proceeds from disposal of property and equipment. Net cash used in investing
activities during the year ended December 31, 2001 consisted of $37.4 million of
capital expenditures, including $21.8 million of costs to complete the
construction of our new distribution facility and $6.3 million to acquire
related distribution equipment.
During the year ended December 31, 2002 net cash provided by financing
activities of $11.4 million consisted of net proceeds from the Term Loan of
$164.0 million, which were used to repay our AXEL term loan and revolver
borrowings at the closing date and to pay certain fees and expenses associated
with the refinancing, scheduled payments of other long-term obligations totaling
$3.1 million and loans to officers under notes totaling $0.2 million. During the
year ended December 31, 2001, net cash provided by financing activities of $11.0
million included the proceeds of $6.0 million from the issuance of 40 shares of
Series A Redeemable Convertible Preferred Stock to GSCP and the net proceeds
from the two $10.0 million mortgage loans noted above. During 2001, we also
repaid borrowings under our then existing revolving credit facility and AXEL
term loan and other obligations totaling $13.5 million and made loans to
officers under notes of $1.0 million.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Our contractual obligations at December 31, 2003 are summarized by the
year in which the payments
20
are due in the following table (dollars in thousands):
More than
Total 2004 2005 2006 2007 2008 5 years
-------- ------- ------- ------- -------- ------ ---------
Long-term debt obligations (a)....... $295,245 $23,141 $ 2,519 $83,742 $173,074 $1,288 $11,481
Capital lease obligations (a)........ 264 96 103 65
Operating lease obligations (b)...... 45,667 10,500 9,344 7,456 6,331 1,801 10,235
Open purchase obligations (c)........ 916 916
-------- ------- ------- ------- -------- ------ -------
Total contractual obligations ... $342,092 $34,653 $11,966 $91,263 $179,405 $3,089 $21,716
======== ======= ======= ======= ======== ====== =======
(a) In March 2004, we were required to make a $20.2 million prepayment of our
Term Loan based on our excess cash flows, as defined, for the year ended
December 31, 2003. See Note 6 to our 2003 Consolidated Financial Statements
which are included in this report beginning on page F-2.
(b) See Note 15 to our 2003 Consolidated Financial Statements which are included
in this report beginning on page F-2.
(c) Represent payments required by non-cancelable purchase orders related to
capital expenditures.
At December 31, 2003, we had no borrowings under our Revolver or other
bank credit facilities. Standby letters of credit totaling $7.1 million were
outstanding at December 31, 2003. See Note 5 to our 2003 Consolidated Financial
Statements which are included in this report beginning on page F-2.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements, as defined in Item
303(a) (4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as
amended.
EFFECTS OF INFLATION
Inflation has not had a material impact on our operations during the
past three years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that the following significant
accounting policies may involve a higher degree of judgment and complexity.
Revenue Recognition
Our terms of sale are principally F.O.B. shipping point and,
accordingly, title and the risks and rewards of ownership are transferred to the
customer, and revenue is recognized, when goods are shipped. We estimate
reductions to revenues for volume-based rebate programs at the time sales are
recognized. Should customers earn rebates higher than estimated by us,
additional reductions to revenues may be required.
Royalty Agreements
Commitments for minimum payments under royalty agreements, a portion of
which may be paid in advance, are charged to expense ratably, based on our
estimate of total sales of related products. If all or a portion of the minimum
guarantee subsequently appears not to be recoverable, the unrecoverable portion
is charged to expense at that time.
Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our
21
customers to make required payments. A considerable amount of judgment is
required in assessing the ultimate realization of these receivables, including
consideration of our history of receivable write-offs, the level of past due
accounts and the economic status of our customers. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Inventories
Our policy requires that we state our inventories at the lower of cost
or market. In assessing the ultimate realization of inventories, we are required
to make judgments regarding, among other things, future demand and market
conditions, current inventory levels and the impact of the possible
discontinuation of product designs. If actual conditions are less favorable than
those projected by us, additional inventory write-downs to market value may be
required.
Long-Lived and Intangible Assets
We review the recoverability of our long-lived assets, including
definite-lived intangible assets other than goodwill, whenever facts and
circumstances indicate that the carrying amount may not be fully recoverable.
For purposes of recognizing and measuring impairment, we evaluate long-lived
assets other than goodwill based upon the lowest level of independent cash flows
ascertainable to evaluate impairment. If the sum of the undiscounted future cash
flows expected over the remaining asset life is less than the carrying value of
the assets, we may recognize an impairment loss. The impairment related to
long-lived assets is measured as the amount by which the carrying amount of the
assets exceeds the fair value of the asset. When fair values are not readily
available, we estimate fair values using expected discounted future cash flows.
