-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RsGK/TDJLMPNB43eWSfz1b+iU52LEkvylqQS9KOx4gtLD+GA2uVzaMzNVsfWqYRj Tl1KyBWtJwZwVROZ3H+Eqg== 0000913355-99-000075.txt : 19990518 0000913355-99-000075.hdr.sgml : 19990518 ACCESSION NUMBER: 0000913355-99-000075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-14107 FILM NUMBER: 99627166 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 10-Q 1 QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 000-21827 -------------- AMSCAN HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 13-3911462 (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) Number) 80 Grasslands Road Elmsford, New York 10523 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 345-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of May 12, 1999, 1,132.41 shares of Registrants' Common Stock, par value $0.10, were outstanding. AMSCAN HOLDINGS, INC. FORM 10-Q March 31, 1999 Table of Contents Part I Page Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets at March 31, 1999 and December 31, 1998.......................................................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998.......................... 4 Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 1999............................. 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998.......................... 6 Notes to Consolidated Financial Statements......................... 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk......................................................... 15 Part II Item 6 Exhibits and Reports on Form 8-K.................................. 15 Signature................................................................... 16 2 AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1999 1998 --------------- ------------ (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents...................... $ 934 $ 1,117 Accounts receivable, net of allowances......... 57,954 49,339 Inventories.................................... 53,408 54,691 Prepaid expenses and other current assets...... 13,942 9,113 ----------- ----------- Total current assets..................... 126,238 114,260 Property, plant and equipment, net................ 59,585 59,260 Intangible assets, net............................ 65,600 66,500 Other assets, net................................. 9,398 8,832 ----------- ----------- Total assets............................. $260,821 $248,852 ======== ======== LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Short-term obligations......................... $ 17,235 $ 9,628 Accounts payable............................... 11,783 11,494 Accrued expenses............................... 19,095 17,520 Income taxes payable........................... 3,455 593 Current portion of long-term obligations....... 3,434 3,549 ---------- ----------- Total current liabilities................ 55,002 42,784 Long-term obligations, excluding current portion.. 269,926 270,127 Deferred income tax liabilities................... 8,320 8,128 Other............................................. 3,341 3,553 ---------- ---------- Total liabilities........................ 336,589 324,592 Redeemable Common Stock........................... 19,547 19,547 Stockholders' deficit: Common Stock................................... - - Additional paid-in capital..................... 225 225 Unamortized restricted Common Stock award, net. (532) (575) Notes receivable from officers................. (698) (718) Deficit ....................................... (93,054) (92,969) Accumulated other comprehensive loss........... (1,256) (1,250) ----------- ---------- Total stockholders' deficit.............. (95,315) (95,287) ----------- ---------- Total liabilities, Redeemable Common Stock and stockholders' deficit.... $260,821 $248,852 =========== ========== Note: The balance sheet at December 31, 1998 has been derived from the audited consolidated financial statements at that date. See accompanying notes to consolidated financial statements. 3 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 ----------- ------------ Net sales............................................................... $76,440 $55,561 Cost of sales........................................................... 48,120 35,989 ------- ------- Gross profit...................................................... 28,320 19,572 Operating expenses: Selling expenses..................................................... 5,854 3,626 General and administrative........................................... 7,044 4,319 Provision for doubtful accounts (includes $5,950 in 1999 related to Party City Corporation)................................ 6,412 772 Art and development costs............................................ 2,666 1,620 -------- -------- Total operating expenses.......................................... 21,976 10,337 -------- -------- Income from operations............................................ 6,344 9,235 Interest expense, net................................................... 6,434 5,265 Other expense (income), net............................................. 22 (40) ---------- --------- (Loss) income before income taxes and minority interests....... (112) 4,010 Income tax (benefit) expense............................................ (46) 1,664 Minority interests...................................................... 19 75 ---------- ---------- Net (loss) income................................................. $ (85) $ 2,271 ========= ========
See accompanying notes to consolidated financial statements. 4 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT For The Three Months Ended March 31, 1999 (Dollars in thousands) (Unaudited)
