Filed pursuant to Rule 424(b)(3)
Registration No. 333-45457
AMSCAN HOLDINGS, INC.
Prospectus dated February 24, 1998, as supplemented by
Supplement No. 1 dated March 31, 1998,
Supplement No. 2 dated April 29, 1998,
Supplement No. 3 dated May 15, 1998, and
Supplement No. 4 dated August 7, 1998
The date of this supplement No. 5 is August 14, 1998.
On August 14, 1998, Amscan Holdings, Inc. filed the attached
report on Form 10-Q for the quarterly period ended June 30,
1998.
<PAGE>
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 000-21827
---------
AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of August 7, 1998, 1,012.41 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
<PAGE>
AMSCAN HOLDINGS, INC.
FORM 10-Q
June 30, 1998
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997............................................. 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1998 and 1997....................... 4
Consolidated Statement of Stockholders' Deficit for
the Six Months Ended June 30, 1998............................ 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997........................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk ... 17
Part II
Item 2 Changes in Securities and Use of Proceeds..................... 17
Item 6 Exhibits and Reports on Form 8-K.............................. 17
Signature .............................................................. 19
2
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
---------------- -----------
(Unaudited) (Note)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................. $ 19,833 $111,539
Accounts receivable, net of allowances ............... 42,655 44,838
Inventories........................................... 46,483 51,742
Assets held for disposal.............................. 2,776
Prepaid expenses and other current assets............. 8,281 8,073
----------- -----------
Total current assets................................ 120,028 216,192
Property, plant and equipment, net....................... 33,668 38,860
Intangible assets, net................................... 8,561 7,762
Other assets, net ...................................... 7,759 6,462
----------- -----------
Total assets........................................ $170,016 $269,276
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable......................................... $ 167 $ 424
Due to stockholders................................... 158 93,243
Accounts payable...................................... 5,838 12,152
Accrued expenses...................................... 10,234 10,502
Income taxes payable.................................. 167
Current portion of long-term obligations.............. 4,401 2,911
----------- -----------
Total current liabilities........................... 20,798 119,399
Long-term obligations, excluding current portion......... 231,392 234,422
Deferred tax liabilities................................. 7,342 6,893
Other.................................................... 3,614 3,781
----------- -----------
Total liabilities................................... 263,146 364,495
Stockholders' deficit:
Common Stock.......................................... - -
Additional paid-in capital............................ 181 -
Unamortized restricted Common Stock award, net........ (705) (835)
Notes receivable from officers........................ (728) (750)
Accumulated deficit................................... (90,611) (92,912)
Accumulated other comprehensive loss.................. (1,267) (722)
--------- ---------
Total stockholders' deficit......................... (93,130) (95,219)
--------- ---------
Total liabilities and stockholders' deficit......... $170,016 $269,276
========= ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date.
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $48,686 $49,225 $104,247 $102,401
Cost of sales................................. 31,023 31,554 67,012 65,964
-------- -------- --------- --------
Gross profit................................ 17,663 17,671 37,235 36,437
Operating expenses: ..........................
