-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QQN46lOv7ve6iCZ3bZTJgTEQ2j8Xe3sJ9C6zDXG37BKIfXzTkXqUjO/SJ3ijcHkm uqg7WbkDglJYFtxGP0Pkog== 0000913355-97-000069.txt : 19970815 0000913355-97-000069.hdr.sgml : 19970815 ACCESSION NUMBER: 0000913355-97-000069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21827 FILM NUMBER: 97664016 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JUNE 29, 1997 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, 1997 [ ] 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 ----- ----- Number of shares of the registrant's Common Stock, par value $0.10 per share, outstanding as of August 8, 1997: 21,098,785 AMSCAN HOLDINGS, INC. FORM 10-Q June 30, 1997 Table of Contents PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 1997 and December 31, 1996..........................................3 Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 1997 and 1996.............4 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 1997.........................5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996........................6 Notes to Consolidated Financial Statements.....................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............14 Item 5. Other Information..............................................14 Item 6. Exhibits and Reports on Form 8-K...............................15 Signatures.............................................................16 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, 1997 1996 ---------- ------------ (Unaudited) (Note) (In thousands) ASSETS Cash and cash equivalents .................... $ 1,251 $ 1,589 Accounts receivable, net of allowances ....... 46,650 37,378 Inventories .................................. 43,065 45,693 Deposits and other current assets ............ 10,504 11,360 --------- --------- Total current assets ....................... 101,470 96,020 Property, plant and equipment, net ........... 35,512 34,663 Intangible assets, net ....................... 7,445 7,443 Other assets ................................. 2,391 2,148 --------- --------- Total assets ............................... $ 146,818 $140,274 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Loans and notes payable ...................... $ 8,624 $ 29,328 Subordinated and other indebtedness due to stockholders ............................... 1,193 1,393 Accounts payable ............................. 7,992 7,128 Accrued expenses ............................. 5,944 9,403 Income taxes payable ......................... 1,955 822 Current portion of long-term obligations ..... 5,591 2,541 --------- --------- Total current liabilities .................. 31,299 50,615 Long-term obligations, excluding current portion .................................... 26,218 15,085 Deferred tax liabilities ..................... 5,585 5,662 Other ........................................ 995 963 --------- --------- Total liabilities .......................... 64,097 72,325 Stockholders' equity: Preferred Stock ($0.10 par value; 5,000,000 shares authorized; none issued and outstanding) ............................... - - Common Stock ($0.10 par value; 50,000,000 shares authorized; 21,120,476 and 20,698,076 shares issued, respectively) .... 2,112 2,070 Additional paid-in capital .................... 66,000 61,503 Retained earnings ............................ 15,026 4,748 Foreign currency translation adjustment ...... (127) (372) Treasury stock, at cost (21,691 shares) ...... (290) - --------- --------- Total stockholders' equity ................. 82,721 67,949 --------- --------- Total liabilities and stockholders' equity ................................... $146,818 $140,274 ========= ========= Note: The balance sheet at December 31, 1996 has been derived from the audited consolidated financial statements at that date. See accompanying notes. 3 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1997 1996 1997 1996 (In thousands, except per share data) Net sales .......................... $49,225 $45,714 $102,401 $92,972 Cost of sales ...................... 31,554 28,187 65,964 58,590 ---------- ------- ---------- ------- Gross profit ..................... 17,671 17,527 36,437 34,382 Operating expenses: Selling expenses ................. 3,127 2,963 6,226 5,936 General and administrative expenses ....................... 3,945 4,753 8,309 8,747 Art and development costs ........ 1,293 1,248 2,567 2,450 Special bonuses .................. - 1,000 - 2,100 ---------- ------- ---------- ------- Total operating expenses ....... 8,365 9,964 17,102 19,233 ---------- ------- ---------- ------- Income from operations ......... 9,306 7,563 19,335 15,149 Interest expense, net .............. 882 1,604 1,866 3,084 Other (income) expense, net ........ (12) 29 (39) (143) ---------- ------- ---------- ------- Income before income taxes and minority interests ............. 8,436 5,930 17,508 12,208 Income taxes ....................... 3,417 251 7,145 470 Minority interests ................. 43 559 85 825 ---------- ------- ---------- ------- Net income ....................... $ 4,976 $ 5,120 $ 10,278 $10,913 ========== ======= ========== ======= Net income per common share ...... $ 0.24 $ 0.49 ========== ========== Weighted average common and common equivalent shares used in computation ........... 21,109,511 21,096,294 ========== ========== Pro forma data (Note 6): Income before income taxes ....... $ 5,371 $ 11,383 Pro forma income tax expense ..... 2,253 4,737 ------- ------- Pro forma net income ............. $ 3,118 $ 6,646 ======= ======= See accompanying notes. 4 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 1997 (Unaudited)
Foreign Additional Currency Common Paid-in Retained Translation Treasury Stock Capital Earnings Adjustment Stock Total -------- ---------- -------- ----------- -------- ----- (In thousands) Balance as of December 31, 1996 $ 2,070 $ 61,503 $ 4,748 $ (372) $ - $ 67,949 Net income - - 10,278 - - 10,278 Net proceeds from sale of Common Stock (Note 3) 42 4,497 - - - 4,539 Payments to acquire treasury stock - - - - (290) (290) Net change in translation adjustment - - - 245 - 245 -------- -------- --------- --------- --------- --------- Balance as of June 30, 1997 $ 2,112 $ 66,000 $ 15,026 $ (127) $ (290) $ 82,721 ======== ======== ========= ========= ========= =========
See accompanying notes. 5 AMSCAN HOLDINGS, INC. CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) Six Months Ended June 30, 1997 1996 (In thousands) Cash flows from operating activities: Net income $10,278 $10,913 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,990 2,271 Provision for doubtful accounts 577 237 Changes in operating assets and liabilities: Increase in accounts receivable (9,843) (6,948) Decrease (increase) in inventories 2,628 (4,461) Decrease (increase) in deposits and other current assets 856 (8,700) (Decrease) increase in accounts payable, accrued expenses and income taxes payable (1,462) 259 Other, net (456) (1,771) -------- -------- Net cash provided by (used in) operating activities 5,568 (8,200) Cash flows from investing activities: Capital expenditures (3,711) (2,371) -------- -------- Net cash used in investing activities (3,711) (2,371) Cash flows from financing activities: Net proceeds from sale of Common Stock 4,539 - Proceeds from loans, notes payable and long-term obligations 15,632 11,943 Repayment of loans, notes payable and long-term obligations (22,165) (1,423) Proceeds from subordinated and other indebtedness due to stockholders - 1,355 Repayment of subordinated and other indebtedness due to stockholders (200) (148) Subchapter S and other distributions - (306) Payments to acquire treasury stock (290) - -------- -------- Net cash (used in) provided by financing activities (2,484) 11,421 Effect of exchange rate changes on cash and cash equivalents 289 136 -------- -------- Net (decrease) increase in cash and cash equivalents (338) 986 Cash and cash equivalents at beginning of period 1,589 2,492 -------- -------- Cash and cash equivalents at end of period $ 1,251 $ 3,478 ======== ======== SUPPLEMENTAL DISCLOSURE: Interest paid $ 1,799 $ 2,569 Taxes paid $ 6,189 $ 427 Supplemental information on non-cash activities (dollars in thousands): Capital lease obligations of $59 and $429 were incurred during the six months ended June 30, 1997 and 1996, respectively. See accompanying notes. 6 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities (the "Affiliated Group"). An initial public offering of 4,000,000 shares of the Company's Common Stock at $12.00 per share (the "IPO") was completed on December 18, 1996 pursuant to which the principal stockholder (the "Principal Stockholder") and certain affiliates of the Principal Stockholder exchanged shares in the Affiliated Group for 15,024,616 and 138,461 shares, respectively, in Amscan Holdings (the "Organization") and in the case of the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain members of the Affiliated Group were operated as Subchapter S corporations for federal and, where available, state income tax purposes. In connection with the IPO, such members declared dividends representing distributions of accumulated Subchapter S corporation profits and a return of capital. These amounts were reflected as subordinated debt and repaid from the net proceeds of the IPO. Amscan Holdings and its subsidiaries (collectively the "Company") design, manufacture, contract for manufacture and distribute party and novelty goods principally in the United States, Canada and Europe. NOTE 2: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Amscan