Unamortized Restricted Notes Accumulated Additional Common Receivable Other Common Paid-in Stock Award, from Comprehensive Stock Capital Net Officers Deficit Loss Total ------ ---------- ------------ --------- ------- ------------- ----- Balance at December 31, 1998.. $ $ 225 $ (575) $ (718) $(92,969) $ (1,250) $(95,287) Net loss................... (85) (85) Net change in cumulative translation adjustment.. (6) (6) -------- Comprehensive loss... (91) Payments received on notes receivable from officers 20 20 Amortization of restricted Common Stock award...... 43 43 ------ --------- ---------- ---------- -------- ------- --------- Balance at March 31, 1999..... $ - $ 225 $ (532) $ (698) $(93,054) $(1,256) $(95,315) ====== ======== ========== ========== ======== ======= ========
See accompanying notes to consolidated financial statements. 5 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 ------------ ------------ Cash flows from operating activities: Net (loss) income.................................................................. $ (85) $ 2,271 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization................................................... 3,219 1,723 Amortization of deferred financing costs........................................ 217 162 Amortization of restricted Common Stock award................................... 43 65 Provision for doubtful accounts................................................. 6,412 772 Deferred income tax benefit..................................................... (1,891) (135) Loss on disposal of property and equipment...................................... 71 Changes in operating assets and liabilities: Increase in accounts receivable.............................................. (14,954) (9,938) Decrease in inventories...................................................... 1,283 4,939 (Increase) decrease in prepaid expenses and other current assets............. (2,746) 632 Increase (decrease) in accounts payable, accrued expenses and income taxes payable...................................................... 4,746 (1,249) Other, net......................................................................... (1,005) (635) ----------- ------- Net cash used in operating activities........................................... (4,690) (1,393) Cash flows from investing activities: Capital expenditures............................................................... (2,205) (1,072) Proceeds from sale of property and equipment....................................... 100 17 ------------ ---------- Net cash used in investing activities........................................... (2,105) (1,055) Cash flows from financing activities: Payments to acquire Common Stock in Merger......................................... (18) (92,731) Proceeds from short-term obligations............................................... 7,607 Repayment of loans, notes payable and long-term obligations........................ (942) (1,116) Other ............................................................................. 20 ----------- -------- Net cash provided by (used in) financing activities............................. 6,667 (93,847) Effect of exchange rate changes on cash and cash equivalents....................... (55) (104) ---------- ----------- Net decrease in cash and cash equivalents....................................... (183) (96,399) Cash and cash equivalents at beginning of period........................................ 1,117 111,539 --------- ---------- Cash and cash equivalents at end of period.............................................. $ 934 $ 15,140 ========== ========== Supplemental Disclosures: Interest paid................................................................ $3,553 $2,839 Taxes paid................................................................... $292 $188
Capital lease obligations of $651 were incurred during the three months ended March 31, 1999. There were no capital lease obligations incurred during the three months ended March 31, 1998. See accompanying notes to consolidated financial statements. 6 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Organization and Description of Business Amscan Holdings, Inc. ("Amscan Holdings" and, together with its subsidiaries, "AHI" or the "Company") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities in connection with an initial public offering of common stock. On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc. ("Confetti"), a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P. and certain other private investment funds managed by Goldman, Sachs & Co. (collectively, "GSCP"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for a recapitalization of Amscan Holdings in which Confetti would be merged with and into Amscan Holdings (the "Merger"), with Amscan Holdings as the surviving corporation. On December 19, 1997 (the "Effective Time"), the Merger was consummated pursuant to the Merger Agreement. At the Effective Time, each share of the Common Stock, par value $0.10 per share, of the Company (the "Company Common Stock"), issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock owned, directly or indirectly, by the Company or by Confetti) was converted, at the election of each of the Company's stockholders, into the right to receive from the Company either (a) $16.50 in cash or (b) $9.33 in cash plus a retained interest in the Company equal to one share of Company Common Stock for every 150,000 shares held by such stockholder, with fractional shares of Company Common Stock paid in cash. Also pursuant to the Merger Agreement, at the Effective Time each outstanding share of Common Stock, par value $0.10 per share, of Confetti ("Confetti Common Stock"), was converted into an equal number of shares of Company Common Stock as the surviving corporation in the Merger. The Merger was financed with an equity contribution of approximately $67.5 million (including contributions of Company Common Stock by certain employee stockholders and including issuances of restricted stock), $117 million from a senior term loan and $110 million from the issuance of senior subordinated notes. The Merger was accounted for as a recapitalization and, accordingly, the historical basis of the Company's assets and liabilities were not affected by the Merger. Amscan Holdings and its subsidiaries design, manufacture, contract for manufacture and distribute party and novelty goods principally in the United States, Canada and Europe. Note 2: Basis of Presentation The consolidated financial statements include the accounts of Amscan Holdings and its majority-owned subsidiaries. Investments in less than majority-owned subsidiaries are accounted for on an equity basis. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The results of 7 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) operations may be affected by seasonal factors such as the timing of holidays or industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the financial statements and footnotes thereto included in the Amscan Holdings' Annual Report on Form 10-K for the year ended December 31, 1998. Note 3: Inventories Inventories consisted of the following: March 31, December 31, 1999 1998 ----------- ------------- (In thousands) Finished goods ............ $46,474 $48,093 Raw materials ............. 4,538 4,845 Work-in-process ........... 4,406 3,345 -------- -------- 55,418 56,283 Less: reserve for slow moving and obsolete inventory................. (2,010) (1,592) -------- -------- $53,408 $54,691 ======== ======== Inventories are valued at the lower of cost, determined on a first in - first out basis, or market. Note 4: Income Taxes The consolidated income tax (benefit) provision for the three months ended March 31, 1999 and 1998 were determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 1999 and 1998, respectively. The differences between the consolidated effective income tax rate and the U.S. Federal statutory rate are primarily attributable to state income taxes and the effects of foreign operations. Note 5: Comprehensive (Loss) Income During the first quarter of 1999 and 1998, total comprehensive (loss) income amounted to $(91,000) and $2,256,000, respectively, consisting of net (loss) income of $(85,000) and $2,271,000 and foreign currency translation adjustments of $(6,000) and $(15,000), respectively. Accumulated other comprehensive loss at March 31, 1999 and December 31, 1998 consisted solely of the Company's foreign currency translation adjustment. 8 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) Note 6: Capital Stock At March 31, 1999 and December 31, 1998, respectively, the Company's authorized capital stock consisted of 5,000,000 shares of preferred stock, $0.10 par value, of which no shares were issued or outstanding, and 3,000 shares of common stock, $0.10 par value, of which 1,132.41 shares were issued and outstanding. Note 7: Segment Information Industry Segments The Company operates in one operating segment which involves the design, manufacture, contract for manufacture and distribution of party and novelty goods. Geographic Segments The Company's export sales, other than those intercompany sales reported below as sales between geographic areas, are not material. Sales between geographic areas primarily consist of sales of finished goods for distribution in the foreign markets. No one single foreign operation is significant to the Company's consolidated operations. Sales between geographic areas are made at cost plus a share of operating profit. The Company's geographic area data is as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated Three Months Ended March 31, 1999 Sales to unaffiliated customers................... $ 66,534 $ 9,906 $ 76,440 Sales between geographic areas.................... 4,496 471 $ (4,967) - ----------- ---------- ----------- ---------------- Net sales......................................... $ 71,030 $10,377 $ (4,967) $ 76,440 ========= ======= =========== ========== Income from operations............................ $ 6,039 $ 305 $ 6,344 ======== ====== Interest expense, net............................. 6,434 Other expense, net................................ 22 ---------- Loss before income taxes and minority interests..................................... $ (112) ========== Long-lived assets at March 31, 1999 $133,121 $ 14,686 $ (13,224) $ 134,583 ======== ========= ========== ========= Three Months Ended March 31, 1998 Sales to unaffiliated customers................... $ 49,287 $ 6,274 $ 55,561 Sales between geographic areas.................... 1,793 $ (1,793) - ---------- ------------- ----------- ---------- Net sales......................................... $ 51,080 $ 6,274 $ (1,793) $ 55,561 ========= ======== =========== ========= Income from operations............................ $ 8,922 $ 313 $ 9,235 ========== ========= Interest expense, net............................. 5,265 Other income, net................................. (40) -------- Income before income taxes and minority interests..................................... $ 4,010 ======= Long-lived assets at March 31, 1998............... $53,422 $ 1,799 $ (1,939) $53,282 ======= ======== ========= =======
9 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) Note 8: Provision for Doubtful Accounts During the first quarter of 1999, the Company's largest customer, Party City Corporation ("Party City") announced that, due to difficulties implementing new financial reporting and accounting systems, it would not be able to complete its year end audit and that it would be in default of certain covenants of its credit facility as of December 31, 1998. The Company understands that Party City is negotiating with its lenders to amend its credit facility and with its vendors to amend existing credit terms on certain inventory. The Company also understands that Party City is considering various alternatives to improve its current financial condition. Based on the current financial condition of Party City, the Company has established reserves approximating 50% of the $13,200,000 accounts receivable balance due from Party City corporate stores at March 31, 1999, including $5,950,000 charged to the provision for doubtful accounts during the first quarter of 1999. For the three months ended March 31, 1999 and 1998, sales to Party City's corporate stores represented 18% and 11%, respectively, of consolidated net sales. If Party City were to significantly reduce their volume of purchases from the Company for any reason, the Company's financial condition and results of operations could be materially adversely affected. 