AMSCAN HOLDINGS, INC.
Filed pursuant to Rule 424(b)(3)
Registration No. 333-45457
Supplement No. 1 to prospectus dated October 1, 1998
The date of this supplement No. 1 is November 16, 1998
On November 16, 1998, Amscan Holdings, Inc. filed the attached report on Form
10-Q for the quarterly period ended September 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 September 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 November 7, 1998, 1,132.41 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
<PAGE>
AMSCAN HOLDINGS, INC.
FORM 10-Q
September 30, 1998
Table of Contents
Part I Page
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997........................................... 3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997............... 4
Consolidated Statement of Stockholders' Deficit for the
Nine Months Ended September 30, 1998........................ 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997.................... 6
Notes to Consolidated Financial Statements.................. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................12
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.......................... 18
Signature........................................................... 20
2
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Note)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 1,409 $111,539
Accounts receivable, net of allowances ............ 60,396 44,838
Inventories........................................ 54,527 51,742
Assets held for disposal........................... 2,903
Prepaid expenses and other current assets.......... 9,943 8,073
---------- --------
Total current assets............................. 129,178 216,192
Property, plant and equipment, net.................... 58,247 38,860
Intangible assets, net................................ 68,438 7,762
Other assets, net ................................... 8,294 6,462
---------- --------
Total assets..................................... $ 264,157 $269,276
========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable...................................... $ 17,166 $ 424
Due to stockholders................................ 93,243
Accounts payable................................... 11,332 12,152
Accrued expenses................................... 24,900 10,669
Current portion of long-term obligations........... 5,045 2,911
----------- -----------
Total current liabilities........................ 58,443 119,399
Long-term obligations, excluding current portion...... 271,131 234,422
Deferred income tax liabilities....................... 7,829 6,893
Other................................................. 3,630 3,781
----------- -----------
Total liabilities................................ 341,033 364,495
Stockholders' deficit:
Common Stock....................................... - -
Additional paid-in capital......................... 12,781
Unamortized restricted Common Stock award, net..... (640) (835)
Notes receivable from officers..................... (708) (750)
Accumulated deficit................................ (87,186) (92,912)
Accumulated other comprehensive loss............... (1,123) (722)
----------- -----------
Total stockholders' deficit...................... (76,876) (95,219)
----------- -----------
Total liabilities and stockholders' deficit...... $264,157 $269,276
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales....................................... $62,252 $58,885 $166,499 $161,286
Cost of sales................................... 39,548 37,496 106,560 103,460
------- ------- -------- --------
Gross profit.................................. 22,704 21,389 59,939 57,826
Operating expenses:
Selling expenses.............................. 4,373 3,372 11,532 9,598
General and administrative expenses........... 5,297 4,916 15,068 13,225
Art and development costs..................... 1,784 1,324 5,000 3,891
Restructuring charges......................... 2,400
------- ------- --------- --------
Total operating expenses................. 11,454 9,612 34,000 26,714
------- ------- --------- --------
Income from operations................... 11,250 11,777 25,939 31,112
Interest expense, net........................... 5,440 788 16,203 2,654
Other income, net............................... (22) (180) (81) (219)
------- ------- --------- --------
Income before income taxes and minority
interests ................................ 5,832 11,169 9,817 28,677
Income tax expense.............................. 2,420 4,482 4,074 11,627
Minority interests.............................. (13) 64 17 149
------- ------- --------- --------
Net income.................................... $ 3,425 $ 6,623 $ 5,726 $ 16,901
======= ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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> <C>
Balance as of December 31, 1997..... $ - $(835) $(750) $(92,912) $(722) $(95,219)
Net income.......................... 5,726 5,726
Net change in foreign currency
translation adjustment........... (401) (401)
Payment received on notes
receivable from officers......... 42 42
Issuance of 120 shares of Common
Stock in connection with the
Acquisition......................... $12,600 12,600
Issuance of 2.41 shares of
Common Stock..................... 181 181
Amortization of restricted
Common Stock award............... 195 195
-------- --------- ------ -------- ---------- ---------- ---------
Balance as of September 30, 1998....$ - $12,781 $(640) $(708) $(87,186) $(1,123) $(76,876)
======== ========= ====== ======== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 5,726 $ 16,901
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................. 5,319 4,495
Amortization of deferred financing costs.................................. 522 10
Restructuring charges..................................................... 2,400
Amortization of restricted Common Stock award............................. 195
Provision for doubtful accounts........................................... 1,807 1,423
