-----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, TmDUwKrO5Of2r8XHYUUg8lRcpFXZ2Dms62pRRHS5/aCYKY7SnNgIKhY6jZnVJXKb TbI3AA48y1KM4Qg9NmfP+Q== 0000950123-97-008970.txt : 19971030 0000950123-97-008970.hdr.sgml : 19971030 ACCESSION NUMBER: 0000950123-97-008970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971029 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21827 FILM NUMBER: 97702410 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 AMSCAN HOLDINGS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 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 incorporation (I.R.S. Employer Identification 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 October 28, 1997: 21,098,785 2 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q SEPTEMBER 30, 1997 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 ............... 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996 ....................................................... 4 Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 1997 ................................................................ 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 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 5. OTHER INFORMATION ...................................................................... 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................................... 16 SIGNATURE ............................................................................................. 17
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1997 1996 (UNAUDITED) (NOTE) (IN THOUSANDS) ASSETS Cash and cash equivalents .................................... $ 684 $ 1,589 Accounts receivable, net of allowances ....................... 56,276 37,378 Inventories .................................................. 48,736 45,693 Deposits and other current assets ............................ 9,680 11,360 --------- --------- Total current assets ................................. 115,376 96,020 Property, plant and equipment, net ........................... 37,157 34,663 Intangible assets, net ....................................... 7,540 7,443 Other assets, net ............................................ 2,687 2,148 --------- --------- Total assets ......................................... $ 162,760 $ 140,274 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Loans and notes payable ...................................... $ 10,020 $ 29,328 Subordinated and other indebtedness due to stockholders ...... 1,393 Accounts payable ............................................. 11,153 7,128 Accrued liabilities .......................................... 7,317 9,403 Income taxes payable ......................................... 6,458 822 Current portion of long-term obligations ..................... 5,556 2,541 --------- --------- Total current liabilities ............................ 40,504 50,615 Long-term obligations, excluding current portion ............. 24,828 15,085 Deferred tax liabilities ..................................... 5,585 5,662 Other ........................................................ 2,841 963 --------- --------- Total liabilities .................................... 73,758 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 ................................... 65,985 61,503 Retained earnings ............................................ 21,649 4,748 Foreign currency translation adjustment ...................... (454) (372) Treasury stock, at cost (21,691 shares) ...................... (290) --------- --------- Total stockholders' equity ........................... 89,002 67,949 --------- --------- Total liabilities and stockholders' equity ........... $ 162,760 $ 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 4 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales ................................... $ 58,885 $54,036 $ 161,286 $147,008 Cost of sales ............................... 37,496 34,271 103,460 92,861 ------------- ------- ------------ -------- Gross profit ........................... 21,389 19,765 57,826 54,147 Operating expenses: Selling expenses ......................... 3,372 2,755 9,598 8,691 General and administrative expenses ...... 4,916 5,366 13,225 14,113 Art and development costs ................ 1,324 1,221 3,891 3,671 Special bonuses .......................... 1,200 3,300 ------------- ------- ------------ -------- Total operating expenses ............... 9,612 10,542 26,714 29,775 ------------- ------- ------------ -------- Income from operations ................. 11,777 9,223 31,112 24,372 Interest expense, net ....................... 788 1,485 2,654 4,569 Other income, net ........................... (180) (158) (219) (301) ------------- ------- ------------ -------- Income before income taxes and minority interests .................. 11,169 7,896 28,677 20,104 Income tax expense .......................... 4,482 297 11,627 767 Minority interests .......................... 64 417 149 1,242 ------------- ------- ------------ -------- Net income ............................. $ 6,623 $ 7,182 $ 16,901 $18,095 =========== ======= ============ ======== Net income per common share ............ $ 0.31 $ 0.80 ======== ============ Weighted average common and common equivalent shares used in computation 21,098,785 21,097,133 =========== ============ Pro forma data (Note 6): Income before income taxes ............. $ 7,479 $ 18,862 Pro forma income tax expense ........... 3,151 7,888 ======= ======== Pro forma net income ................... $ 4,328 $ 10,974 ======= ========
See accompanying notes. 4 5 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 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 ........................... 16,901 16,901 Net proceeds from sale of Common Stock (Note 3) ................... 42 4,482 4,524 Payments to acquire treasury stock ... $ (290) (290) Net change in translation adjustment .. (82) (82) -------- -------- ------- ----- -------- ------- Balance as of September 30, 1997 ..... $ 2,112 $ 65,985 $21,649 $(454) $ (290) $89,002 ======== ======== ======= ===== ======== =======