Holdings and its majority-owned subsidiaries. Investments in less than majority-owned subsidiaries are accounted for on an equity basis. As a result of the transfer of ownership between the former stockholders of the Affiliated Group and Amscan Holdings, certain members of the Affiliated Group terminated their Subchapter S election on December 18, 1996 and are being taxed as Subchapter C corporations under federal and certain state income tax requirements. Such transfer of ownership was accounted for in a manner similar to a pooling of interests. For the period prior to December 18, 1996, financial statements are presented on a combined basis. Certain reclassifications have been made to conform to the current year's presentation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 each ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. NOTE 3: COMMON STOCK On January 8, 1997, an additional 422,400 shares of the Company's Common Stock were sold at $12.00 per share to cover the over-allotment option as provided for in the underwriting agreement between the Company and the underwriters associated with the IPO. The proceeds, net of underwriters' discount, fees and expenses, of $4,538,984 were used to repay outstanding bank borrowings. 7 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) Note 4: Inventories Inventories consisted of the following: June 30, December 31, 1997 1996 (In thousands) Finished goods $ 39,799 $ 42,127 Raw materials 3,541 3,863 Work-in-process 1,504 1,388 -------- -------- 44,844 47,378 Less: reserve for slow moving and obsolete inventory (1,779) (1,685) -------- -------- $ 43,065 $ 45,693 ======== ======== Substantially all inventories are valued at the lower of cost, determined on a first in - first out basis, or market. NOTE 5: NET INCOME PER COMMON SHARE Net income per common share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during each period, including the common stock equivalent of dilutive stock options. NOTE 6: INCOME TAXES The consolidated income tax provision for the six months ended June 30, 1997 was determined based upon an estimate of the Company's consolidated effective income tax rates for the year ending December 31, 1997. 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. The amounts shown as income taxes for the six months ended June 30, 1996 consisted principally of foreign income taxes. Pro forma net income for the three and six months ended June 30, 1996 gives effect to pro forma income tax provisions at an estimated effective tax rate (40.5%) assuming members of the Affiliated Group had not elected Subchapter S corporation status for those periods. NOTE 7: BORROWINGS On May 19, 1997, the Company entered into a $15 million term loan arrangement with a bank. The loan is unsecured, bears interest currently at LIBOR plus 0.30% (6.02% at June 30, 1997), and requires quarterly principal payments through June 30, 2002. The interest rate is determined annually based on the Company's financial position. Additionally, the new arrangement requires the Company to comply with certain covenants including the maintenance of financial ratios. At June 30, 1997, the Company was in compliance with all such covenants. During the second quarter of 1997, the Company terminated its $55 million committed revolving credit facility with several banks and subsequently entered into uncommitted facilities with various banks which provide the Company with borrowing capacity of $35 million. Borrowings under uncommitted facilities are typically short-term and bear interest at prevailing market rates as established by the banks. At June 30, 1997, $7.7 million was outstanding under such facilities, bearing interest at 6.60%. 8 NOTE 8: SUBSEQUENT EVENTS On July 7, 1997, a customer accounting for approximately 2% of the Company's consolidated sales for the six months ended June 30, 1997 and the year ended December 31, 1996, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. According to publicly available documents, the customer is currently operating as a debtor-in- possession and plans to reorganize pursuant to the Bankruptcy Code. The Company does not believe the potential loss of the customer will have a material adverse effect on the Company's future results of operations or its financial condition. On August 10, 1997, Amscan Holdings and Confetti Acquisition, Inc. ("Confetti"), a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P. ("GSCP"), a private investment fund managed by Goldman, Sachs & Co., entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for a recapitalization of Amscan Holdings in which Confetti will be merged with and into Amscan Holdings ("Merger"), with Amscan Holdings as the surviving corporation. Pursuant to the Merger Agreement, each share of Amscan