Selling expenses............................ 3,533 3,127 7,159 6,226
General and administrative expenses......... 4,680 3,945 9,771 8,309
Art and development costs................... 1,596 1,293 3,216 2,567
Restructuring charges....................... 2,400 2,400
-------- -------- --------- ----------
Total operating expenses............... 12,209 8,365 22,546 17,102
------ -------- --------- ----------
Income from operations................. 5,454 9,306 14,689 19,335
Interest expense, net......................... 5,498 882 10,763 1,866
Other income, net............................. 19) (12) (59) (39)
--------- --------- --------- ----------
(Loss) income before income taxes and
minority interests................. (25) 8,436 3,985 17,508
Income tax (benefit) expense.................. (10) 3,417 1,654 7,145
Minority interests............................ (45) 43 30 85
---------- --------- --------- ----------
Net income.................................. $ 30 $ 4,976 $ 2,301 $ 10,278
========= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Six Months Ended June 30, 1998
(Dollars in thousands)
(Unaudited)
Unamortized
Restricted Notes Accumulated
Additional Common Receivable Other
Common Paid-in Stock Award, from Accumulated Comprehensive
Stock Capital Net Officers Deficit Loss Total
-------- ----------- ------------ ----------- ------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997.... $ - - $(835) $(750) $(92,912) $ (722) $(95,219)
Net income......................... - - - - 2,301 - 2,301
Net change in foreign currency
translation adjustment.......... - - - - - (545) (545)
Payment received on notes
receivable from officers........ - - - 22 - - 22
Issuance of 2.41 shares of
Common Stock ................... - $181 - - - - 181
Amortization of restricted
Common Stock award.............. - - 130 - - - 130
-------- ------------ ----------- ------------ -------------- ---------- ------
Balance as of June 30, 1998........ $ - $181 $(705) $(728) $(90,611) $(1,267) $(93,130)
======== ==== ===== ===== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
1998 1997
---------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income................................................................. $ 2,301 $ 10,278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 3,445 2,981
Amortization of deferred financing costs.............................. 348 9
Restructuring charges................................................. 2,400 -
Amortization of restricted Common Stock award......................... 130 -
Provision for doubtful accounts....................................... 1,303 577
Deferred income tax (benefit) provision............................... (251) 1,725
Gain on disposal of equipment......................................... (2)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.......................... 880 (9,843)
Decrease in inventories............................................. 5,259 2,628
Decrease in prepaid expenses and other current assets............... 492 856
Decrease in accounts payable, accrued expenses and income
taxes payable.................................................. (8,905) (3,187)
Other, net............................................................. (1,294) (456)
-------- ---------
Net cash provided by operating activities....................... 6,106 5,568
Cash flows from investing activities:
Capital expenditures....................................................... (2,474) (3,711)
Proceeds from disposal of property and equipment........................... 23 -
--------
Net cash used in investing activities........................... (2,451) (3,711)
Cash flows from financing activities:
Payments to acquire Common Stock in Merger................................. (93,085) -
Net proceeds from the issuance of Common Stock............................. 181 4,539
Proceeds from loans, notes payable and long-term obligations............... 167 15,632
Repayment of loans, notes payable and long-term obligations................ (2,058) (22,165)
Repayment of subordinated and other indebtedness due to stockholders....... (200)
Payments received on notes receivable from officers........................ 22 -
Payments to acquire treasury stock......................................... - (290)
-------- --------
Net cash used in financing activities........................... (94,773) (2,484)
Effect of exchange rate changes on cash and cash equivalents.................. (588) 289
-------- --------
Net decrease in cash and cash equivalents....................... (91,706) (338)
Cash and cash equivalents at beginning of period.............................. 111,539 1,589
-------- --------
Cash and cash equivalents at end of period.................................... $ 19,833 $ 1,251
======== ========
Supplemental Disclosures:
Cash paid during the period for:
Interest .......................................................... $8,345 $1,799
Income taxes ...................................................... $2,297 $6,189
</TABLE>
Capital lease obligations of $94 and $59 were incurred during the six months
ended June 30, 1998 and 1997, respectively.
See accompanying notes to consolidated financial statements.
6
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan" and, together with its subsidiaries,
the "Company") was incorporated on October 3, 1996 for the purpose of becoming
the holding company for Amscan Inc. and certain affiliated entities in
connection with an initial public offering of common stock.
On August 10, 1997, Amscan and Confetti Acquisition, Inc. ("Confetti"),
a newly formed Delaware corporation affiliated with GS Capital Partners II, L.P.
and certain other private investment funds managed by Goldman, Sachs & Co.
(collectively, "GSCP"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") providing for a recapitalization of Amscan in which Confetti
would be merged with and into Amscan (the "Merger"), with Amscan as the
surviving corporation.
On December 19, 1997 (the "Effective Time"), the Merger was consummated
pursuant to the Merger Agreement. At the Effective Time, each share of the
Common Stock, par value $0.10 per share, of the Company (the "Company Common
Stock"), issued and outstanding immediately prior to the Effective Time (other
than shares of Company Common Stock owned, directly or indirectly, by the
Company or by Confetti) was converted, at the election of each of the Company's
stockholders, into the right to receive from the Company either (a) $16.50 in
cash or (b) $9.33 in cash plus a retained interest in the Company equal to one
share of Company Common Stock for every 150,000 shares held by such stockholder,
with fractional shares of Company Common Stock paid in cash. Also pursuant to
the Merger Agreement, at the Effective Time each outstanding share of Common
Stock, par value $0.10 per share, of Confetti ("Confetti Common Stock"), was
converted into an equal number of shares of Company Common Stock as the
surviving corporation in the Merger. The Merger was financed with an equity
contribution of approximately $67.5 million (including contributions of Company
Common Stock by certain employee stockholders and including issuances of
restricted Common Stock), $117 million from a senior term loan and $110 million
from the issuance of senior subordinated notes. The Merger was accounted for as
a recapitalization and, accordingly, the historical basis of the Company's
assets and liabilities were not affected by the Merger.
