AMSCAN HOLDINGS, INC.
Filed pursuant to Rule 424 (b) (3)
Registration No. 333-45457
Supplement No. 2 to Prospectus dated August 4, 1999, as supplemented by
Supplement No. 1 dated August 13, 1999
The date of this supplement No. 2 is November 10, 1999.
On November 10, 1999, Amscan Holdings, Inc. filed the attached report on Form
10-Q for the quarterly period ended September 30, 1999.
<PAGE>
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.
<PAGE>
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
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note)
ASSETS
------
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Nine Months Ended September 30, 1999
(Dollars in thousands)
(Unaudited)
<CAPTION>
Unamortized
Restricted Notes Accumulated
Additional Common Receivable Other
Common Paid-in Stock Award, from Comprehensive
Stock Capital Net Stockholders Deficit Loss Total
--------- ------------ ------------ ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
======= ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
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
=========
</TABLE>
10
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
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
=========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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).
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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
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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
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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
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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.
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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)
----------------------
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