Holdings Common Stock will, at the election of each of Amscan Holdings public stockholders, be exchanged for either (i) $16.50 in cash or (ii) $9.33 in cash plus a retained interest in Amscan Holdings equal to one share of Amscan Holdings Common Stock for every 150,000 shares elected (the "Mixed Consideration Option"), with fractional shares paid in cash. It is expected that following the Merger, GSCP will own approximately 83% of the then outstanding shares of Amscan Holdings Common Stock, Amscan Holdings management will own approximately 7%, and the Estate of John A. Svenningsen (the "Estate"), which currently owns approximately 72% of Amscan Holdings, will own almost 10%. The Merger, which is expected to be consummated in the fourth quarter of 1997, is subject to the approval of Amscan Holdings stockholders, the availability of contemplated financing, Confetti's satisfaction that the Merger will be recorded as a recapitalization for financial reporting purposes, the expiration of antitrust waiting periods and certain other customary conditions. The Merger is expected to be financed with an equity contribution of approximately $67.5 million (including contributions of Amscan Holdings Common Stock by certain employee stockholders and including issuances of restricted stock), $130 million from a senior debt facility and $110 million from the issuance of senior subordinated debt. GSCP has received a commitment from Goldman Sachs Credit Partners L.P. with respect to the senior debt facility and a highly confident letter from Goldman, Sachs & Co. with respect to the senior subordinated debt. In connection with the Merger, Confetti has entered into a Voting Agreement (the "Voting Agreement") with the Estate and Christine Svenningsen, the wife of John A. Svenningsen and the executrix of the Estate, pursuant to which they have, among other things, (i) agreed to vote all their shares of Amscan Holdings Common Stock in favor of the Merger and against certain competing transactions, and to elect the Mixed Consideration Option in the Merger with respect to all such shares, (ii) agreed not to sell or transfer any of their shares of Amscan Holdings Common Stock prior to the effective time or termination of the Voting Agreement, and (iii) granted Confetti an irrevocable option to acquire their shares at a price of $9.83 per share exercisable within 90 days after termination of the Merger Agreement (other than a termination upon mutual consent or a termination by Amscan Holdings based on an actual material breach by Confetti of its obligations under the Merger Agreement). In the event that Confetti exercises its option under the Voting Agreement, it will be required to make a cash tender offer for the remaining shares of Amscan Holdings Common Stock not held by it at a price of $16.50 per share. At a meeting held on August 10, 1997, the Amscan Holdings Board of Directors approved the Merger Agreement and the Voting Agreement and approved Confetti becoming an "interested stockholder" within the meaning of Section 203 of the General Corporation Law of the State of Delaware. 9 ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 PERCENTAGE OF NET SALES THREE MONTHS ENDED JUNE 30, 1997 1996 ------- ------- Net sales 100.0% 100.0% Cost of sales 64.1 61.7 ------- ------- Gross profit 35.9 38.3 Operating expenses: Selling 6.4 6.5 General and administrative 8.0 10.4 Art and development 2.6 2.7 Special bonuses - 2.2 ------- ------- Total operating expenses 17.0 21.8 ------- ------- Income from operations 18.9 16.5 Interest expense, net 1.8 3.5 Other (income) expense, net - 0.1 ------- ------- Income before income taxes and minority interests 17.1 12.9 Income taxes 6.9 0.5 Minority interests 0.1 1.2 ------- ------- Net income 10.1% 11.2% ======= ======= Net sales for the three months ended June 30, 1997 totaled $49.2 million, an increase of 7.7% over the three months ended June 30, 1996 for which net sales totaled $45.7 million. Sales to national accounts, principally party superstores, accounted for the majority of the second quarter sales growth. Gross profit of $17.7 million for the three months ended June 30, 1997 increased slightly as compared to the same period in 1996. As anticipated, gross profit decreased as a percentage of net sales to 35.9% from 38.3% as a result of an increase in manufacturing capacity and the addition of a new distribution facility which created near-term excess capacity. Selling expenses of $3.1 million for the three months ended June 30, 1997 were comparable to those of the corresponding quarter in 1996. Selling expenses decreased to 6.4% of net sales from 6.5%, primarily due to the Company's ability to increase sales to its party superstore customers while not significantly increasing its sales costs associated with