Amscan and its subsidiaries 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
and its majority-owned subsidiaries. Investments in less than majority-owned
subsidiaries are accounted for on an equity basis.
The accompanying unaudited consolidated 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 six-month periods each ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. 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 a general level of
7
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
raw material costs. For further information, see the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
NOTE 3: RESTRUCTURING CHARGES
In the second quarter of 1998, the Company commenced a restructuring of
its distribution operations to reduce costs and improve operating efficiencies.
The Company will close two distribution facilities located in California and
Canada which will result in the elimination of approximately 100 positions. The
restructuring will be substantially completed by the end of 1998. The Company
has recorded restructuring charges of approximately $2,400,000 which include the
non-cash write-down of $1,328,000 relating to property, plant and equipment (the
majority of which has been classified as assets held for disposal), the accrual
of future lease obligations of $474,000, severance and related costs of
$335,000, and other costs of $263,000.
NOTE 4: ACQUISITION OF MINORITY INTEREST
In May 1998, the Company acquired the remaining 25% interest in its
U.K. based subsidiary, Amscan Holdings Limited, for approximately $1,703,000. In
conjunction with the acquisition, the Company will issue a non-interest bearing
note to the former shareholder in the amount of 350,000 pounds sterling
(approximately $583,000) which is payable over five years. The acquisition has
been accounted for as a purchase and the excess purchase price over the fair
value of the net assets acquired of $949,000 is being amortized on a
straight-line basis over thirty years.
The results of operations attributable to the additional 25% interest
in Amscan Holdings Limited are included in the accompanying financial statements
from the date of acquisition. The pro forma results of operations for this
acquisition for the periods presented, had the acquisition occurred at the
beginning of 1998 and 1997, are not significant, and accordingly, pro forma
information has not been provided.
NOTE 5: INVENTORIES
Inventories consisted of the following:
June 30, December 31,
1998 1997
------------ ------------
(In thousands)
Finished goods ................................ $42,996 $47,704
Raw materials ................................ 2,950 3,570
Work-in-process .............................. 2,183 1,630
------- -------
48,129 52,904
Less: reserve for slow moving
and obsolete inventory ..................... (1,646) (1,162)
------- -------
$46,483 $51,742
======= =======
Inventories are valued at the lower of cost, determined on a first in - first
out basis, or market.
8
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
NOTE 6: INCOME TAXES
The consolidated income tax provisions for the three and six-month
periods each ended June 30, 1998 and 1997 were determined based upon estimates
of the Company's consolidated effective income tax rates for the years ending
December 31, 1998 and 1997, respectively. The differences between the
consolidated effective income tax rate and the U.S. Federal statutory rate are
primarily attributable to state income taxes and the effects of foreign
operations.
NOTE 7: COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' deficit. SFAS No. 130 requires the
Company's foreign currency translation adjustment, which prior to adoption was
reported separately in stockholders' deficit to be included in other
comprehensive (loss) income. Amounts reported in prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
Comprehensive (loss) income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
----- ----- ----- ----
(in thousands)
<S> <C> <C> <C> <C>
Net income............................. $ 30 $4,976 $2,301 $10,278
Net change in foreign currency
translation adjustment............... (530) 54 (545) 245
------ ------- ------- --------
Comprehensive (loss) income............ $(500) $5,030 $1,756 $10,523
====== ====== ====== =======
</TABLE>
Accumulated other comprehensive loss at June 30, 1998 and December 31, 1997
consisted solely of the Company's foreign currency translation adjustment.
NOTE 8: CAPITAL STOCK
At June 30, 1998 and December 31, 1997, respectively, the Company's
authorized capital stock consisted of 5,000,000 shares of preferred stock, $0.10
par value, of which no shares were issued or outstanding, and 50,000,000 shares
of Common Stock, $0.10 par value, of which 1,012.41 and 1,010 shares were issued
and outstanding, respectively. In July 1998, the Company reduced its authorized
shares of Common Stock to 3,000 shares.
