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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 000-21827
----------------
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
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, 2004, the
last business day of the registrant's most recently completed second fiscal
quarter, was $6,994,000.
As of March 25, 2005, 1,000.00 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
DECEMBER 31, 2004
TABLE OF CONTENTS
PART I PAGE
ITEM 1 Business............................................................. 3
ITEM 2 Properties........................................................... 9
ITEM 3 Legal Proceedings.................................................... 10
ITEM 4 Submission of Matters to a Vote of Security Holders.................. 10
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities................. 10
ITEM 6 Selected Consolidated Financial Data................................. 11
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 14
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
ITEM 9B Other Information.................................................... 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....................................... 30
ITEM 13 Certain Relationships and Related Transactions....................... 32
ITEM 14 Principal Accountant Fees and Services............................... 32
PART IV
ITEM 15 Exhibits and Financial Statement Schedules........................... 33
Signatures........................................................... 37
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 a leading designer, manufacturer and
distributor 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 extensive gift and stationery product
lines, encompassing home, baby and wedding products for general gift giving or
self-purchase, further leverage our design, marketing and distribution
capabilities,. 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 manufactured items which represented
approximately 60% of 2004 net sales and purchased 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 Hollywood, Chinatown,
Cocktail Party, Bachelorette, Card Party, Hawaiian Luaus, Mardi Gras, Fifties
Rock-and-Roll Parties, Summer Barbeque, Patriotic and Western. In 2004,
approximately 80% of our net sales consisted of products designed for
non-seasonal occasions, with the remaining 20% comprised of items used for
holidays and seasonal celebrations throughout the year.
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 net sales in 2004 and have
grown at a 6.0% 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 line of metallic balloons, we acquired M&D Balloons, Inc. (since
renamed M&D Industries, Inc. ("M&D Industries")) in 2002. The acquisition
significantly increased our balloon manufacturing capacity as well as our
portfolio of character licenses. During 2003, M&D Industries was integrated into
Anagram International Inc ("Anagram"), our existing balloon operation.
THE TRANSACTIONS
On April 30, 2004, Amscan and AAH Acquisition Corporation ("AAH
Acquisition"), a wholly-owned subsidiary of AAH Holdings Corporation, ("AAH
Holdings"), an entity jointly controlled by funds affiliated with Berkshire
Partners LLC and Weston Presidio (together the "Principal Investors") entered
into a merger agreement, with Amscan continuing as the surviving entity and as a
wholly owned subsidiary of AAH Holdings. Under the terms of the agreement, the
equity interests in Amscan held by GS Capital Partners II, L.P. and certain
other private investment funds managed by Goldman, Sachs & Co., which are
collectively referred to as GSCP, and all other stockholders, other than certain
management investors, were cancelled in exchange for the right to receive cash.
Cash paid to consummate the acquisition totaled $530.0 million and was financed
with initial borrowings (before deducting deferred financing costs of $13.1
million) consisting of a $205.0 million term loan under a new senior secured
credit facility which includes a $50.0 million revolving loan facility, the
proceeds from the issuance of $175.0 million of 8.75% senior subordinated notes
due 2014, an equity contribution by the Principal Investors and employee
stockholders of $140.5 million, borrowings under the revolver of $23.6 million
and available cash on hand. Certain existing employee shareholders participated
in the Transactions (as defined hereafter) by purchasing approximately 296.91
shares of common stock. The Chief Executive Officer and the President of the
Company exchanged
3
5.4945 and 2.7472 of their shares of common stock of Amscan for 100 and 50
shares of common stock of AAH Holdings with an equivalent value of $1.0 million
and $0.5 million, respectively. In addition, the Chief Executive Officer and the
President of the Company exchanged vested options to purchase 5.607 and 2.804
shares of Amscan common stock, which had intrinsic values of $0.6 million and
$0.3 million, respectively, for vested options under the AAH Holdings equity
incentive plan with intrinsic values of $0.5 million and $0.2 million and fair
values of $0.6 million and $0.3 million, respectively.
Concurrent with the acquisition, the following financing transactions
were also consummated: the repayment of a term loan of $147.7 million under our
then existing senior secured credit facility and the termination of all
commitments there under; the redemption of $87.2 million of the $110.0 million
aggregate principal amount outstanding of our 9.875% senior subordinated notes
due 2007 for $93.5 million or 103.542% of the principal amount of such notes
plus accrued and unpaid interest following our tender offer and consent
solicitation; and repayment of a $8.5 million mortgage obligation with a
financial institution (the acquisition together with the foregoing financing
transactions are referred to herein collectively as the "Transactions").
On May 31, 2004, the remaining outstanding 9.875% senior subordinated
notes due 2007 were redeemed for $23.6 million or 103.292% of the principal
amount of such notes plus accrued and unpaid interest pursuant to the redemption
notice. The Company financed the redemption with borrowings under its new
revolving credit facility.
The 8.75% senior subordinated notes were sold to the initial purchasers
by the Company on April 30, 2004, and were subsequently resold to qualified
institutional buyers and non-U.S. persons in reliance upon Rule 144A and
Regulation S under the Securities Act of 1933 (the "Note Offering"). In August
2004, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-4, offering to exchange registered notes for
the notes issued in connection with the Note Offering. The terms of the notes
and the exchange notes are substantially identical. The exchange was completed
in October 2004.
