F O R M 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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from
--------------------
to
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Commission file number 000-21827
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AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
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 24, 2000 was
$1,551,250.
As of March 24, 2000, 1,132.41 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
-----------------------------------
None.
<PAGE>
AMSCAN HOLDINGS, INC.
1999 FORM 10-K
Table of Contents
Part I Page
Item 1 Business ....................................................... 3
Item 2 Properties ..................................................... 9
Item 3 Legal Proceedings ..............................................10
Item 4 Submission of Matters to a Vote of Security Holders ............10
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .........................................10
Item 6 Selected Consolidated Financial Data ...........................10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................14
Item 7A Quantitative and Qualitative Disclosures About
Market Risk .................................................22
Item 8 Financial Statements and Supplementary Data ....................23
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .........................23
Part III
Item 10 Directors and Executive Officers of the Registrant .............23
Item 11 Executive Compensation .........................................24
Item 12 Security Ownership of Certain Beneficial Owners and
Management ..................................................31
Item 13 Certain Relationships and Related Transactions .................34
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................35
Signatures .....................................................39
2
<PAGE>
PART I
ITEM 1. BUSINESS
Amscan Holdings, Inc. ("Amscan" or the "Company") designs, manufactures
and distributes decorative party goods, offering one of the broadest and deepest
product lines in the industry. Our 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). During 1999, Amscan introduced new
product lines encompassing home, baby and wedding products for general gift
giving or self-purchase. Our 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 350 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 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 addition to its long-standing relationships with independent card
and gift retailers, Amscan is a leading supplier to the party goods superstore
distribution channel. Despite recent consolidations in the party goods
superstore channel, superstores continue to grow, 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.
Amscan's sales to party goods superstores represented approximately 40%
of total sales in 1999. While the number of superstores that Amscan supplies has
grown at a compound annual growth rate ("CAGR") of 7% from 1996 to 1999, the
Company's sales to superstores have grown by a 14% 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, Amscan
has continued to broaden and increase its distribution channels by expanding its
presence in the gift shop, supermarket, and other smaller independent retail
channels. This has been accomplished in part by acquisition via the utilization
of the strong presence in the gift shop, supermarket and other channels of
Anagram International, Inc. and certain related companies (collectively
"Anagram") to bring party goods to these markets as well as a realignment of its
salesforce in 1999 to focus more closely on these channels. To further achieve
sales growth and expansion, Amscan, during the latter half of 1999, introduced
new product lines encompassing home, baby and wedding gifts which are being
distributed through a newly aligned salesforce. Our recent expansion initiatives
have been primarily funded by current revenues.
The Company's sales and cash flows have grown substantially over the
past five years. From 1994 to 1999, 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)
(refer to Note 8 in Item 6, "Selected Consolidated Financial Data") have grown
at compound annual rates of 18% and 23%, 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's achieving greater
economies of scale in manufacturing and distribution.
3
<PAGE>
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 December 31, 1999, is included
in Note 13 to the Company's 1999 Consolidated Financial Statements which are
included in this report beginning on page F-2
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:
o 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.
o 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.
o DIVERSIFY DISTRIBUTION CHANNELS, PRODUCT OFFERING AND
GEOGRAPHIC PRESENCE. The Company seeks, 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.
o PROVIDE SUPERIOR CUSTOMER SERVICE. The Company strives to
achieve high average fill rates in excess of 95% and to ensure
short turnaround times.
o 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.
o 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.
o 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.
4
<PAGE>
PRODUCT DESIGN
The Company's 90-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 or to add a
number of its designed product ensembles each year. During 1999, the Company
introduced approximately 100 new ensembles.