See accompanying notes. 5 6 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 -------- -------- (In thousands) Cash flows from operating activities: Net income .......................................................... $ 16,901 $ 18,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 4,505 3,579 Provision for doubtful accounts ................................. 1,423 963 Gain on disposal of equipment ................................... (29) Changes in operating assets and liabilities: Increase in accounts receivable .............................. (24,310) (20,442) Increase in inventories ...................................... (3,043) (61) Decrease in deposits and other current assets ................ 2,469 262 Increase (decrease) in accounts payable, accrued liabilities and income taxes payable ................................. 7,575 (1,029) Other, net .................................................... 2,988 195 -------- -------- Net cash provided by operating activities ............... 8,479 1,562 Cash flows from investing activities: Capital expenditures ................................................ (6,895) (5,574) Proceeds from disposal of equipment 140 -------- -------- Net cash used in investing activities ................... (6,755) (5,574) Cash flows from financing activities: Net proceeds from sale of Common Stock .............................. 4,524 Proceeds from loans, notes payable and long-term obligations ........ 15,620 10,242 Repayment of loans, notes payable and long-term obligations ......... (22,208) (2,003) Repayment of subordinated and other indebtedness due to stockholders (182) (3,220) Payments to acquire treasury stock .................................. (290) -------- -------- Net cash (used in) provided by financing activities .... ( 2,536 ) 5,019 Effect of exchange rate changes on cash and cash equivalents ........... (93) 31 -------- -------- Net (decrease) increase in cash and cash equivalents ................... (905) 1,038 Cash and cash equivalents at beginning of period ....................... 1,589 2,492 -------- -------- Cash and cash equivalents at end of period ............................. $ 684 $ 3,530 ======== ======== Supplemental Disclosure: Interest paid ....................................................... $ 2,622 $ 4,970 Taxes paid .......................................................... $ 6,612 $ 546
Supplemental information on non-cash activities (dollars in thousands): Capital lease obligations of $59 and $2,074 were incurred during the nine months ended September 30, 1997 and 1996, respectively. During September 1996, the Company declared the distribution of $7,600 of previously provided capital and $13,067 of previously undistributed earnings. Such amounts were included in subordinated and other indebtedness to stockholders. See accompanying notes. 6 7 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (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 paper and plastic party goods, accessories and novelty items 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. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods each ended September 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 $4,523,984 were used to repay outstanding bank borrowings. 7 8 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) NOTE 4: INVENTORIES Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (IN THOUSANDS) Finished goods ..................................... $ 45,357 $ 42,127 Raw materials ...................................... 3,408 3,863 Work-in-process .................................... 1,708 1,388 -------- -------- 50,473 47,378 Less: reserve for slow moving and obsolete inventory (1,737) (1,685) ======== ======== $ 48,736 $ 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 three and nine months ended September 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 three and nine months ended September 30, 1996 consisted principally of foreign income taxes as most of the members of the Affiliated Group had elected Subchapter S Corporation status for those periods. Pro forma net income for the three and nine months ended September 30, 1996 gives effect to pro forma income tax provisions at an estimated effective tax rate (40.5%) assuming those members of the Affiliated Group had not elected Subchapter S corporation status for those periods. NOTE 7: OTHER MATTERS On July 7, 1997, a customer accounting for approximately 2% of the Company's consolidated sales for the nine months ended September 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. At September 30, 1997, amounts receivable from the customer which totaled approximately $1.8 million, have been substantially provided for in the Company's allowance for doubtful accounts. The Company does not believe the potential loss of this 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") and certain other private investment funds 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 converted into the right to receive 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 82.5% of the then outstanding shares of Amscan Holdings Common Stock, certain members of Amscan Holdings management will own approximately 7.5%, and the Estate of John A. 8 9 Svenningsen (the "Estate"), which currently owns approximately 71.2% 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. As of September 24, 1997, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, had expired or been terminated with respect to all of the filings made thereunder. 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), $117 million from a senior term loan 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 term loan and a highly confident letter from Goldman, Sachs & Co. with respect to the senior subordinated debt. In connection with the Merger, the Company will also enter into a $50 million revolving credit facility, which will, subject to an borrowing base, be available to fund the working capital requirements of the Company. 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. During September 1997, the Company entered into an agreement to convert $4.0 million of trade accounts receivable from a customer into an equity interest. The Company subsequently transferred 50% of this interest to the Principal Stockholder in full satisfaction of $2.0 million of obligations. The remaining equity interest is included in other assets. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 PERCENTAGE OF NET SALES
