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, 2000
[ ] 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, 2000, 1,132.54 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
<PAGE>
AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 2000
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 .......................................... 3
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2000 and 1999 ................ 4
Consolidated Statement of Stockholders' Deficit
for the Six Months Ended June 30, 2000 ..................... 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 ........................ 6
Notes to Consolidated Financial Statements .................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk .... 15
Part II
Item 2 Changes in Securities and Use of Proceeds ..................... 16
Item 6 Exhibits and Reports on Form 8-K .............................. 16
Signature ................................................................. 17
2
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -------------
(Unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 1,042 $ 849
Accounts receivable, net of allowances ................................... 55,753 56,896
Inventories, net of allowances ........................................... 65,507 59,193
Prepaid expenses and other current assets ................................ 11,813 11,802
--------- ---------
Total current assets ............................................... 134,115 128,740
Property, plant and equipment, net .......................................... 61,467 61,709
Intangible assets, net ...................................................... 61,173 63,331
Other assets, net ........................................................... 10,059 9,707
--------- ---------
Total assets ....................................................... $ 266,814 $ 263,487
========= =========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term obligations ................................................... $ 7,400 $ 4,688
Accounts payable ......................................................... 18,331 18,967
Accrued expenses ......................................................... 15,660 16,332
Income taxes payable ..................................................... 4,574 2,963
Current portion of long-term obligations ................................. 4,170 3,562
--------- ---------
Total current liabilities .......................................... 50,135 46,512
Long-term obligations, excluding current portion ............................ 263,232 266,891
Deferred income tax liabilities ............................................. 12,586 12,001
Other ....................................................................... 2,620 3,030
--------- ---------
Total liabilities .................................................. 328,573 328,434
Redeemable Common Stock ..................................................... 23,910 23,582
Stockholders' deficit:
Common Stock ............................................................. -- --
Additional paid-in capital ............................................... 233 225
Unamortized restricted Common Stock award, net ........................... (379) (405)
Notes receivable from stockholders ....................................... (534) (664)
Deficit .................................................................. (82,968) (86,797)
Accumulated other comprehensive loss ..................................... (2,021) (888)
--------- ---------
Total stockholders' deficit ........................................ (85,669) (88,529)
--------- ---------
Total liabilities, redeemable Common Stock and stockholders' deficit $ 266,814 $ 263,487
========= =========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the
audited consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................................ $ 78,758 $ 73,203 $ 156,135 $ 149,643
Cost of sales ............................ 50,560 47,131 97,676 95,251
--------- --------- --------- ---------
Gross profit ....................... 28,198 26,072 58,459 54,392
Operating expenses:
Selling expenses ...................... 7,040 5,743 14,056 11,697
General and administrative expenses.... 7,827 7,399 15,756 14,793
Provision for doubtful accounts ....... 3,906 709 4,373 7,121
Art and development costs ............. 2,090 2,355 4,100 4,571
--------- --------- --------- ---------
Total operating expenses ........... 20,863 16,206 38,285 38,182
--------- --------- --------- ---------
Income from operations ............. 7,335 9,866 20,174 16,210
Interest expense, net .................... 6,583 6,604 13,173 13,038
Other expense, net ....................... 4 43 73 65
--------- --------- --------- ---------
Income before income taxes and
minority interests ............... 748 3,219 6,928 3,107
Income tax expense ....................... 296 1,315 2,737 1,269
Minority interests ....................... 4 (25) 34 (6)
--------- --------- --------- ---------
Net income ......................... $ 448 $ 1,929 $ 4,157 $ 1,844
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2000
(Dollars in thousands)
(Unaudited)
<TABLE>
<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, 1999....... $ -- $ 225 $ (405) $ (664) $(86,797) $ (888) $(88,529)
Net income ..................... 4,157 4,157
Net change in cumulative
translation adjustment....... (1,133) (1,133)
--------
Comprehensive income 3,024
Payments received on notes
receivable and other......... 8 130 (328) (190)
Amortization of restricted
Common Stock award........... 26 26
-------- -------- -------- -------- -------- ------- --------
Balance at June 30, 2000........... $ -- $ 233 $ (379) $ (534) $(82,968) $(2,021) $(85,669)
======== ======== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 4,157 $ 1,844
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 6,942 6,575
Amortization of deferred financing costs ........................... 436 435
Amortization of restricted Common Stock award ...................... 26 85
Provision for doubtful accounts .................................... 4,373 7,121
Deferred income tax (benefit) expense .............................. (476) 164
(Gain) loss on disposal of property and equipment .................. (1) 72
Changes in operating assets and liabilities:
Increase in accounts receivable ................................ (3,584) (15,252)
Increase in inventories ........................................ (6,314) (2,891)
Decrease (increase) in prepaid expenses and other current assets 1,050 (597)
Increase in accounts payable, accrued expenses and
