<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (assuming for purposes of this calculation, without conceding, that
all executive officers and directors are "affiliates") at March 29, 1999 was
$599,550.
As of March 29, 1999, 1,132.41 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
None.
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AMSCAN HOLDINGS, INC.
1998 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
ITEM 1 Business ............................................................................... 3
ITEM 2 Properties ............................................................................. 10
ITEM 3 Legal Proceedings ...................................................................... 11
ITEM 4 Submission of Matters to a Vote of Security Holders .................................... 11
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................................... 11
ITEM 6 Selected Consolidated Financial Data ................................................... 13
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................ 16
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ............................. 25
ITEM 8 Financial Statements and Supplementary Data ............................................ 26
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................. 26
PART III
ITEM 10 Directors and Executive Officers of the Registrant ..................................... 26
ITEM 11 Executive Compensation ................................................................. 28
ITEM 12 Security Ownership of Certain Beneficial Owners and Management ......................... 37
ITEM 13 Certain Relationships and Related Transactions ......................................... 39
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 39
Signatures ............................................................................. 45
</TABLE>
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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 Amscan Holdings, Inc.
("Amscan" or the "Company") expects or anticipates will or may occur in the
future, 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 (the "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 there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will 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 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.
PART I
ITEM 1. BUSINESS
Amscan designs, manufactures and distributes decorative party goods,
offering one of the broadest and deepest product lines in the industry. The
Company's products include paper and plastic tableware (such as plates, napkins,
tablecovers, cups and cutlery), accessories (such as invitations, thank-you
cards, table and wall decorations and balloons) and novelties (such as games and
party favors). The Company's products are sold to party goods superstores,
independent card and gift retailers, mass merchandisers and other distributors
which sell Amscan products in more than 20,000 retail outlets throughout the
world, including North America, South America, Europe, Asia and Australia.
The Company currently offers over 300 product ensembles, generally
containing 30 to 150 coordinated items. These ensembles comprise a wide variety
of products to accessorize a party including matching invitations, tableware,
decorations, party favors and thank-you cards. The Company designs, manufactures
and markets party goods for a wide variety of occasions
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including seasonal holidays, special events and themed celebrations. The
Company's seasonal ensembles enhance holiday celebrations throughout the year
including New Year's, Valentine's Day, St. Patrick's Day, Easter, Passover,
Fourth of July, Halloween, Thanksgiving, Hanukkah and Christmas. The Company's
special event ensembles include birthdays, christenings, first communions, bar
mitzvahs, confirmations, graduations, baby and bridal showers and anniversaries,
while its theme-oriented ensembles include Hawaiian luaus, Mardi Gras and 50's
rock-and-roll parties.
In September 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 $87,225,000, plus certain other related
costs. Anagram primarily markets its products through a network of distributors
and supermarkets.
In addition to its long-standing relationships with independent card
and gift retailers, the Company is a leading supplier to the party goods
superstore distribution channel. Despite some consolidation in the party goods
superstore channel during the past two years, superstores continue to grow
rapidly, providing consumers with a one-stop source for all of their party
needs, generally at discounted prices. The retail party goods business has
historically been fragmented among independent stores and drug, discount or
department store chains. However, according to industry analysts, there has been
a significant shift of sales since 1990 to the party goods superstore channel.
Company sales to party goods superstores represented approximately 47%
of total sales in 1998. While the number of superstores that Amscan supplies has
grown at a compound annual growth rate ("CAGR") of 14% from 1995 to 1998, the
Company's sales to superstores have grown by a 21% CAGR during the same period.
With Amscan products occupying an increasing share of superstore shelf space in
many product categories, Amscan believes it is well positioned to take advantage
of continued growth in the party goods superstore channel. In addition, as
result of the acquisition of Anagram, the Company believes it is also well
positioned to expand its presence in the gift shop, supermarket and other
channels where Anagram has developed a strong network base.
The Company's sales and cash flows have grown substantially over the
past five years. From 1993 to 1998, sales and adjusted earnings before interest,
income taxes, depreciation and amortization ("Adjusted EBITDA" - EBITDA adjusted
for non-recurring items, other income or expenses, and minority interests) have
grown at compound annual rates of 17% and 24%, respectively. During the same
period, Adjusted EBITDA margins (i.e., as a percentage of net sales) increased
from approximately 15% to 19% due in part to the Company achieving greater
economies of scale in manufacturing and distribution, and reducing selling
expenses as a percentage of sales.
SUMMARY FINANCIAL INFORMATION ABOUT THE COMPANY
Information about the Company's revenues, operating profits or losses
and assets for the last five years is included in this report in Item 6,
"Selected Consolidated Financial Data." Because more holidays fall in the fourth
quarter of the year than in the other quarters, the Company's business is
somewhat seasonal. Sales for the third quarter are generally the highest for the
year because the Company begins to ship such seasonal merchandise in that
quarter.
The Company does business in the United States and in other geographic
areas of the world. Information about the Company's revenues, operating profits
or losses and assets relating to geographic areas outside the United States for
each of the years in the three year period ended
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December 31, 1998, is included in Note 15 to the Company's 1998 Consolidated
Financial Statements which are included in this report beginning on page F-1.
COMPANY STRATEGY
The Company seeks to become the primary source for consumers' party
goods requirements. The key elements of the Company's strategy are as follows:
- Strengthen Position as a Leading Provider to Party Goods
Superstores. The Company offers convenient "one-stop shopping"
for large superstore buyers and seeks to increase its
proportionate share of sales volume and shelf space in the
superstores.
- Offer the Broadest and Deepest Product Line in the Industry.
The Company strives to offer the broadest and deepest product
line in the industry. The Company helps retailers boost
average purchase volume per consumer through coordinated
ensembles that promote "add on" purchases.
- Diversify Distribution Channels, Product Offering and
Geographic Presence. The Company will seek, through internal
growth and acquisitions, to expand its distribution
capabilities internationally, increase its presence in
additional retail channels and further broaden and deepen its
product line.
- Provide Superior Customer Service. The Company strives to
achieve high average fill rates in excess of 95% and to ensure
short turnaround times.
- Maintain Product Design Leadership. The Company will continue
investing in art and design to support a steady supply of
fresh ideas and create complex, unique ensembles that appeal
to consumers and are difficult to replicate.
- Maintain State-of-the-Art Manufacturing and Distribution
Technology. The Company intends to maintain technologically
advanced production and distribution systems in order to
enhance product quality, manufacturing efficiency, cost
control and customer satisfaction.
- Pursue Attractive Acquisitions. The Company believes that
opportunities exist to make acquisitions of complementary
businesses to leverage the Company's existing marketing,
distribution and production capabilities, expand its presence
in the various retail channels, further broaden and deepen its
product line and penetrate international markets. The Company
receives inquiries from time to time with respect to the
possible acquisition by the Company of other entities and the
Company intends to pursue acquisition opportunities
aggressively.
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PRODUCT DESIGN
The Company's 100-person in-house design staff produces and manages the
Company's party goods. From the designs and concepts developed by the Company's
artists, the Company selects those it believes best to replace a number of its
designed product ensembles each year. During 1998, the Company introduced
approximately 75 new ensembles.
PRODUCT LINE
The categories of products which the Company offers are tableware,
accessories and novelties. The percentages of sales for each product category
for 1998, 1997 and 1996 are set forth in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tableware........................... 57% 59% 59%
Accessories......................... 26 26 25
Novelties........................... 17 15 16
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The following table sets forth the principal products in each of the
three categories:
TABLEWARE ACCESSORIES NOVELTIES
- --------- ----------- ---------
Decorated Balloons Buttons
Paper Plates Banners Cocktail Picks
Paper Napkins Cascades Games
Paper Tablecovers Caketops Candles
Paper Cups Confetti Mugs
Banners Noise Makers
Crepe Party Favors
Cutouts Party Hats
Solid Color Decorative Tissues Pinatas
- -----------
Paper and Plastic Plates Flags Pom Poms
Paper Napkins Gift Bags T-shirts
Paper and Plastic Tablecovers Gift Wrap
Paper and Plastic Cups Guest Towels
Plastic Cutlery Honeycomb Centerpieces
Invitations and Notes
Ribbons and Bows
Signs
The Company supplies party goods for the following types of occasions:
SEASONAL EVERYDAY THEMES
New Year's Anniversaries Fall
Valentine's Day Bar Mitzvahs Fiesta
St. Patrick's Day Birthdays Fifties Rock-and-Roll
Easter Christenings Hawaiian Luau
Passover Confirmations Mardi Gras
Fourth of July First Communions Patriotic
Halloween Graduations Religious
Thanksgiving Retirements Sports
Hanukkah Showers Summer Fun
Christmas Weddings
MANUFACTURED PRODUCTS
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Items manufactured by the Company accounted for over 55% of the
Company's sales in 1998. State-of-the-art printing, forming, folding and
packaging equipment support the Company's manufacturing operations. Company
facilities in Kentucky, New York, Rhode Island, Minnesota and Mexico produce
paper and plastic plates, napkins, cups, balloons and other party and novelty
items. This vertically integrated manufacturing capability allows the Company
the opportunity to better control costs and monitor product quality, manage
inventory investment and provide efficient order fulfillment.
Given its size and sales volume, the Company is generally able to
operate its manufacturing equipment on the basis of at least two shifts per day
thus lowering its production costs. In addition, the Company manufactures
products for third parties allowing the Company to maintain a satisfactory level
of equipment utilization.
PURCHASED PRODUCTS
The Company purchases the remainder of its products from
independently-owned manufacturers, many of whom are located in the Far East and
with whom the Company has long-standing relationships. The two largest such
suppliers operate as exclusive suppliers to the Company and represent
relationships which have been in place for more than ten years. The Company
believes that the quality and price of the products manufactured by these
suppliers provide a significant competitive advantage. The Company's business,
however, is not dependent upon any single source of supply for products
manufactured for the Company by third parties.
RAW MATERIALS
The principal raw material used by the Company in its products is
paper. The Company has historically been able to change its product prices in
response to changes in raw material costs. While the Company currently purchases
such raw material from a relatively small number of sources, paper is available
from a number of sources. The Company believes its current suppliers could be
replaced by the Company without adversely affecting its operations in any
material respect.
SALES AND MARKETING
The Company's principal sales and marketing efforts are conducted
through a domestic direct employee sales force of approximately 60 professionals
servicing over 5,000 retail accounts. These professionals have, on average, been
affiliated with the Company for over five years. In addition to this seasoned
sales team, the Company utilizes a select group of manufacturers'
representatives to handle specific account situations. International customers
are generally serviced by employees of the Company's foreign subsidiaries. To
support its sales and marketing efforts, the Company produces four separate
product catalogues annually, three for seasonal products and one for everyday
products. In addition, the Company also produces additional catalogues to market
its metallic balloons.
The Company's practice of including party goods retailers in all facets
of the Company's product development is a key element of the Company's sales and
marketing efforts. The Company targets important consumer preferences by
integrating its own market research with the input of party goods retailers in
the creation of its designs and products. In addition, the sales organization
assists customers in the actual set-up and layout of displays of the Company's
products, and, from time to time, the Company also provides customers with
promotional displays.
DISTRIBUTION AND SYSTEMS
The Company ships its products from distribution warehouses which
employ computer assisted systems. Prior to the second quarter of 1998,
nonseasonal products were shipped throughout North America from distribution
warehouses in New York, California and Canada. During the second quarter of
1998, the Company commenced a restructuring of its distribution
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operations, to reduce costs and improve operating efficiencies, which included
the closure of the distribution facilities located in California and Canada. In
order to better control inventory investment, seasonal products are shipped out
of a central warehouse located in New York. As a result of the acquisition of
Anagram, the Company distributes its metallic balloons domestically from
facilities in New York and Minnesota. Products for foreign markets are shipped
from the Company's distribution warehouses in Mexico, England and Australia.
Management is currently evaluating the further consolidation of its distribution
facilities which may result in additional restructuring charges in subsequent
periods..
Many of the Company's sales orders are generated electronically through
hand-held units with which the sales force and many customers are equipped.
Specifically, orders are entered into the hand-held units and then transmitted
over telephone lines to the Company's mainframe computer, where they are
processed for shipment. This electronic order entry expedites the order
processing which in turn improves the Company's ability to fill customer
merchandise needs accurately and quickly.
CUSTOMERS
The Company's customers are principally party goods superstores,
independent card and party retailers, mass merchandisers and other distributors.
In the aggregate, Amscan supplies more than 20,000 retail outlets both
domestically and internationally. The Company is a leading supplier to the party
goods superstore channel, which has been experiencing significant growth.
The Company has a diverse customer base. Only one customer, Party City
Corporation ("Party City"), accounted for more than 10% of the Company's sales
in 1998. For the years ended December 31, 1998, 1997 and 1996, sales to Party
City's corporate and franchise stores represented 13%, 7% and 3% and 10%, 12%
and 11% respectively, of consolidated net sales. Although the Company believes
its relationships with Party City and its franchisees are good, if they were to
significantly reduce their volume of purchases from the Company, the Company's
financial condition and results of operations could be materially adversely
affected. On March 19, 1999, Party City announced that, due to difficulties
implementing new financial reporting and accounting systems, it would not be
able to complete its year end audit by its deadline and that Party City
accordingly would be in default of certain covenants of its credit facility as
of December 31, 1998. The Company understands that Party City is currently in
discussions with its lenders and the Company does not believe this default by
Party City will have a material adverse effect on the Company's financial
condition or results of operations.
COMPETITION
The Company competes on the basis of diversity and quality of its
product designs, breadth of product line, product availability, price,
reputation and customer service. The Company has many competitors with respect
to one or more of its products but believes that there are few competitors which
manufacture and distribute products with the complexity of design and breadth of
product offerings that the Company does. Furthermore, the Company believes that
its design and manufacturing processes create an efficiency in manufacturing
that few of its competitors achieve in the production of numerous coordinated
products in multiple design types.
Competitors include smaller independent specialty manufacturers, as
well as divisions or subsidiaries of large companies with greater financial and
other resources than those of the Company. Certain of these competitors control
licenses for widely recognized images, such as cartoon or motion picture
characters, which could provide them with a competitive advantage. The Company
has pursued a strategy of developing its own designs and generally has not
pursued licensing opportunities. Anagram, however, controls various licenses
which it uses for its production of balloons.
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INTELLECTUAL PROPERTY AND LICENSES
The Company owns copyrights on the designs created by the Company and
used on its products. The Company owns trademarks on the words and designs used
on or in connection with its products. It is the practice of the Company to
register its copyrights with the United States Copyright Office to the extent it
deems reasonable. The Company does not believe that the loss of copyrights or
trademarks with respect to any particular product or products would have a
material adverse effect on the business of the Company. Except for Anagram, the
Company does not depend on licenses to any material degree in its business and,
therefore, does not incur any material licensing expenses. Anagram holds
approximately 190 licenses allowing it to use various cartoon and other
characters on its balloons. None of Anagram's licenses is individually material
to its business.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,500 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
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ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Elmsford, New York
and conducts its principal design, manufacturing and distribution operations at
the following facilities:
<TABLE>
<CAPTION>
OWNED OR LEASED
LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE)
-------- ------------------ ----------- ----------------------
<S> <C> <C> <C>
Elmsford, New York (1) Executive Offices; design and 53,575 square feet Leased (expiration date:
art production of paper party January 1, 2007)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 2002)
Providence, Rhode Island Manufacture and distribution 51,000 square feet Leased (expiration date:
of plastic plates, cups and bowls June 30, 2008)
Louisville, Kentucky Manufacture and distribution 189,000 square feet Leased (expiration date:
of paper plates March 31, 2001)
Newburgh, New York Manufacture and distribution 167,000 square feet Leased (expiration date:
of solid color party products November 30, 2002)
Brooklyn, New York Manufacture and distribution 12,200 square feet Leased (expiration date:
of wedding cake tops and July 20, 2003)
accessories
Eden Prairie, Minnesota Manufacture and distribution 115,600 square feet Owned
of balloons and accessories
Tijuana, Mexico Manufacture and distribution 50,000 square feet Leased (expiration date:
of party products May 14, 2001)
Temecula, California (2) Distribution of party products 100,000 square feet Leased (expiration date:
and decorations December 31, 2000)
Goshen, New York Distribution of seasonal party 130,000 square feet Leased (expiration date:
products and decorations December 31, 1999)
Chester, New York (3) Distribution of party products 287,000 square feet Owned
and decorations
Milton Keynes, England Distribution of party products 110,000 square feet Leased (expiration date:
and decorations throughout United June 30, 2017)
Kingdom and Europe
Melbourne, Australia Distribution of party products 10,000 square feet Owned
and decorations in Australia
and Asia
Saint Denis, France Distribution of balloons and 6,800 square feet Leased (expiration date:
accessories March 31, 2005)
Madrid, Spain Distribution of balloons and 6,700 square feet Leased (expiration date:
accessories February 24, 2004)
Silverwater, Australia Distribution of balloons and 4,700 square feet Leased (expiration date:
accessories December 31, 2000)
Granada, Mexico Distribution of balloons and 6,600 square feet Leased (expiration date:
accessories November 10, 1999)
Ontario, Canada Distribution of balloons and 7,200 square feet Leased (expiration date:
accessories May 31, 2000)
</TABLE>
(1) Prior to December 16, 1997, this property was leased by the Company
from a limited liability company which is 79%-owned by a trust
established for the benefit of the
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children of Mr. John Svenningsen, the former principal stockholder of
the Company, 20%-owned by a trust established for the benefit of Mr.
Svenningsen's sister's children and 1%-owned by a corporation owned by
the Estate of Mr. Svenningsen (the "Estate"). In July 1997, such
limited liability company entered into a purchase and sale agreement
pursuant to which the Elmsford property was sold on December 16, 1997.
See Item 13, "Certain Relationships and Related Transactions".
(2) Property leased by the Company from the Estate. See Item 13, "Certain
Relationships and Related Transactions".
(3) Property subject to a ten-year mortgage securing a loan in the original
principal amount of $5,925,000 bearing interest at a rate of 8.51%.
Such loan matures in September 2004. The principal amount outstanding
as of December 31, 1998 was approximately $3,407,000.
The Company believes that its properties have been adequately
maintained, are in generally good condition and are suitable for the Company's
business as presently conducted. The Company believes its existing facilities
provide sufficient production capacity for its present needs and for its
anticipated needs in the foreseeable future. To the extent such capacity is not
needed for the manufacture of the Company's products, the Company generally uses
such capacity for the manufacture of products for others pursuant to terminable
contracts. All properties generally are used on a basis of two shifts per day.
The Company also believes that upon the expiration of its current leases, it
will be able either to secure renewal terms or to enter into leases for
alternative locations at market terms.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 10, 1997, Amscan Holdings 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 Holdings in
which Confetti would be merged with and into Amscan Holdings (the "Merger"),
with Amscan Holdings as the surviving corporation. On December 19, 1997, the
Merger was consummated pursuant to the Merger Agreement. Following the
consummation of the Merger, the common stock of the Company (the "Common Stock"
or "Company Common Stock"), par value $0.10 per share, was delisted from the
Nasdaq National Market System ("Nasdaq") and the Company filed with the
Commission a Form 15 to deregister the Company's Common Stock under the
Securities Exchange Act of 1934. As a result, there is no public trading market
for the Company Common Stock.
Prior to the Merger, the Company Common Stock was traded on Nasdaq under
the symbol "AMSN." The following table shows, for the fiscal periods indicated,
the high and low closing
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bid quotations per share of Company Common Stock as quoted on Nasdaq. These
market quotations reflect inter-dealer prices, without retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
The Company Common Stock commenced trading on Nasdaq on December 19, 1996
following the Company's initial public offering ("IPO").
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter.................................................... 14 11 3/4
Second Quarter ................................................. 13 1/2 11
Third Quarter.................................................... 16 1/8 11
Fourth Quarter (through December 19, 1997) ...................... 16 3/8 15 1/16
</TABLE>
As of the close of business on March 29, 1999, there were 15 holders of
record of the Company's Common Stock.
The Company has not paid any dividends on the Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay dividends or distributions to its stockholders.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statements of Operations Data" and "Balance Sheet Data" as of the end
of and for each of the years in the five-year period ended December 31, 1998,
are derived from the consolidated financial statements of Amscan Holdings, Inc.,
which consolidated financial statements have been audited by Ernst & Young LLP,
independent certified public accountants, as of and for the year ended December
31, 1998 and by KPMG LLP, independent certified public accountants as of the end
of and for each of the years in the four year period ended December 31, 1997.