During the second quarter of 1998, the Company issued 2.41 shares of
its Common Stock to certain of its employees at a price of $75,000 per share and
received cash proceeds of approximately $181,000.
9
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
In addition, during the second quarter of 1998, the Company granted
stock options to purchase 5.55 shares of Common Stock under the terms of the
Amscan Holdings, Inc. Stock Incentive Plan, at an exercise price of $75,000 per
share which represented the estimated fair market value of the Company's Common
Stock at the grant date. The options vest in equal installments on each of the
first five anniversaries of the grant date. The options are non-transferable
(except under certain limited circumstances) and have a term of ten years.
At June 30, 1998, there were 87.41 shares of Common Stock held by
employees of which 10 shares were not yet fully paid and 11.25 shares were
subject to future vesting provisions. Under the terms of a stockholders'
agreement ("Stockholders' Agreement"), the Company can purchase all of the
shares held by the employee stockholders, and the employees can require the
Company to purchase all of the shares held by the employee stockholders, under
certain circumstances. The Company has the option to assign the obligation to
purchase employee shares, at a cost of up to $15,000,000, to GSCP. The purchase
price as prescribed in the Stockholders' Agreement is to be determined through a
market valuation of the minority-held shares or, under certain circumstances,
based on cost. At June 30, 1998, the aggregate amount that may be payable to
employee stockholders is significantly less than the cap of $15,000,000.
NOTE 9: SUBSEQUENT EVENT
On August 6, 1998, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") with the stockholders of Anagram International,
Inc., a Minneapolis-based metallic balloon manufacturer and distributor, and
certain related companies (collectively, the "Anagram Companies"), providing
for, among other things, the acquisition (the "Acquisition") by the Company of
all of the capital stock of each of the Anagram Companies in a transaction
valued at approximately $87,000,000, including the issuance of equity and the
payment or assumption of debt. Consummation of the Acquisition is subject to a
number of conditions, including the availability of financing and customary
consents and approvals. The Acquisition is expected to be completed during the
third quarter of 1998.
The Acquisition will be accounted for under the purchase method,
whereby the purchase price will be allocated to the underlying assets and
liabilities based on their estimated fair values.
The Company is planning to finance the Acquisition with approximately
$40,000,000 of senior term debt, approximately $24,000,000 of additional
revolving credit borrowings, cash on hand, and the issuance of approximately
$13,000,000 of equity. The Company's existing credit agreements are required to
be amended in connection with the Acquisition, including to provide for the
senior debt. The Company has received a commitment for the senior debt financing
from Goldman Sachs Credit Partners L.P.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Results of Operations
Percentage of Net Sales
Three Months Ended June 30,
---------------------------
1998 1997
---------- -------
Net sales.................................. 100.0% 100.0%
Cost of sales.............................. 63.7 64.1
------ ------
Gross profit....................... 36.3 35.9
Operating expenses:
Selling expenses........................ 7.3 6.4
General and administrative expenses..... 9.6 8.0
Art and development costs............... 3.3 2.6
Restructuring charges................... 4.9
------- ------
Total operating expenses........... 25.1 17.0
------- ------
Income from operations............. 11.2 18.9
Interest expense, net...................... 11.3 1.8
------- ------
Other income, net..........................
(Loss) income before income taxes
and minority interests........ (0.1) 17.1
Income tax (benefit) expense............... (0.1) 6.9
Minority interests......................... (0.1) 0.1
------- -------
Net income......................... 0.1% 10.1%
======= ======
Net sales for the three months ended June 30, 1998 were $48.7 million,
as compared to $49.2 million for the three months ended June 30, 1997. The
decrease in net sales for the three months ended June 30, 1998 of 1.1% results
from the timing of shipments of seasonal goods to customers, the majority of
which will be shipped in the third quarter 1998 versus the second quarter in
1997, and the reduction in sales attributable to the recent bankruptcies of two
national accounts which more than offset the growth in sales to party
superstores.
Gross profit for the three months ended June 30, 1998 was $17.7
million, or 36.3% of net sales, as compared to 35.9% of net sales for the
comparable period in 1997. The improvement in second quarter 1998 gross profit
margin is primarily due to operating efficiencies and reduced distribution costs
which are partially attributable to a restructuring plan commenced during the
second quarter of 1998.