PRODUCT LINE
The major categories of products which the Company offers are
tableware, accessories and novelties. The percentage of sales for each product
category for 1999, 1998 and 1997 are set forth in the following table:
1999 1998 1997
---- ---- ----
Tableware ...................... 45% 57% 59%
Accessories .................... 38 26 26
Novelties ...................... 17 17 15
--- --- ---
100% 100% 100%
=== === ===
The following table sets forth the principal products in each of the
three categories:
<TABLE>
<CAPTION>
Tableware Accessories Novelties
- --------- ----------- ---------
<S> <C> <C>
Decorated Balloons Buttons
- --------- Banners Cocktail Picks
Paper Plates Cascades Games
Paper Napkins Caketops Candles
Paper Tablecovers Confetti Mugs
Paper Cups Banners Noise Makers
Crepe Party Favors
Cutouts Party Hats
Decorative Tissues Pinatas
Flags Pom Poms
Solid Color Gifts T-shirts
- ----------- Gift Bags
Paper and Plastic Plates Gift Wrap
Paper Napkins Guest Towels
Paper and Plastic Tablecovers Honeycomb Centerpieces
Paper and Plastic Cups Invitations and Notes
Plastic Cutlery Ribbons and Bows
Signs
</TABLE>
The Company supplies party goods and gifts for the following types of
occasions:
<TABLE>
<CAPTION>
Seasonal Everyday Themes
- -------- -------- ------
<S> <C> <C>
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
</TABLE>
5
<PAGE>
MANUFACTURED PRODUCTS
Items manufactured by the Company accounted for nearly 65% of the
Company's sales in 1999. 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, metallic balloons and other party and
novelty items. This vertically integrated manufacturing capability provides 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 90 professionals
servicing over 5,000 retail accounts. These professionals have, on average, been
affiliated with the Company for nearly 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 main product
catalogues annually, three for seasonal products and one for everyday products.
The Company also produces additional catalogues to market its metallic balloons
and new gift products.
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. In order to better control inventory
investment, seasonal products are shipped out of
6
<PAGE>
warehouses 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 consolidation of its distribution facilities which may
result in 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.
E-COMMERCE
Amscan has successfully pursued sales opportunities to have our
products listed on the sites of various Internet retailers. We have also
developed a website to enable our key customers to access real time information
regarding the status of existing orders, stock availability, and to place new
orders. In addition, we have also begun making portions of Amscan's catalogue
available to retailers over the Internet.
CUSTOMERS
Amscan's customers are principally party goods superstores, independent
card and party retailers, mass merchandisers and other distributors. Amscan has
also expanded its presence in the gift shop, supermarket, and other smaller
independent retail channels. In the aggregate, Amscan supplies more than 20,000
retail outlets both domestically and internationally. We are a leading supplier
to the party goods superstore channel, which has experienced significant growth
in the past decade.
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 1999. For the years ended December 31, 1999, 1998 and 1997, sales to Party
City's corporate stores represented 10%, 13% and 7% of consolidated net sales,
respectively. For the years ended December 31, 1999, 1998 and 1997, sales to
Party City's franchise stores represented 9%, 10% and 12% of consolidated net
sales, respectively. During the first quarter of 1999, Party City experienced
financial difficulties which they appear to have resolved through new financing
arrangements. Although the Company believes its relationships with Party City
and its franchisees are good, if they were to reduce their volume of purchases
from the Company significantly, the Company's financial condition and results of
operations could be materially adversely affected.
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.
7
<PAGE>
Through its acquisition of Anagram, however, the Company controls various
licenses which it uses for its production of balloons.
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 145 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, 1999, the Company had approximately 1,800 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
8
<PAGE>
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 Executive Offices; design and 59,000 square feet Leased (expiration date:
art production of paper party December 31, 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 457,000 square feet Leased (expiration date:
of solid color party products October 31, 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, 2002)
Chester, New York (1) Distribution of party products 287,000 square feet Owned
and decorations
Goshen, New York Distribution of seasonal party 130,000 square feet Leased (expiration date:
products and decorations December 31, 2000)
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 October 31, 2000)
Quebec, Canada Sales and administrative 14,700 square feet Leased (expiration date:
offices March 31, 2002)
</TABLE>
(1) 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, 1999 was approximately $2,814,000.