The consolidated financial statements as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998 and the
reports thereon, are included in this report under Item 14, "Exhibits, Financial
Statement Schedules and Reports on Form 8-K." The selected consolidated
financial data should be read in conjunction with the consolidated financial
statements and the related notes thereto and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales ................................................. $ 235,294 $ 209,931 $ 192,705 $ 167,403 $ 132,029
Cost of sales ............................................. 150,456 136,571 123,913 108,654 86,748
--------- --------- --------- --------- ---------
Gross profit .............................................. 84,838 73,360 68,792 58,749 45,281
Selling expenses .......................................... 17,049 13,726 11,838 12,241 11,309
General and administrative expenses ....................... 23,471 20,772 19,266 15,002 14,460
Art and development costs ................................. 7,470 5,282 5,173 4,256 2,796
Restructuring charges (1) ................................. 2,400
Non-recurring charges in connection with the Merger (2) ... 22,083
Non-recurring compensation in connection with the IPO (3) . 15,535
Special bonuses (4) ....................................... 4,222 2,581 2,200
--------- --------- --------- --------- ---------
Income from operations .................................... 34,448 11,497 12,758 24,669 14,516
Interest expense, net ..................................... 22,965 3,892 6,691 5,772 3,843
Other (income) expense, net .............................. (121) (71) 335 (309) 82
--------- --------- --------- --------- ---------
Income before income taxes and minority interests ......... 11,604 7,676 5,732 19,206 10,591
Income tax expense ........................................ 4,816 7,665 1,952 731 464
Minority interests ........................................ 79 193 1,653 1,041 160
--------- --------- --------- --------- ---------
Net income (loss) ......................................... $ 6,709 $ (182) $ 2,127 $ 17,434 $ 9,967
========= ========= ========= ========= =========
PRO FORMA DATA RELATING TO CHANGE IN TAX STATUS:
Income before income taxes................................. $ 4,079 $ 18,165 $ 10,431
Pro forma income taxes (5)................................. 1,827 7,403 4,238
--------- --------- ---------
Pro forma net income (5)................................... $ 2,252 $ 10,762 $ 6,193
========= ========= =========
OTHER FINANCIAL DATA:
Gross margin percentage.................................... 36.1% 34.9% 35.7% 35.1% 34.3%
Capital expenditures, including assets under
capital leases ............................................ $ 7,714 $ 10,296 $ 11,008 $ 4,522 $ 8,040
Depreciation and amortization.............................. 8,501 6,245 5,137 4,332 3,672
Ratio of earnings to fixed charges (6)..................... 1.4x 2.2x 1.7x 3.8x 3.2x
NON-GAAP FINANCIAL DATA:
Adjusted EBITDA (7)........................................ $ 45,349 $ 39,825 $ 37,652 $ 31,582 $ 20,388
Adjusted EBITDA margin..................................... 19.3% 19.0% 19.5% 18.9% 15.4%
Adjusted EBITDA to interest expense, net................... 2.0x 10.2x 5.4x 5.2x 5.1x
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............. $ 71,476 $ 96,793 $ 45,405 $ 8,383 $ (438)
========= ========= ========= ========= =========
Total assets ................. $ 248,852 $ 269,276 $ 140,274 $ 114,601 $ 93,884
========= ========= ========= ========= =========
Short-term indebtedness (8) .. $ 3,549 $ 2,911 $ 33,262 $ 58,541 $ 50,869
Long-term indebtedness ....... 270,127 234,422 15,085 12,284 8,800
--------- --------- --------- --------- ---------
Total indebtedness ........... $ 273,676 $ 237,333 $ 48,347 $ 70,825 $ 59,669
========= ========= ========= ========= =========
Redeemable Common Stock ...... $ 19,547
=========
Stockholders' (deficit) equity $ (95,287) $ (95,219) $ 67,949 $ 27,205 $ 20,820
========= ========= ========= ========= =========
</TABLE>
(1) The Company recorded charges of approximately $2.4 million in
1998 in connection with the restructuring of its distribution
operations. The Company closed two facilities located in
California and Canada. The restructuring charges include the
non-cash write-down of $1.3 million relating to property,
plant and equipment, the accrual of future lease obligations
of $0.7 million and severance and other costs of $0.4 million.
(2) In connection with the Merger in 1997, the Company recorded
non-recurring charges of approximately $22.1 million related
to the recapitalization comprised of $11.7 million in
transaction costs, $7.5 million compensation payment to an
officer, $1.9 million for the redemption of Company stock
options and $1.0 million of debt retirement costs.
(3) In conjunction with the IPO in 1996, the Company recorded
non-recurring compensation expense of $15.5 million related to
stock and cash payments of $12.5 million to certain executives
in connection with the termination of prior employment
agreements and $3.0 million for the establishment of an
Employee Stock Ownership Plan for the benefit of the Company's
domestic employees and the payment of stock bonuses to certain
of such employees.
(4) In each of the years in the three year period ended December
31, 1996, special bonus arrangements existed with certain
members of management. In connection with the IPO, such
special profit sharing arrangements were substantially
modified and replaced by incentives tied to the value of the
Company Common Stock.
(5) Prior to the consummation of the IPO in 1996, Amscan Inc. and
certain of its affiliates elected to be taxed as Subchapter S
corporations under the Internal Revenue Code. The pro forma
net income amounts give effect to pro forma income tax amounts
for each of the periods shown at statutory rates (40.5%)
assuming these entities had not elected Subchapter S
corporation status.
(6) For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as earnings before income taxes
and minority interests plus fixed charges. Fixed charges
consist of interest expense on all obligations, amortization
of deferred financing costs and one-third of the rental
expense on operating leases representing that portion of
rental expense deemed by the Company to be attributable to
interest.
14
<PAGE> 15
(7) "EBITDA" represents earnings before interest, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents
EBITDA adjusted for certain non-recurring items, other income
or expenses, and minority interests reflected in the following
table. Neither EBITDA nor Adjusted EBITDA is intended to
represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as
an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of
liquidity. EBITDA and Adjusted EBITDA are presented because
they are widely accepted financial indicators of a leveraged
company's ability to service and/or incur indebtedness and
because management believes EBITDA and Adjusted EBITDA are
relevant measures of the Company's ability to generate cash
without regard to the Company's capital structure or working
capital needs. EBITDA and Adjusted EBITDA as presented may not
be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When
evaluating EBITDA and Adjusted EBITDA, investors should
consider that EBITDA and Adjusted EBITDA (i) should not be
considered in isolation but together with other factors which
may influence operating and investing activities, such as
changes in operating assets and liabilities and purchases of
property and equipment, (ii) are not measures of performance
calculated in accordance with generally accepted accounting
principles, (iii) should not be construed as an alternative or
substitute for income from operations, net income or cash
flows from operating activities in analyzing the Company's
operating performance, financial position or cash flows and
(iv) should not be used as an indicator of the Company's
operating performance or as a measure of its liquidity.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EBITDA ........................... $ 42,991 $ 17,620 $ 15,907 $ 28,269 $ 17,946
Adjustments - increase (decrease):
Non-recurring items and special
bonuses ..................... 2,400 22,083 19,757 2,581 2,200
Other (income) expense, net ... (121) (71) 335 (309) 82
Minority interests ............ 79 193 1,653 1,041 160
-------- -------- -------- -------- --------
Adjusted EBITDA .................. $ 45,349 $ 39,825 $ 37,652 $ 31,582 $ 20,388
======== ======== ======== ======== ========
</TABLE>
(8) Short-term indebtedness consists primarily of the Company's
borrowings under bank lines of credit and current portions of
long-term debt. Prior to December 31, 1997, short term
indebtedness also included debt previously due to Mr.
Svenningsen.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The party goods industry has experienced significant changes in both
distribution channels and product offerings over the last several years. The
retail distribution of party goods continues to shift from smaller independent
stores and designated departments within drug, discount or department store
chains to superstores dedicated to retailing party goods. Despite a
consolidation of party goods superstores in the past three years, the superstore
channel has continued to grow at a faster pace than the reduction in independent
stores. In part due to the success of the superstore channel, party goods
manufacturers broadened their product lines to support the celebration of a
greater number of occasions. The industry's growth has been directly affected by
these changes.
Revenues are generated from sales of approximately 20,000 SKUs consisting
of paper and plastic tableware, accessories and novelties for all occasions.
Tableware (plates, cups, cutlery, napkins and tablecovers) is the Company's core
product category, generating approximately 57% of revenues in 1998. Coordinated
accessories (e.g., balloons and banners) and novelties (e.g., party favors) are
offered to complement the Company's tableware products. To serve its customers
better, the Company has made significant additions to its product line. Through
increased spending on internal product development as well as through
acquisitions, the Company has had a net increase of approximately 12,300 SKUs
since 1991. Revenue growth primarily has been the result of increased orders
from its party goods superstore customers (new stores and increased same-store
sales), increased international sales and price increases.
The Company's gross profit is influenced by its product mix and paper
costs. Products manufactured by the Company, primarily tableware and metallic
balloons, represented over 55% of the Company's 1998 sales. As a result of the
Acquisition, the Company expects its manufactured products to grow to
approximately 65% of sales. The Company has made significant additions to its
manufacturing capacity which have allowed it to improve gross margins. The
Company believes that its manufacturing capabilities enable it to lower product
cost, ensure product quality and be more responsive to customer demands. The
Company has historically been able to adjust its prices in response to changes
in paper prices.
16
<PAGE> 17
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
----- -----
<S> <C> <C>
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 63.9 65.1
----- -----
Gross profit ....................................... 36.1 34.9
Operating expenses:
Selling expenses ................................... 7.2 6.5
General and administrative expenses ................. 10.0 9.9
Art and development costs ........................... 3.2 2.5
Restructuring charges ............................... 1.0
Non-recurring charges in connection with the Merger . 10.5
----- -----
Total operating expenses ............................... 21.4 29.4
----- -----
Income from operations ................................. 14.7 5.5
Interest expense, net .................................. 9.8 1.9
Other income, net ...................................... (0.1)
----- -----
Income before income taxes and minority interests ... 4.9 3.7
Income tax expense ..................................... 2.0 3.7
Minority interests ..................................... 0.1
----- -----
Net income (loss) ................................... 2.9% (0.1)%
===== =====
</TABLE>
Net sales for the year ended December 31, 1998 of $235.3 million, were
$25.4 million or 12.1% higher than for the year ended December 31, 1997. The
increase in net sales in 1998 over 1997 reflects additional sales from the
acquisition of Anagram as well as increased sales to party goods superstores
which was partially offset by a decline in sales to smaller independent stores.
The Company's marketing strategy of continually offering new products, new
designs and themes for existing products also contributed to the increase in
sales. During the year ended December 31, 1998, the Company added approximately
6,000 SKUs to its product line, including approximately 4,500 SKUs as a result
of the acquisition of Anagram.
Gross profit for the year ended December 31, 1998 was $84.8 million, or
36.1% of net sales, as compared to 34.9% for the year ended December 31, 1997.
The increase in current year gross profit margin principally results from
savings associated with a restructuring of the Company's distribution operations
begun in the second quarter of 1998 partially offset by higher freight costs
incurred in the latter half of 1998.
Selling expenses for the year ended December 31, 1998 increased by $3.3
million to $17.0 million and, as a percentage of net sales, to 7.2% from 6.5%,
principally due to the addition of a new seasonal catalogue, expansion of the
"everyday" catalogue, the inclusion of the results of Anagram, and higher
advertising costs.
General and administrative expenses of $23.5 million for the year ended
December 31, 1998 increased by $2.7 million as compared to the year ended
December 31, 1997. The increase results from additional amortization of goodwill
and other intangible assets arising from the September 1998 acquisition of
Anagram.
Art and development costs of $7.5 million for the year ended December
31, 1998 were $2.2 million higher than the prior year. As a percentage of sales,
art and development costs increased to 3.2% in 1998 from 2.5% in 1997. The
increase in costs reflects the Company's investment in additional art and
product development staff associated with the development of new product lines.
17
<PAGE> 18
In the second quarter of 1998, the Company commenced a restructuring of
its distribution operations to reduce costs and improve operating efficiencies.
The Company closed two distribution facilities located in California and Canada
which resulted in the elimination of a total of approximately 100 positions. The
restructuring was substantially completed by December 1998. The Company has
recorded restructuring charges of approximately $2.4 million, or 1.0% of sales
for the year ended December 31, 1998. The restructuring charges include the
non-cash write-down of $1.3 million relating to property, plant and equipment,
the accrual of future lease obligations of $0.7 million and severance and other
costs of $0.4 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, net, of $23.0 million for the year ended December 31,
1998 increased by $19.1 million as compared to the corresponding period in 1997
due to the Company's increased borrowings in connection with the Merger and the
Acquisition (see "Liquidity and Capital Resources"), offset, in part, by reduced
levels of working capital.
Income taxes for the years ended December 31, 1998 and 1997 were
provided for at consolidated effective income tax rates of 41.5% and 99.9%,
respectively. The effective income tax rates exceed the federal statutory income
tax rate primarily due to state income taxes and, for the year ended December
31, 1997, non-deductible charges related to the Merger.
Minority interests represent the portion of income of the Company's
subsidiaries attributable to equity ownership not held by the Company.
18
<PAGE> 19
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
----- -----
<S> <C> <C>
Net sales .............................................. 100.0% 100.0%
Cost of sales .......................................... 65.1 64.3
----- -----
Gross profit ........................................ 34.9 35.7
Operating expenses:
Selling expenses .................................... 6.5 6.1
General and administrative expenses ................. 9.9 10.0
Art and development costs ........................... 2.5 2.7
Non-recurring charges in connection with the Merger . 10.5 --
Non-recurring compensation in connection with the IPO -- 8.1
Special bonuses ..................................... -- 2.2
----- -----
Total operating expenses ............................... 29.4 29.1
----- -----
Income from operations .............................. 5.5 6.6
Interest expense, net .................................. 1.9 3.4
Other (income) expense, net ............................ (0.1) 0.2
----- -----
Income before income taxes and minority interests ... 3.7 3.0
Income tax expense ..................................... 3.7 1.0
Minority interests ..................................... 0.1 0.9
----- -----
Net (loss) income ................................... (0.1)% 1.1%
===== =====
</TABLE>
Net sales for the year ended December 31, 1997 were $209.9 million, an
increase of 8.9% over the year ended December 31, 1996. Sales to national
accounts totaled $106.3 million, or 15.9% higher than in the corresponding
period in 1996, principally as a result of sales to the party goods superstore
channel. Sales to international customers increased $1.9 million, accounting for
1.0% of the increase in net sales. Also contributing to the increase in sales
was the Company's marketing strategy of continually offering new products, as
well as new designs and themes for existing products. During the year ended
December 31, 1997, the Company added approximately 600 SKUs to its product line.
Gross profit for the year ended December 31, 1997 was $73.4 million, an
increase of $4.6 million over the year 1996. As a percent of net sales, gross
profit decreased for the year ended December 31, 1997 to 34.9% from 35.7% for
the year ended December 31, 1996 as a result of excess capacity due to increases
in manufacturing capacity and the addition of a new distribution facility during
the first half of 1997.
Selling expenses for the year ended December 31, 1997 increased by $1.9
million to $13.7 million and, as a percentage of net sales, to 6.5% from 6.1%,
primarily due to the expansion of foreign operations.
General and administrative expenses of $20.8 million for the year ended
December 31, 1997 increased $1.5 million as compared to the year ended December
31, 1996. General and administrative expenses for 1997 included a $3.8 million
or 61.0% increase in bad debt expense as two national customers (Party Stores
Holdings, Inc. and Party America, Inc.) filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code during the year. General
and administrative expenses for 1996 were 10.0% of net sales and included
non-recurring costs associated with the Company's move to new corporate offices
and additional personnel costs, including relocation and recruitment.
19
<PAGE> 20
Art and development costs of $5.3 million for the year ended December 31,
1997 were comparable to those of 1996 and decreased slightly, to 2.5% of net
sales from 2.7%, reflecting the 8.9% increase in 1997 net sales over the prior
year. In 1996, the Company significantly expanded its creative and new product
development staff and internal development capabilities. The continued
investment in art and development expenditures in 1997 reflects the Company's
strategy to remain a leader in product quality and development.
In connection with the Merger, the Company recorded non-recurring charges
of $22.1 million, comprised of $11.7 million in transaction costs, $7.5 million
of compensation to an officer, $1.9 million for the redemption of Company Stock
Options (as defined below) and $1.0 million of debt retirement costs.
The employment agreements which gave rise to special bonuses during the
first eleven months of 1996 were substantially modified at the time of the IPO
in December 1996 to eliminate future special bonus payments. Such bonuses, which
were based entirely upon the pre-tax income of Amscan Inc. and certain
affiliates, were $4.2 million or 2.2% of net sales for the year ended December
31, 1996.
Interest expense, net, of $3.9 million for the year ended December 31,
1997 decreased by $2.8 million as compared to 1996, as the net proceeds received
from the issuance of Common Stock in December 1996 and January 1997 were used to
reduce indebtedness under the Company's line of credit and to repay subordinated
debt, prior to the Merger. In addition to the lower debt, the Company
experienced generally lower interest rates during 1997 as compared to 1996. See
"Liquidity and Capital Resources."
Income tax expense for the year ended December 31, 1997 was $7.7 million
or nearly 100% of income before income taxes and minority interests.
Non-deductible charges related to the Merger had the effect of increasing the
1997 effective income tax rate by 51.2% of income before income taxes and
minority interests.
During 1996, prior to the IPO, Amscan Inc. and certain of its affiliates
were taxed as Subchapter S corporations for federal and, where available, state
income tax purposes. Accordingly, these entities were not subject to federal and
state income taxes, except in states which do not recognize Subchapter S
corporation status. In connection with the IPO, these subsidiaries became
subject to federal and state income taxes. The amounts shown as income taxes for
the year ended December 31, 1996 consisted principally of foreign income taxes
and a one-time charge of $0.8 million related to the establishment of deferred
income taxes in connection with the change in tax status.
Minority interests of $0.2 million and $1.7 million for the years ended
December 31, 1997 and 1996, respectively, represent the portion of income of the
Company's subsidiaries attributable to equity ownership not held by the Company.
In addition to the minority interests of certain foreign entities, the minority
interest amount for the year ended December 31, 1996 includes a 50% minority
interest in Am-Source, Inc. through December 18, 1996, the date the Company
acquired the 50% not previously owned.
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
20
<PAGE> 21
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.
The Company is obligated to obtain interest rate protection, pursuant
to interest rate swaps, caps or other similar arrangements satisfactory to GS
Credit Partners, with respect to a notional amount of not less than half of the
aggregate amount outstanding under the Term Loan, which protection must remain
in effect for not less than three years. The interest rate swap contracts
require the Company to settle the difference in interest obligations quarterly.
At December 31, 1998, the Company had two interest rate swap contracts
outstanding with a financial institution and Goldman Sachs Capital Markets, L.P.
covering $93,500,000 of its Term Loan at effective interest rates ranging from
7.18% to 8.36% at December 31, 1998.
In addition to the Term Loan, the Bank Credit Facilities, as amended,
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 December 31, 1998, the Company had borrowing capacity
of approximately $36.5 million under the Revolving Credit Facility.
On September 17, 1998, the Company completed the acquisition of all of
the capital stock of Anagram pursuant to a Stock Purchase Agreement dated August
6, 1998, in a transaction valued at approximately $87.2 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, the issuance of 120 shares of the Company's Redeemable Common Stock
valued at $12.6 million and warrants to purchase 10 shares of the Company's
Common Stock valued at $0.2 million. In connection with and upon consummation of
the Acquisition, the Company amended and restated the Revolving Credit Facility
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 December 31, 1998, the Company
did not have material commitments for capital expenditures.
CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER
31, 1997
Net cash provided by operating activities increased by $18.6 million to
$22.8 million during the year ended December 31, 1998 from $4.2 million during
the year ended December 31, 1997, principally as a result of increased earnings
and lower accounts receivable and inventory
21
<PAGE> 22
levels (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 lower accounts payable balances at
December 31, 1997.
Net cash used in investing activities during the year ended December
31, 1998 increased by $73.0 million to $83.1 million 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 and proceeds
received from the sale of the Company's Canadian distribution facility and other
assets in connection with its restructuring plan.