Selling expenses of $3.5 million for the three months ended June 30,
1998 were $0.4 million higher than those of the corresponding quarter in 1997.
Selling expenses increased as a percentage of net sales from 6.4% to 7.3%
principally due to the addition of a new seasonal catalogue, expansion of the
Company's "everyday" catalogue, and higher advertising costs.
General and administrative expenses of $4.7 million increased by $0.7
million for the three months ended June 30, 1998 as compared to the
corresponding quarter in 1997. General and administrative expenses increased as
a percentage of net sales from 8.0% to 9.6% principally due to a $0.3 million
increase in the Company's provision for bad debts.
11
<PAGE>
Art and development costs of $1.6 million for the three months ended
June 30, 1998 increased by $0.3 million as compared to the corresponding quarter
in 1997. As a percentage of net sales, art and development costs increased from
2.6% to 3.3%. The increase in costs is attributable to the Company's investment
in additional art and product development staff associated with the development
of new product lines.
In the second quarter of 1998, the Company commenced a restructuring of
its distribution operations to reduce costs and improve operating efficiencies.
The Company will close two distribution facilities located in California and
Canada which will result in the elimination of approximately 100 positions. The
restructuring will be substantially completed by the end of 1998. The Company
has recorded restructuring charges of approximately $2.4 million, or 4.9% of
sales for the three months ended June 30, 1998. The restructuring charges
include the non-cash write-down of $1.3 million relating to property, plant and
equipment (the majority of which has been classified as assets held for
disposal), the accrual of future lease obligations of $0.5 million, severance
and related costs of $0.3 million, and other costs of $0.3 million. Management
is currently evaluating the further consolidation of its domestic distribution
facilities which may result in additional restructuring charges in subsequent
periods.
Interest expense of $5.5 million for the three months ended June 30,
1998 increased by $4.6 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the Merger (see
"Liquidity and Capital Resources"), offset in part by reduced levels of working
capital.
Income taxes for the three months ended June 30, 1998 and 1997 were
based upon estimated consolidated effective income tax rates of 41.5% and 40.5%
for the years ending December 31, 1998 and 1997, respectively. The higher
effective income tax rate for the year ending December 31, 1998 is attributable
to an increase in estimated state income taxes.
Minority interests represent the portion of (loss) income of the
Company's subsidiaries attributable to equity ownership not held by the Company.
12
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Results of Operations
Percentage of Net Sales
Six Months Ended June 30,
--------------------------
1998 1997
-------- -------
Net sales.................................. 100.0% 100.0%
Cost of sales.............................. 64.3 64.4
------ ------
Gross profit........................ 35.7 35.6
Operating expenses:
Selling expenses........................ 6.9 6.1
General and administrative expenses..... 9.4 8.1
Art and development costs............... 3.0 2.5
Restructuring charges................... 2.3 -
------ ------
Total operating expenses............ 21.6 16.7
------ ------
Income from operations.............. 14.1 18.9
Interest expense, net...................... 10.3 1.8
Other income, net.......................... (0.1) -
------ ------
Income before income taxes
and minority interests........ 3.9 17.1
Income tax expense......................... 1.6 7.0
Minority interests......................... 0.1 0.1
------ ------
Net income.......................... 2.2% 10.0%
====== ======
Net sales for the six months ended June 30, 1998 were $104.2 million,
as compared to $102.4 million for the six months ended June 30, 1997. The
increase in net sales for the six months ended June 30, 1998 of 1.8% is
attributable to growth in sales to party superstores and international customers
which more than offset the reduction in sales attributable to the recent
bankruptcies of two national accounts and the timing of shipments of seasonal
goods to customers which will be shipped in the third quarter 1998 versus the
second quarter in 1997.
The Company maintained a consistent gross profit margin of
approximately 36% between the comparative periods ending June 30, 1998 and 1997
reflecting its effective management of product and distribution costs.
Selling expenses of $7.2 million for the six months ended June 30, 1998
were $0.9 million higher than those of the corresponding period in 1997. Selling
expenses increased as a percentage of net sales from 6.1% to 6.9% principally
due to the addition of a new seasonal catalogue, expansion of the "everyday"
catalogue, and higher advertising costs.