Deferred income tax provision............................................. 1,719 1,520
Gain on disposal of equipment............................................ (8) (29)
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable......................................... (10,464) (24,310)
Decrease (increase) in inventories...................................... 7,018 (3,043)
Decrease in prepaid expenses and other current assets................... 818 2,469
(Decrease) increase in accounts payable, accrued expenses and
income taxes payable................................................... (2,222) 7,575
Other, net................................................................. (263) 1,468
---------- ---------
Net cash provided by operating activities.................................. 12,567 8,479
Cash flows from investing activities:
Cash paid for acquisitions..................................................... (78,546)
Capital expenditures........................................................... (4,259) (6,895)
Proceeds from disposal of equipment............................................ 89 140
---------- ---------
Net cash used in investing activities............................... (82,716) (6,755)
Cash flows from financing activities:
Payments to acquire Common Stock in Merger..................................... (93,147)
Net proceeds from the issuance of Common Stock................................. 181 4,524
Proceeds from loans, notes payable and long-term obligations, net of
financing costs of $800 in 1998............................................. 59,766 15,620
Repayment of loans, notes payable and long-term obligations.................... (6,355) (22,208)
Repayment of subordinated and other indebtedness due to stockholders........... (182)
Payments received on notes receivable from officers............................ 42
Payments to acquire treasury stock............................................. (290)
----------- ---------
Net cash used in financing activities............................... (39,513) (2,536)
Effect of exchange rate changes on cash and cash equivalents...................... (468) (93)
----------- ---------
Net decrease in cash and cash equivalents........................... (110,130) (905)
Cash and cash equivalents at beginning of period.................................. 111,539 1,589
----------- ---------
Cash and cash equivalents at end of period........................................ $ 1,409 $ 684
========== =========
Supplemental disclosures:
Cash paid during the period for:
Interest .............................................................. $13,884 $2,622
Income taxes .......................................................... $2,903 $6,612
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
Supplemental information on noncash activities:
Capital lease obligations of $94 and $59 were incurred during the nine
months ended September 30, 1998 and 1997, respectively.
In connection with the acquisition of Anagram International, Inc. and
certain related companies, the Company issued 120 shares of its Common Stock,
valued at $12,600, to the former owner of Anagram International, Inc.
See accompanying notes to consolidated financial statements.
7
<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, after the elimination of intercompany
transactions. 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 nine-month periods each ended
September 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
8
<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: Acquisitions
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 issued 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.
On September 17, 1998, the Company completed the acquisition (the
"Acquisition") of all the capital stock of Anagram International, Inc., a
Minneapolis-based metallic balloon manufacturer and distributor, and certain
related companies (collectively, "Anagram"), pursuant to a Stock Purchase
Agreement (the "Stock Purchase Agreement") dated August 6, 1998, in a
transaction valued at approximately $87,000,000, plus certain other related
costs.
The Company financed the Acquisition with $40,000,000 of senior term debt,
approximately $20,000,000 of additional revolving credit borrowings, cash on
hand, and the issuance of 120 shares of the Company's Common Stock valued at
$12,600,000. In connection with and upon consummation of the Acquisition, the
Company amended and restated its credit agreements to provide for, among other
things, the additional senior term debt.
The Acquisition was accounted for under the purchase method, and,
accordingly, the operating results of Anagram have been included in the
Company's consolidated financial statements since the date of acquisition. Based
on preliminary estimates, the excess of the aggregate purchase price over the
fair market value of net assets acquired (principally goodwill) approximated
$59,000,000 and is being amortized on a straight-line basis over a range of 3 to
25 years.
The following summarized unaudited pro forma financial information assumes
the Acquisition had occurred on January 1 of each period presented:
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
(in thousands)
Net sales.... $209,962 $207,022
Net income..... $4,865 $16,942
9
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
Note 4: 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 a total of approximately 100 positions,
of which approximately 55 jobs already have been eliminated. 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 5: Inventories
Inventories consisted of the following:
September 30, December 31,
1998 1997
---- ----
(In thousands)
Finished goods .......................... $47,056 $47,704
Raw materials ........................... 4,258 3,570
Work-in-process ......................... 5,021 1,630
------- ------
56,335 52,904
Less: reserve for slow moving and
obsolete inventory..................... (1,808) (1,162)
------- ------
$54,527 $51,742
======= =======
Inventories are valued at the lower of cost, determined on a first in -
first out basis, or market.