10 Item 2 . Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Percentage of Net Sales Three Months Ended March 31, 1999 1998 ---------- -------- Net sales................................... 100.0% 100.0% Cost of sales............................... 63.0 64.8 ------ ------ Gross profit........................ 37.0 35.2 Operating expenses: Selling expenses......................... 7.7 6.5 General and administrative expenses...... 9.2 7.8 Provision for doubtful accounts (7.8% in 1999 related to Party City)....... 8.4 1.4 Art and development costs................ 3.5 2.9 ------- ------- Total operating expenses............ 28.8 18.6 ------ ------ Income from operations.............. 8.2 16.6 Interest expense, net....................... 8.4 9.5 Other expense (income), net................. - (0.1) --------- -------- (Loss) income before income taxes and minority interests......... (0.2) 7.2 Income tax (benefit) expense................ (0.1) 3.0 Minority interests.......................... - 0.1 -------- -------- Net (loss) income................... (0.1)% 4.1% ======== ========= Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Net sales for the three months ended March 31, 1999 were $76.4 million, as compared to $55.6 million for the three months ended March 31, 1998. Net sales for the three months ended March 31, 1999 increased by 37.6%, reflecting the September 1998 acquisition of Anagram International Inc. ("Anagram"), a manufacturer and distributor of metallic balloons, and strong growth in sales to both party goods superstores and smaller independent stores. The Company attributes its sales growth to the growth in party goods superstores, a realignment of its independent sales force, and its marketing strategy of continually offering new products, new designs and themes for existing products. Gross profit for the three months ended March 31, 1999 was $28.3 million, or 37.0% of net sales, as compared to 35.2% for the three months ended March 31, 1998. The increase in gross profit margin principally reflects the savings associated with the restructuring of the Company's distribution operations begun in the second quarter of 1998 as well as initial synergies arising from the acquisition of Anagram. Selling expenses of $5.9 million for the three months ended March 31, 1999 were $2.2 million higher than those of the corresponding quarter in 1998. Selling expenses increased as a percentage of net sales from 6.5% to 7.7% principally due to the inclusion of the results of Anagram which historically operates at a higher level of expense as a percentage of sales , additional catalogues and advertising and the realignment of the independent sales force. General and administrative expenses of $7.0 million increased by $2.7 million for the three months ended March 31, 1999 as compared to the corresponding quarter in 1998. General and administrative expenses increased as a percentage of net sales from 7.8% to 9.2%. The increase primarily results from the additional amortization of 11 goodwill and other intangible assets arising from the acquisition of Anagram as well as the inclusion of Anagram results, which historically operates at a higher level of expense as a percentage of sales. During the first quarter of 1999, the Company's largest customer, Party City Corporation ("Party City") announced that, due to difficulties implementing new financial reporting and accounting systems, it would not be able to complete its year end audit and that it would be in default of certain covenants of its credit facility as of December 31, 1998. The Company understands that Party City is negotiating with its lenders to amend its credit facility and with its vendors to amend existing credit terms on certain inventory. The Company also understands that Party City is considering various alternatives to improve its current financial condition. Based on Party City's current financial condition, the Company has established reserves approximating 50% of the $13,200,000 accounts receivable balance due from Party City corporate stores at March 31, 1999, including $5,950,000 charged to the provision for doubtful accounts during the first quarter of 1999. Art and development costs of $2.7 million for the three months ended March 31, 1999, increased by $1.0 million compared to the corresponding quarter in 1998. As a percentage of net sales, art and development costs increased from 2.9% to 3.5%, and reflect the Company's investment in additional staff associated with the development of new product lines. Interest expense of $6.4 million for the three months ended March 31, 1999 increased by $1.2 million as compared to the corresponding period in 1998 principally due to the Company's increased borrowings in connection with the acquisition of Anagram (see "Liquidity and Capital Resources"). Income taxes for the three months ended March 31, 1999 and 1998 were based upon estimated consolidated effective income tax rates of 40.85% and 41.5% for the years ending December 31, 1999 and 1998, respectively. Minority interests represent the portion of income of the Amscan Holdings' subsidiaries attributable to equity ownership not held by Amscan Holdings. Liquidity and Capital Resources On December 19, 1997, the Company and Confetti consummated the Merger, providing for a recapitalization of the Company in which Confetti was merged with and into the Company with the Company as the surviving