As used herein and in the consolidated financial statements,
"Predecessor" refers to Amscan prior to the Transactions and "Successor" refers
to Amscan after the Transactions; this distinction between Predecessor and
Successor is needed because generally accepted accounting principles required us
to account for the acquisition under the purchase method of accounting, which
required that the Successor adjust its assets and liabilities to their relative
fair values at the date of the Transactions. In order to reflect the ultimate
beneficial ownership of the Successor, the capital structure disclosed in the
Successor financial statements is the capital structure of AAH Holdings.
The purchase price has been allocated based upon preliminary estimates
of the fair value of net assets acquired at the date of the Transactions. The
final allocations will be based on independent valuations that have not yet been
completed and will be subject to change when the valuations are completed during
the second quarter of 2005. The Company does not expect the final allocation to
be significantly different from the preliminary estimates currently reflected in
Successor consolidated financial statements. The excess of the purchase price
over tangible net assets acquired has been allocated to intangible assets
consisting of customer lists / relationships ($14.0 million) and copyrights /
designs and other intangibles ($12.8 million), which are being amortized using
the straight-line method over the assets estimated useful lives ( 2 to 15
years), and tradenames ($33.5 million) and goodwill ($282.9 million), which are
not being amortized. The acquisition was structured as a purchase of common
stock and, accordingly, amortization of intangible assets is not deductible for
income tax purposes.
SUMMARY FINANCIAL INFORMATION ABOUT THE COMPANY
Information about the Company's net sales, income from operations and
assets for the last five years is included in this report in Item 6, "Selected
Consolidated Financial Data." The Company's consolidated financial statements
for the periods prior to May 1, 2004 (the "Predecessor") and for the period
subsequent to April 30, 2004 (the "Successor") include the accounts of Amscan
Holdings and its majority-owned and controlled entities.
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 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
4
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 net sales, income from
operations and assets relating to geographic areas outside the United States for
the eight months ended December 31, 2004 (Successor), the four months ended
April 30, 2004 (Predecessor), and for each of the years in the two-year period
ended December 31, 2003, (Predecessor), is included in Note 16 to the Company's
2004 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 and 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 will continue to offer convenient "one-stop
shopping" for both large party superstores and smaller party
goods retailers. We will 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
helping retailers promote coordinated ensembles that increase
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 all major party superstore chains, we expect our sales
will continue to grow as new party superstores are opened.
- CAPITALIZE ON INVESTMENTS IN INFRASTRUCTURE. We intend to
increase our net sales and profitability by leveraging the
significant investments that we have made in our
infrastructure. We invested approximately $38 million in a new
544,000 square foot distribution facility and related
equipment that was completed in the fourth quarter of 2002. We
believe that the addition of this new facility provides us
with state of the art warehousing and distribution
capabilities to serve anticipated future growth.
We also intend to leverage our investment in our design
capabilities and our relationships with Asian suppliers to
further build our business. Under this program, we will design
products and utilize our Asian suppliers as a direct source
for customers who possess the necessary infrastructure, global
logistics and distribution capabilities to deliver products to
their outlets. This program will enable us to offer products
that we currently do not sell as well as to further penetrate
existing and new customer accounts with minimal capital
expenditures and working capital requirements.
- EXPAND INTERNATIONAL PRESENCE. We believe there is an
opportunity to expand our international business, which
represented approximately 14% of our net sales in each of the
years in the three-year period ended December 31, 2004. 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 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.
- INCREASE PENETRATION IN INDEPENDENT RETAIL DISTRIBUTION
CHANNEL. We believe there is a significant opportunity to
expand our sales to independent retailers, including card and
gift stores. 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.
- 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.
5
INNOVATIVE PRODUCT DEVELOPMENT AND DESIGN CAPABILITIES
Our 120 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 2004, we
introduced over 5,000 new products and 59 new ensembles and also provided
customers with over 2,000 new private label products. Our proprietary designs
help us keep our products differentiated from the competition.
PARTY PRODUCT LINES
The percentage of net sales for each product line for 2004, 2003 and
2002 are set forth in the following table:
2004 2003 2002
----- ----- -----
Party Goods................ 68% 65% 65%
Metallic Balloons.......... 24 24 23
Stationery................. 5 8 7
Gift....................... 3 3 5
---- ---- ----
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 Mugs
Crepe Bags Plush Toys
Cutouts Invitations, Notes Wedding Accessories
Flags and Banners and Stationery and Cake Tops
Guest Towels Photograph Albums
Latex Balloons Ribbons
Party Favors Stickers and Confetti
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 net sales consist of items
designed for non-seasonal occasions, with the remaining 20% comprised of items
used for holidays and seasonal celebrations throughout the year. Our product
offerings cover the following:
SEASONAL THEMES EVERYDAY
---------------- ------------------ ------------
New Year's Bachelorette Birthdays
Valentine's Day Card Party Graduations
St. Patrick's Day Chinatown Weddings
Easter Cocktail Party Anniversaries
Passover Fiesta Showers
Fourth of July Fifties Rock and Roll First Communions
Halloween Hawaiian Luau Confirmations
Thanksgiving Hollywood Retirements
Hanukkah Mardi Gras Christenings
Christmas Masquerade Bar Mitzvahs
Patriotic
Religious
Sports
Summer Barbeque
Western
MANUFACTURED PRODUCTS
Our vertically integrated manufacturing capability (i.e., our ability
to perform each of the steps in the process of
6
converting raw materials into our finished products) enables us to control
costs, monitor product quality, manage inventory investment better and provide
more efficient order fulfillment. We manufactured items representing
approximately 60% of our 2004 net 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 nearly
40% of net sales in 2004, 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. During 2004, we experienced inventory
shortages of certain products as a result of a production disruption at one of
our largest foreign suppliers. However, as our business is not dependent upon
any single source of supply for these products, we were able to eventually
procure these products from alternate suppliers.