General and administrative expenses of $9.8 million increased by $1.5
million for the six months ended June 30, 1998 as compared to the corresponding
period in 1997 and increased as a percentage of net sales from 8.1% to 9.4%
principally due to a $0.7 million increase in the Company's provision for bad
debts.
Art and development costs of $3.2 million for the six months ended June
30, 1998 increased by $0.6 million compared to the corresponding period in 1997.
As a percentage of net sales, art and development costs increased from 2.5% to
3.0%. The increase in costs is attributable to the Company's investment in
additional art and product development staff associated with the development of
new product lines.
In the second quarter of 1998, the Company commenced a restructuring of
its distribution operations to reduce costs and improve operating efficiencies.
The Company will close two distribution facilities located in California and
Canada which will result in the elimination of approximately 100 positions. The
restructuring will be substantially completed by the end of 1998. The Company
has recorded restructuring charges of approximately $2.4 million, or 2.3% of
sales for the six month period ended June 30, 1998. The restructuring charges
include the non-cash write-down of $1.3 million relating to property, plant and
equipment (the majority of which has been
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classified as assets held for disposal), the accrual of future lease obligations
of $0.5 million, severance and related costs of $0.3 million, and other costs of
$0.3 million. Management is currently evaluating the further consolidation of
its domestic distribution facilities which may result in additional
restructuring charges in subsequent periods.
Interest expense of $10.8 million for the six months ended June 30,
1998 increased by $8.9 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the Merger (see
"Liquidity and Capital Resources"), offset in part by reduced levels of working
capital.
Income taxes for the six months ended June 30, 1998 and 1997 were based
upon estimated consolidated effective income tax rates of 41.5% and 40.5% for
the years ending December 31, 1998 and 1997, respectively. The higher effective
income tax rate for the year ending December 31, 1998 is attributable to an
increase in estimated state income taxes.
Minority interests represent the portion of income of the Company's
subsidiaries attributable to equity ownership not held by the Company.
Liquidity and Capital Resources
On December 19, 1997 the Company and Confetti consummated the Merger,
providing for a recapitalization of the Company in which Confetti was merged
with and into the Company with the Company as the surviving corporation. Upon
consummation of the Merger, the Company's then existing loan arrangements were
repaid and terminated and 90% of its then outstanding Common Stock was converted
into the right to receive cash. The Merger was financed with an equity
contribution of approximately $67.5 million (including contributions of Company
Common Stock by certain employee stockholders and including issuances of
restricted Common Stock), $117 million from a senior term loan (the "Term Loan")
provided under a bank credit agreement (the "Bank Credit Facilities") and $110
million from the issuance of 9 7/8% senior subordinated notes (the "Notes")
(collectively, the "Merger Financings"). The Merger has been accounted for as a
recapitalization and, accordingly, the historical basis of the Company's assets
and liabilities has not been affected by the Merger.
In addition to the Term Loan, the Bank Credit Facilities provide for
revolving loan borrowings of up to $50 million (the "Revolving Credit
Facility"). The Revolving Credit Facility has a term of five years and bears
interest, at the option of the Company, at the lenders' customary base rate plus
1.25% per annum or at the lenders' customary reserve adjusted Eurodollar rate
plus 2.25% per annum. Interest on balances outstanding under the Revolving
Credit Facility are subject to adjustment in the future based on the Company's
performance. At June 30, 1998, the Company had borrowing capacity of
approximately $46.1 million under the Revolving Credit Facility.
On August 6, 1998, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") with the stockholders of Anagram International,
Inc., a Minneapolis-based metallic balloon manufacturer and distributor, and
certain related companies (collectively, the "Anagram Companies"), providing
for, among other things, the acquisition (the "Acquisition") by the Company of
all of the capital stock of each of the Anagram Companies in a transaction
valued at approximately $87 million, including the issuance of equity and the
payment or assumption of debt. Consummation of the Acquisition is subject to a
number of conditions, including the availability of financing and customary
consents and approvals. The Acquisition is expected to be completed during the
third quarter of 1998.
In a press release, the Company stated that the Company and the Anagram
Companies expect that on a stand alone basis, the revenues of the Anagram
Companies for calendar year 1998 will be approximately $65 to $70 million with
an earnings margin (before interest, taxes, depreciation and amortization) of
approximately 13%. In addition, the Company stated that it expects to realize a
number of operational synergies, of both a revenue and cost nature, from its
combination with the Anagram Companies. The Company estimates that these
synergies will be in the range of at least $1 million to $2 million for 1999.