9
<PAGE>
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
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect upon its
financial condition or results of operations.
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
Following the consummation of a merger in December 1997 (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 Securities and Exchange Commission
(the "Commission") a Form 15 to deregister the Company Common Stock under the
Securities Exchange Act of 1934. As a result, there is no public trading market
for the Company Common Stock.
As of the close of business on March 24, 2000, there were 23 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.
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, 1999,
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 the end of and for each of the
years ended December 31, 1999 and 1998 and by KPMG LLP, independent certified
public accountants, as of the end of and for
10
<PAGE>
each of the years in the three-year period ended December 31, 1997. The
consolidated financial statements as of December 31, 1999 and 1998 and for each
of the years in the three-year period ended December 31, 1999 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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
Statements of Operations Data (1):
<S> <C> <C> <C> <C> <C>
Net sales ................................................... $ 306,112 $ 235,294 $ 209,931 $ 192,705 $ 167,403
Cost of sales ............................................... 193,586 150,456 136,571 123,913 108,654
--------- --------- --------- --------- ---------
Gross profit ................................................ 112,526 84,838 73,360 68,792 58,749
Selling expenses ............................................ 24,455 17,202 13,726 11,838 12,241
General and administrative expenses ......................... 33,249 23,432 20,772 19,266 15,002
Art and development costs ................................... 10,047 7,356 5,282 5,173 4,256
Non-recurring charges (2) ................................... 995
Restructuring charges (3) ................................... 2,400
Non-recurring charges in connection with the Merger (4) ..... 22,083
Non-recurring compensation in connection with the IPO (5) ... 15,535
Special bonuses (5) ......................................... 4,222 2,581
--------- --------- --------- --------- ---------
Income from operations ...................................... 43,780 34,448 11,497 12,758 24,669
Interest expense, net ....................................... 26,365 22,965 3,892 6,691 5,772
Other expense (income), net ................................. 35 (121) (71) 335 (309)
--------- --------- --------- --------- ---------
Income before income taxes and minority interests ........... 17,380 11,604 7,676 5,732 19,206
Income tax expense .......................................... 7,100 4,816 7,665 1,952 731
Minority interests .......................................... 73 79 193 1,653 1,041
--------- --------- --------- --------- ---------
Net income (loss) ........................................... $ 10,207 $ 6,709 $ (182) $ 2,127 $ 17,434
========= ========= ========= ========= =========
Pro forma data relating to change in tax status:
Income before income taxes .................................. $ 4,079 $ 18,165
Pro forma income taxes (6) .................................. 1,827 7,403
--------- ---------
Pro forma net income (6) .................................... $ 2,252 $ 10,762
========= =========
Other financial data:
Gross margin percentage ..................................... 36.8% 36.1% 34.9% 35.7% 35.1%
Capital expenditures, including assets under capital leases.. $ 12,283 $ 7,714 $ 10,296 $11,008 $4,522
Depreciation and amortization ............................... 12,931 8,501 6,245 5,137 4,332
Ratio of earnings to fixed charges (7) ...................... 1.6x 1.4x 2.2x 1.7x 3.8x
Cash Flow Statement Data:
Cash flows from operations .................................. $ 19,435 $ 22,762 $ 4,169 $ 12,273 $ 4,721
Cash flows from investing ................................... (11,416) (83,127) (10,097) (7,613) (4,513)
Cash flows from financing ................................... (8,767) (49,762) 116,005 (5,958) 147
Non-GAAP financial data:
Adjusted EBITDA (8) ......................................... $ 56,881 $ 45,609 $ 40,115 $ 37,652 $ 31,582
Adjusted EBITDA margin ...................................... 18.6% 19.4% 19.1% 19.5% 18.9%
Adjusted EBITDA to interest expense, net .................... 2.2x 2.0x 10.3x 5.4x 5.2x
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital ...................................... $ 82,228 $ 71,476 $ 96,793 $ 45,405 $ 8,383
========= ========= ========= ========= =========
Total assets ......................................... $ 263,487 $ 248,852 $ 269,276 $ 140,274 $ 114,601
========= ========= ========= ========= =========
Short-term indebtedness (9) .......................... $ 8,250 $ 13,177 $ 3,335 $ 33,262 $ 58,541
Long-term indebtedness ............................... 266,891 270,127 234,422 15,085 12,284
--------- --------- --------- --------- ---------
Total indebtedness ................................... $ 275,141 $ 283,304 $ 237,757 $ 48,347 $ 70,825
========= ========= ========= ========= =========
Redeemable Common Stock (10) ......................... $ 23,582 $ 19,547
========= =========
Stockholders' (deficit) equity ....................... $ (88,529) $ (95,287) $ (95,219) $ 67,949 $ 27,205
========= ========= ========= ========= =========
</TABLE>
- ------------------
(1) In connection with the preparation of the selected consolidated
financial data, Amscan has reclassified certain amounts in prior
years to conform to the current year presentation.
