-----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, AxoNQ9dU0ecndN3wJjjS5JPSOilz0ULQUVoMCESY7XB/AFBEzl+Xg19Fk12IZJUr NPgO9mXtnBaygRq69bHslA== 0000913355-99-000156.txt : 19991115 0000913355-99-000156.hdr.sgml : 19991115 ACCESSION NUMBER: 0000913355-99-000156 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747800 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 September 30, 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 (I.R.S. Employer Identification of incorporation or organization) Number) 80 Grasslands Road Elmsford, New York 10523 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 345-2020 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 November 10, 1999, 1,132.41 shares of Registrants' Common Stock, par value $0.10, were outstanding. AMSCAN HOLDINGS, INC. FORM 10-Q September 30, 1999 Table of Contents Part I Page Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 1999 and December 31, 1998.................................................. 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998........................... 4 Consolidated Statement of Stockholders' Deficit for the Nine Months Ended September 30, 1999.................................... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.................................. 6 Notes to Consolidated Financial Statements......................... 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 13 Item 3 Quantitative and Qualitative Disclosures About Market Risk ........ 18 Part II Item 6 Exhibits and Reports on Form 8-K................................... 19 Signature ................................................................... 20 2 AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (Note) ASSETS ------ Current assets: Cash and cash equivalents ............................................... $ 558 $ 1,117 Accounts receivable, net of allowances .................................. 56,012 49,339 Inventories, net of allowances .......................................... 62,174 54,691 Prepaid expenses and other current assets ............................... 17,054 9,113 --------- --------- Total current assets ............................................... 135,798 114,260 Property, plant and equipment, net ......................................... 61,323 59,260 Intangible assets, net ..................................................... 64,356 66,500 Other assets, net .......................................................... 10,570 8,832 --------- --------- Total assets ....................................................... $ 272,047 $ 248,852 ========= ========= LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT -------------------------------------------------------------- Current liabilities: Short-term obligations .................................................. $ 14,295 $ 9,628 Accounts payable ........................................................ 20,080 11,494 Accrued expenses ........................................................ 20,086 17,520 Income taxes payable .................................................... 1,621 593 Current portion of long-term obligations ................................ 3,564 3,549 --------- --------- Total current liabilities .......................................... 59,646 42,784 Long-term obligations, excluding current portion ........................... 267,847 270,127 Deferred income tax liabilities ............................................ 11,579 8,128 Other ...................................................................... 3,126 3,553 --------- --------- Total liabilities .................................................. 342,198 324,592 Redeemable Common Stock .................................................... 19,547 19,547 Stockholders' deficit: Common Stock ............................................................ -- -- Additional paid-in capital .............................................. 225 225 Unamortized restricted Common Stock award, net .......................... (447) (575) Notes receivable from stockholders ...................................... (650) (718) Deficit ................................................................. (88,035) (92,969) Accumulated other comprehensive loss .................................... (791) (1,250) --------- --------- Total stockholders' deficit ........................................ (89,698) (95,287) --------- --------- Total liabilities, redeemable Common Stock and stockholders' deficit $ 272,047 $ 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 INCOME (Dollars in thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net sales ...................................... $ 74,853 $ 62,252 $ 224,496 $ 166,499 Cost of sales .................................. 47,486 39,548 142,301 106,560 --------- --------- --------- --------- Gross profit ........................... 27,367 22,704 82,195 59,939 Operating expenses: Selling expenses ............................. 6,321 4,373 18,018 11,532 General and administrative expenses .......... 7,697 4,793 22,224 13,261 (Reduction of) provision for doubtful accounts (858) 504 6,263 1,807 Art and development costs .................... 2,406 1,784 7,679 5,000 Restructuring charges ........................ -- -- -- 2,400 --------- --------- --------- --------- Total operating expenses .................. 15,566 11,454 54,184 34,000 --------- --------- --------- --------- Income from operations ................ 11,801 11,250 28,011 25,939 Interest expense, net .......................... 6,637 5,440 19,675 16,203 Other income, net .............................. (78) (22) (13) (81) --------- --------- --------- --------- Income before income taxes and minority interests .................. 5,242 5,832 8,349 9,817 Income tax expense ............................. 2,142 2,420 3,411 4,074 Minority interests ............................. 10 (13) 4 17 --------- --------- --------- --------- Net income ............................ $ 3,090 $ 3,425 $ 4,934 $ 5,726 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Nine Months Ended September 30, 1999 (Dollars in thousands) (Unaudited)