Goodwill is reviewed for potential impairment, on an annual basis or
more frequently if circumstances indicate a possible impairment, by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit exceeds its fair value, the excess,
if any, of the fair value of the reporting unit over amounts allocable to the
unit's other assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss will be recognized in an amount equal
to that excess. The fair value of a reporting unit refers to the amount at which
the unit as a whole could be sold in a current transaction between willing
parties.
LEGAL PROCEEDINGS
We are a party to certain claims and litigation in the ordinary course
of business. We do not believe any of these proceedings will result,
individually or in the aggregate, in a material adverse effect upon our
financial condition or future results of operations.
INCOME TAXES
For information regarding income tax matters, see Note 13 of the Notes
to Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, Statement of Financial Accounting Standards ("SFAS") No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
No. 146"), was issued. SFAS No. 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3 ("EITF No. 94-3"), "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date an entity committed to an exit plan. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have
a material effect on our consolidated financial statements.
22
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB 51" ("FIN No. 46"). FIN No. 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("VIE's") and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors (if any) do not
have a controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The consolidation provisions
of FIN No. 46 apply immediately to variable interests in VIE's created after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period ended after March 15, 2004 (except for special purpose entities
for which the effective date is periods ended after December 31, 2003). We have
performed an evaluation to identify such entities and do not believe that any
entities fall within the scope of this standard.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not
applicable or not significant to our consolidated financial statements.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report
that address activities, events or developments that we expect or anticipate
will or may occur in the future, future capital expenditures (including the
amount and nature thereof), business strategy and measures to implement
strategy, including any changes to operations, goals, expansion and growth of
our business and operations, plans, references to future success and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by us in light of our experience and our
perception of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances. Actual results may differ materially from those discussed.
Whether actual results and developments will conform with our expectations and
predictions is subject to a number of risks and uncertainties, including, but
not limited to (1) the concentration of sales by us to party superstores where
the reduction of purchases by a small number of customers could materially
reduce our sales and profitability, (2) the concentration of our credit risk in
party superstores, several of which are privately held and have expanded rapidly
in recent years, (3) the failure by us to anticipate changes in tastes and
preferences of party goods retailers and consumers, (4) the introduction by us
of new product lines, (5) the introduction of new products by our competitors,
(6) the inability to increase prices to recover fully future increases in raw
material prices, especially increases in prices of paper and petroleum-based
resin, (7) the loss of key employees, (8) changes in general business
conditions, (9) other factors which might be described from time to time in our
filings with the Commission, and (10) other factors which are beyond our
control. Consequently, all of the forward-looking statements made in this report
are qualified by these cautionary statements, and the actual results or
developments anticipated by us may not be realized or, even if substantially
realized, may not have the expected consequences to or effects on our business
or operations. Although we believe that we have the product offerings and
resources needed for growth in revenues and margins, future revenue and margin
trends cannot be reliably predicted. Changes in such trends may cause us to
adjust our operations in the future. Because of the foregoing and other factors,
recent trends should not be considered reliable indicators of future financial
results. In addition, our highly leveraged nature may impair our ability to
finance our future operations and capital needs and our flexibility to respond
to changing business and economic conditions and business opportunities.
QUARTERLY RESULTS (UNAUDITED)
Despite a concentration of holidays in the fourth quarter of the year,
as a result of our expansive product lines and customer base and increased
promotional activities, the impact of seasonality on our quarterly results of
operations in recent years has been limited. Promotional activities, including
special dating terms, particularly with respect to Halloween and Christmas
products sold in the third quarter, and the introduction of our new everyday
products and designs during the fourth quarter result in higher accounts
receivables and inventory balances and higher interest costs to support these
balances. The following table sets forth our historical net sales, gross profit,
income from operations and net income, by quarter, for 2003
23
and 2002.
FOR THE THREE MONTHS ENDED,
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- --------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
2003
Net sales.............................. $99,844 $100,996 $103,220 $98,756
Gross profit........................... 32,875 32,046 34,978 33,792
Income from operations................. 12,374 (a) 11,016 (a)(b) 14,378 (a)(b) 14,493
Net income............................. 3,462 (a) 2,706 (a)(b) 5,226 (a)(b)(c) 5,769 (c)
2002
Net sales.............................. $95,908 $ 94,129 $100,226 $95,340
Gross profit........................... 34,232 32,150 34,465 31,776
Income from operations................. 15,626 11,847 (a) 14,137 (a) 7,105 (a)(b)(d)
Net income............................. 6,231 3,940 (a) 5,436 (a) 858 (a)(b)(d)
(a) We incurred restructuring charges of $0.3 million, $0.5 million, and $0.2
million during the first, second, and third quarters of 2003, respectively,
and $0.2 million, $0.6 million, and $0.9 million during the second, third
and fourth quarters of 2002, respectively. These charges resulted from the
consolidation of certain domestic and foreign distribution operations, in
addition to the ongoing integration of M&D Industries.