Note 6: Income Taxes
The consolidated income tax provisions for the three and nine-month periods
ended September 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 income. Amounts
reported in prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
10
<PAGE>
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(Unaudited)
Comprehensive income consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
Net income......................... $3,425 $6,623 $5,726 $16,901
Net change in foreign currency
translation adjustment........... 144 (327) (401) (82)
-------- ------ ------- --------
Comprehensive income............. . $3,569 $6,296 $5,325 $16,819
======== ====== ======= =======
Accumulated other comprehensive loss at September 30, 1998 and December 31,
1997 consisted solely of the Company's foreign currency translation adjustment.
Note 8: Capital Stock
At September 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. During the third
quarter of 1998, the Company reduced its authorized shares of Common Stock,
$0.10 par value, from 50,000,000 shares to 3,000 shares, of which 1,132.41 and
1,010 shares were issued and outstanding at September 30, 1998 and December 31,
1997, respectively.
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. During the third quarter of
1998, in connection with the Acquisition, 120 shares of Common Stock valued at
$12,600,000, were issued to the former owner of Anagram.
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 September 30, 1998, there were 147.41 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 September 30, 1998, the aggregate amount that may be payable
to employee stockholders is less than the cap of $15,000,000.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Results of Operations
Percentage of Net Sales
Three Months Ended September 30,
1998 1997
---- ----
Net sales................................... 100.0% 100.0%
Cost of sales............................... 63.5 63.7
----- ------
Gross profit........................ 36.5 36.3
Operating expenses:
Selling expenses......................... 7.0 5.7
General and administrative expenses...... 8.5 8.4
Art and development costs................ 2.9 2.2
------ ------
Total operating expenses............ 18.4 16.3
----- ------
Income from operations.............. 18.1 20.0
Interest expense, net....................... 8.7 1.3
Other income, net........................... (0.3)
------ ------
Income before income taxes
and minority interests......... 9.4 19.0
Income tax expense.......................... 3.9 7.6
Minority interests.......................... ____ 0.1
-------
Net income.......................... 5.5% 11.3%
====== ======
Net sales for the three months ended September 30, 1998 were $62.3 million,
as compared to $58.9 million for the three months ended September 30, 1997. The
increase in net sales for the three months ended September 30, 1998 of 5.7%
reflects additional sales from the acquisition of Anagram International, Inc.
("Anagram") as well as increased sales to party superstores which more than
offset the reduction in sales attributable to the bankruptcies of two national
accounts that occurred in the second half of 1997.
Gross profit for the three months ended September 30, 1998 was $22.7
million, or 36.5% of net sales, as compared to 36.3% for the same period in
1997. The increase in margin is attributable to the commencement of a plan to
restructure the Company's distribution operations which began during the second
quarter of 1998.
Selling expenses of $4.4 million for the three months ended September 30,
1998 were $1.0 million higher than those of the corresponding quarter in 1997.
Selling expenses increased as a percentage of net sales from 5.7% to 7.0%
principally due to the addition of a new seasonal catalogue, expansion of the
"everyday" catalogue, and higher advertising costs.
General and administrative expenses for the three months ended September
30, 1998 were $5.3 million, $0.4 million higher than the same period in 1997,
and reflect the acquisition of Anagram. General and administrative expenses were
8.5% of net sales, remaining comparable to 1997 as a percentage of net sales.
Art and development costs of $1.8 million for the three months ended
September 30, 1998 increased by $0.5 million as compared to the corresponding
quarter in 1997. As a percentage of net sales, art and development costs
increased from 2.2% to 2.9%. 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.
Interest expense of $5.4 million for the three months ended September 30,
1998 increased by $4.7 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the
12
<PAGE>
Merger and the acquisition of Anagram (see "Liquidity and Capital Resources"),
offset, in part, by reduced levels of working capital.