(2) During the fourth quarter of 1999, the Company recorded
non-recurring charges of $1.0 million in association with the
proposed construction of a new distribution facility. The
non-recurring charges represented building costs written-off due to
the relocation of the proposed site.
(3) The Company recorded charges of $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 $0.5 million and severance and other
costs of $0.6 million.
(4) In connection with the Merger, 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.
(5) In conjunction with Amscan's initial public offering of Common Stock
("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. In addition, in each of the years in the two-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.
(6) 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.
(7) 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.
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<PAGE>
(8) "EBITDA" represents earnings before interest, income taxes,
depreciation and amortization. "Adjusted EBITDA" represents EBITDA
adjusted for certain non-recurring items, other income or expenses,
amortization of the restricted Common Stock award, and minority
interests reflected in the following table. Neither EBITDA nor
Adjusted EBITDA are intended to represent cash flow from operations
as defined by accounting principles generally accepted in the United
States 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 accounting principles generally accepted in the
United States, (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>
Years Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
EBITDA ................................................... $ 56,603 $ 42,991 $ 17,620 $ 15,907 $ 28,269
Adjustments - increase (decrease):
Certain non-recurring items and special
bonuses .............................................. 2,400 22,083 19,757 2,581
Amortization of restricted Common
Stock award .......................................... 170 260 290
Other expense (income), net ............................ 35 (121) (71) 335 (309)
Minority interests ..................................... 73 79 193 1,653 1,041
-------- -------- -------- --------
Adjusted EBITDA .......................................... $ 56,881 $ 45,609 $ 40,115 $ 37,652 $ 31,582
======== ======== ======== ======== ========
</TABLE>
(9) Short-term indebtedness consists primarily of the Company's borrowings
under bank lines of credit and the current portion of long-term debt.
Prior to December 31, 1997, short-term indebtedness also included debt
previously due to John A. Svenningsen.
(10) 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.
The aggregate amount that may be payable by the Company to employee
stockholders based on fully paid and vested shares has been classified
as redeemable common stock ("Redeemable Common Stock").
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the past several years, the party goods industry has experienced
significant changes in both distribution channels and product offerings. Despite
the recent consolidation in the party goods superstore channel, 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. 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.
Amscan's revenues are generated from sales of approximately 30,000
SKU's consisting of paper and plastic tableware, accessories and novelties for
all occasions and, in 1999, gifts. Tableware (plates, cups, cutlery, napkins and
tablecovers) is the Company's core product category, generating approximately
45% of revenues in 1999. 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 as well as introducing new gift lines.
Our new gift lines encompass home, baby, and wedding products for general gift
giving or self-purchase and are being distributed through a newly aligned
salesforce. Through increased spending on internal product development as well
as through acquisitions, the Company has had a net increase of approximately
22,300 SKU's 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.