During the year ended December 31, 1998, net cash used in financing
activities of $49.8 million consisted of payments of $93.2 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 $59.1 million from additional borrowings in
connection with the Acquisition and the issuance of Redeemable Common Stock to
employees as well as net payments received applicable to notes receivable from
officers. During the year ended December 31, 1997, net cash provided by
financing activities of $116.0 million included net proceeds of $4.5 million
from the issuance of Common Stock to cover the over-allotments provided for in
the IPO underwriting agreement, a contribution to capital by the Estate of $7.5
million and proceeds of $61.9 million from the issuance of Common Stock in
connection with the Merger, proceeds of the Merger Financings of $237.1 million
and related payments to repurchase the Company's Common Stock of $142.7 million.
In addition, during 1997, the Company repaid indebtedness of $51.8 million.
CASH FLOW DATA -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER
31, 1996
Net cash provided by operating activities decreased by $8.1 million to
$4.2 million during the year ended December 31, 1997 from $12.3 million during
the year ended December 31, 1996 as a result of charges incurred in connection
with the recapitalization of the Company, the change in the Company's tax status
in December 1996 and growth in the Company's inventories and accounts
receivable. Net cash used in investing activities of $10.1 million increased by
$2.5 million from 1996, reflecting increased capital expenditures. During the
year ended December 31, 1997, net cash provided by financing activities of
$116.0 million included net proceeds of $4.5 million from the issuance of Common
Stock to cover the over-allotments provided for in the IPO underwriting
agreement, a contribution to capital by the Estate of $7.5 million and proceeds
of $61.9 million from the issuance of Common Stock in connection with the
Merger, proceeds of the Merger Financings of $237.1 million and related payments
to repurchase the Company's Common Stock of $142.7 million. In addition, during
1997, the Company repaid indebtedness of $51.8 million. During the year ended
December 31, 1996, net cash used in financing activities of $6.0 million
included increased distributions to stockholders of $17.2 million, repayment of
bank debt and indebtedness to the then principal stockholder of $29.1 million,
partially offset by net proceeds of $43.3 million from the IPO.
During 1996, the Company used net proceeds from the IPO to repay debt
owed to the banks and to Mr. Svenningsen. The Company used $8.9 million of the
cash in 1996 to fund its working capital needs, which consisted primarily of
increases in accounts receivable and deposits on machinery and equipment.
During 1996, the Company distributed $23.4 million to Mr. Svenningsen.
Approximately $1.4 million of the distributions in 1996 were reinvested in the
Company as debt payable to stockholders. The distributions in 1996 were funded
by net proceeds from the IPO and represented accumulated earnings and the return
of previously provided capital.
In 1997 and 1996, the Company acquired machinery and equipment totaling
$10.3 million and $11.0 million, respectively. The Company financed the
acquisitions using long-term debt, borrowings under the Company's revolving
credit facility and capital leases.
22
<PAGE> 23
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financal 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 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. To date, the Company has not incurred
significant expenses associated with the Year 2000 issue and management expects
that the historical and anticipated remaining costs to upgrade its software will
not be material.
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 is currently working on contingency plans for certain
critical applications. These contingency plans are expected to be completed by
June 1999 and involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies.
To date, the Company is 50% complete, and expects to complete the
upgrade of its principal software by June 30, 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.
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<PAGE> 24
"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, the impact of the Year 2000 issue,
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 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 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.
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<PAGE> 25
QUARTERLY RESULTS
As a result of the seasonal nature of certain of the Company's products,
the quarterly results of operations may not be indicative of those for a full
year. Third quarter sales are generally the highest of the year due to a
combination of increased sales to consumers of the Company's products during
summer months as well as initial shipments of seasonal holiday merchandise as
retailers build inventory. Conversely, fourth quarter sales are generally lower
as retailers sell through inventories purchased during the third quarter.
However, fourth quarter sales in 1998 were higher than prior quarters as a
result of the acquisition of Anagram. The overall growth rate of the Company's
sales in recent years has offset, in part, this sales variability. Promotional
activities, including special dating terms, particularly with respect to
Halloween and Christmas products sold in the third quarter, result in generally
lower profitability in the fourth quarter, due to higher accounts receivables
balances and associated higher interest costs to support these balances. The
following table sets forth the historical net sales, gross profit, income (loss)
from operations and net income (loss) of the Company for 1998 and 1997 by
quarter.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Net sales.............................. $55,561 $48,686 $62,252 $ 68,795
Gross profit........................... 19,572 17,663 22,704 24,899
Income from operations................. 9,235 5,454(a) 11,250 8,509
Net income ............................ 2,271 30(a) 3,425 983
1997
Net sales.............................. $53,176 $49,225 $58,885 $ 48,645
Gross profit........................... 18,766 17,671 21,389 15,534
Income (loss) from operations.......... 10,029 9,306 11,777 (19,615)(b)
Net income (loss)...................... 5,302 4,976 6,623 (17,083)(b)
</TABLE>
(a) Included in second quarter results in 1998 are non-recurring
restructuring charges of $2.4 million which related to the closure
of two distribution facilities located in California and Canada.
The restructuring charges consist of the non-cash write-down of
$1.3 million relating to property, plant and equipment, the
accrual of future lease obligations of $0.7 million, and severance
and other costs of $0.4 million.
(b) Included in fourth quarter results in 1997 are non-recurring
charges relating to the Merger of $22.1 million comprised of $11.7
million in transaction costs, $7.5 million compensation payment to
an officer, $1.9 million for the redemption of Company stock
options and $1.0 million of debt retirement costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in interest rates as a
result of its issuance of variable rate indebtedness. However, the Company
utilizes interest rate swap agreements and other off-balance sheet financial
instruments to manage the market risk associated with fluctuations in interest
rates. If market interest rates for the Company's variable rate indebtedness
average 2% more in 1998 the Company's interest expense, after considering the
effects of its interest rate swap agreements, would increase, and income before
taxes would decrease by $1.3 million. This amount is determined by considering
the impact of the hypothetical interest rates on the Company's borrowing cost,
short-term investment balances, and interest rate swap agreements. This analysis
does not consider the effects of the reduced level of overall economic activity
that could exist in such an environment. Further, in the event of a change of
such magnitude,
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<PAGE> 26
management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be
taken and their possible effects, the sensitivity analysis assumes no changes in
the Company's financial structure.
The Company's earnings are also affected by fluctuations in the value of
the U.S. dollar as compared to foreign currencies, predominately in European
countries, as a result of the sales of its products in foreign markets. Foreign
currency forward contracts are used periodically to hedge against the earnings
effects of such fluctuations. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which the Company's foreign sales are
denominated would have resulted in a decrease in gross profit of $1.1 million
for the year ended December 31, 1998. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, which are a changed
dollar value of the resulting sales, changes in exchange rates also affect the
volume of sales or the foreign currency sales price as competitors' products
become more or less attractive. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and supplementary data listed
in the accompanying Index to Financial Statements and Schedule on page F-1
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions with the Company of the
persons who are currently serving as directors and executive officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Terence M. O'Toole 40 Director, Chairman of the Board
Sanjeev K. Mehra 39 Director
Joseph P. DiSabato 32 Director
Gerald C. Rittenberg 46 Chief Executive Officer and Director
James M. Harrison 47 President, Chief Financial Officer, Treasurer
and Director
William S. Wilkey 42 Senior Vice President -- Sales and Marketing
Garry Kieves 50 Senior Vice President
</TABLE>
26
<PAGE> 27
Terence M. O'Toole is a Managing Director of Goldman, Sachs & Co. in the
Principal Investment Area. He joined Goldman Sachs in 1983. He is a member of
Goldman Sachs' Principal Investment Area Investment Committee. Mr. O'Toole
serves on the Boards of Directors of AMF Bowling, Inc., Western Wireless
Corporation and several other privately held companies on behalf of Goldman
Sachs. He holds a B.S. degree from Villanova University and an M.B.A. from the
Stanford Graduate School of Business.
Sanjeev K. Mehra is a Managing Director of Goldman, Sachs & Co. in the
Principal Investment Area. He joined Goldman Sachs in 1986. He is a Director of
the Stone Street and Bridge Street Funds, private equity funds affiliated with
Goldman Sachs for the benefit of its employees. Mr. Mehra serves on the Boards
of Directors of several privately held companies on behalf of Goldman Sachs. He
holds an A.B. from Harvard University and an M.B.A. from the Harvard Graduate
School of Business Administration.
Joseph P. DiSabato is a Vice President of Goldman, Sachs & Co. in the
Principal Investment Area. He joined Goldman Sachs in 1988, worked as a
Financial Analyst until 1991, and returned in 1994 as an Associate. Mr. DiSabato
serves on the Board of Directors of several privately held companies on behalf
of Goldman Sachs. He holds a B.S. from Massachusetts Institute of Technology and
an M.B.A. from the Anderson Graduate School of Management.
Gerald C. Rittenberg became Chief Executive Officer upon consummation of
the Merger. Prior to that time, Mr. Rittenberg served as the President of the
predecessor to the Company, Amscan Inc., since April 1996, and served as
President of the Company from the time of its formation in October 1996. From
May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of the
Board. From 1991 to April 1996, he was Executive Vice President -- Product
Development of Amscan Inc.
James M. Harrison became President, Chief Financial Officer and Treasurer
upon consummation of the Merger. Prior to that time, Mr. Harrison served as the
Chief Financial Officer of the predecessor to the Company, Amscan Inc., since
August 1996 and served as Chief Financial Officer and Secretary of the Company
since February 1997. From 1993 to 1995, Mr. Harrison was the Executive Vice
President, Chief Operating Officer, Secretary, Treasurer and a member of the
Board of Directors of The C.R. Gibson Company, a manufacturer and distributor of
paper gift products. From 1988 to 1993, Mr. Harrison was the Chief Financial
Officer of The C.R. Gibson Company.
William S. Wilkey joined the Company in 1990 and has served as the Senior
Vice President -- Sales and Marketing of Amscan Inc. since 1992.
Gary Kieves became Senior Vice President of the Company in September 1998
when the Company acquired Anagram. He has served as President of Anagram
International, Inc. for more than five years.
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<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
earned for the past three years for the Company's former and current Chief
Executive Officer and each other executive officer of the Company as of December
31, 1998 whose aggregate salary and bonus for 1998 exceeded $100,000. The
amounts shown include compensation for services in all capacities that were
provided to the Company or its subsidiaries. Amounts shown were paid by the
Company's principal subsidiary, Amscan Inc., except for payments to or on behalf
of Garry Kieves, which were paid by Anagram. Prior to the Merger, the Company
granted stock options on shares of Company Common Stock ("Company Stock
Options") pursuant to the 1996 Stock Option Plan for Key Employees (the "Prior
Stock Plan"). Following the Merger, Company stock options ("New Options") were
granted pursuant to a new stock incentive plan and related option agreement
(together, the "Option Documents") adopted by the Company. At the time of the
Merger, certain employees converted Company Stock Options into options to
purchase shares of Common Stock ("Rollover Options"). Information for 1996 with
respect to Company Common Stock relates to the Company Common Stock prior to the
consummation of the Merger.
<TABLE>
<CAPTION>
Long Term
Compensation
No. of Securities Under- All Other
Name and Principal Position Year Salary Bonus (a) Other lying Options Granted Compensation (b)
- --------------------------- ---- ------ --------- ----- ------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
John A. Svenningsen 1997 $126,953 $ 4,219
Former Chief Executive 1996 315,609 (c) 5,939
Officer and Chairman
Gerald C. Rittenberg 1998 $295,000 $ 395,000 $ 6,532
Chief Executive Officer 1997 220,000 16.648(d) 3,763
1996 211,000 2,800,000(e) 21,895
James M. Harrison 1998 $275,000 $ 350,000 $ 6,286
President, Chief Financial 1997 215,000 255,000 $176,041(f) 16.268(g) 3,763
Officer and Treasurer 1996(h) 62,500 50,000 50,000(i)
William S. Wilkey 1998 $210,000 $ 50,000 $ 6,532
Senior Vice President 1997 200,000 $ 210,000 $352,082(j) 16.441(k) 3,763
and Marketing 1996 181,000 1,036,000(l) 100,000(i) 21,679
Garry Kieves 1998 $ 72,900(m) 6.648(n) $ 929
Senior Vice President
</TABLE>
(a) Represents amounts earned with respect to the years indicated,
whether paid or accrued.
(b) Represents contributions by the Company under the Profit Sharing &
Savings Plan and in 1996, under the ESOP, as well as insurance
premiums paid by the Company with respect to term life insurance
for the benefit of the named executive officer.
(c) Prior to the IPO, which was consummated in December 1996, certain
entities which are now subsidiaries of the Company elected to be
taxed as Subchapter S corporations under the Internal Revenue
Code. Mr. Svenningsen received $15,841,000 from such entities in
1996. Such amounts represented distributions to him as an
Subchapter S corporation stockholder and additional distributions
of accumulated capital and previously-taxed earnings in
conjunction with the IPO.
(d) Represents the New Options granted to Mr. Rittenberg immediately
following the Merger.
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<PAGE> 29
(e) Represents bonuses earned by Mr. Rittenberg pursuant to his prior
employment agreement with Amscan Inc. which terminated in December
1996 in connection with the IPO.
(f) Represents a cash bonus paid to Mr. Harrison at the time of the
Merger in connection with the conversion by Mr. Harrison of 50,000
Company Stock Options into the Rollover Options to purchase 2.394
shares of Company Common Stock.
(g) Represents the New Options and the Rollover Options granted to Mr.
Harrison immediately following the Merger.
(h) Mr. Harrison became an employee and Chief Financial Officer of
Amscan Inc. on August 1, 1996.
(i) Reflects Company Stock Options at an exercise price equal to the
fair market value on the date of grant.
(j) Represents a cash bonus paid to Mr. Wilkey at the time of the
Merger in connection with the conversion by Mr. Wilkey of 100,000
Company Stock Options into the Rollover Options to purchase 4.787
shares of Company Common Stock.
(k) Represents the New Options and the Rollover Options granted to Mr.
Wilkey immediately following the Merger.
(l) Represents bonuses earned by Mr. Wilkey pursuant to an employment
agreement with Amscan Inc. which expired on December 31, 1996.
(m) Garry Kieves became an employee and Senior Vice President of the
Company on September 17, 1998.
(n) Represents the New Options granted to Mr. Kieves in connection
with the Acquisition at an exercise price greater than the fair
market value on the date of grant. In addition, 10 Common Stock
warrants valued at $225,000 were issued to Mr. Kieves in
connection with the Acquisition.
OPTION GRANTS TABLE
The following table sets forth information concerning stock options
which were granted during 1998 to the executive officers named in the Summary
Compensation Table. Information with respect to options relates to options on
the Company Common Stock at December 31, 1998.
<TABLE>
<CAPTION>
% OF
TOTAL OPTIONS
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES GRANTED TO MARKET ASSUMED ANNUAL RATES OF
UNDERLYING EMPLOYEES IN PRICE AT STOCK PRICE APPRECIATION FOR
OPTIONS FISCAL EXERCISE DATE OF EXPIRATION OPTION TERM
NAME GRANTED (1) YEAR PRICE GRANT (2) DATE 5% 10%
---- ----------- ------------- -------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Garry Kieves 6.648 59.9% $125,000 $105,000 September 17, $438,994 $1,112,497
2008
</TABLE>
29
<PAGE> 30
(1) All New Options listed in this column become exercisable ratably over
five years beginning one year from the date of grant and expire ten years
after the date of grant. To the extent permitted under the Internal
Revenue Code, such options were incentive stock options.
(2) Assumes a fair market value of the Company Common Stock underlying the
New Options of $105,000 based on the valuation of Company Common Stock
issued in connection with the Acquisition.
FISCAL 1998 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
------------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald C. Rittenberg 3.330 13.318 $99,888 $399,552
James M. Harrison 2.775 11.099 83,244 332,976
0.479 1.915 24,158 96,631
William S. Wilkey 2.331 9.323 69,924 279,696
0.957 3.830 48,306 193,222
Garry Kieves - 6.648 - -
</TABLE>
The valuation of unexercised in the money options is based on the
valuation of Company Common Stock issued in connection with the September 1998
Acquisition (last valuation date) of $105,000 per share. No New or Rollover
Options were exercised in the most recent fiscal year.
For a further description of the New Options and Rollover Options granted
to the executives named in the Summary Compensation Table in connection with the
Merger, see "Employment Arrangements" below.
EMPLOYMENT ARRANGEMENTS
Employment Agreement with Gerald C. Rittenberg. Under the Employment
Agreement between the Company and Gerald C. Rittenberg, dated as of August 10,
1997 (the "Rittenberg Employment Agreement"), Mr. Rittenberg serves as Chief
Executive Officer of the Company for a three-year period commencing at the time
of the Merger (an "Initial Term"), which term will be extended automatically for
successive additional one-year periods (each an "Additional Term"), unless
either the Company gives Mr. Rittenberg, or Mr. Rittenberg gives the Company,
written notice of the intention not to extend the term no less than twelve
months prior to the end of the Initial Term or Additional Term, whichever is
then in effect. Mr. Rittenberg will receive during the Initial Term an annual
base salary of $295,000 which will be increased by 5% at the beginning of each
Additional Term. During Mr. Rittenberg's Initial Term and any Additional Term,
Mr. Rittenberg will be eligible for an annual bonus for each calendar year
comprised of (i) a non-discretionary bonus equal to 50% of his annual base
salary if certain operational and financial targets determined by the Board of
Directors in consultation with Mr. Rittenberg are attained, and (ii) a
discretionary bonus awarded in the sole discretion of the Board of Directors.
The Rittenberg Employment Agreement also provides for other customary benefits
including incentive, savings
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<PAGE> 31
and retirement plans, paid vacation, health care and life insurance plans, and
expense reimbursement
Under the Rittenberg Employment Agreement, if Mr. Rittenberg's employment
were to be terminated by the Company other than for cause, death or disability,
the Company would be obligated to pay Mr. Rittenberg a lump sum cash payment in
an amount equal to the sum of (1) accrued unpaid salary, earned but unpaid bonus
for any prior year, any deferred compensation and accrued but unpaid vacation
pay (collectively, "Accrued Obligations") plus (2) severance pay equal to his
annual base salary, provided, however, that in connection with a termination by
the Company other than for cause following a Sale Event (as defined below), such
severance pay will be equal to Mr. Rittenberg's annual base salary multiplied by
the number of years the Company elects as the Restriction Period (as defined
below) in connection with the non-competition provisions. Upon termination of
Mr. Rittenberg's employment by the Company for cause, death, disability or if he
terminates his employment, Mr. Rittenberg will be entitled to his unpaid Accrued
Obligations. Additionally, upon termination of Mr. Rittenberg's employment
during his Initial Term or any Additional Term (1) by the Company other than for
cause or (2) by reason of his death or disability, or if the Initial Term or any
Additional Term is not renewed at its expiration (other than for cause), the
Rittenberg Employment Agreement provides for payment of a prorated portion of
the bonus to which Mr. Rittenberg would otherwise have been entitled.
The Rittenberg Employment Agreement also provides that during his Initial
Term, any Additional Term and during the three-year period following any
termination of his employment (the "Restriction Period"), Mr. Rittenberg shall
not participate in or permit his name to be used or become associated with any
person or entity that is or intends to be engaged in any business which is in
competition with the business of the Company, or any of its subsidiaries or
controlled affiliates, in any country in which the Company or any of its
subsidiaries or controlled affiliates operate, compete or are engaged in such
business or at such time intend to so operate, compete or become engaged in such
business (a "Competitor"), provided, however, that if Mr. Rittenberg's
employment is terminated by the Company other than for cause following a Sale
Event, the Restriction Period will be instead a one, two or three-year period at
the election of the Company. For purposes of the Rittenberg Employment
Agreement, "Sale Event" means either (1) the acquisition by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) that is a Competitor (as defined in the Rittenberg Employment
Agreement), other than GSCP and its affiliates, of a majority of the outstanding
voting stock of the Company or (2) the sale or other disposition (other than by
way of merger or consolidation) of all or substantially all of the assets of the
Company and its subsidiaries taken as a whole to any person or group of persons
that is a Competitor, provided, however, that an underwritten initial public
offering of shares of Company Common Stock pursuant to a registration statement
under the Securities Act will not constitute a Sale Event. The Rittenberg
Employment Agreement also provides for certain other restrictions during the
Restriction Period in connection with (a) the solicitation of persons or
entities with business relationships with the Company and (b) inducing any
employee of the Company to terminate their employment or offering employment to
such persons, in each case subject to certain conditions.