Income taxes for the three months ended September 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.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Results of Operations
Percentage of Net Sales
Nine Months Ended September 30,
1998 1997
---------- --------
Net sales................................... 100.0% 100.0%
Cost of sales............................... 64.0 64.1
------ -----
Gross profit......................... 36.0 35.9
Operating expenses:
Selling expenses......................... 6.9 6.0
General and administrative expenses...... 9.0 8.2
Art and development costs................ 3.0 2.4
Restructuring charges.................... 1.4 -
------ -----
Total operating expenses............. 20.3 16.6
------ -----
Income from operations............... 15.7 19.3
Interest expense, net....................... 9.7 1.6
Other income, net........................... - (0.1)
----- -----
Income before income taxes
and minority interests......... 6.0 17.8
Income tax expense.......................... 2.4 7.2
Minority interests.......................... - 0.1
------ ------
Net income.......................... 3.6% 10.5%
====== ======
Net sales for the nine months ended September 30, 1998 were $166.5
million, as compared to $161.3 million for the nine months ended September 30,
1997. The increase in net sales for the nine months ended September 30, 1998 of
3.2% reflects additional sales from the acquisition of Anagram as well as
increased sales to party superstores which more than offset the reduction in
sales attributable to the bankruptcies of two national accounts that occurred in
the second half of 1997.
The gross profit margin approximated 36% during the comparative periods
ended September 30, 1998 and 1997.
Selling expenses of $11.5 million for the nine months ended September
30, 1998 were $1.9 million higher than those of the corresponding period in
1997. Selling expenses increased as a percentage of net sales from 6.0% 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 $15.1 million increased by $1.8 million
for the nine months ended September 30, 1998 as compared to the corresponding
period in 1997 and increased as a percentage of net sales from 8.2% to 9.0% as a
result of various factors including the increased provision for bad debts, the
inclusion of the results of Anagram and the additional amortization of goodwill
and other intangible assets.
13
<PAGE>
Art and development costs of $5.0 million for the nine months ended
September 30, 1998 increased by $1.1 million compared to the corresponding
period in 1997. As a percentage of net sales, art and development costs
increased from 2.4% 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 a total of approximately 100 positions,
of which approximately 55 jobs already have been eliminated. The restructuring
will be substantially completed by the end of 1998. The Company has recorded
restructuring charges of approximately $2.4 million, or 1.4% of sales for the
nine-month period ended September 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 $16.2 million for the nine months ended September 30,
1998 increased by $13.5 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the Merger and the
acquisition of Anagram (see "Liquidity and Capital Resources"), offset in part
by reduced levels of working capital.
Income taxes for the nine months ended September 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 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 September 30, 1998, the Company had borrowing capacity of
approximately $29.5 million under the Revolving Credit Facility.
On September 17, 1998, the Company completed the acquisition (the
"Acquisition") of all of the capital stock of Anagram International, Inc., a
Minneapolis-based metallic balloon manufacturer and distributor, and
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certain related companies (collectively, "Anagram"), pursuant to a Stock
Purchase Agreement (the "Stock Purchase Agreement") dated August 6, 1998, in a
transaction valued at approximately $87 million, plus certain other related
costs.
The Company financed the Acquisition with $40 million of senior term debt,
approximately $20 million of additional revolving credit borrowings, cash on
hand, and the issuance of 120 shares of the Company's Common Stock valued at
$12.6 million. In connection with and upon consummation of the Acquisition, the
Company amended and restated its credit agreements to provide for, among other
things, the additional senior term debt.
Based upon the current level of operations and anticipated growth,
including giving effect to the Acquisition, and the 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 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 September 30, 1998, the Company did not
have material commitments for capital expenditures.
Cash Flow Data - Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
During the nine months ended September 30, 1998, net cash provided by
operating activities increased by $4.1 million to $12.6 million from $8.5
million during the same period in 1997 as a result of lower accounts receivable
and inventory balances (excluding the effects of the Acquisition) 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 nine months ended
September 30, 1998 increased by $76.0 million to $82.7 million primarily due to
the acquisitions of Anagram and the remaining 25% interest in the Company's U.K.
based subsidiary, which were partially offset by lower levels of capital
expenditures.