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 130 professionals
servicing over 40,000 retail accounts. Included in this sales force are
approximately 30 seasoned sales professionals who primarily 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. Anagram utilizes 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.
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 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. We 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.
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, maintain strong fill rates and provide quick order
turnaround times of generally between 24 to 48 hours.
Our distribution facilities for party items are principally located in
New York; represent more than 1,000,000 square
7
feet in the aggregate and include a state-of-the-art 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 the United Kingdom, Mexico 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. During 2004 we
began utilizing our Asian suppliers as a direct source for mass market, grocery,
drug and other customers who possess the necessary infrastructure, global
logistics and distribution capabilities to deliver products to their outlets. In
addition, to deepen our retail penetration at key European hypermarket and
supermarket accounts, our future focus will include broadening our distribution
network, increasing accessorization and customization of our products to local
tastes and holidays.
We have a diverse customer base. Although our sales volume is
concentrated with several important customers, generally party superstores, only
one customer, Party City Corporation ("Party City"), the nation's largest party
goods retailer, accounted for more than 10% of our net sales in 2004. For the
years ended December 31, 2004, 2003 and 2002, sales to Party City's
corporate-owned and operated stores represented 14%, 12%, and 13% of net sales,
respectively. For the years ended December 31, 2004, 2003 and 2002, sales to
Party City's franchise-owned and operated stores represented 14%, 13% and 14% of
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 ours. 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 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 approximately 110
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.
EMPLOYEES
As of December 31, 2004, the Company had approximately 1,750 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
8
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; 117,411 square feet Leased (expiration date:
design and art production of party December 31, 2014)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 2006)
Narragansett, Rhode Island Manufacture and distribution 48,455 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, 2006)
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 dates:
of party products May 16, 2007 and June 30,
2009)
Chester, New York Distribution of decorative party 287,000 square feet Owned
products
Chester, New York (1) 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, Distribution of party products 110,000 square feet Leased (expiration date:
Buckinghamshire, England throughout United Kingdom June 30, 2017)
and Europe
Edina, Minnesota Distribution of balloons and 122,312 square feet Leased (expiration date:
accessories December 31, 2009)
(1) Property is subject to a lien mortgage note in the original principal
amount of $10.0 million with the New York State Job Development
Authority. The lien mortgage note bears interest at a rate of 3.31%,
subject to change under certain conditions. The mortgage note is for a
term of 96 months and requires monthly payments based on a 180-month
amortization period with a balloon payment upon maturity in January
2010. At December 31, 2004, the principal amount outstanding under the
lien mortgage note is approximately $8.5 million.
In addition to the facilities listed above, 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.
9
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's Common Stock.
As of the close of business on March 25, 2005, there were 59 holders of
record of the Company's Common Stock.
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
(a) (b) (c)
Number of securities
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 98.182 $2,500 1,604.750
Equity compensation plans not
approved by security holders -- -- --
------ ------ ---------
Total 98.182 $2,500 1,604.750
====== ====== =========
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Operations Data," and "Balance Sheet Data" as of and for
the eight months ended December 31, 2004 (Successor), for the four months ended
April 30, 2004 and as of and for each of the years in the four-year period ended
December 31, 2003 (Predecessor), are derived from the consolidated financial
statements of Amscan Holdings, Inc. The consolidated financial statements as of
and for the eight months ended December 31, 2004 (Successor), for the four
months ended April 30, 2004 and as of December 31, 2003 and for each of the
years in the two-year period ended December 31, 2003 (Predecessor), 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
EIGHT MONTHS ENDED FOUR MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------ ----------------- ------------------------------------------
DECEMBER 31, 2004 APRIL 30, 2004 2003 2002 2001 2000
----------------- -------------- ---- ---- ---- ----
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales ............................ $265,556 $133,660 $402,816 $385,603 $345,183 $323,484
Cost of sales ........................ 178,210 88,247 269,125 252,980 225,036 206,872
-------- -------- -------- -------- -------- --------
Gross profit ......................... 87,346 45,413 133,691 132,623 120,147 116,612
Selling expenses ..................... 23,529 12,430 36,515 34,619 31,414 28,578
General and administrative expenses .. 21,410 10,145 31,925 32,056 33,317 31,958
Provision for doubtful accounts ...... 1,308 729 2,588 3,008 3,758 7,133
Art and development costs ............ 6,713 3,332 9,395 10,301 8,772 8,453
Non-recurring expenses related
to the Transactions (1) ........... 11,757
Write-off of deferred financing
and IPO-related costs (2) ......... 2,261
Restructuring charges (3) ............ 1,007 1,663 500
-------- -------- -------- -------- -------- --------
Income from operations ............... 34,386 7,020 52,261 48,715 42,886 39,990
Interest expense, net ................ 19,124 8,384 26,368 21,792 24,069 26,355
Undistributed loss in unconsolidated
joint venture ..................... 1,168 89
Gain on sales of available-for-sale
securities (4)...................... (47) (1,486)
Other (income) expense, net .......... (286) (11) 52 (311) 24 96
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and minority interests ...... 14,380 (1,395) 27,327 27,234 18,793 13,539