income taxes payable ......................................... 324 6,167
Other, net ......................................................... (806) (3,893)
-------- --------
Net cash provided by (used in) operating activities ............. 6,127 (170)
Cash flows from investing activities:
Capital expenditures .................................................. (5,032) (6,234)
Proceeds from sale of property and equipment .......................... 3 113
-------- --------
Net cash used in investing activities ........................... (5,029) (6,121)
Cash flows from financing activities:
Proceeds from short-term obligations .................................. 2,712 6,997
Repayment of loans, notes payable and long-term obligations ........... (3,051) (1,286)
Other ................................................................. 117 19
-------- --------
Net cash (used in) provided by financing activities ............. (222) 5,730
Effect of exchange rate changes on cash and cash equivalents .............. (683) 210
-------- --------
Net increase (decrease) in cash and cash equivalents ............ 193 (351)
Cash and cash equivalents at beginning of period .......................... 849 1,117
-------- --------
Cash and cash equivalents at end of period ................................ $ 1,042 $ 766
======== ========
Supplemental Disclosures:
Interest paid .............................................. $ 12,735 $ 11,946
Income taxes paid, net of refunds ...................... $ 866 $ 266
</TABLE>
Supplemental information on noncash activities:
There were no capital lease obligations incurred during the six months
ended June 30, 2000. Capital lease obligations of $651 were incurred during the
six months ended June 30, 1999.
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. AHI designs, manufactures, contracts for manufacture and
distributes party and novelty goods and gifts principally in North America,
South America, Europe, Asia and Australia.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States 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 months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, 1999.
In connection with the preparation of the accompanying unaudited
consolidated financial statements, the Company has reclassified certain amounts
in prior periods to conform to the current year presentation.
NOTE 3 - INVENTORIES
Inventories consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Finished goods ........................................ $ 55,149 $ 50,278
Raw materials ......................................... 7,918 6,706
Work-in-process ....................................... 4,393 4,238
-------- --------
67,460 61,222
Less: reserve for slow moving and obsolete inventory... (1,953) (2,029)
-------- --------
$ 65,507 $ 59,193
======== ========
</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 for the three and six months ended
June 30, 2000 and 1999 was determined based upon estimates of the Company's
consolidated effective income tax rates for the years ending December 31, 2000
and 1999, respectively. The differences between the consolidated effective
income tax rate and the U.S. Federal statutory rate are primarily attributable
to state income taxes and the effects of foreign operations.
NOTE 5 - COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ....................... $ 448 $ 1,929 $ 4,157 $ 1,844
Net change in cumulative
translation adjustment ......... (955) 37 (1,133) 31
------- ------- ------- -------
Comprehensive (loss) income ...... $ (507) $ 1,966 $ 3,024 $ 1,875
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive loss at June 30, 2000 and December 31,
1999 consisted solely of the Company's cumulative translation adjustment.
NOTE 6 - CAPITAL STOCK
At June 30, 2000 and December 31, 1999, 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 1,132.54 and 1,132.41 shares, respectively, were
issued and outstanding.
NOTE 7 - SEGMENT INFORMATION
Industry Segments
The Company principally operates in one operating segment which involves
the design, manufacture, contract for manufacture and distribution of party and
novelty goods and gifts.
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.
8
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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, 2000
Sales to unaffiliated customers .......... $ 68,635 $ 10,123 $ 78,758
Sales between geographic areas ........... 5,242 $ (5,242) --
--------- --------- --------- ---------
Net sales ................................ $ 73,877 $ 10,123 $ (5,242) $ 78,758
========= ========= ========= =========
Income from operations ................... $ 6,686 $ 649 $ 7,335
========= =========
Interest expense, net .................... 6,583
Other expense, net ....................... 4
---------
Income before income taxes and minority
interests ............................ $ 748
=========
Long-lived assets, net at June 30, 2000 .. $ 125,672 $ 7,027 $ 132,699
========= ========= =========
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 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, net at June 30, 1999 .. $ 129,250 $ 7,822 $ 137,072
========= ========= =========
Six Months Ended June 30, 2000
Sales to unaffiliated customers .......... $ 135,294 $ 20,841 $ 156,135
Sales between geographic areas ........... 8,726 $ (8,726) --
--------- --------- --------- ---------
Net sales ................................ $ 144,020 $ 20,841 $ (8,726) $ 156,135
========= ========= ========= =========
Income from operations ................... $ 18,456 $ 1,718 $ 20,174
========= =========
Interest expense, net .................... 13,173
Other expense, net ....................... 73
---------
Income before income taxes and minority
interests ............................ $ 6,928
=========
</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
=========
</TABLE>
NOTE 8 - PROVISION FOR DOUBTFUL ACCOUNTS
During the second quarter of 2000, two of the Company's customers filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. On a combined basis, these two customers accounted for approximately 4.0%
and 2.6% of the Company's consolidated net sales for the three and six months
ended June 30, 2000, respectively, and at June 30, 2000, the combined accounts
receivable balances due to the Company from these customers totaled $3.7
million. As a result, the Company charged $3.4 million to the provision for
doubtful accounts during the second quarter of 2000. The Company does not
believe the potential loss of these customers will have a material adverse
effect on the Company's future results of operations or its financial condition.