Pursuant to the Rittenberg Employment Agreement, Mr. Rittenberg
contributed to Confetti immediately prior to the Merger, 272,728 shares of
Company Common Stock in exchange for 60.0 shares of Confetti Common Stock,
having an aggregate value equal to 272,728 times the Cash Consideration of
$16.50 per share, or approximately $4.5 million, which shares of Confetti Common
Stock were valued at the purchase price for which GSCP purchased common shares
of Confetti immediately prior to the Merger (the "New Purchase Price"). At the
time of the Merger, such shares of Confetti Common Stock were converted into
60.0 shares of the Company's Redeemable Common Stock as the surviving company in
the Merger (as converted, the "Rollover Stock").
Also pursuant to the Rittenberg Employment Agreement, following the
Merger, Mr. Rittenberg was granted New Options to purchase 16.648 shares of
Company Common Stock
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<PAGE> 32
at $75,000 per share. Such New Options vest in equal annual installments over a
five-year period and are subject to forfeiture upon termination of Mr.
Rittenberg's employment if not vested and exercised within certain time periods
specified in the Option Documents. Unless sooner exercised or forfeited as
provided in the Option Documents, the New Options will expire on the tenth
anniversary of the Merger.
Mr. Rittenberg is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, shares of Rollover Stock or shares of
Redeemable Common Stock acquired upon exercise of the New Options, except as
provided in the Stockholders' Agreement and the Option Documents, and the shares
of Rollover Stock and shares of Redeemable Common Stock acquired upon exercise
of the New Options are subject to the terms of the Stockholders' Agreement.
At the time of the Merger, the Rittenberg Employment Agreement replaced
and superseded Mr. Rittenberg's former employment agreement with the Company.
Employment Agreement with James M. Harrison. Under the Employment
Agreement, dated August 10, 1997, by and between the Company and James M.
Harrison (the "Harrison Employment Agreement"), Mr. Harrison serves as President
of the Company for a three-year Initial Term at an annual base salary of
$275,000. The Harrison Employment Agreement contains provisions for Additional
Terms, salary increases during any Additional Term, non-discretionary and
discretionary bonus payments, severance, other benefits, definitions of cause
and disability, and provisions for non-competition and non-solicitation similar
to those in the Rittenberg Employment Agreement, with the exception of the
provision for an election by the Company of a one, two or three-year Restriction
Period following a Sale Event; under the Harrison Employment Agreement, the
Restriction Period is fixed at three years and severance pay is fixed at one
year's annual base salary. In addition, the Harrison Employment Agreement
provided that Mr. Harrison's bonus for the 1997 calendar year was equal to the
bonus that would have been payable to him in accordance with the relevant terms
of his current employment agreement with the Company, without taking into
account any incremental financing or transaction costs attributable to the
Merger as determined in good faith by the Board. The Harrison Employment
Agreement also provided that Mr. Harrison receive a bonus payment of $105,000 on
March 15, 1998, in addition to any other bonus payable.
Pursuant to the Harrison Employment Agreement, following the Merger, Mr.
Harrison was granted New Options to purchase 13.874 shares of Company Common
Stock at $75,000 per share. Such New Options were granted on terms similar to
those granted pursuant to the Rittenberg Employment Agreement.
Additionally, under the Harrison Employment Agreement, Mr. Harrison
converted, as of the time of the Merger, his Company Stock Options to purchase
50,000 shares of Company Common Stock into Rollover Options to purchase 2.394
shares of Company Common Stock. The Rollover Options have an exercise price per
share (the "Rollover Exercise Price") equal to $54,545. Mr. Harrison also
received at the time of the Merger a cash bonus equal to $176,041 in connection
therewith. The Rollover Options were granted pursuant to the Option Documents
and on the same terms as the New Options.
Pursuant to the Harrison Employment Agreement, Mr. Harrison was granted
immediately prior to the Merger, 15.0 shares of Confetti Common Stock (the
"Restricted Stock"), having an aggregate value of $1,125,000, based on the New
Purchase Price, which shares were converted in the Merger into 15.0 shares of
Company Common Stock. During the Stock Restricted Period (as defined below), the
Restricted Stock will be forfeitable and may not be sold, assigned, transferred,
pledged or otherwise encumbered by Mr. Harrison. For purposes of the Harrison
Employment Agreement, the "Stock Restricted Period" means the period beginning
on the date of grant of the Restricted Stock and ending on the earliest of (i)
the occurrence of an IPO (as such term is defined in the Stockholders'
Agreement); (ii) immediately prior to the consummation of a transaction or
series of transactions, approved by the Board of Directors, pursuant to which a
person, entity or
32
<PAGE> 33
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act,
other than Goldman Sachs or any of its affiliates, acquires a majority of the
outstanding voting stock of the Company; and (iii) the termination of Mr.
Harrison's employment with the Company, (1) because of his death, (2) by the
Company without cause, (3) by Mr. Harrison because of the Company's material
breach of its obligations under the Harrison Employment Agreement, (4) by Mr.
Harrison if the Company imposes on him duties or work conditions materially
burdensome to him which are inconsistent with his prior duties and work
conditions or (5) because of Mr. Harrison's disability; provided, however, that
the Stock Restricted Period ended with respect to 25% of the shares of
Restricted Stock on January 1, 1998 and with respect to the remaining 75%, in
equal installments on January 1 of each of the years 1999 through 2007. Pursuant
to the Harrison Employment Agreement, upon the voluntary or involuntary
termination of Mr. Harrison's employment during the Stock Restricted Period for
any reason other than a reason listed in clause (iii) of the preceding sentence,
all shares of Restricted Stock (with respect to which the Stock Restricted
Period has not then ended) will be forfeited and returned to the Company without
payment.
Mr. Harrison is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of Restricted Stock
or shares of Company Common Stock acquired upon exercise of the New Options or
Rollover Options (in either case, "Option Shares"), except as provided in the
Stockholders' Agreement and the Option Documents, and the shares of Restricted
Stock and Option Shares will be subject to the terms of the Stockholders'
Agreement.
At the time of the Merger, the Harrison Employment Agreement replaced and
superseded Mr. Harrison's former employment agreement with the Company, dated as
of February 1, 1997 (the "Prior Harrison Employment Agreement"). At that time,
in consideration and in full satisfaction, and in lieu of the payment of any
Bonus (other than as set forth above) or Sale Bonus (as such terms are defined
in the Prior Harrison Employment Agreement), the Company paid to Mr. Harrison,
immediately after the Merger, $270,000 in cash. The Harrison Employment
Agreement also provides that none of the Merger or other transactions and
arrangements contemplated by the Merger Agreement, the Stockholders' Agreement,
the Voting Agreement and the Harrison Employment Agreement would be or result in
or give rise to any change of control or potential change of control under or
constitute good reason for Mr. Harrison terminating the Prior Harrison
Employment Agreement.
Stock and Option Agreement with William S. Wilkey. Pursuant to a Stock
and Option Agreement, dated as of August 10, 1997, by and between the Company
and William S. Wilkey (the "Wilkey Agreement"), Mr. Wilkey contributed to the
Company immediately after the Merger $500,000 in cash in exchange for 6.67
shares of Company Common Stock ("New Stock") valued at the New Cost Per Share.
Mr. Wilkey made payment to the Company for the New Stock immediately after the
Merger and borrowed the funds for such payment from the Company. Such borrowing
is evidenced by a personal full recourse note maturing on March 15, 2001,
accruing interest at 6.65%, compounded annually, and payable in annual payments
of principal and interest equal to one-quarter of any bonus Mr. Wilkey receives
from the Company (provided, that the first such payment will be made from any
bonus corresponding to the 1998 calendar year), with any portion of the note
remaining at maturity payable at maturity. Mr. Wilkey also entered into a
related stock pledge agreement with the Company.
Also pursuant to the Wilkey Agreement, following the Merger, Mr. Wilkey
was granted New Options to purchase 11.654 shares of Company Common Stock at
$75,000 per share. Such New Options were granted on terms similar to those
granted pursuant to the Rittenberg Employment Agreement.
Additionally, Mr. Wilkey converted, as of the time of the Merger, his
Company Stock Options to purchase 100,000 shares of Company Common Stock into
Rollover Options to purchase 4.787 shares of Company Common Stock. The Rollover
Options have a Rollover Exercise Price equal to $54,545. Mr. Wilkey also
received at the time of the Merger a cash bonus
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<PAGE> 34
equal to $352,082 in connection therewith. The Rollover Options were granted
pursuant to the Option Documents and on the same terms as the New Options.
Mr. Wilkey will not be permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of New Stock or
Option Shares, except as provided in the Stockholders' Agreement and the Option
Documents, and the shares of New Stock and Option Shares are subject to the
terms of the Stockholders' Agreement.
The Wilkey Agreement is not intended to, and does not, supersede, amend,
modify or replace Mr. Wilkey's employment agreement with the Company, dated as
of October 4, 1996 (the "Wilkey Employment Agreement"), which, except for
certain provisions thereof relating to option grants under the Prior Stock Plan,
which plan was terminated at the time of the Merger (and which provisions
therefore are no longer operative), will remain in full force and effect.
Under the terms of the Wilkey Employment Agreement, which commenced on
January 1, 1997, Mr. Wilkey is employed as Senior Vice President -- Sales and
Marketing of the Company for a period of five years. Mr. Wilkey received an
initial base salary of $200,000 for 1997, which will be increased by 5% each
successive year during the term of the agreement. In addition, Mr. Wilkey is
entitled to receive an annual bonus which will be determined by a formula which
takes into account the amount by which sales and profits are increased on a year
to year basis. Mr. Wilkey's agreement also provides that upon termination of
employment he may not for a period of three years be employed by, or associated
in any manner with, any business which is competitive with the Company. The
Wilkey Employment Agreement may be terminated by the Company upon the death or
permanent disability of Mr. Wilkey or for "cause".
Employment Agreement with Gary Kieves. Under the Employment Agreement
dated August 6, 1998, by and between the Company and Gary Kieves (the "Kieves
Employment Agreement"), Mr. Kieves is employed as Senior Vice President of the
Company and President of Anagram for a period of three years at an annual base
salary of $250,000. The Kieves Employment Agreement contains provisions for
Additional Terms, salary increases during any Additional Terms, discretionary
bonus payments, severance and other benefits, and definitions of disability. The
Kieves Employment Agreement also provides that upon termination of employment he
may not, for a period of three years, be employed by, or associated in any
manner with, any business which is in competition with the Company. The
Employment Agreement may be terminated by the Company upon the death or
permanent disability of Mr. Kieves, or for "cause" or without "cause".
Mr. Kieves will not be permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, shares of Common Stock, Redeemable Common
Stock or Option Shares, except as provided in the Stockholders' Agreement and
the Option Documents, and the shares of New Stock and Option Shares are subject
to the terms of the Stockholders' Agreement.
Other Employment Matters. The Company has agreed in the Merger and
Acquisition Agreements that, for a period of at least two years from the then
effective dates, subject to applicable law, the Company and its subsidiaries
will provide benefits to their employees as a group (and not necessarily on an
individual-by-individual or group-by-group basis) that will be, in the
aggregate, similar to those currently provided by the Company and its
subsidiaries to their employees.
AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN
Following consummation of the Merger, the Company adopted the Amscan
Holdings, Inc. 1997 Stock Incentive Plan (the "Stock Incentive Plan") under
which the Company may grant incentive awards in the form of shares of Company
Common Stock ("Restricted Stock Awards"), options to purchase shares of Company
Common Stock ("Company Stock Options") and stock appreciation rights ("Stock
Appreciation Rights") to certain directors, officers, employees and consultants
("Participants") of the Company and its affiliates. The total number of shares
of
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<PAGE> 35
Company Common Stock reserved and available for grant under the Stock Incentive
Plan is 135 shares. A committee of the Company's board of directors (the
"Committee"), or the board itself in the absence of a Committee, is authorized
to make grants and various other decisions under the Stock Incentive Plan.
Unless otherwise determined by the Committee, any Participant granted an award
under the Stock Incentive Plan must become a party to, and agree to be bound
by, the Stockholders' Agreement.
Company Stock Option awards under the Stock Incentive Plan may include
incentive stock options, nonqualified stock options, or both types of Company
Stock Options, in each case with or without Stock Appreciation Rights. Company
Stock Options are nontransferable (except under certain limited circumstances)
and, unless otherwise determined by the Committee, have a term of ten years.
Upon a Participant's death or when the Participant's employment with the Company
or the applicable affiliate of the Company is terminated for any reason, such
Participant's previously unvested Company Stock Options are forfeited and the
Participant or his or her legal representative may, within three months (if
termination of employment is for any reason other than death) or one year (in
the case of the Participant's death), exercise any previously vested Company
Stock Options. Stock Appreciation Rights may be granted in conjunction with all
or part of any Company Stock Option award, and are exercisable, subject to
certain limitations, only in connection with the exercise of the related Company
Stock Option. Upon termination or exercise of the related Company Stock Option,
Stock Appreciation Rights terminate and are no longer exercisable. Stock
Appreciation Rights are transferable only with the related Company Stock
Options.
Unless otherwise provided in the related award agreement or, if
applicable, the Stockholders' Agreement, immediately prior to certain change of
control transactions described in the Stock Incentive Plan, all outstanding
Company Stock Options and Stock Appreciation Rights will, subject to certain
limitations, become fully exercisable and vested and any restrictions and
deferral limitations applicable to any Restricted Stock Awards will lapse.
The Stock Incentive Plan will terminate ten years after its effective
date; however, awards outstanding as of such date will not be affected or
impaired by such termination. The Company's board of directors and the Committee
have authority to amend the Stock Incentive Plan and awards granted thereunder,
subject to the terms of the Stock Incentive Plan.
COMPENSATION OF DIRECTORS
The Company currently does not compensate its directors other than for
expense reimbursement. During 1997, until the effective time of the Merger, the
Company compensated directors who were not employees of the Company in the
amount of $1,000 for each meeting of the Board of Directors attended and $1,000
for each meeting of the Audit Committee and Nominating Committee attended.
STOCK PERFORMANCE GRAPH
The Company's Common Stock has not traded publicly since December 19,
1997. For this reason a graph indicating the relative performance of the Company
Common Stock price to other standard measures has not been included since it
would provide no meaningful information.
COMPENSATION COMMITTEE POLICIES
During 1998, with the exception of compensation paid to Garry Kieves,
compensation of executive officers of the Company was paid according to the
terms of existing employment agreements and, accordingly, the Compensation
Committee did not make any decisions in 1998 in connection with compensation
paid to the Chief Executive Officer and other executive officers of the Company
named in the Summary Compensation Table. The compensation paid to Garry Kieves
was based on the terms of an employment agreement negotiated in conjunction with
the acquisition of Anagram on September 17, 1998.
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<PAGE> 36
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
John A. Svenningsen served as a member of the Compensation Committee from
the creation of the Compensation Committee in February 1997 until his death on
May 28, 1997. Mr. Svenningsen served as Chairman of the Board and Chief
Executive Officer. John Tugwell served as a member of the Compensation Committee
from the creation of the Compensation Committee in February 1997 to December 19,
1997. For a description of certain relationships and related transactions
between the Company and Mr. Svenningsen and the Company and Mr. Tugwell, see
Item 13 "Certain Relationships and Related Transactions".
To the knowledge of the Company, no relationship of the type described in
Item 402(j)(3) of Regulation S-K existed during 1998 with respect to the
Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company Common Stock, to file reports of ownership and changes in ownership
of the Company's securities with the Commission. Officers, directors and greater
than ten percent beneficial owners are required by applicable regulations to
furnish the Company with copies of all forms they file pursuant to Section
16(a). Based solely upon a review of the copies of the forms furnished to the
Company, and written representations from certain reporting persons that no
Forms 5 were required, the Company believes that during 1998, all filing
requirements under Section 16(a) applicable to its officers, directors and ten
percent beneficial owners were complied with in a timely manner.
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<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning ownership
of shares of Company Common Stock by: (i) persons who are known by the Company
to own beneficially more than 5% of the outstanding shares of Company Common
Stock; (ii) each director of the Company; (iii) each executive officer of the
Company; and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES OF COMPANY PERCENTAGE
COMMON STOCK OF CLASS
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING(A)
- ------------------------ ------------------ --------------
<S> <C> <C>
Gerald C. Rittenberg........................... 60.0 5.3%
James M. Harrison.............................. 15.0 1.3
William S. Wilkey.............................. 6.7 *
Garry Kieves, Garry Kieves Retained
Annuity Trust and Garry Kieves
Irrevocable Trust, in aggregate................ 120.0 10.6
Terence M. O'Toole(b).......................... -- --
Sanjeev K. Mehra(c)............................ -- --
Joseph P. DiSabato(d).......................... -- --
Estate of John A. Svenningsen.................. 100.0 8.8
c/o Kurzman & Eisenberg LLP
One North Broadway, Suite 1004
White Plains, New York 10601
GS Capital Partners II, L.P(e)................. 825.0 72.9
and other GSCP funds
85 Broad Street
New York, New York 10004
All directors and executive officers
as a group (7 persons)....................... 201.7 17.8
</TABLE>
(a) The amounts and percentage of Company Common Stock beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities. Under the rules of
the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one
person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which
he has no economic interest. The percentage of Company Common Stock
outstanding is based on the 1,132.41 shares of Company Common Stock
outstanding as of the date hereof.
(b) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by GSCP and its affiliates, except to the extent of his pecuniary
interest therein.
(c) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by GSCP and its affiliates, except to the extent of his pecuniary
interest therein.
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<PAGE> 38
(d) Mr. DiSabato, who is a Vice President of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by GSCP and its affiliates.
(e) Of the 825.0 shares of Company Common Stock beneficially owned by GSCP
and its affiliates, approximately 517.6 shares are owned by GSCP II,
approximately 205.8 shares are owned by GS Capital Partners II Offshore,
L.P., approximately 19.1 shares are owned by Goldman, Sachs & Co.
Verwaltungs GmbH as nominee for GS Capital Partners II (Germany) C.L.P.,
approximately 55.5 shares are owned by Stone Street Fund 1997, L.P. and
approximately 27.0 shares are owned by Bridge Street Fund 1997, L.P. Each
of the GSCP funds are investment partnerships that are managed by Goldman
Sachs or its affiliates, which has full dispositive power with respect to
the holdings of such partnerships.
* Less than 1%
STOCKHOLDERS' AGREEMENT
As of December 19, 1997, the Company entered into the Stockholders'
Agreement with GSCP and the Estate and certain employees of the Company listed
as parties thereto (including the Estate, the "Non-GSCP Investors"). The
following discussion summarizes the terms of the Stockholders' Agreement which
the Company believes are material to an investor in the debt or equity
securities of the Company. This summary is qualified in its entirety by
reference to the full text of the Stockholders' Agreement, a copy of which is
filed with the Commission, and which is incorporated herein by reference. The
Stockholders' Agreement provides, among other things, for (i) the right of the
Non-GSCP Investors to participate in, and the right of GSCP to require the
Non-GSCP Investors to participate in, certain sales of Company Common Stock by
GSCP, (ii) prior to an initial public offering of the stock of the Company (as
defined in the Stockholders' Agreement), certain rights of the Company to
purchase, and certain rights of the Non-GSCP Investors (other than the Estate)
to require the Company to purchase (except in the case of termination of
employment by such Non-GSCP Investors) all, but not less than all, of the shares
of Company Common Stock owned by a Non-GSCP Investor (other than the Estate)
upon the termination of employment or death of such Non-GSCP Investor, at prices
determined in accordance with the Stockholders' Agreement and (iii) certain
additional restrictions on the rights of the Non-GSCP Investors to transfer
shares of Company Common Stock. The Stockholders' Agreement also contains
certain provisions granting GSCP and the Non-GSCP Investors certain rights in
connection with registrations of Company Common Stock in certain offerings and
provides for indemnification and certain other rights, restrictions and
obligations in connection with such registrations. The Stockholders' Agreement
will terminate (i) with respect to the rights and obligations of and
restrictions on GSCP and the Non-GSCP Investors in connection with certain
restrictions on the transfer of shares of Company Common Stock, when GSCP and
its affiliates no longer hold at least 40% of the outstanding shares of Company
Common Stock, on a fully diluted basis; provided that the Stockholders'
Agreement will terminate in such respect in any event if the Company enters into
certain transactions resulting in GSCP, its affiliates, the Non-GSCP Investors,
and each of their respective permitted transferees, owning less than a majority
of the outstanding voting power of the entity surviving such transaction; and
(ii) with respect to the registration of Company Common Stock in certain
offerings, with certain exceptions, on the earlier of (1) the date on which
there are no longer any registrable securities outstanding (as determined under
the Stockholders' Agreement) and (2) the twentieth anniversary of the
Stockholders' Agreement.
