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 June 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 of (I.R.S. Employer Identification
incorporation or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
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 August 11, 1999, 1,132.41 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
<PAGE>
AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 1999
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998............................................... 3
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 1999 and 1998..................... 4
Consolidated Statement of Stockholders' Deficit
for the Six Months Ended June 30, 1999.......................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998......................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk .................................................... 16
Part II
Item 6 Exhibits and Reports on Form 8-K................................ 17
Signature ................................................................ 18
2
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1999 1998
------- -----------
(Unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 766 $ 1,117
Accounts receivable, net of allowances................................................. 57,538 49,339
Inventories............................................................................ 57,582 54,691
Prepaid expenses and other current assets.............................................. 11,464 9,113
---------- -----------
Total current assets............................................................. 127,350 114,260
Property, plant and equipment, net........................................................ 60,993 59,260
Intangible assets, net.................................................................... 64,843 66,500
Other assets, net......................................................................... 11,236 8,832
---------- -----------
Total assets..................................................................... $264,422 $248,852
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term obligations................................................................. $ 16,625 $ 9,628
Accounts payable....................................................................... 17,843 11,494
Accrued expenses....................................................................... 16,643 17,520
Income taxes payable................................................................... 1,386 593
Current portion of long-term obligations............................................... 3,322 3,549
---------- ----------
Total current liabilities........................................................ 55,819 42,784
Long-term obligations, excluding current portion.......................................... 269,130 270,127
Deferred income tax liabilities........................................................... 10,046 8,128
Other..................................................................................... 3,163 3,553
---------- ----------
Total liabilities................................................................ 338,158 324,592
Redeemable Common Stock................................................................... 19,547 19,547
Stockholders' deficit:
Common Stock........................................................................... - -
Additional paid-in capital............................................................. 225 225
Unamortized restricted Common Stock award, net......................................... (490) (575)
Notes receivable from officers......................................................... (674) (718)
Deficit ............................................................................... (91,125) (92,969)
Accumulated other comprehensive loss................................................... (1,219) (1,250)
----------- ----------
Total stockholders' deficit...................................................... (93,283) (95,287)
---------- ---------
Total liabilities, redeemable Common Stock and stockholders' deficit............. $264,422 $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>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.................................................. $73,203 $48,686 $149,643 $104,247
Cost of sales.............................................. 46,695 31,023 94,815 67,012
-------- -------- --------- ---------
Gross profit......................................... 26,508 17,663 54,828 37,235
Operating expenses:
Selling expenses........................................ 5,503 3,533 11,357 7,159
General and administrative expenses..................... 7,483 4,149 14,527 8,468
Provision for doubtful accounts ($5,950 in the
six months ended June 30, 1999 related
to Party City Corporation)............................ 709 531 7,121 1,303
Art and development costs............................... 2,947 1,596 5,613 3,216
Restructuring charges................................... - 2,400 - 2,400
-------- -------- --------- ---------
Total operating expenses............................. 16,642 12,209 38,618 22,546
-------- -------- --------- ---------
Income from operations............................... 9,866 5,454 16,210 14,689
Interest expense, net...................................... 6,604 5,498 13,038 10,763
Other expense (income), net................................ 43 (19) 65 (59)
-------- -------- --------- ---------
Income (loss) before income taxes and
minority interests................................. 3,219 (25) 3,107 3,985
Income tax expense (benefit)............................... 1,315 (10) 1,269 1,654
Minority interests......................................... (25) (45) (6) 30
-------- -------- --------- ---------
Net income........................................... $ 1,929 $ 30 $ 1,844 $ 2,301
======== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 1999
(Dollars in thousands)
(Unaudited)
Unamortized