those accounts. General and administrative expenses of $3.9 million for the three months ended June 30, 1997 decreased by $0.8 million as compared to the corresponding period in 1996. The decrease is primarily attributable to non-recurring costs incurred in the second quarter of 1996 associated with a move to new corporate offices and additional personnel costs including relocation and recruitment costs. As a percentage of net sales, general and administrative expenses decreased to 8.0% from 10.4% principally due to the previously mentioned increase in net sales and lowered expenses. Art and development costs of $1.3 million for the three months ended June 30, 1997 were slightly higher than those for the three months ended June 30, 1996 as the Company maintains its strategy to be a leader in product quality and design. As a percentage of net sales, art and development costs decreased slightly to 2.6% from 2.7%. The employment agreements which gave rise to special bonuses during the second quarter of 1996 were substantially modified at the time of the Company's initial public offering ("IPO") in December 1996 to eliminate future special bonus payments. Such bonuses, which were based entirely upon the pre-tax income of Amscan Inc. and certain affiliates, were $1.0 million or 2.2% of net sales for the three months ended June 30, 1996. 10 Interest expense, net decreased by $0.7 million to $0.9 million for the three months ended June 30, 1997, as the net proceeds received from the issuance of Common Stock in December 1996 and January 1997 in connection with the IPO were used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. Income taxes were $3.4 million for the three months ended June 30, 1997. Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were taxed as Subchapter S corporations for federal income tax and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal and state income taxes except in states which do not recognize Subchapter S corporation status. In connection with the IPO, the aforementioned companies became subject to federal and state income taxes. The amounts shown as income taxes for the three months ended June 30, 1996 consisted principally of foreign taxes. Minority interests represent the portion of income of the Company's subsidiaries attributable to equity ownership not held by the Company. The minority interests for the three months ended June 30, 1996 reflects a 50% minority interest in Am-Source, Inc. which was subsequently acquired by Amscan Holdings on December 18, 1996. SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 PERCENTAGE OF NET SALES SIX MONTHS ENDED JUNE 30, 1997 1996 ------- ------- Net sales 100.0% 100.0% Cost of sales 64.4 63.0 ------- ------- Gross profit 35.6 37.0 Operating expenses: Selling 6.1 6.4 General and administrative 8.1 9.4 Art and development 2.5 2.6 Special bonuses - 2.3 ------- ------- Total operating expenses 16.7 20.7 ------- ------- Income from operations 18.9 16.3 Interest expense, net 1.8 3.3 Other income, net - (0.1) ------- ------- Income before income taxes and minority interests 17.1 13.1 Income taxes 7.0 0.5 Minority interests 0.1 0.9 ------- ------- Net income 10.0% 11.7% ======= ======= Net sales for the six months ended June 30, 1997 were $102.4 million, an increase of 10.1% over the six months ended June 30, 1996 for which net sales were $93.0 million. Sales to national accounts, principally party superstores, accounted for the majority of the sales growth. Also contributing to this sales increase was the impact of the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. Gross profit increased $2.1 million for the six months ended June 30, 1997 compared to the same period in 1996. However, gross profit decreased as a percentage of net sales to 35.6% from 37.0% as a result of an increase in manufacturing capacity and the addition of a new distribution facility which created near-term excess capacity. Selling expenses of $6.2 million for the six months ended June 30, 1997 were comparable to those of the corresponding period in 1996. Selling expenses decreased as a percentage of net sales to 6.1% from 6.4%, primarily due to the Company's ability to increase sales to its party superstore customers while not significantly increasing its sales costs associated with those accounts. General and administrative expenses of $8.3 million decreased $0.4 million for the six months ended June 30, 1997 as compared to the corresponding period in 1996. The decrease is primarily attributable to non-recurring costs incurred in the second quarter of 1996 associated with the move to new corporate offices and additional personnel costs including relocation and recruitment costs, offset by increases in bad debt expense. As a percentage of net sales, general and administrative expenses decreased to 8.1% from 9.4% principally due to the previously mentioned increase in sales and reduced expenses. 