(b) During the second quarter of 2003, a customer filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code and, as a
result, we charged a total of $3.3 million to the provision for doubtful
accounts, of which approximately $1.5 million, $1.6 million and $0.2 million
were charged during the fourth quarter of 2002 and the second and third
quarters of 2003, respectively. This customer accounted for approximately
2.1% of our net sales for the year ended December 31, 2003. We do not
believe the potential loss of this customer will have a material adverse
effect on our future results of operations or our financial condition.
(c) We recognized gains of $1.0 million and $0.5 million during the third and
fourth quarter of 2003, respectively, from the sale of shares of common
stock of a customer which we had received in connection with the customer's
reorganization in bankruptcy.
(d) During the fourth quarter of 2002, we amended and restated our credit
facility with various lenders which resulted in a write-off of $1.5 million
of deferred financing costs associated with the facility at that time.
Additionally, during the fourth quarter of 2002, we decided not to pursue an
IPO of shares of our Common Stock, given the valuations available in the
equity markets at that time, which resulted in a $0.8 million write-off of
costs associated with the offering. On March 12, 2003, we filed a Form RW
with the Commission withdrawing our registration statement for the IPO.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates as a result of
our variable rate indebtedness. However, we utilize interest rate swap
agreements to manage the market risk associated with fluctuations in interest
rates. If market interest rates for our variable rate indebtedness averaged 2%
more than the interest rate actually paid for the years ended December 31, 2003,
2002 and 2001, our interest expense, after considering the effects of our
interest rate swap agreements, would have increased, and income before income
taxes would have decreased, by $2.1 million, $3.4 million and $2.2 million,
respectively. These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowings and interest rate swap agreements.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the uncertainty of the
specific actions that we would take and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
24
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $1.7 million, $1.5 million
and $1.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. These calculations assume that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, which could change the U.S. dollar value
of the resulting sales, changes in exchange rates may also affect the volume of
sales or the foreign currency sales price as competitors' products become more
or less attractive. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and supplementary data
listed in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of December 31, 2003.
Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2003. There were no material
changes to the Company's internal controls over financial reporting during the
fourth quarter of 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions with the Company of
the persons who are serving as directors and executive officers of the Company
at December 31, 2003.
NAME AGE POSITION
Terence M. O'Toole 45 Director, Chairman of the Board
Sanjeev K. Mehra 45 Director
Joseph P. DiSabato 37 Director
Gerald C. Rittenberg 51 Chief Executive Officer and Director
James M. Harrison 52 President, Chief Operating Officer, and Director
James F. Flanagan 52 Executive Vice President
Michael A. Correale 46 Chief Financial Officer
Terence M. O'Toole has been a Managing Director of Goldman, Sachs & Co.
("Goldman Sachs") in the Principal Investment Area since 1992. He is a member of
Goldman Sachs' Principal Investment Area Investment Committee. Mr. O'Toole
serves on the Boards of Directors of Western Wireless Corporation, R.H.
Donnelley Corporation and several privately held companies on behalf of Goldman
Sachs.
Sanjeev K. Mehra has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 1996. He is a member of Goldman Sachs' Principal
Investment Area Investment Committee. Mr. Mehra serves on the Boards of
Directors of Hexcel Corporation, Madison River Telephone Company, LLC and
25
several privately held companies on behalf of Goldman Sachs.
Joseph P. DiSabato has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 2000. Mr. DiSabato serves on the Boards of
Directors of Madison River Telephone Company, LLC and several privately held
companies on behalf of Goldman Sachs.
Gerald C. Rittenberg became Chief Executive Officer in December 1997.
From May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of
the Board. Prior to that time, Mr. Rittenberg served as the President of the
predecessor to the Company, Amscan Inc., from April 1996 to October 1996, and as
President of the Company from the time of its formation in October 1996.
James M. Harrison became President in December 1997 and Chief Operating
Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also
served as Chief Financial Officer and Treasurer. From February 1997 to December
1997, Mr. Harrison served as our Chief Financial Officer and Secretary. Prior to
that time, Mr. Harrison served as the Chief Financial Officer of the predecessor
to the Company, Amscan Inc., from August 1996 to February 1997.
James F. Flanagan became a Senior Vice President of the Company in July
2001 and became an Executive Vice President in January 2002. From 1975 to July
2001, Mr. Flanagan was employed at Hallmark Cards, Inc. where he most recently
served as Vice President - Sales.
Michael A. Correale became Chief Financial Officer in March 2002. Prior
to that time, Mr. Correale served as Vice President -- Finance, from May 1997 to
March 2002.