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<PAGE> 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, the Company leased a warehouse in Temecula, California from
the Estate. Rent payments related to this warehouse were $350,000 for the year
ended December 31, 1998. The lease requires future rent payments of $350,000 per
year through December 31, 2000.
The Company believes these rent payments are at least as favorable to the
Company as the terms which would have been available for leases negotiated with
unaffiliated persons at the inception of the lease.
The Company is obligated to obtain interest rate protection, pursuant to
interest rate swaps, caps or other similar arrangements satisfactory to GS
Credit Partners, with respect to a notional amount of not less than half of the
aggregate amount outstanding under the Term Loan, which protection must remain
in effect for not less than three years from the date of the borrowing. The
Company entered into a three year interest rate swap contract dated September
30, 1998 for a notional amount of $35,000,000 with Goldman Sachs Capital
Markets, L.P. ("GSCM") at an interest rate of 4.808% plus a spread based on
certain defined ratios (7.18% at December 31, 1998). Net settlements received
from GSCM under the swap contract for the year ended December 31, 1998 was
$44,000.
Under the Merger Agreement, the Company has agreed to indemnify for six
years after the Merger all former directors, officers, employees and agents of
the Company, to the fullest extent currently provided in the Company's
Certificate of Incorporation and By-laws consistent with applicable law, for
acts or omissions occurring prior to the Merger to the extent such acts or
omissions are uninsured and will, subject to certain limitations, maintain for
six years its prior directors' and officers' liability insurance.
Goldman Sachs and its affiliates have certain interests in the Company.
Messrs. O'Toole and Mehra are Managing Directors of Goldman Sachs, Mr. DiSabato
is Vice President of Goldman Sachs and each of them is a director of the
Company. GSCP currently owns approximately 72.9% of the outstanding shares of
Company Common Stock. Accordingly, the general and managing partners of each of
the GSCP Fund Partners (as defined herein), which are affiliates of Goldman
Sachs and The Goldman Sachs Group, will each be deemed to be an "affiliate" of
GSCP and the Company. See "Ownership of Capital Stock". In 1998, Goldman Sachs
received a fee of approximately $400,000 relating to the amendment of the
Company's credit agreements in connection with the Acquisition. Pursuant to the
Stockholder's Agreement, Goldman Sachs has the exclusive right (if it so elects)
to perform certain investment banking and similar services for the Company on
customary terms. Goldman Sachs may from time to time receive customary fees for
services rendered to the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Schedule.
See Index to Financial Statements and Schedule which appears
on page F-1 herein.
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<PAGE> 40
3. Exhibits
Exhibit
Number Description
-------- -----------
2(a) Share Exchange Agreement dated as of December 18, 1996,
among the Registrant, John A. Svenningsen, Gerald C.
Rittenberg and the following trusts each created by
agreement dated as of October 29, 1996: Christina
Svenningsen Trust, Jon Svenningsen Trust, Elisabeth
Svenningsen Trust, Melissa Svenningsen Trust, Emily
Svenningsen Trust and Sara Svenningsen Trust (incorporated
by reference to Exhibit 2(a) to the Registrant's 1996
Annual Report on Form 10-K (Commission File No. 000-21827))
2(b) Capital Contribution Agreement by and between the Company
and Messrs. Allan J. Kaufman, Arthur J. Kaufman and Michael
F. Hodges, dated October 9, 1996, as supplemented
(incorporated by reference to Exhibit 2(b) to Amendment No.
1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
2(c) Agreement and Plan Merger, by and among Amscan Holdings,
Inc. and Confetti Acquisition, Inc., dated as of August 10,
1997 (incorporated by reference to Exhibit 2.1 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
2.1 Stock Purchase Agreement, dated as of August 6, 1998, by
and among Amscan Holdings, Inc. and certain stockholders of
Anagram International, Inc. and certain related companies
(incorporated by reference to Exhibit 2.1 to Current Report
on Forms 8-K dated August 6, 1998)
3(a) Certificate of Incorporation of Amscan Holdings, Inc.,
dated October 3, 1996, (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-45457))
3(b) By-Laws of Amscan Holdings, Inc. (incorporated by reference
to Exhibit 3(b) to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14107))
3(c) Amended By-Laws of Amscan Holdings, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
3.1 Certificate of Incorporation 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)
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<PAGE> 41
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(a) Credit Agreement among Amscan Inc., Kookaburra USA Ltd.,
Deco Paper Products, Inc., Trisar, Inc., the banks
signatory thereto and The Chase Manhattan Bank N.A., dated
as of September 20, 1995 (incorporated by reference to
Exhibit 4(a) to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14107))
4(b) Amendment No. 1 to Credit Agreement among Amscan Holdings,
Inc., Amscan Inc., Trisar Inc., the banks signatory thereto
and The Chase Manhattan Bank, dated as of November 14, 1996
(incorporated by reference to Exhibit 4(b) to Amendment No.
2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
4(c) Amendment No. 2 to Credit Agreement among Amscan Holdings,
Inc., Amscan Inc., Trisar Inc., the banks signatory thereto
and The Chase Manhattan Bank, dated as of December 11, 1996
(incorporated by reference to Exhibit 4(c) to Amendment No.
2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
4(d) Indenture, dated as of December 19, 1997, by and among the
Company, the Guarantors named therein and IBJ Schroder Bank
& Trust Company with respect to the Senior Subordinated
Notes (incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-45457)
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)
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)
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<PAGE> 42
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)
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)
10(a) Employment Agreement by and between Amscan Holdings, Inc.
and John A. Svenningsen, dated November 1, 1996
(incorporated by reference to Amendment No. 1 to Exhibit
10(a) to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-14107))
10(b) Employment Agreement by and between the Company and Gerald
C. Rittenberg, dated October 9, 1996 (incorporated by
reference to Exhibit 10(b) to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
10(c) Stock Agreement among Gerald C. Rittenberg, John A.
Svenningsen and Amscan Inc., dated October 9, 1996
(incorporated by reference to Exhibit 10(c) to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-14107))
10(d) Employment Agreement by and between Amscan Inc. or the
Company and William Wilkey, dated as of October 4, 1996
(incorporated by reference to Exhibit 10(e) to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-14107))
10(e) Employment Agreement between Amscan Holdings, Inc. and
James M. Harrison, dated as of February 1, 1997
(incorporated by reference to Exhibit 10(e) to the
Registrant's 1996 Annual Report on Form 10-K (Commission
File No. 000-21827))
10(f) Lease between ACP East LLC and Amscan Inc. dated as of
December 1, 1995, as amended (incorporated by reference to
Exhibit 10(i) to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-14107))
10(g) Lease between John Anders Svenningsen and Amscan Inc.,
dated March 1, 1995, as modified and amended (incorporated
by reference to Exhibit 10(j) to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
10(h) Lease between John Anders Svenningsen and Amscan Inc.,
dated November 9, 1995, as amended (incorporated by
reference to Exhibit 10(k) to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
10(i) Tax Indemnification Agreement between Amscan Holdings, Inc.
and John A. Svenningsen, dated as of December 18, 1996
(incorporated by reference to
42
<PAGE> 43
Exhibit 10(j) to the Registrant's 1996 Annual Report on
Form 10-K (Commission File No. 000-21827))
10(j) Tax Indemnification Agreement between Amscan Holdings, Inc.
Christine Svenningsen and the Estate of John A.
Svenningsen, dated as of August 10, 1997 (incorporated by
reference to Exhibit 10.17 to the Registrant's Registration
on Form S-4 (Registration No. 333-40235))
10(k) The MetLife Capital Corporation Master Lease Purchase
Agreement between MetLife Capital Corporation and Amscan
Inc., Deco Paper Products, Inc., Kookaburra USA Ltd., and
Trisar, Inc., dated November 21, 1991, as amended
(incorporated by reference to Exhibit 10(n) to Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-14107))
10(l) Form of Indemnification Agreement between the Company and
each of the directors of the Company (incorporated by
reference to Exhibit 10(o) to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-14107))
10(m) Exchange and Registration Agreement, dated as of December
19, 1997, by and among the Company and Goldman, Sachs & Co.
(incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(n) Revolving Loan Credit Agreement, dated as of December 19,
1997, among the Company, Goldman, Sachs Credit Partners
L.P., as Arranger and Syndication Agent, Fleet National
Bank as Administrative Agent and the respective lenders
signatory thereto (incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(o) AXEL Credit Agreement, dated as of December 19, 1997, among
the Company, Goldman, Sachs Credit Partners L.P., as
Arranger and Syndication Agent, Fleet National Bank as
Administrative Agent and the respective lenders signatory
thereto (incorporated by reference to Exhibit 10.3 to
Amendment No. 1 to the Registrant's Registration Statement
on Form S-4 (Registration No. 333-45457))
10(p) Stockholders' Agreement, dated as of December 19, 1997, by
and among the Company and the Stockholders thereto
(incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(q) Employment Agreement, dated as of August 10, 1997, by and
among the Company and Gerald C. Rittenberg (incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(r) Employment Agreement, dated as of August 10, 1997, by and
among the Company and James M. Harrison (incorporated by
reference to Exhibit 10.6 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
43
<PAGE> 44
10(s) Amscan Holdings, Inc. 1997 Stock Incentive Plan (contained
in Exhibit 10(d) (incorporated by reference to Exhibit 10.7
Registrant's Registration Statement on Form S-4
(Registration No. 333-45457)
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 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
(incorporated by reference to Exhibit 99.1 to Current
Report on Form 8 - K dated August 6, 1998)
12(a) Statement re: computation of ratio of earnings to fixed
charges
21 Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21.1 to the Registrant's Registration Statement
on Form S-4 (Registration No. 333-45457))
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
27 Financial Data Schedule
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)
(b) Reports on Form 8-K.
During the fourth quarter of 1998, the Company filed a Current Report
on Form 8-K/A dated December 1, 1998 (File No. 000-21827) providing pro forma
financial information and historical financial statements relating to the
acquisition of Anagram.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ James M. Harrison
---------------------------
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terence M. O'Toole Chairman of the Board of Directors March 31, 1999
- ----------------------
Terence M. O'Toole
/s/ Sanjeev K. Mehra Director March 31, 1999
- --------------------
Sanjeev K. Mehra
/s/ Joseph P. DiSabato Director March 31, 1999
- ----------------------
Joseph P. DiSabato
/s/ Gerald C. Rittenberg Chief Executive Officer and March 31, 1999
- ------------------------ Director
Gerald C. Rittenberg
President, Chief Financial Officer,
/s/ James M. Harrison Treasurer and Director March 31, 1999
James M. Harrison (principal financial officer)
/s/ Michael A. Correale Controller March 31, 1999
- ----------------------- (principal accounting officer)
Michael A. Correale
</TABLE>
45
<PAGE> 46
FORM 10-K
ITEM 8, ITEM 14(A) 1 AND 2
AMSCAN HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
Consolidated Financial Statements as of December 31, 1998 and 1997 and for each
of the years in the three-year period ended December 31, 1998:
Page
Reports of Independent Auditors..................................... F-2
Consolidated Balance Sheets ....................................... F-4
Consolidated Statements of Operations .............................. F-5
Consolidated Statements of Stockholders' (Deficit) Equity .......... F-6
Consolidated Statements of Cash Flows .............................. F-7
Notes to Consolidated Financial Statements ......................... F-9
Financial Statement Schedule for the three years ended December 31, 1998:
Schedule II - Valuation and Qualifying Accounts .................... F-36
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefor have been omitted.
F-1
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Amscan Holdings,
Inc. as of December 31, 1998, and the related consolidated statements of
operations, stockholders' (deficit) equity and cash flows for the year then
ended. Our audit also included the financial statement schedule as of and for
the year ended December 31, 1998 as listed in the accompanying index to the
financial statements (Item 14(a)). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amscan Holdings,
Inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule as of and for the year ended December 31, 1998, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 19, 1999
F-2
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Amscan Holdings,
Inc. and subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholders' (deficit) equity and cash flows for each
of the years in the two-year period ended December 31, 1997. In connection with
our audits of the consolidated financial statements, we also have audited the
information in the financial statement schedule as listed in the accompanying
index as of December 31, 1997 and for each of the years in the two-year period
ended December 31, 1997. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Amscan Holdings,
Inc. and subsidiaries as of December 31, 1997 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, as of
and for the periods described above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Stamford, Connecticut
February 13, 1998
F-3
<PAGE> 49
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,117 $ 111,539
Accounts receivable, net of allowances of $6,875 and $5,693,
respectively ....................................................... 49,339 44,838
Inventories .............................................................. 54,691 51,742
Prepaid and other current assets ......................................... 9,113 8,073
--------- ---------
Total current assets ............................................... 114,260 216,192
Property, plant and equipment, net .......................................... 59,260 38,860
Intangible assets, net ...................................................... 66,500 7,762
Other assets, net ........................................................... 8,832 6,462
--------- ---------
Total assets ....................................................... $ 248,852 $ 269,276
========= =========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Loans and notes payable .................................................. $ 9,628 $ 424
Due to stockholders ...................................................... 88 93,243
Accounts payable ......................................................... 11,494 12,152
Accrued expenses ......................................................... 17,432 10,502
Income taxes payable ..................................................... 593 167
Current portion of long-term obligations ................................. 3,549 2,911
--------- ---------
Total current liabilities .......................................... 42,784 119,399
Long-term obligations, excluding current portion ............................ 270,127 234,422
Deferred income tax liabilities ............................................. 8,128 6,893
Other ....................................................................... 3,553 3,781
--------- ---------
Total liabilities .................................................. 324,592 364,495
Redeemable Common Stock ..................................................... 19,547
Stockholders' deficit:
Common Stock ............................................................. -- --
Additional paid-in capital ............................................... 225 --
Unamortized restricted Common Stock award, net ........................... (575) (835)
Notes receivable from officers ........................................... (718) (750)
Deficit .................................................................. (92,969) (92,912)
Accumulated other comprehensive loss ..................................... (1,250) (722)
--------- ---------
Total stockholders' deficit ........................................ (95,287) (95,219)
--------- ---------
Total liabilities, Redeemable Common Stock and stockholders' deficit $ 248,852 $ 269,276
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales .............................................. $ 235,294 $ 209,931 $ 192,705
Cost of sales .......................................... 150,456 136,571 123,913
--------- --------- ---------
Gross profit ................................ 84,838 73,360 68,792
Operating expenses:
Selling expenses .................................... 17,049 13,726 11,838
General and administrative expenses ................. 23,471 20,772 19,266
Art and development costs ........................... 7,470 5,282 5,173
Restructuring charges ............................... 2,400
Non-recurring charges in connection with the Merger . 22,083
Non-recurring compensation in connection with the IPO
15,535
Special bonuses ..................................... . 4,222
--------- --------- ---------
Total operating expenses .................... 50,390 61,863 56,034
--------- --------- ---------
Income from operations ...................... 34,448 11,497 12,758
Interest expense, net .................................. 22,965 3,892 6,691
Other (income) expense, net ............................ (121) (71) 335
--------- --------- ---------
Income before income taxes and minority interests ...... 11,604 7,676 5,732
Income tax expense ..................................... 4,816 7,665 1,952
Minority interests ..................................... 79 193 1,653
--------- --------- ---------
Net income (loss) ........................... $ 6,709 $ (182) $ 2,127
========= ========= =========
Pro forma data (unaudited) (Note 12 ):
Income before income taxes .......................... $ 4,079
Pro forma income tax expense ........................ 1,827
---------
Pro forma net income ........................... $ 2,252
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAMORTIZED
RESTRICTED NOTES ACCUMULATED
ADDITIONAL COMMON RECEIVABLE RETAINED OTHER
COMMON PAID-IN STOCK AWARD, FROM EARNINGS COMPREHENSIVE TREASURY
STOCK CAPITAL NET OFFICERS (DEFICIT) LOSS STOCK TOTAL
----- ------- --- -------- --------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 393 $ 9,090 $ 18,462 $ (653) $ (87) $ 27,205
Net income .................. 2,127 2,127
Net change in cumulative
translation adjustment 281 281
------ ---------
Comprehensive income .. 2,408
Net adjustment for exchange
of shares issued in the
Organization ............. 1,123 (1,210) 87 --
Subchapter S distributions
and other ................ (7,583) (15,841) (23,424)
Net proceeds from IPO ....... 400 42,940 43,340
Shares issued to officer .... 66 7,854 7,920
Shares issued for acquisition 63 7,437 7,500
Contribution to ESOP and
stock bonuses ............ 25 2,975 3,000
------- --------- --------- ------- --------- --------- ------ ---------
Balance at December 31, 1996 ... 2,070 61,503 -- -- 4,748 (372) -- 67,949
Net loss .................... (182) (182)
Net change in cumulative
translation adjustment ... (350) (350)
---------
Comprehensive loss .... (532)
Net proceeds from sale of
Common Stock ............. 42 4,482 4,524
Purchase of treasury stock .. (290) (290)
Capital contribution ........ 7,500 7,500
Distribution to the Estate .. (619) (619)
Issuance of Common Stock
in the Merger, net ....... 63,750 $ (1,125) $ (750) 61,875
Repurchase of Common Stock
in the Merger ............ (2,112) (137,235) (96,859) 290 (235,916)
Amortization of restricted
Common Stock award ....... 290 290
------- --------- --------- ------- --------- --------- ------ ---------
Balance at December 31, 1997 -- -- (835) (750) (92,912) (722) -- (95,219)
Net income .................. 6,709 6,709
Net change in cumulative
translation adjustment ... (528) (528)
---------
Comprehensive income .. 6,181
Reclassification of Common
Stock to Redeemable ......
Common Stock .......... (4,781) (4,781)
Issuance of 10 shares of
Common Stock warrants .... 225 225
Accretion in Redeemable .....
Common Stock ............. (1,985) (1,985)
Amortization of restricted ..
Common Stock award ....... 260 260
Payments received on notes
receivable from officers
and other ............. 32 32
------- --------- --------- ------- --------- --------- ------ ---------
Balance at December 31, 1998 ... $ -- $ 225 $ (575) $ (718) $ (92,969) $ (1,250) $ -- $ (95,287)
======= ========= ========= ======= ========= ========= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 52
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 6,709 $ (182) $ 2,127
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................................ 8,501 6,245 5,137
Amortization of deferred financing costs ............................. 748 13
(Gain) loss on disposal of property and equipment .................... (22) (31) 660
Provision for doubtful accounts ...................................... 3,336 3,775 2,350
Restructuring charges ................................................ 2,400
Amortization of Restricted Common Stock award ........................ 260 290
Deferred income tax provision ........................................ 2,441 1,565 748
Stock compensation expenses in connection with the IPO ............... 10,920
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable .................................... (1,124) (15,869) (7,848)
Decrease (increase) in inventories ................................. 6,853 (5,871) (680)
Decrease (increase) in prepaid and other current assets
and other, net ................................................ 2,078 6,276 (3,796)
(Increase) decrease in other assets, net ........................... (490) 2,863 683
(Decrease) increase in accounts payable, accrued expenses
and income taxes payable ........................................ (8,928) 5,095 1,972
--------- --------- ---------
Net cash provided by operating activities ...................... 22,762 4,169 12,273
Cash flows from investing activities:
Cash paid for acquisitions ............................................. (78,382)
Capital expenditures ................................................... (7,514) (10,237) (7,613)
Proceeds from disposal of property, plant and equipment ............... 2,769 140
--------- --------- ---------
Net cash used in investing activities ..................................... (83,127) (10,097) (7,613)
Cash flows from financing activities:
Net proceeds from sale of Capital Stock ............................... 181 4,524 43,340
Capital contributions .................................................. 7,500
Issuance of Common Stock in connection with the Merger ................. 61,875
Payments to acquire treasury stock ..................................... (290)
Payments to acquire Common Stock in the Merger ......................... (93,155) (142,673)
Proceeds from loans, notes payable and long-term obligations net of debt
issuance costs of $964 and $5,500 in 1998 and
1997, respectively .................................................. 59,064 237,062 3,273
Repayment of loans, notes payable and long-term obligations ............ (15,917) (51,811) (11,968)
Repayment of indebtedness to Principal Stockholder ..................... (182) (17,179)
Subchapter S distributions and other ................................... 65 (23,424)
--------- --------- ---------
Net cash (used in) provided by financing activities ............ (49,762) 116,005 (5,958)
Effect of exchange rate changes on cash ................................ (295) (127) 395
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ........... (110,422) 109,950 (903)
Cash and cash equivalents at beginning of year ............................ 111,539 1,589 2,492
--------- --------- ---------
Cash and cash equivalents at end of year .................................. $ 1,117 $ 111,539 $ 1,589
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 23,174 $ 3,598 $ 7,826
Taxes .......................................................... $ 2,558 $ 6,604 $ 1,085
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 53
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
Supplemental information on noncash activities (dollars in thousands):
In connection with the acquisition of Anagram International, Inc. and certain
related companies in 1998, the Company issued 120 shares of Redeemable Common
Stock (see Note 13) valued at $12,600 and issued warrants to purchase 10 shares
of the Company's Common Stock for $125 per share valued at $225 to the
former owner of Anagram International, Inc.