11 Art and development costs of $2.6 million for the six months ended June 30, 1997 decreased slightly as compared to those of the corresponding period in 1996. As a percentage of net sales, art and development costs decreased slightly to 2.5% from 2.6%. In 1996, the Company significantly expanded its creative and new product development staff and internal development capabilities. The continued investment in art and development expenditures in 1997 reflects the Company's strategy to remain a leader in product quality and development. The employment agreements which gave rise to special bonuses during the first six months of 1996 were substantially modified at the time of the IPO in December 1996 to eliminate future special bonus payments. Such bonuses, which were based entirely upon the pre-tax income of Amscan Inc. and certain affiliates, were $2.1 million or 2.3% of net sales for the six months ended June 30, 1996. Interest expense, net decreased by $1.2 million to $1.9 million for the six months ended June 30, 1997 over the corresponding period in 1996, as the net proceeds received from the issuance of Common Stock in December 1996 and January 1997 in connection with the IPO were used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. Income taxes were $7.1 million for the six months ended June 30, 1997. Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were taxed as Subchapter S corporations for federal income tax and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal and state income taxes except in states which do not recognize Subchapter S corporation status. In connection with the IPO, the aforementioned companies, became subject to federal and state income taxes. The amounts shown as income taxes for the six months ended June 30, 1996 consisted principally of foreign taxes. Minority interests of $0.1 million and $0.8 million for the six months ended June 30, 1997 and 1996, respectively, represent the portion of income of the Company's subsidiaries attributable to equity ownership not held by the Company. In addition to the minority interests of certain foreign entities, the minority interests for the six months ended June 30, 1996 included a 50% minority interest in Am-Source, Inc. On December 18, 1996, the Company acquired the minority interest in Am-Source, Inc. not previously owned. LIQUIDITY AND CAPITAL RESOURCES On May 19, 1997, the Company entered into a $15 million term loan arrangement with a bank and terminated its existing revolving credit facility, repaying all amounts outstanding thereunder. The new term loan is unsecured and currently bears interest at LIBOR plus 0.30% (6.02% at June 30, 1997). The interest rate is determined annually, based on the Company's financial position. Payments under the new loan arrangement will be made on a quarterly basis through June 30, 2002. Additionally, the new arrangement requires the Company to comply with certain covenants including the maintenance of financial ratios. At June 30, 1997, the Company was in compliance with all such covenants. During the second quarter of 1997, the Company also entered into uncommitted lines of credit with various banks. Amounts available for short- term borrowings under these arrangements total $35 million and bear interest at market rates. At June 30, 1997, $7.7 million was outstanding under such facilities, bearing interest at 6.60%. Management believes that the Company's working capital requirements for at least the next 12 months will be met by cash flow from operations and from borrowings under its existing credit facilities. Net cash provided by operating activities increased by $13.8 million to $5.6 million for the six months ended June 30, 1997 as compared to the same period in 1996 principally as a result of lower levels of inventories and other current assets. Net cash used in investing activities of $3.7 million for the six months ended June 30, 1997 consisted solely of capital expenditures and increased by $1.3 million from the same period in 1996. Net cash used in financing activities increased by $13.9 million to $2.5 million for the six months ended June 30, 1997 as the net proceeds of $4.5 million received from the sale of the Company's Common Stock to cover the exercise of the underwriters' over-allotment option and proceeds under the new loan arrangements were more than offset by the repayment of bank and subordinated indebtedness. Accounts receivable, net increased $9.3 million to $46.7 million at June 30, 1997 from $37.4 million at December 31, 1996. This increase is due to seasonality sales and extended terms given to customers in association with new promotions. Inventories decreased $2.6 million to $43.1 million at June 30, 1997 from $45.7 million at December 31, 1996 due to improved management of inventory levels. In addition, year-end inventory levels generally increase as the Company produces new "everyday" lines which are shipped in the following year. 12 Deposits and other current assets decreased $0.9 million to $10.5 million at June 30, 1997 from December 31, 1996, principally due to a reduction in deposits for the manufacture of equipment to be leased. Property, plant and equipment, net increased $0.8 million to $35.5 million at June 30, 1997 from $34.7 million at December 31, 1996. This increase reflects the acquisition of certain manufacturing and warehouse equipment, partially offset by depreciation. Loans and notes payable decreased $20.7 million to $8.6 million at June 30, 1997 from December 31, 1996, reflecting the repayment of borrowings under the revolving credit line which was financed by advances under the Company's uncommitted facilities and the new term loan. Income taxes payable increased $1.1 million to $2.0 million at June 30, 1997 from December 31, 1996. This increase is primarily due to the change in tax status. In connection with the IPO on December 18, 1996, Amscan Inc., Am- Source, Inc., JCS Realty Corp. and SSY Realty Corp. terminated their Subchapter S corporation status and, accordingly, became subject to federal and state income taxes. Third-party long-term financings for the six months ended June 30, 1997 consisted primarily of borrowings under the term loan previously mentioned and long-term loans secured by machinery and equipment. Common Stock and additional paid-in capital increased by $4.5 million as a result of the exercise of the underwriters' over-allotment option. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128 - Earnings per Share, effective for interim and annual periods ending after December 15, 1997. The Company does not believe that the impact of SFAS 128 will have a significant impact on its earnings per share calculation. In June 1997, the FASB issued SFAS No. 130 - Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997 and SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information, effective for interim and annual periods ending after December 15, 1997. The Company will adopt these statements in 1998. 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. "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this report, and in particular in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," statements in other filings with the Securities and Exchange Commission and statements in other public documents of the Company may be forward-looking and are subject to a variety of risks and uncertainties. Many factors could cause actual results to differ materially from these statements. These factors include, but are 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 the party goods superstores which are generally privately held and have expanded rapidly in recent years, (3) the failure by the Company to anticipate 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 and (7) other factors which might be described from time to time in the Company's filings with the Securities and Exchange Commission. In addition, the Company is subject to the effects of changes in general business conditions. Although the Company believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Factors external to the Company can also affect the price of the Company's Common Stock. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices. 13 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ANNUAL MEETING At the Annual Meeting of Stockholders held on May 22, 1997, pursuant to the Notice of 1997 Annual Meeting of Stockholders and Related Proxy Statement dated April 25, 1997, the actions were taken as follows: (1) The election of John Tugwell as a director of the Company to serve for a period of three years expiring at the Annual Meeting of Stockholders to be held in 2000, the result of which voting is as follows: WITHHOLDING FOR AUTHORITY 19,386,767 3,070 (2) The approval of the selection of KPMG Peat Marwick LLP as independent certified public accountants for the 1997 fiscal year, the results of which voting is as follows: BROKER FOR AGAINST ABSTAIN NON-VOTES 19,376,209 2,800 10,828 - ITEM 5. OTHER INFORMATION On August 10, 1997, Amscan Holdings, Inc., ("Amscan Holdings") and Confetti Acquisition, Inc. ("Confetti"), a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P. ("GSCP"), a private investment fund managed by Goldman, Sachs & Co., entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for a recapitalization of Amscan Holdings in which Confetti will be merged with and into Amscan Holdings ("Merger"), with Amscan Holdings as the surviving corporation. Pursuant