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1997 1996 ------ ------ Net sales ................... 100.0% 100.0% Cost of sales ............... 63.7 63.4 ------ ------ Gross profit ............. 36.3 36.6 Operating expenses: Selling expenses.......... 5.7 5.1 General and administrative expenses................. 8.4 9.9 Art and development costs. 2.2 2.3 Special bonuses .......... -- 2.2 ------ ------ Total operating expenses .... 16.3 19.5 ------ ------ Income from operations ... 20.0 17.1 Interest expense, net ....... 1.3 2.8 Other income, net ........... (0.3) (0.3) ------ ------ Income before income taxes and minority interests .. 19.0 14.6 Income tax expense .......... 7.6 0.5 Minority interests .......... 0.1 0.8 ------ ------ Net income ............... 11.3% 13.3% ====== ======
Net Sales Net sales for the three months ended September 30, 1997 totaled $58.9 million, an increase of 9.0% over the three months ended September 30, 1996 for which net sales totaled $54.0 million. Sales to national accounts totaled $29.8 million, or 26.6% higher than in the corresponding period of 1996, principally as a result of sales to the party goods superstore channel. In addition, sales to international customers increased approximately $0.7 million from 1996, contributing 15% to sales growth. Gross Profit Gross profit for the three months ended September 30, 1997 was $21.4 million, an increase of $1.6 million over the same period in 1996. As a percent of sales, gross profit during the third quarter of 1997 increased to 36.3% from 35.6% during the first six months of 1997 representing the greater utilization of capacity added in the latter part of 1996. The third quarter margin was only slightly below the 1996 amount of 36.6%. Selling Expenses Selling expenses of $3.4 million for the three months ended September 30, 1997 increased $0.6 million as compared to those of the corresponding quarter in 1996, reflecting the expansion of the Company's foreign operations and the costs associated with annual marketing events which, in 1996, occurred in the fourth quarter. General and Administrative Expenses General and administrative expenses for the three months ended September 30, 1997 amounted to $4.9 million, a decrease of $0.5 million from the corresponding period in 1996. As a percentage of net sales, general and administrative expenses decreased to 8.4% from 9.9% principally as a result of increased sales and certain cost containment efforts. 10 11 Art and Development Costs Art and development costs for the three months ended September 30, 1997 remained relatively constant with that of the prior period in 1996. Special Bonuses 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 $1.2 million or 2.2% of net sales for the three months ended September 30, 1996. Interest Expense, Net Interest expense, net, decreased by $0.7 million to $0.8 million for the three months ended September 30, 1997 as compared to the same period in 1996, as a result of the application of the net proceeds received from the issuance of Common Stock in December 1996 and January 1997 in connection with the IPO being used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. Interest expense also decreased as a result of lower effective interest rates during the third quarter of 1997. Income Taxes Income tax expense was $4.5 million for the three months ended September 30, 1997 and was determined based upon an estimated consolidated effective income tax rate of 40.5% for the year ending December 31, 1997. Prior to the IPO, Amscan Inc., Am-Source, Inc., and certain other subsidiaries of the Company 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 these companies became subject to federal and state income taxes. The amounts shown as income taxes for the three months ended September 30, 1996 consisted principally of foreign taxes. Minority Interests 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 September 30, 1996 reflects a 50% minority interest in Am-Source, Inc. which was subsequently acquired by Amscan Holdings on December 18, 1996. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 PERCENTAGE OF NET SALES
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ------ ------ Net sales ................................ 100.0% 100.0% Cost of sales ............................ 64.1 63.2 ------ ------ Gross profit .......................... 35.9 36.8 Operating expenses: Selling expenses....................... 6.0 5.9 General and administrative expenses.... 8.2 9.6 Art and development costs.............. 2.4 2.5 Special bonuses ....................... -- 2.2 ------ ------ Total operating expenses ................. 16.6 20.2 ------ ------ Income from operations ................ 19.3 16.6 Interest expense, net .................... 1.6 3.1 Other income, net ........................ (0.1) (0.2) ------ ------ Income before income taxes and minority interests .............. 17.8 13.7 Income tax expense ....................... 7.2 0.5 Minority interests ....................... 0.1 0.9 ------ ------ Net income............................. 10.5% 12.3% ====== ======