Cash consideration due to stockholders as a result of the Merger totaled
$235,916 of which $88 and $93,243 was payable at December 31, 1998 and 1997,
respectively.
In conjunction with the Merger in 1997, 15 shares of Common Stock aggregating
$1,125 were issued to an officer and are subject to future vesting provisions.
In addition, subsequent to the Merger, 10 shares of Common Stock were issued to
certain officers of the Company in exchange for notes aggregating $750.
Capital lease obligations of $200, $59 and $3,395 were incurred in 1998, 1997
and 1996, respectively.
In conjunction with the IPO in 1996, the Principal Stockholder (see Note 1) and
certain affiliates of the Principal Stockholder exchanged shares in Amscan Inc.
and certain affiliated entities for 15,024,616 and 138,461 shares of Company
Common Stock, respectively.
In conjunction with the IPO in 1996, the Company entered into an agreement to
purchase an additional 50% of Am-Source, Inc. The Am-Source, Inc. stockholders
exchanged all of their outstanding capital stock for 624,999 shares of the
Company's Common Stock valued at $7,500.
In conjunction with the IPO in 1996, the Company incurred stock compensation
expense of $7,920 for the issuance of Common Stock to an officer and $3,000 for
the establishment of the ESOP for the benefit of the Company's domestic
employees and the payment of Common Stock bonuses to certain of such employees.
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 54
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Initial Public Offering
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, "AHI" or 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 ("IPO") involving the sale of 4,000,000 shares of its Common Stock at
$12.00 per share. The IPO was completed on December 18, 1996 pursuant to which
John A. Svenningsen (the "Principal Stockholder") and certain affiliates of the
Principal Stockholder exchanged shares in Amscan Inc. and certain affiliated
entities for 15,024,616 and 138,461 shares, respectively, in Amscan Holdings
(the "Organization") and, in the case of the Principal Stockholder, $133,000 in
cash. On January 8, 1997, an additional 422,400 shares of Common Stock were sold
at $12.00 per share to cover the over-allotments as provided for in the
underwriting agreements between the Company and the underwriters associated with
the IPO.
Prior to the IPO, certain subsidiaries of Amscan Holdings were operated
as Subchapter S corporations for federal and, where available, state income tax
purposes. In connection with the IPO in 1996, such subsidiaries declared a
dividend representing distributions of accumulated Subchapter S corporation
profits and a return of capital. These amounts were reflected as subordinated
debt and repaid from the net proceeds of the IPO.
Recapitalization
On August 10, 1997, Amscan Holdings 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 Holdings in
which Confetti would be merged with and into Amscan Holdings (the "Merger"),
with Amscan Holdings as the surviving corporation.
On December 19, 1997, the Merger was consummated pursuant to the Merger
Agreement. At the time of the Merger, 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 Merger (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. The Estate of John A. Svenningsen (the
"Estate"), which owned approximately 71.2% of the outstanding Company Common
Stock immediately prior to the Merger, elected to retain almost 10% of the
outstanding shares of Company Common Stock. No stockholder other than the Estate
elected to retain shares. Also pursuant to the Merger Agreement, at the time of
the Merger, 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.
Pursuant to certain employment arrangements, certain employees of the Company
purchased an aggregate of 10 shares of Company Common Stock following the Merger
(see Note 13). Accordingly, in the Merger, the 825 shares of Confetti Common
Stock owned by GSCP immediately prior to the Merger were converted into 825
shares of Company Common Stock, representing approximately 81.7% of the 1,010
issued and outstanding shares of the Company immediately following the Merger.
F-9
<PAGE> 55
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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 stock), $117 million
from a senior term loan and $110 million from the issuance of senior
subordinated notes (see Note 6). The Merger has been accounted for as a
recapitalization and, accordingly, the historical basis of the Company's assets
and liabilities has not been impacted by the Merger.
Amscan Holdings and its subsidiaries design, manufacture, contract for
manufacture and distribute party and novelty goods principally in North America,
South America, Europe, Asia and Australia.
Basis of Presentation
The consolidated financial statements include the accounts of Amscan
Holdings and its subsidiaries. In connection with the IPO, there was a transfer
of ownership between the former stockholders of Amscan Inc. and certain of its
affiliates and Amscan Holdings whereby Amscan Holdings became the holding
company for the business conducted by Amscan Inc. and certain of its affiliates.
Such transfer of ownership was accounted for in a manner similar to a pooling of
interests and resulted in certain of its affiliates being taxed as Subchapter C
corporations under federal and certain state income tax requirements. All
material intercompany balances and transactions have been eliminated in
consolidation. For periods prior to December 18, 1996, financial statements are
presented on a combined basis.
Acquisitions
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 $87,225,000, plus certain other related
costs.
The Company financed the Acquisition with $40,000,000 of senior term
debt, $20,000,000 of additional revolving credit borrowings, cash on hand, the
issuance of 120 shares of the Company's Redeemable Common Stock (see Note 13)
valued at $12,600,000 and the issuance of 10 warrants to purchase shares of the
Company's Common Stock at $125,000 per share valued at $225,000.
The Acquisition was accounted for under the purchase method of
accounting, and, accordingly, the operating results of Anagram have been
included in the Company's consolidated financial statements since the date of
acquisition. The excess of the aggregate purchase price over the fair market
value of net assets acquired (principally goodwill) approximated $58,858,000 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
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales ...... $278,754 $272,729
Net income ..... $ 4,843 $ 56
</TABLE>
F-10
<PAGE> 56
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
The unaudited pro forma consolidated financial information does not
purport to be indicative of actual results that would have been achieved had the
Acquisition been consummated on the dates or for the periods indicated or
results of operations as of any future date or for any future period.
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 $589,000) 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 $957,000 is being amortized on a straight
line basis over thirty years.
During 1997, the Company transferred an equity interest in a customer to
the Estate for (i) cash of $1,000,000, (ii) satisfaction of approximately
$2,000,000 of certain debts and future lease obligations owed to the Estate, and
(iii) substantially all of the assets of Ya Otta Pinata ("Ya Otta"), a
California corporation 100% owned by the Estate, at a valuation of approximately
$1,015,000. Ya Otta manufactures pinatas which historically had been sold by the
Company's sales force with no commissions charged to Ya Otta. The assets
transferred were recorded at a historical cost of $396,000 resulting in a
distribution to the Estate of $619,000.
In conjunction with the IPO in 1996, the Company entered into an
agreement to acquire the remaining 50% interest of Am-Source, Inc. The
stockholders of Am-Source, Inc. exchanged all of their outstanding capital stock
for 624,999 shares of the Company's stock valued at $7,500,000. The acquisition
has been accounted for as a purchase and the excess purchase price over the fair
value of the net assets acquired of $7,443,000 is being amortized on a
straight-line basis over thirty years.
The results of operations for the acquisitions of the additional 25%
interest in Amscan Holdings Limited, Ya Otta and the remaining 50% balance of
Am-Source, Inc. are included in the accompanying financial statements from their
respective dates of acquisition or transfer. The pro forma results of operations
for the aforementioned acquisitions for the periods presented, had the
acquisitions occurred at the beginning of the immediately preceding prior year
from the respective dates of acquisition are not significant, and, accordingly,
pro forma information has not been provided.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Substantially all inventories of the Company are valued at the lower of
cost or market (principally on the first-in, first-out method).
Long-Lived Assets
Property, plant and equipment are stated at cost. Machinery and
equipment under capital leases are stated at the present value of the minimum
lease payments at the inception of the lease.
F-11
<PAGE> 57
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Depreciation is calculated principally on the straight-line method over
the estimated useful lives of the assets. Machinery and equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset.
Intangible assets of $66,500,000 and $7,762,000 at December 31, 1998
and 1997, respectively, are comprised principally of goodwill, net of
amortization, which represents the excess of the purchase price of acquired
companies over the estimated fair value of the net assets acquired. Goodwill is
being amortized on a straight-line basis over periods ranging from twenty-five
to thirty years. Accumulated amortization was $2,637,000 and $1,315,000 at
December 31, 1998 and 1997, respectively. The Company systematically reviews the
recoverability of its long-lived and intangible assets by comparing the
unamortized carrying value of such assets to the related anticipated
undiscounted future cash flows. Any impairment related to long-lived assets is
measured by reference to the assets' fair market value, and any impairment
related to goodwill is measured against discounted cash flows. Impairments are
charged to expense when such determination is made.
Deferred Financing Costs
Deferred financing costs (included in other assets) are amortized to
interest expense using the interest method over the lives of the related debt.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are
shipped to the customers. Product returns and warranty costs are immaterial.
Royalty Agreements
Commitments for minimum payments under royalty agreements, a portion of
which may be paid in advance, are charged to expense ratably, based on the
Company's estimate of total sales of related products. If all or a portion of
the minimum guarantee subsequently appears not to be recoverable, the
unrecoverable portion is charged to expense at that time.
Catalogue Costs
The Company expenses costs associated with the production of annual
catalogues when incurred.
Art and Development Costs
Art and development costs are primarily internal costs that are not
easily associated with specific designs which may not reach commercial
production. Accordingly, the Company expenses these costs as incurred.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to limit the
effect of increases in the interest rates on any floating rate debt. The
differential is accrued as interest rates change and is recorded in interest
expense.
Income Taxes
Prior to the IPO, Amscan Inc. and certain of its affiliates were
operated as Subchapter S corporations for federal and, where available, state
income tax purposes. As a result, these corporations did not record or pay any
federal or state income taxes except in states which do not recognize Subchapter
S corporation status.
F-12
<PAGE> 58
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Since December 18, 1996, the Company has been taxed as a Subchapter C
corporation, and as a result, the Company accounts for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities and operating loss and tax credit carryforwards applying enacted
statutory tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance when, in
the judgment of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective January 1, 1996. SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
apply the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" which requires the recognition of
compensation expense at the date of grant only if the current market price of
the underlying stock exceeds the exercise price, and to provide pro forma net
income disclosures for employee stock option grants made in 1995 and subsequent
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the recognition provisions of APB No.
25 and has provided the pro forma disclosure provisions of SFAS No. 123 (see
Note 11).
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted 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) equity, 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.
Accumulated other comprehensive loss at December 31, 1998, 1997 and
1996 consisted solely of the Company's foreign currency translation adjustment.
Foreign Currency Transactions and Translation
The functional currencies of the Company's foreign operations are the
local currencies in which they operate. Realized foreign currency exchange gains
or losses, which result from the settlement of receivables or payables in
currencies other than U.S. dollars, are credited or charged to operations.
Unrealized gains or losses on foreign currency exchanges are insignificant.
The balance sheets of foreign subsidiaries are translated into U.S.
dollars at the exchange rates in effect on the balance sheet date. The results
of operations of foreign subsidiaries are translated into U.S. dollars at the
average exchange rates effective for the periods presented. The differences from
historical exchange rates are reflected as a separate component of stockholders'
equity.
F-13
<PAGE> 59
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Segment information
For the year ended December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes new standards for the way that public
business enterprises report information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position (see Note 15).
Concentration of Credit Risk
While the Company's customers are geographically dispersed throughout
North America, South America, Europe, Asia and Australia, there is a
concentration of sales made to and accounts receivable from the stores which
operate in the party goods superstore channel of distribution. At December 31,
1998 and 1997, Party City Corporation ("Party City") the Company's largest
customer with approximately 368 corporate and franchise stores, accounted for
22% and 17%, respectively, of consolidated accounts receivable, net. For the
years ended December 31, 1998, 1997 and 1996, sales to Party City's corporate
and franchise stores represented 13%, 7% and 3% and 10%, 12% and 11%,
respectively of consolidated net sales. No other group or combination of
customers subjected the Company to a concentration of credit risk. On March 19,
1999, Party City announced that, due to difficulties implementing new financial
reporting and accounting systems, it would not be able to complete its year end
audit by its deadline and that Party City accordingly would be in default of
certain covenants of its credit facility as of December 31, 1998. The Company
understands that Party City is currently in discussions with its lenders and the
Company does not believe this default by Party City will have a material adverse
effect on the Company's financial condition or results of operations.
Reclassifications
In connection with the preparation of the accompanying financial
statements, the Company has reclassified certain amounts in prior financial
statements to conform to the current year presentation.
Use of Estimates
Management has made estimates and assumptions relating to the reporting
of assets and liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
NOTE 3 - INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished goods ...................................... $ 48,093 $ 47,704
Raw materials ....................................... 4,845 3,570
Work-in process ..................................... 3,345 1,630
-------- --------
56,283 52,904
Less: reserve for slow moving and obsolete inventory (1,592) (1,162)
-------- --------
$ 54,691 $ 51,742
======== ========
</TABLE>
F-14
<PAGE> 60
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment at December 31,
1998 and 1997 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 USEFUL LIVES
-------- -------- ------------
<S> <C> <C> <C>
Machinery and equipment ........................ $ 56,025 $ 38,105 3-15
Buildings ...................................... 11,989 12,585 31-40
Data processing equipment ...................... 15,300 11,737 5
Leasehold improvements ......................... 4,475 1,188 2-20
Furniture and fixtures ......................... 3,510 3,547 10
Land ........................................... 2,237 1,917 --
-------- --------
93,536 69,079
Less: accumulated depreciation and amortization (34,276) (30,219)
-------- --------
$ 59,260 $ 38,860
======== ========
</TABLE>
Depreciation and amortization expense was $7,179,000, $5,980,000 and
$4,787,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 5 - LOANS AND NOTES PAYABLE
Loans and notes payable outstanding at December 31, 1998 and 1997
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revolving credit line with interest at LIBOR plus 2.25%
(7.91%, at December 31,1998)................................................ $9,000
Revolving credit line with interest at the prime rate plus 1.25%
(9.0% at December 31, 1998)................................................. 500
Revolving credit line with interest at the prime rate plus 0.75%
(8.5% at December 31, 1998)................................................. 100
Revolving credit line with interest at the U.K. bank rate plus 1.75%
(9.0% at December 31, 1998)................................................. 28
Revolving credit line denominated in Canadian dollars with interest
at the Canadian prime rate (6.0% at December 31, 1997)...................... $424
------ ----
$9,628 $424
====== ====
</TABLE>
Upon consummation of the Merger on December 19, 1997, the Company's
existing domestic revolving credit arrangements terminated and the Company
entered into Bank Credit Facilities (see Note 6) which include a $50,000,000
revolving credit facility (the "Revolving Credit Facility"). At December 31,
1997, there were no amounts borrowed under 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, based on certain terms, either 0.75% or 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. Amounts drawn on
the Revolving Credit Facility for working capital purposes are also subject to
an agreed upon borrowing base and periodic reduction of outstanding balances.
All borrowings under the Revolving Credit Facility are guaranteed by the
Company's domestic subsidiaries and are subject to mandatory prepayments upon
the occurrence of certain events (see Note 6). In connection with and upon
consummation of the Acquisition, the Company amended and restated the Revolving
Credit Facilities credit agreements to provide for, among other things, the
additional senior term debt.
F-15
<PAGE> 61
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
In addition to the Revolving Credit Facility, the Company has a
$1,000,000 Canadian dollar denominated revolving facility which bears interest
at the Canadian prime rate and expires on April 2, 1999 and a $1,000,000 British
Pound Sterling denominated revolving credit facility which bears interest at the
U.K. base rate plus 1.75% and expires on May 18, 1999. No borrowings were
outstanding under the Canadian dollar denominated revolving credit facility at
December 31, 1998 nor under the British Pound Sterling denominated revolving
credit facility at December 31, 1997.
The weighted average interest rates on loans and notes payable
outstanding at December 31, 1998 and 1997 were 7.98% and 6.0%, respectively.
Prior to the Merger, the Company maintained three interest rate swap
contracts covering $25,000,000 of outstanding obligation under its LIBOR based
variable rate revolving credit agreement. The contracts fixed the interest rates
as indicated below and entitled the Company to settle with the counterparty on a
quarterly basis, the product of the notional amount times the amount, if any, by
which the ninety day LIBOR rate differed from the fixed rate. The contracts were
terminated on December 19, 1997, in conjunction with the Merger, at a cost of
$1,030,000, which was reported as a non-recurring charge in connection with the
Merger (see Note 7). Net payments to the counterparty under the swap contracts
for the years ended December 31, 1997 and 1996, which have been recorded as
additional interest expense, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
ADDITIONAL INTEREST
NOTIONAL EXPENSE
-------------------------
DATE OF CONTRACT AMOUNT TERM FIXED RATE 1997 1996
---------------- ------ ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
September 28, 1994 $ 5,000 10 years 7.945% $ 109 $ 122
May 12, 1995 ..... $10,000 5 years 6.590% 70 105
July 20, 1995 .... $10,000 10 years 6.750% 102 122
------- -------
$ 281 $ 349
</TABLE>
NOTE 6 - LONG-TERM INDEBTEDNESS
Long-term indebtedness at December 31, 1998 and 1997 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Senior Subordinated Notes (a) .................. $ 110,000 $ 110,000
Term loan (b) .................................. 155,629 117,000
Mortgage obligations (c) ....................... 3,407 5,869
Note to former shareholder and other (d) ....... 922
Capital lease obligations (e) .................. 3,718 4,464
--------- ---------
Total long-term obligations ........... 273,676 237,333
Less: current portion .................................. (3,549) (2,911)
--------- ---------
Long-term obligations, excluding current portion $ 270,127 $ 234,422
========= =========
</TABLE>
On December 19, 1997, the Company issued $110,000,000 aggregate
principal amount of 9 7/8% Senior Subordinated Notes due in 2007 (the "Notes")
and entered into a bank credit agreement (the "Bank Credit Facilities")
providing for borrowings in the aggregate principal amount of approximately
$117,000,000 under a term loan (the "Term Loan") and revolving loan borrowings
of up to $50,000,000 under a revolving credit facility (the "Revolving Credit
Facility", see Note 5) (collectively, the "Merger Financings"). The proceeds of
the Merger Financings were used to fund the payment of the cash portion of
F-16
<PAGE> 62
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
the Merger consideration, to refinance certain existing outstanding indebtedness
of the Company, to pay transaction costs incurred in connection with the Merger,
and for general corporate purposes. The Company is required to make prepayments
on the Bank Credit Facilities under certain circumstances, including upon
certain asset sales and issuance of debt or equity securities, subject to
certain exceptions. Such mandatory prepayments will be applied to prepay the
Term Loan first (on a pro rata basis) and thereafter to prepay the Revolving
Credit Facility and to reduce the commitments thereunder. Subject to certain
call protection provisions applicable for 18 months from December 19, 1997, the
Company may prepay, in whole or in part, borrowings under the Term Loan. Call
protection provisions also apply to certain mandatory prepayments of borrowings
under the Term Loan. The Company may prepay borrowings under or reduce
commitments for the Revolving Credit Facility, in whole or in part, without
penalty. The Bank Credit Facilities are guaranteed by the Company's domestic
subsidiaries (the "Guarantors" see Note 17). Subject to certain exceptions, all
extensions of credit to the Company and all guarantees are secured by all
existing and after-acquired personal property of the Company and the Guarantors,
including, subject to certain exceptions, a pledge of all of the stock of all
subsidiaries owned by the Company or any of the Guarantors and first priority
liens on after-acquired real property and leasehold interests of the Company and
the Guarantors. The guarantees are joint and several guarantees, irrevocable and
full and unconditional, limited to the largest amount that would not render such
guarantee obligations under the guarantee subject to avoidance under any
applicable federal or state fraudulent conveyance or similar law. In connection
with and upon consummation of the Acquisition, the Company amended and restated
its Bank Credit Facilities, to provide for, among other things, additional
borrowings of $40,000,000,under the Term Loan (see Note 1).