corporation. The Merger was financed with an equity contribution of approximately $67.5 million (including contributions of Company Common Stock by certain employee stockholders and issuances of restricted Common Stock), $117 million from a senior term loan (the "Term Loan") provided under a bank credit agreement (the "Bank Credit Facilities") and $110 million from the issuance of 9 7/8% senior subordinated notes (the "Notes") (collectively, the "Merger Financings"). The Merger has been accounted for as a recapitalization and, accordingly, the historical basis of the Company's assets and liabilities has not been affected by the Merger. The Company is obligated to obtain interest rate protection, pursuant to interest rate swaps, caps or other similar arrangements satisfactory to GS Credit Partners, with respect to a notional amount of not less than half of the aggregate amount outstanding under the Term Loan, which protection must remain in effect for not less than three years. The interest rate swap contracts require the Company to settle the difference in interest obligations quarterly. The Company had two interest rate swap contracts outstanding with a financial institution and Goldman Sachs Capital Markets, L.P. covering $93,500,000 of its Term Loan at effective interest rates ranging from 7.18% to 8.36% at March 31, 1999. In addition to the Term Loan, the Bank Credit Facilities, as amended, provide for revolving loan borrowings of up to $50 million (the "Revolving Credit Facility"). The Revolving Credit Facility has a term of five years and bears interest, at the option of the Company, at the lenders' customary base rate plus 1.25% per annum or at the lenders' customary reserve adjusted Eurodollar rate plus 2.25% per annum. Interest on balances outstanding under the Revolving Credit Facility are subject to adjustment in the future based on the Company's performance. At 12 March 31, 1999, the Company had borrowing capacity of approximately $28.0 million under the Revolving Credit Facility. The Company financed the September 1998 acquisition of Anagram with $40 million of senior term debt, approximately $20 million of additional revolving credit borrowings, cash on hand, the issuance of 120 shares of the Company's Redeemable Common Stock valued at $12.6 million and warrants to purchase 10 shares of the Company's Common Stock valued at $0.2 million. In connection with and upon consummation of the acquisition, the Company amended and restated the Revolving Credit Facility to provide for, among other things, the additional senior term debt. Based upon the current level of operations and anticipated growth, the Company anticipates that its operating cash flow, together with available borrowings under the Revolving Credit Facility, will be adequate to meet its anticipated future requirements for working capital and operating expenses, to permit potential acquisitions and to service its debt requirements as they become due. However, the Company's ability to make scheduled payments of principal of, or to pay interest on, or to refinance its indebtedness and to satisfy its other obligations will depend upon its future performance, which, to a certain extent, will be subject to general economic, financial, competitive, business and other factors beyond its control. The Merger Financings and the amendments to the Company's credit agreements may affect the Company's ability to make future capital expenditures. However, management believes that additions to plant and equipment during the past three years provide adequate capacity to support its operations for at least the next 12 months. As of March 31, 1999, the Company did not have material commitments for capital expenditures. Cash Flow Data - Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 During the three months ended March 31, 1999, net cash used in operating activities totaled $4.7 million as compared to $1.4 million during the same quarter in 1998. The increase in net cash used in operating activities reflects growth in the Company's net accounts receivable balance, as a result of increased sales which have extended terms given to customers in association with new promotions, partially offset by the changes in other operating assets and liabilities. Net cash used in investing activities during the first quarter of 1999 of $2.1 million increased by $1.0 million from the same period in 1998 and principally reflects an upgrade of the Company's data processing systems as well as inclusion of the capital expenditures of Anagram in the first quarter of 1999. During the first quarter of 1999, net cash provided by financing activities of $6.7 million consisted principally of proceeds from short-term working capital borrowings, partially offset by the scheduled maturity of long-term obligations. During the comparable period in 1998, net cash used in financing activities of $93.8 million consisted principally of payments to former shareholders whose investment in Company Common Stock was converted into the right to receive cash in connection with the Merger in 1997. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The statement requires all derivatives to be recognized on the balance sheet at fair value and establishes standards for the recognition of changes in such fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company expects to adopt SFAS No. 133 effective January 1, 2000. Because of the Company's limited use of derivatives, management does not anticipate the adoption of SFAS No. 133 will have a significant effect on earnings or the financial position of the Company. 