Restricted Notes Accumulated
Additional Common Receivable Other
Common Paid-in Stock Award, from Comprehensive
Stock Capital Net Officers Deficit Loss Total
-------- ----------- ------------ -------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998.. $ - $ 225 $(575) $(718) $(92,969) $(1,250) $(95,287)
Net income................. 1,844 1,844
Net change in cumulative
translation adjustment.. 31 31
--------
Comprehensive income. 1,875
Payments received on notes
receivable from officers 44 44
Amortization of restricted
Common Stock award...... 85 85
--------- ---------- ------- ---------- --------- ----------- ---------
Balance at June 30, 1999...... $ - $ 225 $(490) $(674) $(91,125) $(1,219) $(93,283)
========= ========== ====== ====== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 1,844 $ 2,301
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization.................................................... 6,575 3,445
Amortization of deferred financing costs......................................... 435 348
Amortization of restricted Common Stock award.................................... 85 130
Provision for doubtful accounts.................................................. 7,121 1,303
Restructuring charges............................................................ 2,400
Deferred income tax expense (benefit)............................................ 164 (251)
Loss (gain) on disposal of property and equipment................................ 72 (2)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................... (15,252) 880
(Increase) decrease in inventories............................................ (2,891) 5,259
(Increase) decrease in prepaid expenses and other current assets.............. (597) 492
Increase (decrease) in accounts payable, accrued expenses and
income taxes payable....................................................... 6,167 (8,905)
Other, net....................................................................... (3,893) (1,294)
--------- ---------
Net cash (used in) provided by operating activities........................... (170) 6,106
Cash flows from investing activities:
Capital expenditures................................................................ (6,234) (2,474)
Proceeds from sale of property and equipment........................................ 113 23
--------- ---------
Net cash used in investing activities......................................... (6,121) (2,451)
Cash flows from financing activities:
Payments to acquire Common Stock in Merger.......................................... (25) (93,085)
Net proceeds from issuance of Common Stock.......................................... 181
Proceeds from short-term obligations................................................ 6,997 167
Repayment of loans, notes payable and long-term obligations......................... (1,286) (2,058)
Other .............................................................................. 44 22
--------- ---------
Net cash provided by (used in) financing activities........................... 5,730 (94,773)
Effect of exchange rate changes on cash and cash equivalents............................ 210 (588)
--------- ---------
Net decrease in cash and cash equivalents..................................... (351) (91,706)
Cash and cash equivalents at beginning of period........................................ 1,117 111,539
--------- ---------
Cash and cash equivalents at end of period.............................................. $ 766 $ 19,833
========= =========
Supplemental Disclosures:
Interest paid................................................................ $11,946 $8,345
Taxes paid, net of refunds................................................... $266 $2,297
</TABLE>
Capital lease obligations of $651 and $94 were incurred during the six months
ended June 30, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
6
<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.
Amscan Holdings and its subsidiaries design, manufacture, contract for
manufacture and distribute party and novelty goods principally in the United
States, Canada and Europe.
Note 2: Basis of Presentation
The consolidated financial statements include the accounts of Amscan
Holdings and its subsidiaries.
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 six-month periods ended June
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):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Finished goods ................................................ $49,426 $48,093
Raw materials ................................................. 5,087 4,845
Work-in-process ............................................... 4,677 3,345
--------- ---------
59,190 56,283
Less: reserve for slow moving and obsolete inventory........... (1,608) (1,592)
--------- ---------
$57,582 $54,691
========= =========
</TABLE>
Inventories are valued at the lower of cost, determined on a first in -
first out basis, or market.
7
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Note 4: Income Taxes
The consolidated income tax expense (benefit) for the three and six
month periods ended June 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 (Loss)
Comprehensive income (loss) consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.............................. $1,929 $ 30 $1,844 $2,301
Net change in cumulative
translation adjustment............... 37 (530) 31 (545)
------ ----- ------ ------
Comprehensive income (loss)........ $1,966 $(500) $1,875 $1,756
====== ====== ====== ======
</TABLE>
Accumulated other comprehensive loss at June 30, 1999 and December 31,
1998 consisted solely of the Company's cumulative translation adjustment.
Note 6: Capital Stock
At June 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.
8
<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 one single foreign operation is significant
to the Company's consolidated operations. Sales between geographic areas are
made at cost plus a share of operating profit.
