<PAGE> 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)
<TABLE>
<S> <C>
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
</TABLE>
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
<PAGE> 2
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED) (NOTE)
(IN THOUSANDS)
ASSETS
<S> <C> <C>
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
========= =========
</TABLE>
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> 4
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
======= ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ........................... 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
======== ======== ======= ===== ======== =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
AMSCAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 8
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 4: INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------ ------
<S> <C> <C>
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%
====== ======
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------ ------
<S> <C> <C>
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%
====== ======
</TABLE>
11
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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