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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency
Common Paid-in Retained Translation Treasury
Stock Capital Earnings Adjustment Stock Total
-------- ---------- -------- ----------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ========= ========= ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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