The Company's geographic area data is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Sales to unaffiliated customers................... $ 63,269 $ 9,934 $ 73,203
Sales between geographic areas.................... 5,630 $ (5,630) -
-------- ------- --------- --------
Net sales......................................... $ 68,899 $ 9,934 $ (5,630) $ 73,203
======== ====== ========= ========
Income (loss) from operations..................... $ 10,096 $ (230) $ 9,866
======== =======
Interest expense, net............................. 6,604
Other expense, net................................ 43
--------
Income before income taxes and minority
interests..................................... $ 3,219
========
Long-lived assets at June 30, 1999 $135,787 $ 9,379 $ (8,094) $137,072
======== ======= ========= ========
Three Months Ended June 30, 1998
Sales to unaffiliated customers................... $ 43,066 $ 5,620 $ 48,686
Sales between geographic areas.................... 2,396 $ (2,396) -
-------- ------- --------- --------
Net sales......................................... $ 45,462 $ 5,620 $ (2,396) $ 48,686
======== ======= ========= ========
Income from operations............................ $ 5,103 $ 351 $ 5,454
======== =======
Interest expense, net............................. 5,498
Other income, net................................. (19)
--------
Loss before income taxes and minority
interests..................................... $ (25)
========
</TABLE>
9
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Six Months Ended June 30, 1999
Sales to unaffiliated customers................... $129,803 $19,840 $149,643
Sales between geographic areas.................... 10,126 471 $(10,597) -
-------- ------- -------- --------
Net sales......................................... $139,929 $20,311 $(10,597) $149,643
======== ======= ======== ========
Income from operations............................ $ 16,135 $ 75 $ 16,210
======== =======
Interest expense, net............................. 13,038
Other expense, net................................ 65
--------
Income before income taxes and minority
interests..................................... $ 3,107
========
Six Months Ended June 30, 1998
Sales to unaffiliated customers................... $92,353 $11,894 $104,247
Sales between geographic areas.................... 4,189 $(4,189) -
------- ------- -------- ---------
Net sales......................................... $96,542 $11,894 $(4,189) $104,247
======= ======= ======= ========
Income from operations............................ $14,025 $ 664 $ 14,689
======= =======
Interest expense, net............................. 10,763
Other income, net................................. (59)
--------
Income before income taxes and minority
interests..................................... $ 3,985
========
</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 as of December 31, 1998. The Company understands that Party City
is negotiating with its lenders to amend its credit facility and with its
vendors to amend existing credit terms on certain inventory. The Company also
understands that Party City is considering various alternatives to improve its
current financial condition. Based on the current financial condition of Party
City, the Company has established reserves approximating 50% of the $13,200,000
accounts receivable balance due from Party City corporate stores at June 30,
1999, including $5,950,000 charged to the provision for doubtful accounts during
the first quarter of 1999.
For the six months ended June 30, 1999 and 1998, sales to Party City's
corporate stores represented 12% and 13%, respectively, of consolidated net
sales. If Party City were to significantly reduce their volume of purchases from
the Company for any reason, the Company's financial condition and results of
operations could be materially adversely affected.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Results of Operations
Percentage of Net Sales
Three Months Ended June 30,
1999 1998
---------- ---------
Net sales................................... 100.0% 100.0%
Cost of sales............................... 63.8 63.7
------ ------
Gross profit........................ 36.2 36.3
Operating expenses:
Selling expenses......................... 7.5 7.3
General and administrative expenses...... 10.2 8.5
Provision for doubtful accounts.......... 1.0 1.1
Art and development costs................ 4.0 3.3
Restructuring charges..................... - 4.9
------- -------
Total operating expenses............ 22.7 25.1
------ -------
Income from operations.............. 13.5 11.2
Interest expense, net....................... 9.0 11.3
Other expense (income), net................. 0.1 -
------- -------
Income (loss) before income taxes
and minority interests......... 4.4 (0.1)
Income tax expense (benefit)................ 1.8 (0.1)
Minority interests.......................... - (0.1)
------ --------
Net income.......................... 2.6% 0.1%
====== =======
Net sales for the three months ended June 30, 1999 totaled $73.2
million and were $24.5 million or 50.4% higher than net sales for the three
months ended June 30, 1998. The increase in net sales for the three months ended
June 30, 1999 primarily resulted from the inclusion of net sales of Anagram
International Inc. ("Anagram") which totaled approximately $15.6 million.