Amscan's gross profit is principally influenced by its product mix and
paper costs. Products manufactured by the Company, primarily tableware and
metallic balloons, represented nearly 65% of the Company's 1999 sales. Amscan
has made significant additions to its manufacturing capacity which have allowed
it to increase manufacturing efficiencies and 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.
14
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
------ ------
<S> <C> <C>
Net sales ............................................................ 100.0% 100.0%
Cost of sales ........................................................ 63.2 63.9
------ ------
Gross profit .................................................... 36.8 36.1
Operating expenses:
Selling expenses ................................................. 8.0 7.3
General and administrative expenses .............................. 10.9 10.0
Art and development costs ........................................ 3.3 3.1
Non-recurring charges ............................................ 0.3
Restructuring charges ............................................ 1.0
------ ------
Total operating expenses .......................................... 22.5 21.4
------ ------
Income from operations .......................................... 14.3 14.7
Interest expense, net ............................................. 8.6 9.8
Other income, net .................................................
------ ------
Income before income taxes and minority interests ............... 5.7 4.9
Income tax expense ................................................... 2.4 2.0
Minority interests ...................................................
------ ------
Net income ....................................................... 3.3% 2.9%
====== ======
</TABLE>
Net sales for the year ended December 31, 1999 of $306.1 million, were
$70.8 million or 30.1% higher than for the year ended December 31, 1998. The
increase in net sales includes approximately $44.2 million of incremental sales
from Anagram, which was acquired in mid September of 1998, as well as increased
sales to superstores and independent party goods stores. The increased sales to
superstores and independent party goods stores are principally attributable to a
realignment of the Company's independent sales force in 1999 in connection with
the introduction of its new gift lines, a strong solid color tableware program
and stronger than usual seasonal sales as a result of the celebration of the
millennium. During the year ended December 31, 1999, the Company added
approximately 10,000 SKU's to its product line, of which approximately 1,000
related to the newly introduced gift lines.
Gross profit for the year ended December 31, 1999 was $112.5 million,
or 36.8% of net sales, as compared to 36.1% for the year ended December 31,
1998. The improvement in gross profit margin principally resulted from increased
efficiencies gained at the manufacturing level.
Selling expenses for the year ended December 31, 1999 increased by $7.3
million to $24.5 million and, as a percentage of net sales from 7.3% to 8.0%.
The increase in selling expenses reflected the inclusion of approximately $5.0
million of incremental selling expenses from Anagram, which historically
operates at a higher level of expense as a percentage of sales. The remaining
increase in selling expenses principally resulted from the addition of several
new product catalogues and the realignment of the independent sales force in
1999.
General and administrative expenses of $33.2 million for the year ended
December 31, 1999 increased by $9.8 million as compared to the year ended
December 31, 1998. The increase reflected the additional amortization of
goodwill and other intangible assets arising from the acquisition of Anagram as
well as the inclusion of Anagram results, which historically operates at a
higher level of expense as a percentage of sales. The provision for doubtful
accounts for the year ended December 31, 1999 decreased by $0.4 million to $2.9
million and as a percentage of net sales from 1.4% to 1.0%. During the first
quarter of 1999, Party City experienced financial difficulties which were
addressed during the fourth quarter of 1999 through new financing arrangements.
15
<PAGE>
Art and development costs of $10.0 million for the year ended December
31, 1999 were $2.7 million higher than the prior year. As a percentage of sales,
art and development costs increased to 3.3% in 1999 from 3.1% in 1998. The
increase in costs reflected the Company's investment in additional art and
product development staff associated with the development of the new gift lines.
During the fourth quarter of 1999, the Company recorded non-recurring
charges of $1.0 million in association with the proposed construction of a new
distribution facility. The non-recurring charges represented building costs
written-off due to the relocation of the proposed site.