Unamortized Restricted Notes Accumulated Additional Common Receivable Other Common Paid-in Stock Award, from Comprehensive Stock Capital Net Stockholders Deficit Loss Total --------- ------------ ------------ ------------ --------- ------------- --------- Balance at December 31, 1998 ....... $ -- $ 225 $ (575) $ (718) $(92,969) $ (1,250) $(95,287) Net income ....................... -- -- -- -- 4,934 -- 4,934 Net change in cumulative translation adjustment ........ -- -- -- -- -- 459 459 -------- Comprehensive income ....... -- -- -- -- -- -- 5,393 Payments received on notes receivable .................... -- -- -- 68 -- -- 68 Amortization of restricted Common Stock award ............ -- -- 128 -- -- -- 128 ------- -------- -------- -------- -------- -------- -------- Balance at September 30, 1999 ...... $ -- $ 225 $ (447) $ (650) $(88,035) $ (791) $(89,698) ======= ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 5 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net income ............................................................ $ 4,934 $ 5,726 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................... 9,888 5,319 Amortization of deferred financing costs ........................... 653 522 Amortization of restricted Common Stock award ...................... 128 195 Provision for doubtful accounts .................................... 6,263 1,807 Restructuring charges .............................................. -- 2,400 Deferred income tax expense ........................................ 1,845 1,719 Loss (gain) on disposal of property and equipment .................. 69 (8) Changes in operating assets and liabilities: Increase in accounts receivable ................................ (18,244) (10,464) (Increase) decrease in inventories ............................. (7,611) 7,018 (Increase) decrease in prepaid expenses and other current assets (1,050) 818 Increase (decrease) in accounts payable, accrued expenses and income taxes payable ........................................... 12,120 (2,222) Other, net ......................................................... (2,972) (263) --------- --------- Net cash provided by operating activities ....................... 6,023 12,567 Cash flows from investing activities: Cash paid for acquisitions ............................................ -- (78,546) Capital expenditures .................................................. (9,068) (4,259) Proceeds from sale of property and equipment .......................... 172 89 --------- --------- Net cash used in investing activities ........................... (8,896) (82,716) Cash flows from financing activities: Payments to acquire Common Stock in Merger ............................ (29) (93,147) Net proceeds from issuance of Common Stock ............................ -- 181 Proceeds from short-term obligations .................................. 4,695 59,766 Repayment of loans, notes payable and long-term obligations ........... (2,935) (6,355) Other ................................................................. 68 42 --------- --------- Net cash provided by (used in) financing activities ............. 1,799 (39,513) Effect of exchange rate changes on cash and cash equivalents ............. 515 (468) --------- --------- Net decrease in cash and cash equivalents ....................... (559) (110,130) Cash and cash equivalents at beginning of period ......................... 1,117 111,539 --------- --------- Cash and cash equivalents at end of period ............................... $ 558 $ 1,409 ========= ========= Supplemental Disclosures: Interest paid ................................................... $ 15,748 $ 13,884 Taxes paid, net of refunds ...................................... $ 502 $ 2,903
See accompanying notes to consolidated financial statements. 6 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Dollars in thousands) (Unaudited) Supplemental information on noncash activities: Capital lease obligations of $651 and $94 were incurred during the nine months ended September 30, 1999 and 1998, respectively. In connection with the acquisition of Anagram International, Inc. and certain related companies in September 1998, the Company issued 120 shares of Redeemable Common Stock valued at $12,600 and issued warrants to purchase 10 shares of the Company's Common Stock for $125 per share valued at $225 to the former owner of Anagram International, Inc. See accompanying notes to consolidated financial statements 7 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. AHI designs, manufactures, contracts for manufacture and distributes party and novelty goods principally in the United States, Canada and Europe. NOTE 2: BASIS OF PRESENTATION 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 and nine-month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The results of operations may be affected by seasonal factors such as the timing of holidays or industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the 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 (dollars in thousands): September 30, December 31, 1999 1998 -------- -------- Finished goods ...................................... $ 53,418 $ 48,093 Raw materials ..................................... 