13 Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the financial statements of the Company. Impact of Year 2000 Several of the Company's older computer programs have date sensitive software that will not recognize the year 2000 and, if not addressed, could cause disruptions to the Company's normal business operations. The Company has completed an assessment of its software and has begun to upgrade its date-sensitive software to be Year 2000 compliant. The completed assessment indicated that most of the Company's significant information technology systems could be affected, particularly the general ledger, billing, and inventory systems. That assessment also indicated that the software and hardware (embedded chips) used in manufacturing and distribution systems do not require any remediation to be Year 2000 compliant. To date, the Company has not incurred significant expenses associated with the Year 2000 issue and management expects that the historical and anticipated remaining costs to upgrade its software will not be material. The Company is in the process of querying its significant suppliers and subcontractors that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company is currently working on contingency plans for certain critical applications. These contingency plans are expected to be completed by June 1999 and involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. To date, the Company is 70% complete, and expects to complete the upgrade of its principal software by June 30, 1999 and believes that the Year 2000 issue will not pose significant operational problems for its computer systems. However, there can be no guarantee that the estimated cost and completion will be achieved and the actual results could differ materially from those anticipated. "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 the Company expects or anticipates will or may occur in the future, the impact of the Year 2000 issue, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, including any changes to operations, goals, expansion and growth of the Company's 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 the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. Actual results may differ materially from those discussed. Whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including, but not limited to (1) the concentration of sales by the Company to party goods superstores where the reduction of purchases by a small number of customers could materially reduce the Company's sales and profitability, (2) the concentration of the Company's credit risk in party goods superstores, several of which are privately held and have expanded rapidly in recent years, (3) the failure by the Company to anticipate changes in tastes and preferences of party goods retailers and consumers, (4) the introduction of new products by the Company's competitors, (5) the inability of the Company to increase prices to recover fully future increases in raw material prices, especially increases in paper prices, (6) the loss of key employees, (7) changes in general business conditions, (8) other factors which might be described from time to time in the Company's filings with the Commission, and (9) other factors which are beyond the control of the Company. 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 the Company may not be realized or, even if substantially 14 realized, may not have the expected consequences to or effects on the Company or its business or operations. Although the Company believes that it has the product offerings and resources needed for continued growth in revenues and margins, future revenue and margin trends cannot be reliably predicted. Changes in such trends may cause the Company to adjust its 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, the highly leveraged nature of the Company may impair its ability to finance its future operations and capital needs and its flexibility to respond to changing business and economic conditions and business opportunities. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's earnings are affected by changes in interest rates as a result of its issuance of variable rate indebtedness. However, the Company utilizes interest rate swap agreements and other off-balance sheet financial instruments to manage the market risk associated with fluctuations in interest rates. If market interest rates for the Company's variable rate indebtedness averaged 2% more for the three months ended March 31, 1999 above the interest rates actually paid, the Company's interest expense, after considering the effects of its interest rate swap agreements, would increase, and income before taxes would decrease by $0.4 million. This amount is determined by considering the impact of the hypothetical interest rates on the Company's borrowing cost, short-term investment balances, 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 its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. The Company's 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 its products in foreign markets. Foreign currency forward contracts are used periodically to hedge against the earnings effects of such fluctuations. A uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's foreign sales are denominated would have resulted in a decrease in gross profit of $0.3 million for the three months ended March 31, 1999. This calculation assumes 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 are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's 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. Part II Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 27 Financial Data Schedule (b) Reports on Form 8-K None. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMSCAN HOLDINGS, INC. By: /s/ Michael A. Correale ----------------------- Michael A. Correale Controller (on behalf of the registrant and as principal Date: May 17, 1999 accounting officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE 3/31/1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 934 0 70,091 12,137 53,408 126,238 95,992 36,407 260,821 55,002 269,926 0 0 0 (95,315) 260,821 76,440 76,440 48,120 48,120 21,976 6,412 6,434 (112) 46 (85) 0 0 0 (85) 0.00 0.00
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