11 12 Net Sales Net sales for the nine months ended September 30, 1997 were $161.3 million, an increase of 9.7% over the nine months ended September 30, 1996. Sales to national accounts totaled $84.2 million, or 22.1% higher than in the corresponding period in 1996 principally as a result of sales to the party goods superstore channel. Sales to international customers increased $1.6 million, contributing 11% to sales growth. Also contributing to the increase in sales was the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. For 1997, the Company added approximately 600 SKU's to its product line. Gross Profit Gross profit for the nine months ended September 30, 1997 was $57.8 million, an increase of $3.7 million over the same period in 1996. As a percent of sales, gross profit decreased for the first nine months of 1997 to 35.9% from 36.8% over the corresponding period in 1996 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 Selling expenses of $9.6 million for the nine months ended September 30, 1997 increased by $0.9 million and as a percentage of net sales increased to 6.0% as compared to 5.9% in the corresponding period in 1996 primarily due to the expansion of foreign operations. General and Administrative Expenses General and administrative expenses of $13.2 million for the nine months ended September 30, 1997 decreased $0.9 million as compared to the corresponding period in 1996. As a percentage of net sales, general and administrative expenses decreased to 8.2% from 9.6%. 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. General cost reduction efforts in 1997 were offset by increases in bad debt expense. Art and Development Costs Art and development costs of $3.9 million for the nine months ended September 30, 1997 decreased slightly to 2.4% of net sales during the nine months ended September 30, 1997 from 2.5% for the corresponding period of 1996. 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. Special Bonuses The employment agreements which gave rise to special bonuses during the first nine 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 $3.3 million or 2.2% of net sales for the nine months ended September 30, 1996. Interest Expense, Net Interest expense, net, decreased by $1.9 million to $2.7 million for the nine months ended September 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 Income tax expense was $11.6 million for the nine months ended September 30, 1997 and was determined based upon an estimated consolidated effective income tax rate of 40.5% for the year ending December 31, 1997. Prior to the IPO, Amscan Inc., Am-Source, Inc., and certain subsidiaries of the Company 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, these subsidiaries became subject to federal and state income taxes. The amounts shown as income taxes for the nine months ended September 30, 1996 consisted principally of foreign taxes. 12 13 Minority Interests Minority interests of $0.1 million and $1.2 million for the nine months ended September 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 nine months ended September 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 The Company has financed its growth since 1994 principally through cash flow generated from operations, the use of operating leases, increases in its revolving line of credit borrowings and increases in long-term debt, including debt owed to Mr. Svenningsen. The net proceeds from the IPO were used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. In May 1997, the Company entered into a $15 million term loan arrangement with a bank and terminated its then existing revolving credit facility, repaying all amounts outstanding thereunder. The term loan is unsecured and currently bears interest at LIBOR plus 0.30% (5.9% at September 30, 1997). The interest rate spread is determined annually, based on the Company's financial position. Payments of principal and interest under the term loan are made on a quarterly basis through June 30, 2002. Additionally, the term loan requires the Company to comply with certain covenants including the maintenance of financial ratios. At September 30, 1997, the Company was in compliance with all such covenants. At September 30, 1997, the Company had uncommitted lines of credit with various banks which provided $40.0 million of additional borrowing capacity at market rates of interest. At September 30, 1997, $9.6 million was outstanding under such facilities, bearing interest at 6.2 %. Upon consummation of the proposed Merger described in Note 7 to the financial statements, the current term loan arrangement and uncommitted lines of credit will be terminated and the Company will enter into new financing arrangements ("Merger Financings"). As of September 30, 1997, after giving pro forma effect to the Merger and the Merger Financings described below and the application of the net proceeds therefrom, the Company would have had (i) $237.8 million of consolidated indebtedness and (ii) $95.3 million of consolidated stockholders' deficiency. The Company's significant debt service obligations following the Merger could, under certain circumstances, have material consequences to security holders of the Company. In order to fund the payment of the cash portion of the Merger, to refinance certain existing outstanding indebtedness of the Company, to pay transaction costs incurred in connection with the Merger, and for general corporate purposes the Company is issuing $110 million of senior subordinated debt and will enter into a $167 million bank credit agreement, providing for borrowings in the aggregate principal amount of approximately $117 million under a senior term loan and revolving loan borrowings of $50 million under a revolving credit facility. The revolving credit facility will, subject to a borrowing base, be available to fund the working capital requirements of the Company. Based upon the current level of operations and anticipated growth, the Company anticipates that its operating cash flow, together with available borrowings under the new credit agreement, 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, a portion of the principal payments at maturity on the notes may require refinancing. 