Anagram, a manufacturer and distributor of metallic balloons, was acquired in
September 1998. The remaining increase in net sales was attributable to strong
sales growth in both the party goods superstores and independent stores
channels, and to sales growth principally resulting from a realignment of the
Company's independent sales force in 1999.
Gross profit margin for the three month periods ended June 30, 1999 and
1998 remained constant at approximately 36%.
Selling expenses of $5.5 million for the three months ended June 30,
1999 were $2.0 million higher than those of the corresponding period in 1998 and
increased from 7.3% of net sales to 7.5% of net sales. The increase in selling
expenses reflect the inclusion of approximately $1.5 million of 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 realignment of the
independent sales force in 1999.
General and administrative expenses of $7.5 million increased by $3.3
million for the three months ended June 30, 1999 as compared to the
corresponding period in 1998. General and administrative expenses increased as a
percentage of net sales to 10.2% in the three months ended June 30, 1999 from
8.5% in the corresponding period of 1998. 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.
11
<PAGE>
Provision for doubtful accounts of $0.7 million for the three months
ended June 30, 1999 was $0.2 million higher than in the three months ended June
30, 1998. The provision for doubtful accounts for both periods approximated 1.0%
of net sales.
Art and development costs of $2.9 million for the three months ended
June 30, 1999, increased by $1.4 million compared to the corresponding period in
1998. As a percentage of net sales, art and development costs increased to 4.0%
for the three months ended June 30, 1999 as compared to 3.3% in the
corresponding period of 1998 and reflected the Company's investment in
additional staff associated with the development of new product lines.
In the second quarter of 1998 the Company recorded a charge of $2.4
million for the restructuring of its distribution operations which included the
closure of distribution facilities in California and Canada. The restructuring
included the elimination of approximately 100 positions and reduced costs and
improved operating efficiencies. The restructuring charge included the
write-down of property, plant and equipment of $1.3 million, the accrual of
future lease obligations of $0.5 million, severance and related costs of $0.3
million and other costs of $0.3 million.
Interest expense of $6.6 million for the three months ended June 30, 1999
increased by $1.1 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
(7.5% in 1999 versus 8.6% in 1998).
Income taxes for the three months ended June 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.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Results of Operations
Percentage of Net Sales
Six Months Ended June 30,
1999 1998
---------- ---------
Net sales................................... 100.0% 100.0%
Cost of sales............................... 63.4 64.3
------ ------
Gross profit........................ 36.6 35.7
Operating expenses:
Selling expenses......................... 7.6 6.9
General and administrative expenses...... 9.7 8.1
Provision for doubtful accounts (4.0%
in 1999 related to Party City)....... 4.8 1.3
Art and development costs................ 3.7 3.0
Restructuring charges..................... - 2.3
------ ------
Total operating expenses.................. 25.8 21.6
------ ------
Income from operations.................... 10.8 14.1
Interest expense, net....................... 8.7 10.3
Other expense (income), net................. - (0.1)
------ ------
Income before income taxes
and minority interests............. 2.1 3.9
Income tax expense.......................... 0.9 1.6
Minority interests.......................... - 0.1
------ ------
Net income.......................... 1.2% 2.2%
====== ======
12
<PAGE>
Net sales for the six months ended June 30, 1999 were $149.6 million,
as compared to $104.2 million for the six months ended June 30, 1998. Net sales
for the six months ended June 30, 1999 increased by 43.6%, primarily resulting
from the inclusion of net sales of Anagram which totaled approximately $31.0
million. The remaining increase in net sales was attributable to strong growth
in sales to both party goods superstores and smaller independent stores. The
Company attributes its sales growth to a realignment of its independent sales
force, and its marketing strategy of continually offering new products, new
designs and themes for existing products.