Income tax expense (benefit) ......... 5,679 (551) 10,065 10,757 7,423 5,348
Minority interests ................... 137 46 99 12 68 75
-------- -------- -------- -------- -------- --------
Net income (loss) .................... 8,564 (890) 17,163 16,465 11,302 8,116
Dividend on redeemable
convertible preferred stock ....... 136 399 376 270
-------- -------- -------- -------- -------- --------
Net income (loss) applicable
to common shares .................. $ 8,564 $ (1,026) $ 16,764 $ 16,089 $ 11,032 $ 8,116
======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Gross margin percentage .............. 32.9% 34.0% 33.2% 34.4% 34.8% 36.0%
Capital expenditures, including assets
under capital leases .............. $ 7,910 $ 3,757 $ 12,668 $ 17,765 $ 37,623 $ 18,576
Depreciation and amortization (5) .... 9,519 5,296 16,119 13,962 15,468 14,487
Ratio of earnings to fixed charges (6) 1.7x 0.9x 1.9x 2.0x 1.6x 1.4x
AT DECEMBER 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(SUCCESSOR) (PREDECESSOR)
(Dollars in thousands)
BALANCE SHEET DATA:
Working capital .......................... $ 126,372 $ 120,559 $ 119,256 $ 96,713 $ 83,760
Total assets (8) ......................... 647,266 382,102 372,497 310,474 280,627
Short-term obligations (7) ............... $ 4,832 $ 23,237 $ 3,220 $ 4,155 $ 14,089
Long-term obligations (8) ................ 384,993 272,272 295,420 278,443 261,815
--------- --------- --------- --------- ---------
Total obligations ........................ $ 389,825 $ 295,509 $ 298,640 $ 282,598 $ 275,904
========= ========= ========= ========= =========
Redeemable convertible preferred stock (9) $ 7,045 $ 6,646 $ 6,270
Redeemable common securities (10) ........ $ 3,705 9,498 30,523 29,949 $ 28,768
Stockholders' equity (deficit) (8) (10) .. 146,728 (8,619) (46,283) (77,305) (86,881)
11
(1) In connection with the Transactions in April 2004, the Company recorded
non-recurring expenses of $11.8 million comprised of $6.2 million of
debt retirement costs and the write-off of $5.6 million of deferred
financing costs associated with the repayment of debt in connection
with the Transactions.
(2) 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.
(3) 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 integration of M&D Industries. We recorded charges of $0.5 million
in 2000 in connection with the restructuring of our distribution
operations and consolidation of certain manufacturing operations.
(4) During 2004 and 2003, we sold common stock of a customer that we
received in connection with the customer's reorganization in
bankruptcy, receiving net proceeds of approximately $0.07 million and
$2.0 million and recognizing gains of approximately $0.05 million and
$1.5 million, respectively.
(5) Depreciation and amortization includes amortization of goodwill of $2.6
million, in each of the years 2001 and 2000.
(6) 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.
(7) 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 included $20.2 million
of the Company's then existing 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.
(8) Cash paid to consummate the acquisition of the Successor in April 2004
totaled $530.0 million and was financed with initial borrowings (before
deducting deferred financing costs of $13.1 million) consisting of a
$205.0 million term loan under a new senior secured credit facility,
the proceeds from the issuance of $175.0 million of 8.75% senior
subordinated notes due 2014, an equity contribution by the Principal
Investors and employee stockholders of $140.5 million, borrowings under
the revolver of $23.6 million and available cash on hand. The purchase
price has been allocated based upon preliminary estimates of the fair
value of net assets acquired at the date of the Transactions. The final
allocations will be based on independent valuations that have not yet
been completed and will be subject to change when the valuations are
completed during the second quarter of 2005. The excess of the purchase
price over tangible net assets acquired has been allocated to
intangible assets consisting of customer lists / relationships ($14.0
million) and copyrights / designs and other intangibles ($12.8
million), tradenames ($33.5 million) and goodwill ($282.9 million).
(9) 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 were cumulative
and payable annually, at 6% per annum. 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 $0.3 million, and were included in
redeemable convertible preferred stock on the Predecessor's
consolidated balance sheet. At December 31, 2003, 44.94 shares of our
Series A Redeemable Convertible Preferred Stock were issued and
outstanding. Each share of Series A Redeemable Convertible Preferred
Stock was convertible at the option of the holder at any time into
shares of Common Stock, $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. Upon
completion of the Transactions,
12
no shares of the Series A Redeemable Convertible Preferred Stock were
outstanding.
(10) Under the terms of both Amscan's amended and restated stockholders'
agreement, dated February 20, 2002 and effective through April 30,
2004, and the new AAH Holdings stockholders' agreement dated April 30,
2004, we have an option to purchase all of the shares of common stock
held by former employees and, under certain circumstances, including
death and disability, former employee stockholders can require us to
purchase all of the shares held by the former employees. The purchase
price as prescribed in the stockholders' agreements is to be determined
through a market valuation of the minority-held shares or, under
certain circumstances, based on cost, as defined therein. The aggregate
amount that may be payable by us to all employee stockholders based on
fully paid and vested shares is classified as redeemable common
securities.
In connection with the Transactions, our Chief Executive Officer and
President exchanged 5.4945 and 2.7472 of their shares of Amscan Common
Stock for 100 and 50 shares of AAH Holdings Common Stock with an
equivalent value of $1,000,000 and $500,000, respectively. In addition,
our Chief Executive Officer and President exchanged their 5.607 and
2.804 vested options to purchase shares of Amscan Common Stock, which
had intrinsic values of $0.6 million and $0.3 million, respectively,
for vested options to purchase 65.455 and 32.727 shares of AAH Holdings
Common Stock under the new equity incentive plan with intrinsic values
of $0.5 million and $0.2 million and estimated fair values of $0.6
million and $0.3 million, respectively. The fair value of the AAH
Holdings options was included in the equity contribution related to the
Transactions; however, as the AAH Holdings options are options to
purchase redeemable common stock, their estimated redemption value is
classified as redeemable common securities on the consolidated balance
sheet.