During the first quarter of 1999, the Company's largest customer, Party
City Corporation ("Party City"), announced that it would be in default of
certain covenants of its credit facility and, as a result, the Company charged
$6.0 million to the provision for doubtful accounts during the first quarter of
1999. Reflecting Party City's improved financial condition, the provision was
reversed during the second half of 1999. Sales to Party City's corporate stores
accounted for approximately 12.5% and 10.3% of the Company's consolidated net
sales for the three and six months ended June 30, 2000, respectively. Although
the Company believes its relationships with Party City and its franchisees are
good, if they were to significantly reduce their volume of purchases from the
Company, the Company's financial condition and results of operations could be
materially adversely affected.
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net sales ................................ 100.0% 100.0%
Cost of sales ............................ 64.2 64.4
----- -----
Gross profit ........................ 35.8 35.6
Operating expenses:
Selling expenses ..................... 8.9 7.8
General and administrative expenses 9.9 10.1
Provision for doubtful accounts ...... 5.0 1.0
Art and development costs ............ 2.7 3.2
----- -----
Total operating expenses ......... 26.5 22.1
----- -----
Income from operations ........... 9.3 13.5
Interest expense, net .................... 8.3 9.0
Other expense, net ....................... -- 0.1
----- -----
Income before income taxes
and minority interests ....... 1.0 4.4
Income tax expense ....................... 0.4 1.8
Minority interests ....................... -- --
----- -----
Net income ...................... 0.6% 2.6%
===== =====
</TABLE>
Net sales of $78.8 million for the second quarter of 2000 were $5.6
million higher than net sales for the second quarter of 1999. The increase in
net sales reflects increased sales of party goods and gift items to independent
party goods and specialty stores, as well as increased sales of solid color
tableware and gift items to superstores, partially offset by reduced sales of
party goods to other distributors. Increased sales to independent party goods
and specialty stores are attributable to a realignment of the Company's
independent sales force begun in the first quarter of 1999.
Gross profit for the second quarter of 2000 of 35.8% was comparable to
that of the second quarter of 1999 as the incremental margin achieved as a
result of increased sales was offset by a lower margin attributable to product
mix.
Selling expenses of $7.0 million for the three months ended June 30,
2000 were $1.3 million higher than those of the corresponding period in 1999 and
increased to 8.9% of net sales from 7.8% of net sales. The increase in selling
expenses reflects the continued development of a specialty sales force and
increased marketing initiatives relating to new gift product lines.
General and administrative expenses of $7.8 million increased by $0.4
million for the second quarter of 2000 as compared to the corresponding period
in 1999, principally due to depreciation and amortization on new data processing
equipment and increased expenses associated with the development of e-commerce
business opportunities. As a percentage of net sales, general and administrative
expenses were 9.9% for the three months ended June 30, 2000, versus 10.1% for
the corresponding period of 1999.
During the second quarter of 2000, two of the Company's customers filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. On a combined basis, these two customers accounted for approximately 4.0%
of the Company's consolidated net sales for the three months ended June 30,
2000, and at June
11
<PAGE>
30, 2000, the combined accounts receivable balances due to the Company from
these customers totaled $3.7 million. As a result of the filings, the Company
charged $3.4 million to the provision for doubtful accounts during the second
quarter of 2000. The Company does not believe the potential loss of these
customers will have a material adverse effect on the Company's future results of
operations or its financial condition.
Art and development costs of $2.1 million for the second quarter of
2000, decreased by $0.3 million compared to the corresponding period in 1999.
The higher art and development costs for the second quarter of 1999 included
certain start-up costs associated with the development of new product lines. As
a percentage of net sales, art and development costs were 2.7% for the second
quarter of 2000 as compared to 3.2% for the corresponding period of 1999.