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The Acquisition will be accounted for under the purchase method,
whereby the purchase price will be allocated to the underlying assets and
liabilities based on their estimated fair values.
The Company is planning to finance the Acquisition with approximately
$40.0 million of senior term debt, approximately $24.0 million of additional
borrowings under the Revolving Credit Facility, cash on hand, and the issuance
of approximately $13.0 million of equity. The Company's existing credit
agreements are required to be amended in connection with the Acquisition,
including to provide for the senior debt. The Company has received a commitment
for the senior debt financing from Goldman Sachs Credit Partners L.P.
Based upon the current level of operations and anticipated growth,
including giving effect to the anticipated Acquisition, and the contemplated
amendments to the Company's credit agreements, the Company anticipates that its
operating cash flow, together with available borrowings under the Revolving
Credit Facility, will be adequate to meet its anticipated future requirements
for working capital and operating expenses, to permit potential acquisitions and
to service its debt requirements as they become due. However, the Company's
ability to make scheduled payments of principal on, or to pay interest on, or to
refinance its indebtedness and to satisfy its other obligations will depend upon
its future performance, which, to a certain extent, will be subject to general
economic, financial, competitive, business and other factors beyond its control.
The Merger Financings, the Acquisition, and the contemplated amendments
to the Company's credit agreements, may affect the Company's ability to make
future capital expenditures. However, management believes that additions to
plant and equipment during the past three years provide adequate capacity to
support its operations for at least the next 12 months. As of June 30, 1998, the
Company did not have material commitments for capital expenditures.
Cash Flow Data - Six Months Ended June 30, 1998 Compared to Six Months Ended
June 30, 1997
During the six months ended June 30, 1998, net cash provided by
operating activities increased by $0.5 million to $6.1 million from $5.6 million
during the same period in 1997 as a result of lower accounts receivable and
inventory balances attributable to management's efforts to reduce working
capital. The impact of lower accounts receivable and inventory levels was
partially offset by reduced earnings and decreased accounts payable.
Net cash used in investing activities during the six months ended June
30, 1998 of $2.5 million decreased by $1.3 million from 1997 reflecting lower
levels of capital expenditures.
During the six months ended June 30, 1998, net cash used in financing
activities of $94.8 million consisted principally of payments to former
shareholders whose investment in Company Common Stock was converted into the
right to receive cash in connection with the Merger and the scheduled repayment
of debt offset by the net proceeds received from short-term borrowings and the
issuance of Common Stock to employees as well as payments received applicable to
notes receivable from officers. During the comparable period in 1997, net cash
used in financing activities of $2.5 million reflected the repayment of
borrowings under its then existing revolving credit line of $22.2 million which
was principally financed by advances under the Company's uncommitted facilities
and the then existing term loan of $15.6 million, repayments of indebtedness to
stockholders of $0.2 million and payment of $0.3 million to acquire treasury
stock, offset by the net proceeds of $4.5 million from the issuance of Common
Stock to cover the overallotment provided for in the underwriting agreement
relating to the Company's initial public offering.
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Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. The statement requires all derivatives to be recognized on
the balance sheet at fair value and establishes standards for the recognition of
changes in such fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company expects to adopt SFAS No. 133 effective January
1, 2000. Because of the Company's limited use of derivatives, management does
not anticipate the adoption of SFAS No. 133 will have a significant effect on
earnings or the financial position of the Company.
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.
Impact of Year 2000
Several of the Company's older computer programs have time sensitive
software that will not recognize the year 2000 and, if not addressed, could
cause disruptions to the Company's normal business operations. The Company has
completed an assessment of its software and has begun to upgrade its
time-sensitive software to be Year 2000 compliant. Management expects that the
cost to upgrade its software will not be significant and that substantially all
of the cost will be recognized over the life of the new software. To date, the
Company has not incurred significant expenses associated with the Year 2000
issue.