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 has remained
stable. 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, our sales effort has focused more closely on card and gift stores and
other independent retailers and we have created expansive gift lines
encompassing home, baby and wedding products for general gift giving or
self-purchase, principally for this distribution channel. In addition, during
2004 we began utilizing our Asian suppliers as a direct source for mass market,
grocery, drug and other customers who possess the necessary infrastructure,
global logistics and distribution capabilities to deliver products to their
outlets. To deepen our retail penetration at key European hypermarket and
supermarket accounts, our future focus will include broadening our distribution
network, increasing accessorization and customization of our products to local
tastes and holidays.
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
13
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.
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 60% of our net sales in 2004. During the past three
years, we have invested approximately $30.9 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. We believe our ability to manufacture product representing
approximately 60% of our sales 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
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 Sterling
and their impact on our profitability 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
The accompanying audited consolidated financial statements include the
accounts of Amscan Holdings and its majority-owned and controlled entities. For
the purposes of management's discussion and analysis of financial condition and
results of operations, financial information for the Predecessor (periods prior
to May 1, 2004) and the Successor (the period subsequent to April 30, 2004) have
been combined to compare yearly information and therefore the term "Company"
refers to Amscan Holdings, Inc. and its subsidiaries for all periods presented.
14
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
---- ----
Net sales ................................................. 100.0% 100.0%
Cost of sales ............................................. 66.7 66.8
------- -------
Gross profit .......................................... 33.3 33.2
Operating expenses:
Selling expenses ...................................... 9.0 9.1
General and administrative expenses ................... 7.9 7.9
Provision for doubtful accounts ....................... 0.5 0.6
Art and development costs ............................. 2.5 2.3
Non-recurring expenses related to the Transactions .... 3.0
Restructuring charges ................................. 0.3
------- -------
Total operating expenses .................................. 22.9 20.2
------- -------
Income from operations ................................ 10.4 13.0
Interest expense, net ..................................... 6.9 6.5
Undistributed loss in unconsolidated joint venture ........ 0.3
Gain on sales of available-for-sale securities ............ (0.3)
Other income, net ......................................... (0.1)
------- -------
Income before income tax expense and minority interests 3.3 6.8
Income tax expense ........................................ 1.3 2.5
Minority interests ........................................
------- -------
Net income ............................................ 2.0% 4.3%
======= =======
NET SALES. Net sales of $399.2 million for the year ended December 31,
2004 were $3.6 million lower than net sales for the year ended December 31,
2003. The decrease in net sales reflects a general softness in retail markets
that occurred earlier in the year, the impact of inventory shortages of certain
products as a result of a production disruption at one of the Company's foreign
vendors and the rationalization of inventories and changes in the promotional
pricing activities at certain national chains. These decreases in net sales were
partially offset by higher net international sales, principally as a result of
foreign currency exchange fluctuations.
GROSS PROFIT. Gross profit margin for the year ended December 31, 2004
was 33.3% and comparable to the gross profit margin for the year ended December
31, 2003. However, the gross profit margin for 2004 principally reflects higher
inventory costs from the write-up of finished goods inventories as a result of
purchase accounting for the Transactions, increased raw material costs and
higher freight costs (including nonrecurring air freight incurred to expedite
the replenishment of inventory shortages noted above). These increases in costs
were offset by lower depreciation and amortization expense (arising from changes
in asset valuations and useful lives as a result of the Transactions), the full
synergies arising from the completed integration of M&D Industries, Inc., our
2002 balloon business acquisition, and the elimination of redundant distribution
costs incurred in 2003 arising from the transition from four to three east coast
distribution facilities.
OPERATING EXPENSES. Selling expenses of $36.0 million for the year
ended December 31, 2004 were $0.6 million lower than for the year ended December
31, 2003 primarily as a result of a consolidation of sales territories. As a
percentage of net sales, selling expenses were 9.0%, or 0.1% lower than in 2003.
General and administrative expenses of $31.6 million for the year ended
December 31, 2004 were $0.4 million lower than for the year ended December 31,
2003. As a percentage of net sales, general and administrative expenses were
7.9% for each of the years ended December 31, 2004 and 2003. The net decrease in
general and administrative expenses principally reflects the closure, in 2003,
of certain international facilities and the contribution, in December 2003, of
our metallic balloon distribution operations located in Mexico to a newly
created joint venture. The joint venture distributes certain metallic balloons
principally in Mexico and Latin America. These decreases in general and
administrative expenses were partially offset by management fees paid to our
Principal Investors in 2004 ($1.3 million).
Provision for doubtful accounts for the year ended December 31, 2004
was $2.0 million or 0.5% of net sales, as
15
compared to $2.6 million or 0.6% of net sales for 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,
the Company charged $1.8 million to the provision for doubtful accounts during
2003. This customer accounted for approximately 2.1% of our net sales for 2003.
Art and development costs of $10.0 million for the year ended December
31, 2004 were $0.7 million higher as compared to 2003 principally due to
increased development of custom product lines. As a percentage of net sales, art
and development costs were 2.5% for the year ended December 31, 2004 or 0.2%
higher than in 2003.
In connection with the Transactions in April 2004, the Company recorded
non-recurring expenses of $11.8 million comprised of $6.2 million of debt
retirement costs and the write-off of $5.6 million of deferred financing costs
associated with the repayment of debt.