During the nine months ended September 30, 1998, net cash used in financing
activities of $39.5 million consisted of payments of $93.1 million 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 net proceeds of $59.2 million from additional borrowings in
connection with the Acquisition, proceeds of $0.6 million from other 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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Impact of Year 2000
Several of the Company's older computer programs have date 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
date-sensitive software to be Year 2000 compliant. The completed assessment
indicated that most of the Company's significant information technology systems
could be affected, particularly the general ledger, billing, and inventory
systems. That assessment also indicated that the software and hardware (embedded
chips) used in manufacturing and distribution systems do not require any
remediation 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 is in the process of querying its significant suppliers and
subcontractors that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The Company expects to complete the upgrade of its principal software by
March 31, 1999 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 Anagram, the integration of the business of Anagram with that of
the Company, the expected operating results of Anagram and any expected
synergies, the impact of the Year 2000 issue and 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 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
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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 September 17, 1998, the Company issued 120 shares of its Common
Stock in connection with the Acquisition of Anagram.
b) Not applicable.
c) The shares of Common Stock referred to in paragraph (a) were issued in
connection with the Acquisition and were valued at $12,600,000. No
underwriting discounts or commissions were paid in connection with
such issuance.
d) The issuance of the shares of Common Stock referred to in paragraph
(a) was exempt under Section 4 (2) of the Securities Act of 1933 since
they were issued to a single person.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
------- -----------
3.1 Amended Articles of Incorporation of Anagram International, Inc.
(incorporated by reference to Exhibit 3.1 to Current Report on
Form 8 - K dated September 17, 1998)
3.2 By-laws of Anagram International, Inc. (incorporated by reference
to Exhibit 3.2 to Current Report on Form 8 - K dated September
17, 1998)
3.3 Articles of Incorporation of Anagram International Holdings, Inc.
(incorporated by reference to Exhibit 3.3 to Current Report on
Form 8 - K dated September 17, 1998)
3.4 By-laws of Anagram International Holdings, Inc. (incorporated by
reference to Exhibit 3.4 to Current Report on Form 8 - K dated
September 17, 1998)
3.5 Articles of Organization of Anagram International, LLC.
(incorporated by reference to Exhibit 3.5 to Current Report on
Form 8 - K dated September 17, 1998)
3.6 Operating Agreement of Anagram International, LLC. (incorporated
by reference to Exhibit 3.6 to Current Report on Form 8 - K dated
September 17, 1998)
3.7 Certificate of Formation of Anagram Eden Prairie Property
Holdings LLC (incorporated by reference to Exhibit 3.7 to Current
Report on Form 8-K dated September 17, 1998)
4.1 Supplemental Indenture, dated as of September 17, 1998, by and
among Anagram International, Inc., Anagram International
Holdings, Inc., Anagram International, LLC., Anagram Eden Prairie
Property Holdings LLC and IBJ Schroder Bank & Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K dated September 17, 1998)
4.2 Senior Subordinated Guarantee, dated as of September 17, 1998, by
Anagram International, Inc., Anagram International Holdings,
Inc., Anagram International, LLC., and Anagram Eden Prairie
Property Holdings (incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K dated September 17, 1998)
4.3 Amended and Restated Revolving Loan Credit Agreement, dated as of
September 17, 1998, by and among the Registrant, the financial
institutions parties thereto, Goldman, Sachs Credit Partners
L.P., as arranger and syndication agent, and Fleet National Bank,
as administrative agent (incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K dated September 17, 1998)
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4.4 Amended and Restated AXEL Credit Agreement, dated as of September
17, 1998, by and among the Registrant, the financial institutions
parties thereto, Goldman, Sachs Credit Partners L.P., as arranger
and syndication agent, and Fleet National Bank, as administrative
agent (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K dated September 17, 1998)
27 Financial Data Schedule
(b) Reports on Form 8 - K
A Current Report on Form 8-K was filed dated September 17, 1998, regarding
the completion of the acquisition of all the capital stock of Anagram
International, Inc. and certain related companies. This Current Report responded
to Item 2 and 7 of the Form 8-K.
A Current Report on Form 8-K was filed dated September 17, 1998, regarding
the completion of the acquisition of all the capital stock of Anagram
International, Inc. and certain related companies. This Current Report responded
to Item 5 and 7 of the 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. This Current
Report responded to Item 5 of the 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
Date: November 16, 1998 accounting officer)
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