Gross profit for the six months ended June 30, 1999 was $54.8 million,
or 36.6% of net sales, as compared to $37.2 million or 35.7% for the six months
ended June 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 improved efficiencies
experienced at the manufacturing levels.
Selling expenses of $11.4 million for the six months ended June 30,
1999 were $4.2 million higher than those of the corresponding period in 1998.
Selling expenses increased as a percentage of net sales to 7.6% in the six
months ended June 30, 1999 from 6.9% in the corresponding period of 1998,
principally due to the inclusion of approximately $3.2 million of 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 $14.5 million increased by $6.1
million for the six months ended June 30, 1999 as compared to the corresponding
period in 1998. General and administrative expenses increased as a percentage of
net sales from 8.1% to 9.7%. 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 six months ended June 30,
1999 was $7.1 million or $5.8 million higher than in the corresponding period in
1998. During the first quarter of 1999, the Company's largest customer, Party
City Corporation ("Party City") announced that, due to difficulties implementing
new financial reporting and accounting systems, it would not be able to complete
its year end audit and that it would be in default of certain covenants of its
credit facility as of December 31, 1998. The Company understands that Party City
is negotiating with its lenders to amend its credit facility and with its
vendors to amend existing credit terms on certain inventory. The Company also
understands that Party City is considering various alternatives to improve its
current financial condition. Based on Party City's current financial condition,
the Company established reserves approximating 50% of the $13.2 million accounts
receivable balance due from Party City corporate stores at June 30, 1999,
including $6.0 million charged to the provision for doubtful accounts during the
first quarter of 1999.
Art and development costs of $5.6 million for the six months ended June
30, 1999, increased by $2.4 million compared to the corresponding period in
1998. As a percentage of net sales, art and development costs increased to 3.7%
in the six months ended June 30, 1999 from 3.0% for the same period in 1998,
reflecting the Company's investment in additional staff associated with the
development of new product lines.
Interest expense of $13.0 million for the six months ended June 30, 1999
increased by $2.3 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
(7.7% in 1999 versus 8.5% in 1998).
Income taxes for the six months ended June 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.
13
<PAGE>
Liquidity and Capital Resources
On December 19, 1997, the Company and Confetti Acquisition, Inc.
("Confetti") consummated a merger (the "Merger"), providing for a
recapitalization of the Company in which Confetti was merged with and into the
Company with the Company as the surviving corporation. The Merger was financed
with an equity contribution of approximately $67.5 million (including
contributions of Company Common Stock by certain employee stockholders and
issuances of restricted Common Stock), $117 million from a senior term loan (the
"Term Loan") provided under a bank credit agreement (the "Bank Credit
Facilities") and $110 million from the issuance of 9 7/8% senior subordinated
notes (the "Notes") (collectively, the "Merger Financings"). The Merger has been
accounted for as a recapitalization and, accordingly, the historical basis of
the Company's assets and liabilities has not been affected.
The Company is obligated to obtain interest rate protection, pursuant
to interest rate swaps, caps or other similar arrangements satisfactory to GS
Credit Partners, with respect to a notional amount of not less than half of the
aggregate amount outstanding under the Term Loan, which protection must remain
in effect for not less than three years. The interest rate swap contracts
require the Company to settle the difference in interest obligations quarterly.
The Company had two interest rate swap contracts outstanding with a financial
institution and Goldman Sachs Capital Markets, L.P. covering $93,500,000 of its
Term Loan at effective interest rates ranging from 7.18% to 8.36% at June 30,
1999.