to the Merger Agreement, each share of Amscan Holdings Common Stock will, at the election of each of Amscan Holdings public stockholders, be exchanged for either (i) $16.50 in cash or (ii) $9.33 in cash plus a retained interest in Amscan Holdings equal to one share of Amscan Holdings Common Stock for every 150,000 shares elected (the "Mixed Consideration Option"), with fractional shares paid in cash. It is expected that following the Merger, GSCP will own approximately 83% of the then outstanding shares of Amscan Holdings Common Stock, Amscan Holdings management will own approximately 7%, and the Estate of John A. Svenningsen (the "Estate"), which currently owns approximately 72% of Amscan Holdings, will own almost 10%. The Merger, which is expected to be consummated in the fourth quarter of 1997, is subject to the approval of Amscan Holdings stockholders, the availability of contemplated financing, Confetti's satisfaction that the Merger will be recorded as a recapitalization for financial reporting purposes, the expiration of antitrust waiting periods and certain other customary conditions. The Merger is expected to be financed with an equity contribution of approximately $67.5 million (including contributions of Amscan Holdings Common Stock by certain employee stockholders and including issuances of restricted stock), $130 million from a senior debt facility and $110 million from the issuance of senior subordinated debt. GSCP has received a commitment from Goldman Sachs Credit Partners L.P. with respect to the senior debt facility and a highly confident letter from Goldman, Sachs & Co. with respect to the senior subordinated debt. In connection with the Merger, Confetti has entered into a Voting Agreement (the "Voting Agreement") with the Estate and Christine Svenningsen, the wife of John A. Svenningsen and the executrix of the Estate, pursuant to which they have, among other things, (i) agreed to vote all their shares of Amscan Holdings Common Stock in favor of the Merger and against certain competing transactions, and to elect the Mixed Consideration Option in the Merger with respect to all such shares, (ii) agreed not to sell or transfer any of their shares of Amscan Holdings Common Stock prior to the effective time or termination of the Voting Agreement, and (iii) granted Confetti an irrevocable option to acquire their shares at a price of $9.83 per share exercisable within 90 days after termination of the Merger Agreement (other than a termination upon mutual consent or a termination by Amscan Holdings based on an actual material breach by Confetti of its obligations under the Merger Agreement). In the event that Confetti exercises its option 14 under the Voting Agreement, it will be required to make a cash tender offer for the remaining shares of Amscan Holdings Common Stock not held by it at a price of $16.50 per share. At a meeting held on August 10, 1997, the Amscan Holdings Board of Directors approved the Merger Agreement and the Voting Agreement and approved Confetti becoming an "interested stockholder" within the meaning of Section 203 of the General Corporation Law of the State of Delaware. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION 2.1 Agreement and Plan of Merger, dated as of August 10, 1997, between Amscan Holdings, Inc. and Confetti Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8 - K dated August 10, 1997) 2.2 Voting Agreement, dated as of August 10, 1997, among Confetti Acquisition, Inc., the Estate of John A. Svenningsen and Christine Svenningsen (incorporated by reference to Exhibit 2.2 to Current Report on Form 8 - K dated August 10, 1997) 27 Financial Data Schedule (b) Reports on Form 8 - K A Current Report on Form 8 - K dated May 28, 1997, was filed regarding the death of John A. Svenningsen, the Company's Chairman of the Board and Chief Executive Officer, after a protracted illness. A Current Report on Form 8 - K dated August 10, 1997, was filed regarding the signing of a definitive merger agreement between the Company and Confetti Acquisition, Inc., a newly-formed corporation affiliated with GS Capital Partners II, L.P., a private investment fund managed by Goldman, Sachs & Co., providing for the recapitalization of the Company. 15 SIGNATURES 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. /s/ Michael A. Correale By: -------------------------------- Michael A. Correale August 14, 1997 Controller Date: ----------------------- (on behalf of the registrant and as principal accounting officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 1,251 0 49,526 (2,876) 43,065 101,470 63,041 (27,529) 146,818 31,299 26,218 0 0 2,112 80,609 146,818 102,401 102,401 65,964 65,964 0 577 1,866 17,508 7,145 10,278 0 0 0 10,278 0.49 0
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