During the year ended December 31, 2003, the Company incurred
restructuring charges of $1.0 million resulting from the consolidation of
certain domestic and foreign distribution operations and the integration of M&D
Industries, Inc. into our balloon operations.
INTEREST EXPENSE, NET. Interest expense, net, of $27.5 million for the
year ended December 31, 2004 was $1.1 million higher than for the year ended
December 31, 2003, due to the impact of higher average borrowings partially
offset by lower interest rates.
GAIN ON SALES OF AVAILABLE-FOR-SALE SECURITIES. During 2004 and 2003,
the Company sold common stock of a customer that it received in connection with
the customer's reorganization in bankruptcy, receiving net proceeds of $0.07
million and $2.0 million and recognizing gains of $0.05 million and $1.5
million, respectively.
UNDISTRIBUTED LOSS IN UNCONSOLIDATED JOINT VENTURE. Undistributed loss
in unconsolidated joint venture represents our share of the joint venture's
start-up losses, including the elimination of intercompany profit in the joint
venture's inventory on hand at December 31, 2004.
INCOME TAXES. Income taxes for the years ended December 31, 2004 and
2003 were provided for at consolidated effective income tax rates of 39.5% and
36.8%, 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.
16
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. 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
17
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.
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 $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.
LIQUIDITY AND CAPITAL RESOURCES
Capital Structure
Our senior secured credit facility contains financial covenants and
maintenance tests, including a minimum interest coverage test and a maximum
total leverage test, and restrictive covenants, including restrictions on our
ability to make capital expenditures or pay dividends. The senior secured credit
facility is secured by substantially all of our assets and the assets of some of
our subsidiaries, and by a pledge of all of our domestic subsidiaries' capital
stock and a portion of our wholly owned foreign subsidiaries' capital stock.
The Company's term loan provides for amortization (in quarterly
installments) of 1.0% per annum through June 30, 2010, and will then amortize in
equal quarterly payments through June 30, 2012. The term loan bears interest, at
the option of the Company, at the index rate plus 1.75% per annum or at LIBOR
plus 2.75% per annum. At December 31, 2004, the term loan balance was $204.0
million, with a floating interest rate of 4.72%. To hedge the risk associated
with fluctuations in interest rates, the Company entered into two interest rate
swap transactions with a financial institution during 2004, for an initial
aggregate notional amount of $17.4 million, increasing over three years to $62.6
million.
Revolving loans under the senior credit facility expire on April 30,
2010 and bear interest, at the option of the Company, at the index rate plus,
based on performance, a margin ranging from 0.75% to 1.50% per annum, or at
LIBOR
18
plus, based on performance, a margin ranging from 1.75% to 2.50% per annum. At
December 31, 2004, the Company had borrowings under the revolver totaling $2.0
million at a floating interest rate of 6.75%. Standby letters of credit totaling
$7.3 million were outstanding and the Company had borrowing capacity of $40.7
million under the terms of the revolver at December 31, 2004.
On April 30, 2004, in connection with the Transactions, a term loan of
$147.7 million under the then existing senior secured credit facility was repaid
and all commitments under that facility were terminated.
At December 31, 2004, we have a 400,000 Canadian dollar denominated
revolving credit facility which bears interest at the Canadian prime rate plus
0.6% and expires on June 30, 2005, a 1.0 million British Pound Sterling
denominated revolving credit facility which bears interest at the U.K. base rate
plus 1.75% and expires on May 31, 2005, and a $1.0 million revolving credit
facility which bears interest at LIBOR plus 1.0% and expires on December 31,
2005. No borrowings were outstanding under these revolving credit facilities at
December 31, 2004. We expect to renew these revolving credit facilities upon
expiration.
Long-term borrowings at December 31, 2004 include a mortgage note with
the New York State Job Development Authority of $8.5 million which requires
monthly payments based on a 180-month amortization period with a balloon payment
upon maturity in January 2010. The mortgage note bears interest at the rate of
3.41%, and is subject to review and adjustment semi-annually based on the New
York State Job Development Authority's confidential internal protocols. The
mortgage note is collateralized by a distribution facility located in Chester,
New York. On April 30, 2004, in connection with the Transactions, a first lien
mortgage note of $8.5 million was paid in full. The mortgage note bore interest
at LIBOR plus 2.75%. However, we utilized an interest rate swap agreement to
effectively fix the loan rate at 8.40% for the term of the loan. The related
interest rate swap agreement was terminated on April 30, 2004 in connection with
the Transactions at a cost of $0.7 million.
In connection with the Transactions on April 30, 2004, the Company
redeemed all outstanding shares of Series A Redeemable Convertible Preferred
Stock at a redemption price per share equal to $182,000 in cash, together with
accrued and unpaid dividends.
Our senior subordinated notes, totaling $175 million, were sold to the
initial purchasers by the Company in the Note Offering. In connection with the
Note Offering, the Company entered into a Registration Rights Agreement, which
granted holders of the new notes certain exchange and registration rights. In
August 2004, the Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 offering to exchange registered notes for the
notes issued in connection with the Note Offering. The terms of the notes and
the exchange notes are substantially identical. The exchange was completed in
October 2004. The senior subordinated notes due 2014 bear interest at a rate of
8.75% per annum. Interest is payable semi-annually on May 1 and November 1 of
each year.
We have entered into various capital leases for machinery and equipment
with implicit interest rates ranging from 7.70% to 8.80% which extend to 2007.