5,841 4,845 Work-in-process ................................... 4,946 3,345 -------- -------- 64,205 56,283 Less: reserve for slow moving and obsolete inventory (2,031) (1,592) -------- -------- $ 62,174 $ 54,691 ======== ======== Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or market. 8 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) NOTE 4: INCOME TAXES The consolidated income tax expense for the three and nine-month periods ended September 30, 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 INCOME Comprehensive income consisted of the following (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income .................... $ 3,090 $ 3,425 $ 4,934 $ 5,726 Net change in cumulative translation adjustment ...... 428 144 459 (401) ------- ------- ------- ------- Comprehensive income .......... $ 3,518 $ 3,569 $ 5,393 $ 5,325 ======= ======= ======= ======= Accumulated other comprehensive loss at September 30, 1999 and December 31, 1998 consisted solely of the Company's cumulative translation adjustment. NOTE 6: CAPITAL STOCK At September 30, 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. 9 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 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 foreign markets. No single foreign operation is significant to the Company's consolidated operations. Sales between geographic areas are made at cost plus a share of operating profit. The Company's geographic area data is as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ Three Months Ended September 30, 1999 Sales to unaffiliated customers ....... $ 61,548 $ 13,305 -- $ 74,853 Sales between geographic areas ........ 6,336 -- $ (6,336) -- --------- --------- --------- --------- Net sales ............................. $ 67,884 $ 13,305 $ (6,336) $ 74,853 ========= ========= ========= ========= Income from operations ................ $ 9,876 $ 1,925 -- $ 11,801 ========= ========= Interest expense, net ................. -- -- -- 6,637 Other income, net ..................... -- -- -- (78) --------- Income before income taxes and minority interests ........................... -- -- -- $ 5,242 ========= Long-lived assets at September 30, 1999 $ 137,835 $ 9,291 $ (10,877) $ 136,249 ========= ========= ========= ========= Three Months Ended September 30, 1998 Sales to unaffiliated customers ....... $ 54,051 $ 8,201 -- $ 62,252 Sales between geographic areas ........ 3,593 -- $ (3,593) -- --------- --------- --------- --------- Net sales ............................. $ 57,644 $ 8,201 $ (3,593) $ 62,252 ========= ========= ========= ========= Income from operations ................ $ 11,784 $ (534) -- $ 11,250 ========= ========= Interest expense, net ................. -- -- -- 5,440 Other income, net ..................... -- -- -- (22) --------- Income before income taxes and minority interests ........................... -- -- -- $ 5,832 =========
10 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited)
Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ Nine Months Ended September 30, 1999 Sales to unaffiliated customers ....... $ 191,351 $ 33,145 -- $ 224,496 Sales between geographic areas ........ 16,462 -- $ (16,462) -- --------- --------- --------- --------- Net sales ............................. $ 207,813 $ 33,145 $ (16,462) $ 224,496 ========= ========= ========= ========= Income from operations ................ $ 26,011 $ 2,000 -- $ 28,011 ========= ========= Interest expense, net ................. -- -- -- 19,675 Other income, net ..................... -- -- -- (13) --------- Income before income taxes and minority interests ........................... -- -- -- $ 8,349 ========= Nine Months Ended September 30, 1998 Sales to unaffiliated customers ....... $ 146,404 $ 20,095 -- $ 166,499 Sales between geographic areas ........ 7,782 -- $ (7,782) -- --------- --------- --------- --------- Net sales ............................. $ 154,186 $ 20,095 $ (7,782) $ 166,499 ========= ========= ========= ========= Income from operations ................ $ 25,809 $ 130 -- $ 25,939 ========= ========= Interest expense, net ................. -- -- -- 16,203 Other income, net ..................... -- -- -- (81) --------- Income before income taxes and minority interests ........................... -- -- -- $ 9,817 =========
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. On August 17, 1999, Party City received $30 million in new financing from a group of investors. Concurrent with the new financing, Party City entered into an agreement with its existing bank lenders whereby the bank lenders agreed not to exercise certain rights or remedies until June 30, 2000 based upon existing defaults, unless an event of default occurs. Party City also entered into an agreement with its trade vendors, including Amscan, whereby, among other things, the vendors have received promissory notes due November 15, 1999 for one-third of their then existing accounts receivable balances. The Company has reclassified $5.3 million from accounts receivable to prepaid expenses and other current assets at September 30, 1999 upon receipt of this promissory note. Additionally, the trade vendors have extended credit to Party City with respect to its Halloween and holiday purchases in an amount equal to 30% of those purchases. The remaining 70% will be paid in cash in advance. The vendors who have extended credit have received a shared lien on Party City's inventory for the amount of the credit extended. At September 30, 1999, the Company continues to maintain a related allowance for doubtful accounts and sales allowances which approximate one half of the account and note receivable balance of $15.8 million due from Party City, including $4 million charged to the provision for doubtful accounts during the nine months ended September 30, 1999. The decrease in the provision during the third quarter reflected a reduction of approximately $1.9 million to the provision for Party City, partially offset by a $1.0 million provision for other doubtful accounts. For the nine months ended September 30, 1999 and 1998, sales to Party City's corporate stores represented 11% and 12%, 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. 