(a) The Senior Subordinated Notes were sold by the Company on December 19,
1997, and were subsequently resold to qualified institutional buyers in
reliance upon Rule 144A and Regulation S under the Securities Act of 1933
(the "Note Offering"). In connection with the Note Offering, the Company
entered into a Registration Rights Agreement, which granted holders of the
Notes certain exchange and registration rights. In February 1998, the
Company filed with the Commission a Registration Statement on Form S-4
offering to exchange registered notes (the "Exchange Notes") for the Notes
issued in connection with the Note Offering. The terms of the Notes and the
Exchange Notes are substantially identical.
The Notes bore and Exchange Notes bear interest at a rate equal to 9 7/8%
per annum. Interest is payable semi-annually on June 15 and December 15 of
each year. The Exchange Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after December 15, 2002, at
redemption prices ranging from 104.937% to 100%, plus accrued and unpaid
interest to the date of redemption. In addition, at any time prior to
December 15, 2000, up to an aggregate of 35% of the principal amount of
Exchange Notes will be redeemable at the option of the Company, on one or
more occasions, from the net proceeds of public or private sales of common
stock of, or contributions to the common equity capital of the Company at a
price of 109.875% of the principal amount of the Exchange Notes, together
with accrued and unpaid interest, if any, to the date of redemption;
provided that at least $65,000,000 in aggregate principal amount of
Exchange Notes remains outstanding immediately after each such redemption.
At any time on or prior to December 15, 2002, the Exchange Notes may also
be redeemed as a whole but not in part at the option of the Company upon
the occurrence of a Change of Control, as defined in the note indenture, at
a redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium, as defined in the note indenture, together with accrued
and unpaid interest, if any, to the date of redemption. If the Company does
not redeem the Exchange Notes upon a Change of Control, the Company will be
obligated to make an offer to purchase the Exchange Notes, in whole or in
part, at a price equal to 101% of the aggregate principal amount of the
Exchange Notes, plus accrued and unpaid interest, if any, to the date of
purchase. If a Change of Control were to occur, the
F-17
<PAGE> 63
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Company may not have the financial resources to repay all of its
obligations under the Bank Credit Agreement, the note indenture and the
other indebtedness that would become payable upon the occurrence of such
Change of Control.
(b) The Term Loan provides for amortization (in quarterly installments) of one
percent of the principal amount thereof per year for the first five years
and 32.3% and 62.7% of the principal amount thereof in the sixth and
seventh years, respectively. The Term Loan bears interest, at the option of
the Company, at the lenders' customary base rate plus 1.375% per annum or
at the lenders' customary reserve adjusted Eurodollar rate plus 2.375% per
annum. At December 31, 1998 and 1997, the floating interest rate on the
Term Loan was 7.68% and 8.28%, respectively. The Company is obligated to
obtain interest rate protection, pursuant to interest rate swaps, caps or
other similar arrangements satisfactory to GS Credit Partners, with respect
to a notional amount of not less than half of the aggregate amount
outstanding under the Term Loan, which protection must remain in effect for
not less than three years from the date of borrowing. The Company entered
into a three year interest rate swap contract dated September 30, 1998 for
a notional amount of $35,000,000 with Goldman Sachs Capital Markets, L.P.
("GSCM") at an interest rate of 4.808% plus a spread based on certain
defined ratios (7.18% at December 31, 1998). At December 31, 1997, the
Company entered into a three year interest rate swap contract with a
financial institution pursuant to which it exchanged its floating interest
obligation on $58,500,000 notional principal amount of the Term Loan for an
effective fixed interest obligation of 8.36%. The interest rate swap
contracts require the Company to settle the difference in interest
obligations quarterly. Net payments (receipts) to (from) the counterparty
under the swap contracts for the year ended December 31, 1998 which have
been recorded as additional (reduction of) interest expense, were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
ADDITIONAL
NOTIONAL INTEREST (REDUCTION OF)
DATE OF CONTRACT AMOUNT TERM RATE INTEREST EXPENSE
- ------- -------- ------ ---- -------- ------------------
<S> <C> <C> <C> <C>
December 31, 1997 $58,500 3 8.36% $677
September 30, 1998 $35,000 3 7.18% (44)
-----
$633
</TABLE>
(c) At December 31, 1998, the Company has a mortgage obligation payable to a
financial institution relating to a distribution facility due September 13,
2004. The mortgage is collateralized by the related real estate asset of
the Company and its interest rate was 8.51% at December 31, 1998 and 1997,
respectively. At December 31, 1997, the Company had a $1,820,000 mortgage
obligation relating to its Canadian distribution facility which was
denominated in Canadian dollars and collateralized by the related real
estate asset with the interest rate at the Canadian prime rate plus 0.5%
(6.50% as of December 31, 1997). As part of the Company's restructuring of
its distribution operations, the Company sold its Canadian facility in
December 1998 and repaid the then outstanding mortgage obligation (see Note
7).
(d) In conjunction with the acquisition of Amscan Holdings Limited, the Company
issued a non-interest bearing note to the former shareholder in the amount
of 350,000 pounds sterling (approximately $589,000) which is payable over
five years (see Note 1). The remaining portion relates to a note payable
issued to a former employee of Anagram prior to the Acquisition which is
payable through March 2002 at a fixed interest rate of 10%.
(e) The Company has entered into various capital leases for machinery and
equipment with implicit interest rates ranging from 4.71% to prime rate
plus 1.0% (9.50% at December 31, 1998 and 1997) which extend to 2003.
F-18
<PAGE> 64
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, principal maturities of long-term obligations
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
MORTGAGE, NOTES CAPITAL
AND LOANS LEASE OBLIGATIONS TOTAL
--------- ----------------- -----
<S> <C> <C> <C>
1999 ....................... $ 2,287 $ 1,555 $ 3,842
2000 ....................... 2,382 1,163 3,545
2001 ....................... 2,393 1,380 3,773
2002 ....................... 2,214 110 2,324
2003 ....................... 51,482 37 51,519
Thereafter ................. 209,200 -- 209,200
--------- --------- ---------
269,958 4,245 274,203
Amount representing interest -- (527) (527)
--------- --------- ---------
Long-term obligations ...... $ 269,958 $ 3,718 $ 273,676
========= ========= =========
</TABLE>
NOTE 7 - NON-RECURRING ITEMS
In the second quarter of 1998, the Company commenced a restructuring of
its distribution operations to reduce costs and improve operating efficiencies.
The Company closed two distribution facilities located in California and Canada
which will result in the elimination of a total of approximately 100 positions,
of which substantially all jobs have already been eliminated. The restructuring
was substantially completed by December 1998. The Company recorded restructuring
charges of approximately $2.4 million, or 1.0% of sales for the year ended
December 31, 1998. The restructuring charges include the non-cash write-down of
$1.3 million relating to property, plant and equipment, the accrual of future
lease obligations of $0.7 million and severance and other costs of $0.4 million.
In December 1998, the Canadian facility was sold and the net proceeds
were used to repay the related mortgage obligation. To date, the Company has
paid approximately $0.4 million in cash related to the restructuring. As of
December 31, 1998, the Company believes the accrued restructuring costs of $0.7
million represents its remaining cash obligations.
In connection with the Merger in 1997, the Company recorded
non-recurring charges of $22,083,000, comprised of $11,652,000 in transaction
costs, $7,500,000 of compensation to an officer, $1,901,000 for the redemption
of Company Stock Options and $1,030,000 of debt retirement costs.
In conjunction with the IPO in 1996, the Company recorded non-recurring
compensation expenses of $15,535,000 related to stock and cash payments of
$12,535,000 to certain executives in connection with the termination of prior
employment agreements and $3,000,000 for the establishment of an ESOP for the
benefit of the Company's domestic employees and the payment of stock bonuses to
certain of such employees.
NOTE 8 - DUE TO STOCKHOLDERS
At December 31, 1998 and 1997, the Company owed stockholders cash
consideration of $88,000 and $93,243,000, respectively, for their shares of
Company Common Stock in connection with the Merger.
F-19
<PAGE> 65
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE 9 - EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company maintain profit-sharing plans for
eligible employees providing for annual discretionary contributions to a trust.
Eligible employees are full-time domestic employees who have completed a certain
length of service, as defined, and attained a certain age, as defined. The plans
require the subsidiaries to match 25% to 100% of up to the first 6% of an
employee's annual salary voluntarily contributed to the plan. Benefit expense
for the years ended December 31, 1998, 1997 and 1996 totaled $1,822,000,
1,432,000 and $731,000, respectively.
In connection with the IPO in 1996, the Company established the
Employee Stock Ownership Plan (the "ESOP") for the benefit of its domestic
employees and authorized the payments of stock bonuses to certain of such
employees. During the year ended December 31, 1996, there was a special one-time
issuance of 250,000 shares of Company Common Stock valued at $1,898,000 for the
establishment of the ESOP and $1,102,000 for payment of stock bonuses. No shares
of Company Common Stock were issued under the ESOP during the year ended
December 31, 1997. In connection with the Merger, the ESOP shares were converted
to cash and the ESOP plan and assets were merged into the profit-sharing plan.
NOTE 10 - SPECIAL BONUSES
During 1996, Amscan Inc. had employment agreements with certain key
executives and senior managers which provided for these individuals to receive
annual bonuses based upon the pre-tax income of Amscan Inc. and certain of its
affiliates. These bonuses, which amounted to approximately 18% to 20% of pre-tax
income, are reflected in the Consolidated Statements of Operations in the
caption "Special Bonuses." These individuals did not receive such special
bonuses after 1996.
NOTE 11 - STOCK OPTION PLAN
The Company adopted the Amscan Holdings, Inc. Stock Incentive Plan (the
"1997 Stock Incentive Plan") in conjunction with the Merger in 1997. The 1997
Stock Incentive Plan is administered by the Board of Directors. Under the terms
of the 1997 Stock Incentive Plan, the Board may award Company Common Stock,
stock options and stock appreciation rights to certain directors, officers,
employees and consultants of the Company and its affiliates. The vesting periods
for awards are determined by the Board at the time of grant. As of March 19,
1999, there were 135 shares of Company Common Stock reserved for issuance under
the 1997 Stock Incentive Plan. The 1997 Stock Incentive Plan will terminate ten
years after its effective date; however, awards outstanding as of such date will
not be affected or impaired by such termination.
On December 19, 1997, the Company converted 89,000 stock options
granted in 1997 and 425,000 stock options granted in 1996, under the terms of
the 1996 Stock Option Plan for Key Employees (the "1996 Stock Option Plan"),
with exercise prices of $12.00, $13.00 and $13.125, into cash of $1,901,000 and
16.03 stock options ("Rollover Options") issued under the terms of the 1997
Stock Incentive Plan, with exercise prices of $54,545, $59,091 and $59,659. The
cash paid upon conversion of the stock options is reported as a non-recurring
charge of the Merger (see Note 7).
F-20
<PAGE> 66
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
The options granted under the 1997 Stock Incentive Plan 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. The following table summarizes the changes in
outstanding options under the 1997 Stock Incentive Plan for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Average Average Fair Market
Options Exercise Price Value at Grant Date
<S> <C> <C> <C>
Activity:
Rollover Options Granted . 16.030 $ 55,916 $ 39,018
Granted .................. 85.146 75,000 26,737
---------
Outstanding at December 31, 1997 101.176
Granted .................. 4.450 75,000 26,737
Granted .................. 6.648 125,000 24,562
Canceled ................. (0.555) (75,000) 26,737
---------
Outstanding at December 31, 1998 111.719
=========
</TABLE>
At December 31, 1998, there were 3.206 options exercisable at an average price
of $55,916 per share and 16.918 options exercisable at $75,000 per share. There
were no options exercisable at December 31, 1997.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized in connection with the
issuance of options under either stock option plan as all options were granted
with exercise prices either equal to or greater than the estimated fair market
value of the Common Stock on the date of grant. Had the Company determined
stock-based compensation based on the fair value of the options granted at the
grant date, consistent with the method prescribed under SFAS No. 123, the
Company's net income (loss) would have been reduced to the SFAS No. 123 pro
forma amounts indicated below: (dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported ................................................. $6,709 $(182) $2,127
SFAS No. 123 pro forma ...................................... $6,355 $(249) $2,113
</TABLE>
It has been assumed that the estimated fair value of the options granted
in 1998 and 1997 under the 1997 Stock Incentive Plan is amortized on a straight
line basis to compensation expense, net of taxes, over the vesting period of the
grant, which is approximately five years. The estimated fair value of each
option on the date of grant was determined using the Minimum Value Method with
the following assumptions: dividend yield of 0%; risk-free interest rate of
6.50%, and expected lives of seven years.
It has been assumed that the estimated fair value of the options granted
in 1997 and 1996 under the 1996 Stock Option Plan is amortized on a straight
line basis to compensation expense, net of taxes, over the vesting period of the
grant, which is approximately four years. The estimated fair value of each
option on the date of grant is $5.22, using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 0%; expected volatility
of 25%; risk-free interest rate of 6.43%; and expected lives of seven years.
F-21
<PAGE> 67
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE 12 - INCOME TAXES
Prior to the consummation of the IPO in 1996, Amscan Inc. and certain
of its affiliates elected to be taxed as Subchapter S corporations under the
Internal Revenue Code. Accordingly, these companies were not subject to federal
and state income taxes, to the extent that states recognize Subchapter S
corporation status. Upon the termination of the Subchapter S corporation status
in connection with the IPO, the aforementioned companies became subject to
federal and state income taxes. The cumulative effect of such tax status change
relating to the recording of deferred taxes as of December 18, 1996 was $786,000
and has been included in the income tax expense for the year ended December 31,
1996. Pro forma income tax expense for 1996 of $1,827,000 is calculated at a
statutory rate (40.5%) assuming Amscan Inc. and certain of its affiliates had
not elected Subchapter S corporation status for those periods.
A summary of domestic and foreign pre-tax income follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic ..... $10,945 $ 6,655 $ 3,137
Foreign ...... 659 1,021 2,595
------- ------- -------
Total ........ $11,604 $ 7,676 $ 5,732
======= ======= =======
</TABLE>
The provision for income taxes consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ............. $ 1,648 $ 4,222
State ............... 455 1,174 $ 212
Foreign ............. 272 704 992
------- ------- -------
Total current provision 2,375 6,100 1,204
Deferred:
Federal ............. 1,911 1,250 (113)
State ............... 542 375 (25)
Foreign ............. (12) (60) 100
Change in tax status 786
------- ------- -------
Total deferred provision 2,441 1,565 748
------- ------- -------
Income tax expense ......... $ 4,816 $ 7,665 $ 1,952
======= ======= =======
</TABLE>
F-22
<PAGE> 68
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred income tax
assets and liabilities from domestic jurisdictions consisted of the following at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current deferred tax assets:
Provision for doubtful accounts ................ $ 1,434 $ 2,858
Accrued liabilities ............................ 454 340
Inventories .................................... 1,052 976
Charitable contributions carryforward .......... 640
Other .......................................... 373 365
------- -------
Current deferred tax assets ............... $ 3,953 $ 4,539
======= =======
Non-current deferred tax liabilities, net:
Property, plant and equipment .................. $ 8,762 $ 6,275
Future taxable income resulting from a change in
accounting method for tax purposes ........ 438 618
Royalty reserves ............................... (620)
Other .......................................... (452)
------- -------
Non-current deferred tax liabilities, net . $ 8,128 $ 6,893
======= =======
</TABLE>
A non-current foreign deferred tax asset of $780,000 is attributable to
non-current obligations recognized in connection with the Acquisition and is
included in long-term other assets, net. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
The difference between the Company's effective income tax rate and the
federal statutory income tax rate of 35.0% is reconciled below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Provision at federal statutory income tax rate 35.0% 35.0% 35.0%
Effect of non-deductible charges related
to the Merger ............................ 51.2
Effect of Subchapter S income not subject
to federal income taxes .................. (19.1)
State income tax, net of federal tax benefit . 6.1 20.2 4.3
Change in tax status ......................... 13.7
Other ........................................ 0.4 (6.5) 0.2
------ ------ ------
Effective income tax rate .................... 41.5% 99.9% 34.1%
====== ====== ======
</TABLE>
F-23
<PAGE> 69
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE 13 - CAPITAL STOCK
At December 31, 1998 and 1997, 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 December 31, 1998 and December 31, 1997, respectively.
At December 31, 1998, there were 207.41 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. Prior to December 31, 1998, the obligation to purchase
employee shares was assignable to GSCP at a cost of up to $15 million. 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 December 31, 1998, the aggregate amount that
may be payable by the Company to employee stockholders based on fully paid and
vested shares, is approximately $19,547,000 and has been classified as
redeemable common stock ("Redeemable Common Stock").
NOTE 14 - COMMITMENTS
Lease Agreements
The Company is obligated under various capital leases for certain
machinery and equipment which expire on various dates through October 1, 2003
(see Note 6). At December 31, 1998 and 1997, the amount of machinery and
equipment and related accumulated amortization recorded under capital leases and
included with property, plant and equipment consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Machinery and equipment .......... $ 7,243 $ 6,494
Less: accumulated amortization .. (2,749) (1,798)
------- -------
$ 4,494 $ 4,696
======= =======
</TABLE>
Amortization of assets held under capitalized leases is included with
depreciation expense.
The Company has several noncancelable operating leases with unaffiliated
third parties, principally for office and manufacturing space, showrooms, and
warehouse equipment, that expire on various dates through 2017. These leases
generally contain renewal options and require the Company to pay real estate
taxes, utilities and related insurance.
At December 31, 1998, the Company also has non-cancelable operating
leases with real estate entities owned by an employee and the Estate of the
Principal Stockholder ("Unconsolidated Affiliates") for warehouse space that
expire through July 2003.
F-24
<PAGE> 70
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
UNCONSOLIDATED
THIRD PARTIES AFFILIATES TOTAL
------------- ---------- -----
<S> <C> <C> <C>
1999 .............................................................. $ 7,501 $392 $ 7,893
2000 .............................................................. 5,745 392 6,137
2001 .............................................................. 5,411 42 5,453
2002 .............................................................. 4,874 42 4,916
2003 .............................................................. 4,433 23 4,456
Thereafter ........................................................ 21,698 21,698
-------- ---- -------
$49,662 $891 $50,553
======= ==== =======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$7,601,000, $6,844,000, and $5,300,000, respectively, of which $233,000,
$2,089,000 and $2,134,000, respectively, related to leases with Unconsolidated
Affiliates.
Royalty Agreements
In conjunction with the Acquisition, the Company has entered into royalty
agreements with various licensers of copyrighted and trademarked characters and
designs used on the Company's balloons which require royalty payments based on
sales of the Company's products, or in some cases, annual minimum royalties.
At December 31, 1998 future minimum royalties payable was as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999................................... $1,331
2000................................... 924
2001................................... 468
2002................................... 15
2003 and thereafter.................... -
------
$2,738
</TABLE>
NOTE 15 - SEGMENT INFORMATION
Industry Segments
The Company operates in one operating segment which involves the design,
manufacture, contract for manufacture and distribution of party and novelty
goods.
Geographic Segments
The Company's export sales, other than those intercompany sales reported
below as sales between geographic areas, are not material. Sales between
geographic areas primarily consist of sales of finished goods for distribution
in the foreign markets. No one single foreign operation is significant to the
Company's consolidated operations. Intersegment sales between geographic areas
are made at cost plus a share of operating profit.