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. Management believes that additions to plant and equipment provide adequate capacity to support its operations for at least the next 12 months. As of September 30, 1997, the Company did not have material commitments for capital expenditures. Cash Flow Data For the Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Net cash provided by operating activities increased by $6.9 million to $8.5 million for the nine months ended September 30, 1997 as compared to the same period in 1996 primarily as a result of decreased working capital levels. Net cash used in investing activities increased by $1.2 million to $6.8 million for the nine months ended September 30, 1997 over the comparable period in 1996 and consisted primarily of capital expenditures. Net cash used in financing activities totaled $2.5 million for the nine months ended September 30, 1997 as repayments of bank and other indebtedness exceeded 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. Balance Sheet Data at September 30, 1997 Compared to December 31, 1996 13 14 Accounts receivable, net increased $18.9 million to $56.3 million at September 30, 1997 from $37.4 million at December 31, 1996. This increase is principally due to the increased sales and customary extended payment terms offered on seasonal sales during the third quarter. Third quarter sales are generally the highest of the year primarily due to the shipment of certain seasonal holiday merchandise. During September 1997, the Company entered into an agreement to convert $4.0 million of trade accounts receivable from a customer into an equity interest. The Company subsequently transferred 50% of this interest to the Principal Stockholder in full satisfaction of $2.0 million of obligations. The remaining equity interest is included in other assets at September 30, 1997. Inventories increased $3.0 million to $48.7 million at September 30, 1997 from $45.7 million at December 31, 1996 due to seasonality of inventory levels. Deposits and other current assets decreased $1.7 million to $9.7 million at September 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 $2.5 million to $37.2 million at September 30, 1997 from $34.7 million at December 31, 1996. The increase represents the acquisition of certain domestic manufacturing and warehouse equipment, partially offset by depreciation. Loans and notes payable decreased $19.3 million to $10.0 million at September 30, 1997 from December 31, 1996, reflecting the repayment of borrowings under the Company's previous revolving credit line which was financed by advances under the Company's uncommitted facilities and the new term loan. Income taxes payable increased $5.6 million to $6.5 million at September 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., and certain other subsidiaries of the Company terminated their Subchapter S corporation status and, accordingly, became subject to federal and state income taxes. Third-party long-term financings for the nine months ended September 30, 1997 consisted primarily of borrowings under the previously mentioned term loan and long-term loans secured by real property, 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. SFAS No. 130 establishes requirements for disclosure of comprehensive income. The new standard becomes effective for the Company's fiscal year 1998 and requires reclassification of earlier financial statements for comparative purposes. In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim financial reports. It also establishes standards for related disclosure about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The new standard becomes effective for the Company's fiscal year 1998 and requires that comparative information from earlier years be restated to conform to the requirements of this standard. The Company does not believe any substantial changes to its disclosures will be made at the time SFAS No. 131 is adopted. 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. These statements are based on certain assumptions and analysis 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. However, whether actual results and developments will conform 14 15 with the Company's expectations and predictions is subject to a number of risks and uncertainties, including, 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, many 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 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 and other factors which are beyond the control of the Company and its subsidiaries. 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. 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. PART II. OTHER INFORMATION 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 82.5% of the then outstanding shares of Amscan Holdings Common Stock, Amscan Holdings management will own approximately 7.5%, and the Estate of John A. Svenningsen (the "Estate"), which currently owns approximately 71.2% 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), $117 million from a senior term loan and $110 million from the issuance of senior subordinated debt. In connection with the Merger, the Company will also enter into a $50 million revolving credit facility, which will, subject to a borrowing base, be available to fund the working capital requirements of the Company. GSCP has received a commitment from Goldman Sachs Credit Partners L.P. with respect to the senior term loan 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 16 (a) Exhibits Exhibit Number Description ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8 - K 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. 16 17 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 Dated: October 28, 1997 accounting officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1997 SEP-30-1997 684 0 58,336 (2,060) 48,736 115,376 65,959 (28,802) 162,760 40,504 24,828 0 0 2,112 86,890 162,760 161,286 161,286 103,460 103,460 0 1,423 2,654 28,677 11,627 16,901 0 0 0 16,901 0.80 0
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