Interest expense of $6.6 million for the second quarter of 2000 was
comparable to the corresponding period in 1999, and reflects a higher average
interest rate on lower average borrowings as compared to 1999.
Income taxes for the second quarter of 2000 and 1999 were based upon
estimated consolidated effective income tax rates of 39.5% and 40.85% for the
years ending December 31, 2000 and 1999, respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
RESULTS OF OPERATIONS
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net sales ................................ 100.0% 100.0%
Cost of sales ............................ 62.6 63.7
----- -----
Gross profit ........................ 37.4 36.3
Operating expenses:
Selling expenses ...................... 9.0 7.8
General and administrative expenses ... 10.1 9.9
Provision for doubtful accounts ....... 2.8 4.8
Art and development costs ............. 2.6 3.0
----- -----
Total operating expenses ........... 24.5 25.5
----- -----
Income from operations ............. 12.9 10.8
Interest expense, net .................... 8.4 8.7
Other expense, net ....................... -- --
----- -----
Income before income taxes
and minority interests ........ 4.5 2.1
Income tax expense ....................... 1.8 0.9
Minority interests ....................... -- --
----- -----
Net income ........................ 2.7% 1.2%
===== =====
</TABLE>
Net sales of $156.1 million for the six months ended June 30, 2000 were
$6.5 million higher than net sales for the corresponding period in 1999. The
increase in net sales reflects increased sales of party goods and gift items to
independent party goods and specialty stores, as well as increased sales of
solid color tableware and gift items to superstores, partially offset by reduced
sales of party goods to other distributors. Increased sales to independent party
goods and specialty stores are attributable to a realignment of the Company's
independent sales force begun in the first quarter of 1999.
Gross profit for the six months ended June 30, 2000 was 37.4% and was
1.1% higher than the corresponding period in 1999 principally as a result of the
realization of the full benefit from the closing of the Company's Canadian
warehouse in March 1999. Additionally, the incremental margin achieved as a
result of increased sales was offset by a lower margin attributable to product
mix.
12
<PAGE>
Selling expenses of $14.1 million for the six months ended June 30,
2000 were $2.4 million higher than those of the corresponding period in 1999 and
increased to 9.0% of net sales from 7.8% of net sales. The increase in selling
expenses reflects the continued development of a specialty sales force and
increased marketing initiatives relating to new gift product lines.
General and administrative expenses of $15.8 million increased by $1.0
million for the six months ended June 30, 2000 as compared to the corresponding
period in 1999 principally due to depreciation and amortization on new data
processing equipment and increased expenses associated with the development of
e-commerce business opportunities. As a percentage of net sales, general and
administrative expenses were 10.1% for the six months ended June 30, 2000,
versus 9.9% for the corresponding period of 1999.
During the second quarter of 2000, two of the Company's customers filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. On a combined basis, these two customers accounted for approximately 2.6%
of the Company's consolidated net sales for the six months ended June 30, 2000,
and at June 30, 2000, the combined accounts receivable balances due to the
Company from these customers totaled $3.7 million. As a result of the filings,
the Company charged $3.4 million to the provision for doubtful accounts during
the second quarter of 2000. The Company does not believe the potential loss of
these customers will have a material adverse effect on the Company's future
results of operations or its financial condition. During the six months ended
June 30, 1999, the Company's largest customer, Party City, announced that it
would be in default of certain covenants of its credit facility and, as a
result, the Company charged $6.0 million to the provision for doubtful accounts
relating to the accounts receivable due from Party City. Reflecting Party City's
improved financial condition, the provision was reversed during the second half
of 1999.
Art and development costs of $4.1 million for the six months ended June
30, 2000, decreased by $0.5 million compared to the corresponding period in
1999. The higher art and development costs for the six months ended June 30,
1999 included certain start-up costs associated with the development of new
product lines. As a percentage of net sales, art and development costs were 2.6%
for the first quarter of 2000 as compared to 3.0% for the corresponding period
of 1999.
Interest expense of $13.2 million for the six months ended June 30,
2000 increased by $0.1 million as compared to the corresponding period in 1999,
principally as a result of a higher average interest rate, partially offset by
the impact of lower average borrowings.