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms and warehouse
equipment. These leases expire on various dates through 2017 and generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance costs. Rent expense for the years ended December
31, 2004, 2003 and 2002 totaled $11.4 million, $13.2 million and $12.7 million,
respectively. The minimum lease payments currently required under non-cancelable
operating leases for the year ended December 31, 2005 approximated $12.3
million.
In connection with the Transactions, we executed a management agreement
with our Principal Investors, Berkshire Partners LLC and Weston Presidio.
Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio
will be paid annual management fees of $0.8 million and $0.4 million,
respectively. Although the indenture governing the 8.75% senior subordinated
notes will permit the payments under the management agreement, such payments
will be restricted during an event of default under the notes and will be
subordinated in right of payment to all obligations due with respect to the
notes in the event of a bankruptcy or similar proceeding of Amscan.
We expect that cash generated from operating activities and
availability under our senior secured credit facility will be our principal
sources of liquidity. Based on our current level of operations, we believe our
cash flow from operations and
19
available cash and available borrowings under our senior secured credit facility
will be adequate to meet our liquidity needs for at least the next twelve
months. We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us under our senior secured credit facility in an amount sufficient to enable
us to repay our indebtedness, including the notes, or to fund our other
liquidity needs.
Cash Flow Data - Year Ended December 31, 2004 Compared to Year Ended December
31, 2003
Net cash provided by operating activities during the years ended
December 31, 2004 and 2003, totaled $34.2 million and $42.1 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2004 and 2003,
was $40.7 million and $42.1 million, respectively. Changes in operating assets
and liabilities for the year ended December 31, 2004 resulted in the use of cash
of $6.5 million.
During the year ended December 31, 2004, net cash used in investing
activities of $540.7 million included payments of $530.0 million to consummate
the Transactions on April 30, 2004 and $11.4 million of additional investments
principally in distribution and manufacturing equipment, partially offset by
proceeds from the sales of equipment and available-for-sale securities. Net cash
used in investing activities during the 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 in bankruptcy.
During the year ended December 31, 2004, net cash provided by financing
activities of $478.8 million included proceeds totaling $368.9 million from
short-term borrowings under the revolver and debt issued in connection with the
Transactions, net of deferred financing costs of $13.1 million. Net cash
provided by financing activities for the year ended December 31, 2004, also
included a cash contribution of $139.0 million in connection with the
Transactions, partially offset by scheduled payments on other long-term
obligations of $2.8 million, a required prepayment of the Predecessor's term
loan of $20.2 million based on the Company's excess cash flows for the year
ended December 31, 2003 and debt retirement costs totaling $6.2 million paid in
connection with the Transactions. During the 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.
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 $42.2 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 of $12.5 million 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 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 then
outstanding 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 2002, net
cash provided by financing activities of $11.4 million consisted of net proceeds
from the then outstanding 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.
20
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Our contractual obligations at December 31, 2004 are summarized by the
year in which the payments are due in the following table (dollars in
thousands):
More than
Total 2005 2006 2007 2008 2009 5 years
----- ---- ---- ---- ---- ---- -------
Long-term debt obligations (a) .... $ 387,429 $ 2,627 $ 2,619 $ 2,619 $ 2,619 $ 2,619 $374,326
Capital lease obligations (a) ..... 371 180 146 45
Operating lease obligations (b) ... 61,999 11,502 9,713 7,841 5,187 5,050 22,706
Minimum royalty obligations (b) ... 10,836 2,707 3,517 2,324 1,889 399
--------- -------- -------- -------- -------- -------- --------
Total contractual obligations . $ 460,635 $ 17,016 $ 15,995 $ 12,829 $ 9,695 $ 8,068 $397,032
========= ======== ======== ======== ======== ======== ========
(a) See Note 6 to our 2004 Consolidated Financial Statements which
are included in this report beginning on page F-2.
(b) See Note 15 to our 2004 Consolidated Financial Statements
which are included in this report beginning on page F-2.
At December 31, 2004 there were no non-cancelable purchase orders
related to capital expenditures.
At December 31, 2004, borrowings under our Revolver were $2.0 million.
Standby letters of credit totaling $7.1 million were outstanding at December 31,
2004. See Note 5 to our 2004 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
21
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our 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 would 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.
In connection with the Transactions in April 2004, the purchase price
has been allocated based upon preliminary estimates of the fair value of net
assets acquired at the date of the Transactions. The final allocations will be
based on independent valuations that have not yet been completed and will be
subject to change when the valuations are completed during the second quarter of
2005. The Company does not expect the final allocation to be significantly
different from the preliminary estimates currently reflected in the Successor
consolidated financial statements
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
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs",
an amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4. Adoption
of SFAS No. 151 is required by the year beginning January 1, 2006. We plan to
adopt SFAS No. 151 no later than that date. The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight,
22
handling costs and wasted materials (spoilage) should be recognized as
current-period charges and requires the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. While
SFAS No. 151 enhances ARB 43 and clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material
(spoilage), the statement also removes inconsistencies between ARB 43 and
International Accounting Standard No. 2 and amends ARB 43 to clarify that
abnormal amounts of costs should be recognized as period costs. Under some
circumstances, according to ARB 43, the above listed costs may be so abnormal as
to require treatment as current period charges. SFAS No. 151 requires these
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" and requires allocation of fixed production
overheads to the costs of conversion. This statement will apply to our
businesses if they become subject to "abnormal costs" as defined in SFAS No.
151. We are currently evaluating the impact, if any, that adoption of SFAS No.
151 will have on our consolidated statement of income and consolidated balance
sheet.