11 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) NOTE 9: LEGAL PROCEEDINGS The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations. 12 ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Results of Operations - --------------------- Percentage of Net Sales - ----------------------- Three Months Ended September 30, 1999 1998 ------ ------ Net sales ............................ 100.0% 100.0% Cost of sales ........................ 63.4 63.5 ------ ------ Gross profit ................. 36.6 36.5 Operating expenses: Selling expenses .................. 8.4 7.0 General and administrative expenses 10.3 7.7 (Reduction of) provision for doubtful accounts ............. (1.1) 0.8 Art and development costs ......... 3.2 2.9 ------ ------ Total operating expenses ............ 20.8 18.4 ------ ------ Income from operations ....... 15.8 18.1 Interest expense, net ................ 8.9 8.7 Other income, net .................... (0.1) -- ------ ------ Income before income taxes and minority interests .. 7.0 9.4 Income tax expense ................... 2.9 3.9 Minority interests ................... -- -- ------ ------ Net income ................... 4.1% 5.5% ====== ====== Net sales for the third quarter of 1999 totaled $74.9 million and were $12.6 million or 20.2% higher than net sales for the third quarter of 1998. The increase in sales includes approximately $11.5 million of incremental sales from Anagram International, Inc. ("Anagram"), which was acquired in mid September of 1998, as well as increased sales to independent party goods stores. The increased sales to independent party goods stores are attributable to a realignment of the Company's independent sales force in 1999 in connection with the introduction of its new gift lines. Gross profit for the third quarter of 1999 was 36.6% and was comparable to that of the corresponding quarter of 1998. Selling expenses of $6.3 million for the third quarter of 1999 were $1.9 million higher than those of the corresponding period in 1998 and increased from 7.0% of net sales to 8.4% of net sales. The increase in selling expenses reflect the inclusion of approximately $1.3 million of incremental selling expenses from Anagram, which historically operates at a higher level of expense as a percentage of sales. The remaining increase in selling expenses resulted from the addition of several new sales catalogues and the previously mentioned realignment of the independent sales force in 1999. General and administrative expenses of $7.7 million increased by $2.9 million for the third quarter of 1999 as compared to the corresponding period in 1998. General and administrative expenses increased as a percentage of net sales to 10.3% in the third quarter of 1999 from 7.7% in the corresponding period of 1998. The increase results primarily from the additional amortization of 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. 13 During the third quarter of 1999, the Company reduced the provision for doubtful accounts by $0.9 million, or 1.1% of net sales, reflecting the $1.9 million reduction of the provision for Party City, partially offset by a $1.0 million provision for other doubtful accounts. At September 30, 1999, the Company continues to maintain a related allowance for doubtful accounts and sales allowances which approximate one half of the account and note receivable balance due from Party City. Art and development costs of $2.4 million for the third quarter of 1999, increased by $0.6 million compared to the corresponding period in 1998. As a percentage of net sales, art and development costs were 3.2% for the third quarter of 1999 as compared to 2.9% for the corresponding period of 1998. The percentage increase reflects the Company's continued investment in additional staff associated with the development of new product lines. Interest expense of $6.6 million for the third quarter of 1999 increased by $1.2 million as compared to the corresponding period in 1998, principally as a result of higher borrowings in connection with the acquisition of Anagram (see "Liquidity and Capital Resources"), partially offset by a lower average variable interest rate on borrowings under the Bank Credit Facilities (7.73% in 1999 versus 8.43% in 1998). Income taxes for the third quarter of 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. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Results of Operations - --------------------- Percentage of Net Sales - ----------------------- Nine Months Ended September 30, 1999 1998 ------ ------ Net sales ............................ 100.0% 100.0% Cost of sales ........................ 63.4 64.0 ------ ------ Gross profit ................. 36.6 36.0 Operating expenses: Selling expenses .................. 8.0 6.9 General and administrative expenses 9.9 8.0 Provision for doubtful accounts ... 2.8 1.1 Art and development costs ......... 3.4 3.0 Restructuring charges ............. -- 1.4 ------ ------ Total operating expenses ........... 24.1 20.4 ------ ------ Income from operations ............. 12.5 15.6 Interest expense, net ................ 