Income taxes for the six months ended June 30, 2000 and 1999 were based
upon estimated consolidated effective income tax rates of 39.5% and 40.85% for
the years ending December 31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had outstanding a senior term loan of
$152.0 million (the "Term Loan") provided under a bank credit agreement (the
"Bank Credit Facilities"), together with senior subordinated notes of $110.0
million (the "Notes") (collectively, the "Financings"). The Term Loan matures in
December 2004 and provides for amortization (in quarterly installments) of one
percent of the principal amount thereof per year for the first five years and
32.3% and 62.7% of the principal amount thereof in the sixth and seventh years,
respectively. The Term Loan bears interest, at the option of the Company, at the
lenders' customary base rate plus 1.375% per annum or at the lenders' customary
reserve adjusted Eurodollar rate plus 2.375% per annum. At June 30, 2000, the
floating interest rate on the Term Loan was 9.06%. The Notes bear interest at a
rate of 9 7/8% per annum and mature in December 2007. The Company is required to
make prepayments on the Bank Credit Facilities under certain circumstances,
including upon certain asset sales and issuance of debt or equity securities and
based on cash flows, as defined. A prepayment of $1.3 million on the Term Loan
was made by the Company during the first quarter of 2000 as required based on
its cash flows.
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In addition to the Term Loan, the Bank Credit Facilities provide for
revolving loan borrowings of up to $50 million (the "Revolving Credit
Facility"). The Revolving Credit Facility, expiring on December 31, 2002, bears
interest, at the option of the Company, at the lenders' customary base rate
plus, based on certain terms, either 0.75% or 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, 2000,
the Company had borrowing capacity of approximately $37.3 million under the
Revolving Credit Facility.
At June 30, 2000, 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 Financings and 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 June 30, 2000, the Company did not have material commitments for capital
expenditures.
CASH FLOW DATA - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
During the six months ended June 30, 2000, net cash provided by
operating activities totaled $6.1 million, an increase of $6.3 million as
compared to the corresponding period in 1999. Net cash flow provided by
operating activities before changes in other operating assets and liabilities
for the six months ended June 30, 2000 and 1999, was $15.5 million and $16.3
million, respectively. Net cash used as a result of changes in other operating
assets and liabilities for the six months ended June 30, 2000 and 1999, was $9.4
million and $16.5 million, respectively.
Net cash used in investing activities during the six months ended June
30, 2000 of $5.0 million decreased by $1.1 million from the same period in 1999
primarily due to the investment in new data processing equipment during 1999.
During the six months ended June 30, 2000, net cash used in financing
activities was $0.2 million and primarily consisted of the repayment of a
portion of the Term Loan, including the $1.3 million prepayment noted above, and
repayment of other long-term obligations, partially offset by the proceeds from
short-term working capital borrowings. During the comparable period in 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 the Term Loan and the repayment of other long-term
obligations.
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.
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RECENTLY ISSUED ACCOUNTING STANDARDS
Pronouncements issued by the Financial Accounting Standards Board or
other authoritative accounting standards groups with future effective dates are
either not applicable or not significant to the financial statements of the
Company.
"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, 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) introduction of new
product lines by the Company, (5) the introduction of new products by the
Company's competitors, (6) the inability of the Company to increase prices to
recover fully future increases in raw material prices, especially increases in
paper prices, (7) the loss of key employees, (8) changes in general business
conditions, (9) other factors which might be described from time to time in the
Company's filings with the Commission, and (10) 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 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 three months ended June 30, 2000 and 1999, the Company's interest
expense, after considering the effects of its interest rate swap agreements,
would have increased, and income before income taxes would have decreased, by
$0.2 million and $0.4 million, respectively. 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, 2000 and 1999, the Company's
interest expense, after considering the effects of its interest rate swap
agreements, would have increased, and income before income taxes would have
decreased, by $0.4 million and $0.8 million, respectively. These amounts are
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
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does not consider the effects of the reduced level of overall economic activity
that could exist in such an environment. Further, in the event of a change of
such magnitude, management would likely take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity analysis assumes
no changes in the Company's financial structure.
The Company's earnings are also affected by fluctuations in the value
of the U.S. dollar as compared to foreign currencies, predominately in European
countries, as a result of the sales of its products in foreign markets. Foreign
currency forward contracts are used periodically to hedge against the earnings
effects of such fluctuations. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which the Company's foreign sales are
denominated would have resulted in a decrease in gross profit of $0.3 million
and $0.2 million for the three months ended June 30, 2000 and 1999,
respectively. 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 $0.7 million and $0.5 million for the
six months ended June 30, 2000 and 1999, respectively. These calculations assume
that each exchange rates would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange rates, which
could change the U.S. dollar value of the resulting sales, changes in exchange
rates 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) In April 2000, the Company issued 0.132 shares of Common Stock to
a former employee upon exercise of a stock option for $8,000 in
cash. No underwriting discounts or commissions were paid in
connection with such sale. This share was part of an offering to
a limited number of accredited investors and employees of the
Company. Such sale was exempt under Section 4 (2) of the
Securities Act of 1933.
d) Not applicable.
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
Date: August 11, 2000 and as principal accounting
--------------- officer)
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