The Company expects to complete the upgrade of its principal software
by December 31, 1998 and believes that the Year 2000 issue will not pose
significant operational problems for its computer systems. However, there can be
no guarantee that the estimated cost and completion will be achieved and the
actual results could differ materially from those anticipated.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
This report includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including the consummation of the
acquisition of the Anagram Companies and the integration of the business of the
Anagram Companies with that of the Company, and the expected operating results
of the Anagram Companies and any expected synergies, and also including future
capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, including any changes to
operations, goals, expansion and growth of the Company's business and
operations, plans, references to future success and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances. Actual
results may differ materially from those discussed. Whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including, but not limited to
(1) the concentration of sales by the Company to party goods superstores where
the reduction of purchases by a small number of customers could materially
reduce the Company's sales and profitability, (2) the concentration of the
Company's credit risk in party goods superstores, several of which are privately
held and have expanded rapidly in recent years, (3) the failure by the Company
to anticipate changes in tastes and preferences of party goods retailers and
consumers, (4) 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, (7) changes in general business conditions, (8) other
factors which might be described from time to time in the Company's filings with
the Securities and Exchange Commission, and (9) other factors which are beyond
the control of the Company. Consequently, all of the forward-looking statements
made in this report are qualified by these cautionary statements, and the actual
results or developments anticipated by the Company may not be realized or, even
if substantially realized, may not have the expected consequences to or
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effects on the Company or its business or operations. Although the Company
believes that it has the product offerings and resources needed for continued
growth in revenues and margins, future revenue and margin trends cannot be
reliably predicted. Changes in such trends may cause the Company to adjust its
operations in the future. Because of the foregoing and other factors, recent
trends should not be considered reliable indicators of future financial results.
In addition, the highly leveraged nature of the Company may impair its ability
to finance its future operations and capital needs and its flexibility to
respond to changing business and economic conditions and business opportunities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has interest rate risk associated with variable rate
indebtedness. The Company utilizes off-balance sheet financial instruments to
manage the market risk associated with fluctuations in interest rates. It is the
Company's policy to use derivative financial instruments to protect against
market risk arising in the normal course of business. Company policies prohibit
the use of derivative instruments for the purpose of trading for profit on price
fluctuations or contracts which intentionally increase the Company's underlying
exposure.
Part II
Item 2. Changes in Securities and Use of Proceeds
a) On April 1, 1998, the Company sold 2.41 shares of its Common Stock.
b) Not applicable.
c) The shares of Common Stock referred to in paragraph (a) were sold
for $180,666 in cash. No underwriting discounts or commissions were
paid in connection with such sale.
d) The shares of Common Stock referred to in paragraph (a) were part of
an offering to a limited number accredited investors and employees
of the Company. Such sales were exempt under Section 4(2) of the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement, dated as of August 6, 1998,
by and among Amscan Holding, Inc. and certain
stockholders of Anagram International, Inc. and
certain related companies (incorporated by reference
to Exhibit 2.1 to Current Report on Form 8 - K dated
August 6, 1998)
3.1 Certificate of Incorporation, as amended
4.1 Warrant Agreement, dated as of August 6, 1998 by and
between Amscan Holdings, Inc. and Garry Kieves
Retained Annuity Trust (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8 - K dated
August 6, 1998)
10.1 Amendment No. 1 to the Stockholders' Agreement, dated
as of August 6, 1998 by and among Amscan Holdings,
Inc. and certain stockholders of Amscan
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Holdings, Inc.(incorporated by reference to Exhibit
10.1 to Current Report on Form 8 - K
dated August 6, 1998)
10.2 Employment Agreement, dated as of August 6, 1998, by
and between Amscan Holdings, Inc. and Garry Kieves
(incorporated by reference to Exhibit 10.2 to Current
Report on Form 8 - K dated August 6, 1998)
99.1 Joint Press Release, dated as of August 6, 1998
(incorporated by reference to Exhibit 99.1 to Current
Report on Form 8-K dated August 6,1998)
27 Financial Data Schedule
(b) Reports on Form 8 - K
A Current Report on Form 8 - K was filed dated August 6, 1998, regarding
the Company's signing of a definitive agreement to acquire all of the
capital stock of Anagram International, Inc. and certain related companies.
A Current Report on Form 8-K dated April 29, 1998 was filed regarding the
change in the Company's independent auditors responding to Item 4 of Form
8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMSCAN HOLDINGS, INC.
By: /s/ Michael A. Correale
--------------------------
Michael A. Correale
Controller
(on behalf of the registrant and as
principal accounting officer)
Date: August 12, 1998
----------------
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