BOARD OF DIRECTORS
The Board of Directors of the Company does not have any committees,
including an audit committee. All decisions relating to the selection,
compensation and oversight of the Company's independent auditors are made by the
Company's Board of Directors. The functions of an audit committee are carried
out by the full Board of Directors of the Company. The Board of Directors has
determined that James M. Harrison is an "audit committee financial expert"
within the meaning of Item 301(b)(2) of Regulation S-K of the Securities and
Exchange Commission. Because of his roles as an executive officer of the
Company, Mr. Harrison is not "independent," as used in Item 7(d)(iv) of Schedule
14A under the Securities Exchange Act of 1934. Other directors may also qualify
as "audit committee financial experts."
CODE OF ETHICS
The Company has adopted a Code of Business Conduct, a copy of which is
filed with the Securities and Exchange Commission as an exhibit to this report.
The Company's Code of Business Conduct is a "code of ethics," as defined in Item
406(b) of Regulation S-K of the Securities and Exchange Commission.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because the Company Common Stock is not registered under the Exchange
Act, none of the Company's directors, officers or stockholders is obligated to
file reports of beneficial ownership of Company Common Stock pursuant to Section
16 of the Exchange Act.
26
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned for the past three years by the Company's Chief Executive Officer and all
other executive officers of the Company as of December 31, 2003 whose aggregate
salary and bonus for 2003 exceeded $100,000. The amounts shown include
compensation for services in all capacities that were provided to the Company or
its subsidiaries. Amounts shown were paid by the Company's principal subsidiary,
Amscan Inc. Prior to the Company's recapitalization on December 19, 1997 (the
"Merger") the Company granted stock options on shares of Company Common Stock
("Company Stock Options") pursuant to the 1996 Stock Option Plan for Key
Employees (the "Prior Stock Plan"). Following the Merger, Company stock options
("Options") were granted pursuant to a new stock incentive plan and related
option agreement (together, the "Option Documents") adopted by the Company. At
the time of the Merger, certain employees converted Company Stock Options into
options to purchase shares of Common Stock ("Rollover Options").
Long-Term Compensation
No. of Securities Under- All Other
Name and Principal Position Year Salary Bonus (a) lying Options Granted Compensation (b)
- --------------------------- ---- -------- --------- ------------------------ ----------------
Gerald C. Rittenberg 2003 $500,000 $766,263 25(c) $7,694
Chief Executive Officer 2002 325,328 722,000 9,115
2001 309,750 500,000 7,249
James M. Harrison 2003 $450,000 $689,058 25(c) $7,694
President and Chief 2002 303,188 649,000 9,115
Operating Officer 2001 288,750 450,000 7,382
James F. Flanagan 2003 $250,000 $150,000 $7,694
Executive Vice President 2002 250,000 150,000 2.5(e) 3,615
2001 74,000 (d) 125,000 2.5(e) --
Michael A. Correale 2003 $193,269 $ 75,000 4(c) $7,544
Chief Financial Officer 2002 183,100 75,000 9,115
2001 168,300 40,000 7,381
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
(b) Represents contributions by the Company under a profit sharing and savings
plan, as well as insurance premiums paid by the Company with respect to term
life insurance for the benefit of the named executive officer.
(c) Represents Options granted to named executive officer in 2003.
(d) Mr. Flanagan became an employee of the Company on July 16, 2001.
(e) Represents Options granted to Mr. Flanagan in 2002 and 2001, respectively.
OPTION GRANTS TABLE
The following table sets forth information concerning options which
were granted during 2003 to the executive officers named in the Summary
Compensation Table.
27
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS MARKET STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE AT OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE DATE OF EXPIRATION ------------------------------
NAME GRANTED (1) FISCAL YEAR PRICE GRANT (2) DATE 5% 10%
---- ----------- ----------- ----- --------- ---- -- ---
Gerald C. Rittenberg 25 31.25% $150,000 $150,000 June 19, $591,095 $1,241,253
2006
James M. Harrison 25 31.25% $150,000 $150,000 June 19, $591,095 $1,241,253
2006
Michael A. Correale 4 5.00% $150,000 $150,000 December 1, $377,337 $ 956,246
2013
(1) All options granted to Messrs. Rittenberg and Harrison listed in this column
become exercisable on December 19, 2005 and expire three years after the
date of grant. The options granted to Mr. Correale become exercisable
ratably over five years beginning one year from the date of grant and expire
ten years after the date of grant.
(2) Assumes a fair market value of the Company Common Stock underlying the
options of $150,000 based on the value of Company Common Stock at December
31, 2003.
FISCAL 2003 YEAR END OPTION VALUES
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---