In addition to the Term Loan, the Bank Credit Facilities, as amended,
provide for revolving loan borrowings of up to $50 million (the "Revolving
Credit Facility"). The Revolving Credit Facility has a term of five years and
bears interest, at the option of the Company, at the lenders' customary base
rate plus 1.25% per annum or at the lenders' customary reserve adjusted
Eurodollar rate plus 2.25% per annum. Interest on balances outstanding under the
Revolving Credit Facility are subject to adjustment in the future based on the
Company's performance. At June 30, 1999, the Company had borrowing capacity of
approximately $28.4 million under the Revolving Credit Facility.
The Company financed the September 1998 acquisition of Anagram with $40
million of senior term debt, approximately $20 million of additional revolving
credit borrowings, cash on hand, the issuance of 120 shares of the Company's
redeemable Common Stock valued at $12.6 million and warrants to purchase 10
shares of the Company's Common Stock valued at $0.2 million. In connection with
and upon consummation of the acquisition, the Company amended and restated the
Revolving Credit Facility to provide for, among other things, the additional
senior term debt.
Based upon the current level of operations and anticipated growth, the
Company anticipates that its operating cash flow, together with available
borrowings under the Revolving Credit Facility, will be adequate to meet its
anticipated future requirements for working capital and operating expenses 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 to permit potential acquisitions. However, management believes that
additions to plant and equipment during the past three years provide adequate
capacity to support its operations for at least the next 12 months. As of June
30, 1999, the Company did not have material commitments for capital
expenditures.
Cash Flow Data - Six Months Ended June 30, 1999 Compared to Six Months Ended
June 30, 1998
During the six months ended June 30, 1999, net cash used in operating
activities totaled $0.2 million, as compared to net cash provided by operating
activities totaling $6.1 million in the corresponding period of 1998. The net
cash used in operating activities in 1999 reflects an increase in the Company's
net accounts receivable
14
<PAGE>
balance, as a result of higher sales in addition to increased sales with
extended terms. The increase in net accounts receivable was partially offset by
the changes in other operating assets and liabilities.
Net cash used in investing activities during the six months ended June
30, 1999 of $6.1 million increased by $3.7 million from the corresponding period
in 1998, principally reflecting an upgrade of the Company's data processing
systems, investment in additional manufacturing equipment, and inclusion of the
capital expenditures of Anagram for the six months ended June 30, 1999.
During the six months ended June 30, 1999, net cash provided by
financing activities of $5.7 million principally consisted of the proceeds from
short-term working capital borrowings, partially offset by the scheduled
maturity of long-term obligations. During the comparable period in 1998, net
cash used in financing activities of $94.8 million principally consisted of
payments to former shareholders whose investment in Company Common Stock was
converted into the right to receive cash in connection with the Merger and the
scheduled repayment of debt offset by the net proceeds received from short-term
borrowings and the issuance of Common Stock to employees as well as payments
received applicable to notes receivable from officers
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. In July 1999, the Company
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 is in the process of querying its significant suppliers and
subcontractors that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The Company is currently working on contingency plans for certain
critical applications. These contingency plans are expected to be completed by
September 1999 and involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies.
To date, the Company is 90% 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.
15
<PAGE>
"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 six months ended
June 30, 1999, the Company's interest expense, after considering the effects of
its interest rate swap agreements, would increase, and income before taxes would
decrease by $0.8 million. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's borrowing cost, short-term
investment balances, and interest rate swap agreements. This analysis does not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. Further, in the event of a change of such
magnitude, management would likely take actions to further mitigate its exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes no
changes in the Company's financial structure.
The Company's earnings are also affected by fluctuations in the value
of the U.S. dollar as compared to foreign currencies, predominately in European
countries, as a result of the sales of its products in foreign markets. Foreign
currency forward contracts are used periodically to hedge against the earnings
effects of such fluctuations. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which the Company's foreign sales are
denominated would have resulted in a decrease in gross profit of $0.5 million
for the six months ended
16
<PAGE>
June 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.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
----------------------------
Michael A. Correale
Controller
(on behalf of the registrant
and as principal accounting
Date: August 13, 1999 officer)
---------------
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Amscan Holdings, Inc. as of June 30, 1999 and for the
six months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001024729
<NAME> Amscan Holdings, Inc.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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