F-25
<PAGE> 71
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
The Company's geographic area data for each of the three fiscal years
ended December 31, 1998, 1997 and 1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
1998
<S> <C> <C> <C> <C>
Sales to unaffiliated customers ....... $ 203,232 $ 32,062 $ 235,294
Sales between geographic areas ........ 10,643 146 $ (10,789) --
--------- --------- --------- ---------
Net sales ............................. $ 213,875 $ 32,208 $ (10,789) $ 235,294
========= ========= ========= =========
Income from operations ................ $ 33,332 $ 1,116 $ 34,448
========= =========
Interest expense, net ................. 22,965
Other income, net ..................... (121)
---------
Income before income taxes and minority
interests ......................... $ 11,604
=========
Long-lived assets ..................... $ 120,588 $ 14,004 $ 134,592
========= =========
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------------ ------------
1997
<S> <C> <C> <C> <C>
Sales to unaffiliated customers ....... $ 183,536 $ 26,395 $ 209,931
Sales between geographic areas ........ 11,556 308 $ (11,864) --
--------- --------- --------- ---------
Net sales ............................. $ 195,092 $ 26,703 $ (11,864) $ 209,931
========= ========= ========= =========
Income from operations ................ $ 9,575 $ 1,922 $ 11,497
========= =========
Interest expense, net ................. 3,892
Other income, net ..................... (71)
---------
Income before income taxes and minority
interests ........................ $ 7,676
=========
Long-lived assets ..................... $ 47,397 $ 5,687 $ 53,084
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED
1996
<S> <C> <C> <C> <C>
Sales to unaffiliated customers ....... $ 168,165 $ 24,540 $ 192,705
Sales between geographic areas ........ 8,643 116 $ (8,759) --
--------- --------- --------- ---------
Net sales ............................. $ 176,808 $ 24,656 $ (8,759) $ 192,705
========= ========= ========= =========
Income from operations ................ $ 10,643 $ 2,115 $ 12,758
========= =========
Interest expense, net ................. 6,691
Other expense, net .................... 335
---------
Income before income taxes and minority
interests ......................... $ 5,732
=========
Long-lived assets ..................... $ 38,998 $ 5,256 $ 44,254
========= ========= =========
</TABLE>
F-26
<PAGE> 72
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivables,
deposits and other current assets, loans and notes payable, accounts payable,
accrued expenses (non derivatives) and other current liabilities approximate
fair value at December 31, 1998 because of the short-term maturity of those
instruments or their variable rates of interest.
The carrying amount of the Company's Senior Subordinated Notes
approximates fair value at December 31, 1998, based on the quoted market price
of similar debt instruments. The carrying amounts of the Company's borrowings
under its Bank Credit Facilities and other revolving credit facilities
approximate fair value because such obligations generally bear interest at
floating rates. The carrying amounts for other long- term debt approximates fair
value at December 31, 1998, based on the discounted future cash flow of each
instrument at rates currently offered for similar debt instruments of comparable
maturity.
The fair value of interest rate swaps is the estimated amount that the
counterparty would receive or pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the swap counterparties. Termination of the swap agreements
at December 31, 1998 would result in a charge to expense of $1.6 million.
NOTE 17 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
The Notes, Exchange Notes and borrowings under the Bank Credit
Facilities are guaranteed jointly and severally, fully and unconditionally, by
the Guarantors (see Notes 5 and 6).
Non-guarantor companies include the following:
- - Amscan Distributors (Canada) Ltd.
- - Amscan Holdings Limited
- - Amscan (Asia-Pacific) Pty. Ltd.
- - Amscan Partyartikel GmbH
- - Amscan Svenska AB
- - Amscan de Mexico, S.A. de C.V.
- - Anagram International (Japan) Co., Ltd.
- - Anagram Mexico S. de R.L. de C.V.
- - Anagram Espana, S.A.
- - Anagram France S.C.S.
The following consolidating information presents consolidating balance
sheets as of December 31, 1998 and 1997, and the related consolidating
statements of operations and cash flows for each of the years in the three year
period ended December 31, 1998 for the combined Guarantors and the combined
non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
F-27
<PAGE> 73
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 523 $ 594 $ 1,117
Accounts receivable, net ................... 42,636 6,703 49,339
Inventories ................................ 47,948 6,869 $ (126) 54,691
Prepaid and other current assets ........... 8,661 452 9,113
--------- --------- --------- ---------
Total current assets ....................... 99,768 14,618 (126) 114,260
Property, plant and equipment, net .............. 57,729 1,531 59,260
Intangible assets, net .......................... 54,680 11,820 66,500
Other assets, net ............................... 28,781 653 (20,602) 8,832
--------- --------- --------- ---------
Total assets ............................... $ 240,958 $ 28,622 $ (20,728) $ 248,852
========= ========= ========= =========
LIABILITIES, REDEEMABLE COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable .................... $ 9,600 $ 28 $ 9,628
Due to stockholders ........................ 88 88
Accounts payable ........................... 10,671 823 11,494
Accrued expenses ........................... 12,946 4,486 17,432
Income taxes payable ....................... 458 135 593
Current portions of long-term
obligations .............................. 3,506 43 3,549
--------- --------- --------- ---------
Total current liabilities .................. 37,269 5,515 42,784
Long-term obligations, excluding
current portion ............................... 270,118 9 270,127
Deferred tax liabilities ........................ 8,116 12 8,128
Other ........................................... 1,069 16,171 $ (13,687) 3,553
--------- --------- --------- ---------
Total liabilities .......................... 316,572 21,707 (13,687) 324,592
Redeemable Common Stock ......................... 19,547 19,547
Stockholders' (deficit) equity:
Common Stock ............................... 339 (339) --
Additional paid-in capital ................. 225 658 (658) 225
Unamortized restricted Common Stock
award ................................... (575) (575)
Notes receivable from officers ............. (718) (718)
(Deficit) retained earnings ................ (92,843) 7,413 (7,539) (92,969)
Accumulated other comprehensive loss ....... (1,250) (1,495) 1,495 (1,250)
--------- --------- --------- ---------
Total stockholders' (deficit) equity ... (95,161) 6,915 (7,041) (95,287)
--------- --------- --------- ---------
Total liabilities, Redeemable Common
Stock, stockholders' (deficit) equity $ 240,958 $ 28,622 $ (20,728) $ 248,852
========= ========= ========= =========
</TABLE>
F-28
<PAGE> 74
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $110,704 $ 835 $111,539
Accounts receivable, net.......................... 39,457 5,381 44,838
Inventories....................................... 44,052 7,690 51,742
Prepaid and other current assets.................. 7,284 789 8,073
-------- -------- --------
Total current assets.............................. 201,497 14,695 216,192
Property, plant and equipment, net..................... 37,189 1,671 38,860
Intangible assets, net................................. 7,479 283 7,762
Other assets, net...................................... 17,076 1 $(10,615) 6,462
-------- -------- -------- --------
Total assets...................................... $263,241 $ 16,650 $(10,615) $269,276
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable........................... $ 424 $ 424
Due to stockholders ............................. $ 93,243 93,243
Accounts payable ................................ 11,798 354 12,152
Accrued expenses ................................ 9,162 1,340 10,502
Income taxes payable ............................. (150) 317 167
Current portions of long-term
obligations..................................... 2,863 48 2,911
-------- -------- --------
Total current liabilities ....................... 116,916 2,483 119,399
Long-term obligations, excluding
current portion .................................... 234,344 78 234,422
Deferred tax liabilities ............................. 6,893 6,893
Other .............................................. 307 6,711 $ (3,237) 3,781
-------- -------- -------- --------
Total liabilities................................. 358,460 9,272 (3,237) 364,495
Stockholders' (deficit) equity:
Common Stock...................................... 339 (339) -
Additional paid-in capital.......................... 458 (458) -
Unamortized restricted Common Stock
award ......................................... (835) (835)
Notes receivable from officers.................... (750) (750)
(Deficit) retained earnings ...................... (92,912) 7,232 (7,232) (92,912)
Accumulated other comprehensive loss.............. (722) (651) 651 (722)
-------- -------- -------- --------
Total stockholders' (deficit) equity ......... (95,219) 7,378 (7,378) (95,219)
-------- -------- -------- --------
Total liabilities and
stockholders' (deficit) equity ........... $ 263,241 $ 16,650 $(10,615) $269,276
========= ======== ======== ========
</TABLE>
F-29
<PAGE> 75
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................................ $ 215,650 $ 31,808 $(12,164) $235,294
Cost of sales ......................................... 141,322 21,871 (12,737) 150,456
--------- -------- -------- --------
Gross profit ................................ 74,328 9,937 573 84,838
Operating expenses:
Selling expenses ................................. 13,255 3,794 17,049
General and administrative
expenses ....................................... 18,827 4,836 (192) 23,471
Art and development costs ........................ 7,470 7,470
Restructuring charges.............................. 2,033 367 2,400
--------- -------- -------- --------
Income from operations ...................... 32,743 940 765 34,448
Interest expense, net ................................ 22,684 281 22,965
Other income, net ..................................... (833) (58) 770 (121)
--------- -------- -------- --------
Income before income taxes
and minority interests ......................... 10,892 717 (5) 11,604
Income taxes ......................................... 4,350 466 4,816
Minority interests ................................... 79 79
--------- -------- -------- --------
Net income .................................. $ 6,542 $ 172 $ (5) $ 6,709
========= ======== ======== ========
</TABLE>
F-30
<PAGE> 76
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................................ $ 195,092 $ 26,703 $(11,864) $209,931
Cost of sales ......................................... 130,785 18,469 (12,683) 136,571
--------- -------- -------- --------
Gross profit ................................ 64,307 8,234 819 73,360
Operating expenses:
Selling expenses ................................. 10,549 3,177 13,726
General and administrative
expenses ....................................... 17,298 3,930 (456) 20,772
Art and development costs ........................ 5,282 5,282
Non-recurring charges in
connection with the Merger .................... 22,083 22,083
--------- -------- -------- --------
Income from operations ...................... 9,095 1,127 1,275 11,497
Interest expense, net ................................ 3,828 64 3,892
Other (income) expense, net ........................... (1,717) 51 1,595 (71)
--------- -------- -------- --------
Income before income taxes
and minority interests ......................... 6,984 1,012 (320) 7,676
Income taxes ......................................... 7,166 499 7,665
Minority interests ................................... 193 193
--------- -------- -------- --------
Net (loss) income ........................... $ (182) $ 320 $ (320) $ (182)
========= ======== ======== ========
</TABLE>
F-31
<PAGE> 77
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 176,808 $ 24,656 $ (8,759) $192,705
Cost of sales ......................................... 117,707 15,704 (9,498) 123,913
--------- -------- -------- --------
Gross profit ................................. 59,101 8,952 739 68,792
Operating expenses:
Selling expenses ................................. 9,723 2,115 11,838
General and administrative
expenses ....................................... 15,424 4,562 (720) 19,266
Art and development costs ........................ 5,173 5,173
Non-recurring compensation
in connection with the IPO ..................... 15,535 15,535
Special bonuses .................................. 4,222 4,222
--------- -------- -------- --------
Income from operations ....................... 9,024 2,275 1,459 12,758
Interest expense, net ................................. 6,688 3 6,691
Other (income) expense, net ........................... (2,229) 20 2,544 335
--------- -------- -------- --------
Income before income taxes
and minority interests .................... 4,565 2,252 (1,085) 5,732
Income taxes .......................................... 1,035 917 1,952
Minority interests .................................... 1,403 250 1,653
--------- -------- -------- --------
Net income ................................... $ 2,127 $ 1,085 $ (1,085) $ 2,127
========= ======== ======== ========
Pro forma data (unaudited)
(Note 12):
Income before income taxes ....................... $ 4,079
Pro forma income tax expense ..................... 1,827
--------
Pro forma net income ......................... $ 2,252
========
</TABLE>
F-32
<PAGE> 78
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 6,542 $ 172 $ (5) $ 6,709
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ....................... 7,954 547 8,501
Amortization of deferred financing costs.............. 748 748
Loss (gain) on disposal of property and equipment .... 2 (24) (22)
Provision for doubtful accounts ..................... 2,767 569 3,336
Restructuring charges................................. 1,999 401 2,400
Amortization of Restricted Common Stock award ....... 260 260
Deferred income tax provision (benefit).............. 2,469 (28) 2,441
Changes in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable ..... (1,138) 14 (1,124)
Decrease in inventories ........................ 4,701 2,026 126 6,853
Decrease in prepaid and other current assets,
and other, net ................................ 1,302 604 172 2,078
Increase (decrease) in other assets ........... 2,307 (3,097) 300 (490)
Increase in accounts payable, accrued expenses
and income taxes payable ..................... (8,372) (556) (8,928)
--------- -------- -------- --------
Net cash provided by operating activities ..... 21,541 628 593 22,762
Cash flows from investing activities:
Cash paid for acquisitions............................... (78,382) (78,382)
Capital expenditures .................................... (7,334) (180) (7,514)
Proceeds from disposal of property and equipment ....... 2,694 75 2,769
--------- -------- -------- --------
Net cash used in investing activities .......... (83,022) (105) (83,127)
Cash flows from financing activities:
Net proceeds from sale of Capital Stock ................ 181 181
Payments to acquire Common Stock in the Merger........... (93,155) (93,155)
Proceeds from loans, notes payable and long-term
obligations net of debt issuance costs of $964......... 59,036 28 59,064
Repayment of loans, notes payable and
long-term obligations (15,432) (485) (15,917)
Subchapter S distributions and other.................... 65 400 (400) 65
--------- -------- -------- --------
Net cash used in financing activities........... (49,305) (57) (400) (49,762)
Effect of exchange rate changes on cash.................. 605 (707) (193) (295)
--------- -------- -------- --------
Net decrease in cash and cash
equivalents................................... (110,181) (241) - (110,422)
Cash and cash equivalents at beginning of year.............. 110,704 835 111,539
--------- -------- -------- --------
Cash and cash equivalents at end of year.................... $ 523 $ 594 $ - $ 1,117
========= ======== ======== ========
</TABLE>
F-33
<PAGE> 79
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ..................................... $ (182) $ 320 $ (320) $ (182)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization ...................... 5,864 381 6,245
Amortization of deferred financing costs............. 13 13
(Gain) on disposal of property and equipment ........ (31) (31)
Provision for doubtful accounts .................... 3,419 356 3,775
Amortization of Restricted Common Stock award ...... 290 290
Deferred income tax provision ...................... 1,625 (60) 1,565
Changes in operating assets and liabilities,
net of acquisitions:
Increase in accounts receivable ............... (14,915) (954) (15,869)
Increase in inventories ....................... (3,773) (2,098) (5,871)
Decrease in prepaid and other current assets,
and other net............................... 4,042 2,234 6,276
Decrease (increase) in other assets .......... 2,267 (324) 920 2,863
Increase in accounts payable, accrued expenses
and income taxes payable .................... 4,944 151 5,095
--------- -------- -------- --------
Net cash provided by operating activities .... 3,563 6 600 4,169
Cash flows from investing activities:
Capital expenditures ................................... (9,390) (847) (10,237)
Proceeds from disposal of property and equipment ...... 140 140
--------- -------- -------- --------
Net cash used in investing activities ......... (9,250) (847) (10,097)
Cash flows from financing activities:
Net proceeds from sale of Common Stock ................ 4,524 4,524
Capital contributions................................... 7,500 600 (600) 7,500
Issuance of Common Stock in connection with the Merger . 61,875 61,875
Payments to acquire treasury stock ..................... (290) (290)
Payments to acquire Common Stock in the Merger.......... (142,673) (142,673)
Proceeds from loans, notes payable and long-term
obligations net of debt issuance costs of $5,500 ..... 236,981 81 237,062
Repayment of loans, notes payable and long-term
obligations (51,743) (68) (51,811)
Repayment of indebtedness to Principal Stockholder...... (181) (1) (182)
--------- -------- -------- --------
Net cash provided by financing activities .... 115,993 612 (600) 116,005
Effect of exchange rate changes on cash................. 126 (253) (127)
--------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 110,432 (482) - 109,950
Cash and cash equivalents at beginning of year............. 272 1,317 1,589
--------- -------- -------- --------
Cash and cash equivalents at end of year................... $ 110,704 $ 835 - $111,539
========= ======== ======== ========
</TABLE>
F-34
<PAGE> 80
AMSCAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AMSCAN
HOLDINGS AND COMBINED
COMBINED NON-
GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 2,127 $ 1,085 $ (1,085) $ 2,127
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock compensation expense in
connection with the IPO .......................... 10,920 10,920
Depreciation and amortization ...................... 4,764 373 5,137
Loss on disposal of property and
equipment ........................................ 660 660
Provision for doubtful accounts .................... 2,048 302 2,350
Deferred income tax provision ...................... 648 100 748
Changes in operating assets and liabilities,
net of acquisitions:
Increase in accounts receivable ............... (6,684) (1,164) (7,848)
Increase in inventories ....................... (458) (222) (680)
(Increase) decrease in deposits and other, net (4,192) 396 (3,796)
(Increase) decrease in other assets ........... (187) (215) 1,085 683
Increase in accounts payable and accrued
expenses .................................... 1,456 516 1,972
--------- -------- -------- --------
Net cash provided by operating activities .... 11,102 1,171 - 12,273
Cash flows from investing activities:
Capital expenditures .................................. (7,076) (537) (7,613)
--------- -------- -------- --------
Net cash used in investing activities ......... (7,076) (537) (7,613)
Cash flows from financing activities:
Net proceeds from IPO ................................. 43,340 43,340
Proceeds from loans, notes payable and long-term
indebtedness ........................................ 2,777 496 3,273
Repayment of loans, notes payable and long-term
indebtedness ......................................... (11,113) (855) (11,968)
Repayment of loans, notes and subordinated
indebtedness to Principal Stockholder ................ (16,900) (279) (17,179)
Subchapter S distributions and other ................. (23,574) 150 (23,424)
--------- -------- -------- --------
Net cash used in financing
activities .................................. (5,470) (488) (5,958)
Effect of exchange rate changes on cash .................. 123 272 395
--------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents......................... (1,321) 418 - (903)
Cash and cash equivalents at beginning of year............. 1,593 899 2,492
--------- -------- -------- --------
Cash and cash equivalents at end of year................... $ 272 $ 1,317 - $ 1,589
========= ======== ======== ========
</TABLE>
F-35
<PAGE> 81
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
For the year ended:
December 31, 1996 .................................. $ 2,505 $ 717 $ 2,350 $ 4,138
December 31, 1997 .................................. 4,138 2,220 3,775 5,693
December 31, 1998.................................... 5,693 5,459 6,641 (1) 6,875
</TABLE>
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE WRITE-OFFS ADDITIONS BALANCE
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Inventory Reserves:
For the year ended:
December 31, 1996 .................................. $ 1,228 $ 731 $ 1,188 $ 1,685
December 31, 1997 .................................. 1,685 1,562 1,039 1,162
December 31, 1998.................................... 1,162 906 1,336 1,592
</TABLE>
(1) Includes approximately $3,305 of an allowance for doubtful accounts in
connection with receivables purchased in the acquisition of Anagram.
F-36
<PAGE> 1
Exhibit 12(a)
Sheet 1
AMSCAN HOLDINGS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before taxes
and minority interests $11,604 $ 7,876 $ 5,732 $19,205 $10,591
Add: Fixed charges 26,313 6,512 8,735 6,874 4,719
------- ------- ------- ------- -------
Earnings, as adjusted $37,917 $14,188 $14,467 $26,080 $15,310
======= ======= ======= ======= =======
Computation of fixed charges:
Interest expense $23,779 $ 4,231 $ 6,968 $ 6,025 $ 3,971
Interest portion of
rent expense 2,534 2,281 1,767 849 748
------- ------- ------- ------- -------
Total fixed charges $26,313 $ 6,512 $ 8,735 $6,874 $ 4,719
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges 1.4x 2.2x 1.7x 3.0x 3.2x
</TABLE>
Page 1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333-45457) of our report dated March 19, 1999 with respect to the
consolidated financial statements and schedule of Amscan Holdings, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 30, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333-45457) of our report dated February 13, 1998 with respect to the
consolidated financial statements and schedule of Amscan Holdings, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1997, filed
with the Securities and Exchange Commission.
/s/ KPMG LLP
Stamford, Connecticut
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,117
<SECURITIES> 0
<RECEIVABLES> 56,214
<ALLOWANCES> (6,875)
<INVENTORY> 54,691
<CURRENT-ASSETS> 114,260
<PP&E> 93,536
<DEPRECIATION> (34,276)
<TOTAL-ASSETS> 248,852
<CURRENT-LIABILITIES> 42,784
<BONDS> 270,127
0
0
<COMMON> 0
<OTHER-SE> (95,287)
<TOTAL-LIABILITY-AND-EQUITY> 248,852
<SALES> 235,294
<TOTAL-REVENUES> 235,294
<CGS> 150,456
<TOTAL-COSTS> 150,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,336
<INTEREST-EXPENSE> 22,965
<INCOME-PRETAX> 11,604
<INCOME-TAX> 4,816
<INCOME-CONTINUING> 6,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,709
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