8.8 9.7 Other income, net .................... -- -- ------ ------ Income before income taxes and minority interests .. 3.7 5.9 Income tax expense ................... 1.5 2.5 Minority interests ................... -- -- ------ ------ Net income ................... 2.2% 3.4% ====== ====== Net sales for the nine months ended September 30, 1999 were $224.5 million, as compared to $166.5 million for the nine months ended September 30, 1998. Net sales for the nine months ended September 30, 1999 increased by 34.8%, primarily resulting from the inclusion of the incremental net sales of Anagram which totaled approximately $42.5 million. The remaining increase in net sales was attributable to strong growth in sales to both party goods superstores and smaller independent party goods stores. The Company attributes its current sales growth 14 to a realignment of its independent sales force in 1999 as well as its marketing strategy of continually offering new products, new designs and themes for existing products. Gross profit for the nine months ended September 30, 1999 was $82.2 million, or 36.6% of net sales, as compared to $59.9 million or 36.0% for the nine months ended September 30, 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 the addition of the incremental Anagram sales which generate higher gross margins. Selling expenses of $18.0 million for the nine months ended September 30, 1999 were $6.5 million higher than those of the corresponding period in 1998. Selling expenses increased as a percentage of net sales to 8.0% in the nine months ended September 30, 1999 from 6.9% in the corresponding period of 1998, principally due to the inclusion of approximately $5.0 million of incremental selling expenses of Anagram, which historically operates at a higher level of expense as a percentage of sales. The remaining increase in selling expenses resulted from the addition of several new sales catalogues and the realignment of the independent sales force in 1999. General and administrative expenses of $22.2 million for the nine months ended September 30, 1999 increased by $9.0 million as compared to the corresponding period in 1998. General and administrative expenses increased as a percentage of net sales to 9.9% from 8.0%. The increase primarily results from the additional amortization of 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. The provision for doubtful accounts for the nine months ended September 30, 1999 was $6.3 million or $4.5 million higher than in the corresponding period in 1998 and includes a $4.0 million charge for Party City, its largest customer. During the first quarter of 1999, the Company's largest customer, 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. On August 17, 1999, Party City received $30 million in new financing from a group of investors. Concurrent with the new financing, Party City entered into an agreement with its existing bank lenders whereby the bank lenders agreed not to exercise certain rights or remedies until June 30, 2000 based upon existing defaults, unless an event of default occurs. Party City also entered into an agreement with its trade vendors, including Amscan, whereby, among other things, the vendors have received promissory notes due November 15, 1999 for one-third of their then existing accounts receivable balances. The Company has reclassified $5.3 million from accounts receivable to prepaid expenses and other current assets at September 30, 1999 upon receipt of this promissory note. Additionally, the trade vendors have extended credit to Party City with respect to its Halloween and holiday purchases in an amount equal to 30% of those purchases. The remaining 70% will be paid in cash in advance. The vendors who have extended credit have received a shared lien on Party City's inventory for the amount of the credit extended. At September 30, 1999, the Company continues to maintain a related allowance for doubtful accounts and sales allowances which approximate one half of the account and note receivable balance of $15.8 million due from Party City, including the $4 million charged to the provision for doubtful accounts during the nine months ended September 30, 1999. The decrease in the provision for doubtful accounts during the third quarter reflected a reduction of approximately $1.9 million to the provision for Party City, partially offset by a $1.0 million provision for other doubtful accounts. Art and development costs of $7.7 million for the nine months ended September 30, 1999, increased by $2.7 million compared to the corresponding period in 1998. As a percentage of net sales, art and development costs were 3.4% for the third quarter of 1999 as compared to 3.0% for the corresponding period of 1998. The percentage increase reflects the Company's continued investment in additional staff associated with the development of new product lines partially offset by a reclassification of certain Anagram expenses incurred in the first half of 1999 from art and development costs to selling expense. Interest expense of $19.7 million for the nine months ended September 30, 1999 increased by $3.5 million as compared to the corresponding period in 1998 principally as a result of higher borrowings in connection with the acquisition of Anagram (see "Liquidity and Capital Resources"), partially offset by a lower average variable interest rate on borrowings under the Bank Credit Facilities (7.70% in 1999 versus 8.51% in 1998). 15 Income taxes for the nine months ended September 30, 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. LIQUIDITY AND CAPITAL RESOURCES In connection with the Company's recapitalization in December 1997, the Company received approximately $67.5 million from contributed capital (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"). 