Effective May 1, 2004, the Successor adopted the fair-value-based
method of accounting for stock options and the expense recognition provisions of
SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. In December 2004, the FASB issued
SFAS 123R, Share-Based Payment (Revised 2004), which requires companies to
recognize in the income statement the fair value of all employee share-based
payments, including grants of employee stock options as well as compensatory
employee stock purchase plans, for interim periods beginning after June 15, 2005
and will become effective for the Company for the quarter ending September 30,
2005. Although the Company has not determined whether the adoption of SFAS 123R
will result in amounts that are similar to the current pro forma disclosures
under SFAS 123, the Company is evaluating the requirements under SFAS 123R
including the valuation methods and support for the assumptions that underlie
the valuation of the awards, as well as the transition methods (the modified
prospective transition method or the modified retrospective transition method).
Under the "modified prospective" method, compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No.
123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date. The "modified retrospective" method includes the requirements
of the modified prospective method but also permits entities to restate based on
the amounts previously recognized under SFAS No. 123 for purposes of pro forma
disclosures either (a) all prior periods presented or (b) prior interim period
of the year of adoption.
On December 21, 2004, the FASB issued FASB Staff Position ("FSP") 109-1
and 109-2. FSP 109-1 provides guidance on the application of SFAS No. 109,
"Accounting for Income Taxes", with regard to the tax deduction on qualified
production activities provision within H.R. 4520 The American Jobs Creation Act
of 2004 (Act) that was enacted on October 22, 2004. FSP 109-2 provides guidance
on a special one-time dividends received deduction on the repatriation of
certain foreign earnings to qualifying U.S. taxpayers. The Act contains numerous
provisions related to corporate and international taxation including repeal of
the Extraterritorial Income (ETI) regime, creation of a new Domestic Production
Activities (DPA) deduction and a temporary dividends received deduction related
to repatriation of foreign earnings. The Act contains various effective dates
and transition periods related to its provisions. Under the guidance provided in
FSP 109-1 the new DPA deduction will be treated as a "special deduction" as
described in SFAS No. 109. As such, the special deduction has no effect on the
Company's deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in which the
deduction is claimed on our income tax return. The repeal of ETI and its
replacement with a DPA deduction were not in effect in 2004 and therefore, did
not have an affect on our income tax provision for the year ended December 31,
2004. We do not expect the net effect of the phase-out of the ETI deduction and
phase-in of the new DPA deduction to result in a material impact on our
effective income tax rate in 2005. In FSP 109-2, the Financial Accounting
Standards Board acknowledged that, due to the proximity of the Act's enactment
date to many companies' year-ends and the fact that numerous provisions within
the Act are complex and pending further regulatory guidance, many companies may
not be in a position to assess the impacts of the Act on their plans for
repatriation or reinvestment of foreign earnings. Therefore, the FSP provided
companies with a practical exception to the permanent reinvestment standards of
SFAS No. 109 and APB No. 23 by providing additional time to determine the amount
of earnings, if any, that they intend to repatriate under the Act's provisions.
We are not yet in a position to decide whether, and to what extent, we might
repatriate foreign earnings to the U.S. Therefore, under the guidance provided
in FSP 109-2, no deferred tax liability has been recorded in connection with the
repatriation provisions of the Act. We are currently analyzing the impact of the
temporary dividends received deduction provisions contained in the Act.
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
23
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 (loss) from operations and net income (loss), by quarter, for 2004 and
2003.
FOR THE THREE MONTHS ENDED,
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
2004
Net sales.............................. $100,525 $ 96,316 $ 97,834 $104,541
Gross profit........................... 34,444 30,726 31,744 35,845
Income (loss) from operations.......... 14,580 (1,298) (a) 12,270 15,854
Net income (loss)...................... 4,939 (5,127) (a) 2,815 5,047
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 (b) 11,016 (b)(c) 14,378 (b)(c) 14,493
Net income............................. 3,462 (b) 2,706 (b)(c) 5,226 (b)(c)(d) 5,769 (d)
(a) In connection with the Transactions in April 2004, we recorded
non-recurring expenses of $11.8 million comprised of $6.2
million of debt retirement costs and the write-off of $5.6
million of deferred financing costs associated with the
repayment of debt in connection with the Transactions.
(b) 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. These charges resulted from
the consolidation of certain domestic and foreign distribution
operations, in addition to the integration of M&D Industries.
(c) 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, approximately $1.6
million and $0.2 million were charged
24
to the provision for doubtful accounts during 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.
(d) 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.
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, 2004,
2003 and 2002, 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 $3.3 million, $2.1 million and $3.4 million,
respectively. These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowings and interest rate swap agreements.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the uncertainty of the
specific actions that we would take and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $1.9 million, $1.7 million
and $1.5 million for the years ended December 31, 2004, 2003 and 2002,
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, 2004.
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, 2004. There were no material
changes to the Company's internal controls over financial reporting during the
fourth quarter of 2004.
ITEM 9B. OTHER INFORMATION
Not applicable.
25
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 March 25, 2005.
NAME AGE POSITION
Gerald C. Rittenberg.................53 Chief Executive Officer and Director
James M. Harrison....................53 President, Chief Operating Officer and Director
Michael A. Correale..................47 Chief Financial Officer
Robert J. Small ...................38 Chairman of the Board of Directors
Michael F. Cronin....................51 Director
Jordan A. Kahn .....................63 Director
Kevin M. Hayes .....................36 Director
Richard K. Lubin.....................58 Director
John R. Ranell .....................58 Director
Gerald C. Rittenberg became our 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. Rit