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, expiring December 31, 2002, 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 September 30, 1999, the Company had borrowing capacity of approximately $30.6 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. At September 30, 1999, the Company had three interest rate swap contracts outstanding with a financial institution and Goldman Sachs Capital Markets, L.P. covering $123.5 million of its Term Loan at effective interest rates ranging from 7.18% to 8.80%. 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 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 and potential acquisitions. However, management believes that current asset levels provide adequate capacity to support its operations for at least the next 12 months. As of September 30, 1999, the Company did not have material commitments for capital expenditures. Cash Flow Data - Nine Months Ended September 30, 1999 Compared to Nine Months - -------------------------------------------------------------------------------- Ended September 30, 1998 - ------------------------ During the nine months ended September 30, 1999, net cash provided by operating activities totaled $6.0 million, or $6.5 million lower than during the corresponding period of 1998. In addition to the $0.8 million decrease in net income, the lower cash flow from operations reflected an increase in the Company's net accounts receivable balance, as a result of higher sales and increased sales with extended terms and higher levels of inventory as the 16 Company prepares for the introduction of new product lines and for the Millennium, partially offset by an increase in trade accounts payable and accrued liabilities. Net cash used in investing activities during the nine months ended September 30, 1999 of $8.9 million principally reflected an upgrade of the Company's data processing systems, investment in additional manufacturing equipment, and inclusion of the capital expenditures of Anagram for the nine months ended September 30, 1999. Net cash used in investing activities during the nine months ended September 30, 1998 totaled $82.7 million and was comprised of $78.5 million of cash paid for the acquisitions of Anagram and the remaining 25% interest in the Company's U.K. based subsidiary, and $4.3 million for capital expenditures. During the nine months ended September 30, 1999, net cash provided by financing activities of $1.8 million principally consisted of the proceeds from short-term working capital borrowings, partially offset by the scheduled maturity of long-term obligations. During the nine months ended September 30, 1998, net cash used in financing activities of $39.5 million consisted of payments of $93.1 million to former shareholders whose investment in Company Common Stock was converted into the right to receive cash in connection with the merger in December of 1997 and the scheduled repayment of debt offset by net proceeds of $59.2 million from additional borrowings in connection with the acquisition of Anagram, proceeds of $0.6 million from other short-term borrowings, and the issuance of Common Stock to employees. Legal Proceedings - ----------------- The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations. 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, 2000. The Company expects to adopt SFAS No. 133 effective January 1, 2001. 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. 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 The Company conducted an assessment of computer systems and manufacturing and distribution systems to identify potential problems with processing of dates beyond 1999. That assessment indicated that the software and hardware (embedded chips) used in manufacturing and distribution systems do not require remediation to be Year 2000 compliant. The Company has completed upgrades to its principal business systems that were date-sensitive and that are now 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 has queried 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 17 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 has developed contingency plans for certain critical applications which involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. To date, the Company is 95% complete 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 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 than the interest rate actually paid for the nine months ended September 30, 1999, the Company's interest expense, after considering the effects of its interest rate swap agreements, would increase, and income before income taxes would decrease by $1.1 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 18 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 $1.1 million for the nine months ended September 30, 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. 19 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 Date: November 10, 1999 principal accounting officer) ---------------------- 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Amscan Holdings, Inc. as of September 30, 1999 and for the nine months then ended and is qualified in its entirety by reference to such financial statements. 0001024729 Amscan Holdings, Inc. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 558 0 65,933 (9,921) 62,174 135,798 102,134 (40,811) 272,047 59,646 267,847 0 0 0 (89,698) 272,047 224,496 224,496 142,301 142,301 54,184 6,263 19,675 8,349 3,411 4,934 0 0 0 4,934 0.00 0
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