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 included the
non-cash write-down of $1.3 million relating to property, plant and equipment,
the accrual of future lease obligations of $0.5 million and severance and other
costs of $0.6 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 $26.4 million for the year ended December 31,
1999 increased by $3.4 million as compared to 1998 mainly due to higher average
borrowings principally as a result of the acquisition of Anagram (see "Liquidity
and Capital Resources").
Income taxes for the years ended December 31, 1999 and 1998 were
provided for at consolidated effective income tax rates of 40.85% and 41.5%,
respectively. The effective income tax rates exceed the federal statutory income
tax rate primarily due to state income taxes.
16
<PAGE>
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 .................................................. 7.3 6.5
General and administrative expenses ............................... 10.0 9.9
Art and development costs ......................................... 3.1 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 SKU's to its product line, including approximately 4,500 SKU's 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 gross profit margin for 1998 principally resulted 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 $3.5
million to $17.2 million and, as a percentage of net sales, to 7.3% 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 $23.4 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 $7.4 million for the year ended December
31, 1998 were $2.1 million higher than the prior year. As a percentage of sales,
art and development costs increased to 3.1% 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.
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
17
<PAGE>
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 $0.6 million and severance and other costs of $0.5 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 1997 due to the Company's
increased borrowings in connection with the Merger and the acquisition of
Anagram (see "Liquidity and Capital Resources"), offset, in part, by reduced
levels of working capital.
Income taxes for the 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.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Company's recapitalization in December 1997, the
Company received approximately $67.5 million from contributed capital (including
contributions of Company Common Stock by certain employee stockholders and
issuances of restricted Common Stock), $117 million from a senior term loan (the
"Term Loan") provided under a bank credit agreement (the "Bank Credit
Facilities") and $110 million from the issuance of 9 7/8% senior subordinated
notes (the "Notes") (collectively, the "Merger Financings").
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, expiring on December 31, 2002,
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, 1999, the Company had borrowing capacity
of approximately $40.5 million under the Revolving Credit Facility.
The Company financed the September 1998 acquisition of Anagram 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.
At December 31, 1999, the Company had three interest rate swap
contracts outstanding with a financial institution and Goldman Sachs Capital
Markets, L.P. ("GSCM") covering $123.3 million of its Term Loan at fixed
effective interest rates ranging from 7.18% to 8.80%.
Based upon the current level of operations and anticipated growth, 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 and
to service its debt requirements as they become due. However, the Company's
ability to make scheduled
18
<PAGE>
payments of principal of, or to pay interest on, or to refinance its
indebtedness and to satisfy its other obligations will depend upon its future
performance, which, to a certain extent, will be subject to general economic,
financial, competitive, business and other factors beyond its control.
The Merger Financings and the amendments to the Company's credit
agreements may affect the Company's ability to make future capital expenditures
and potential acquisitions. However, management believes that current asset
levels provide adequate capacity to support its operations for at least the next
12 months. As of December 31, 1999, the Company did not have material
commitments for capital expenditures.
CASH FLOW DATA - YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER
31, 1998
For the year ended December 31, 1999, net cash provided by operating
activities totaled $19.4 million, or $3.3 million lower than for the year ended
December 31, 1998. The lower cash flow from operations reflected an increase in
the Company's net accounts receivable balance as a result of higher sales and
increased sales with extended terms and higher levels of inventory to support
the introduction of new gift lines and new sales programs, partially offset by
higher earnings and an increase in trade accounts payable.
Net cash used in investing activities during the year ended December
31, 1999 consisted of $11.4 million of capital expenditures including an upgrade
of the Company's data processing systems and investment in additional
manufacturing equipment. Net cash used in investing activities during the year
ended December 31, 1998 totaled $83.1 million and was comprised of $78.4 million
of cash paid for the acquisitions of Anagram and the remaining 25% interest in
the Company's U.K. based subsidiary, and $7.5 million for capital expenditures
partially offset by 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, 1999, net cash used in financing
activities of $8.8 million principally consisted of scheduled payments of
long-term obligations partially offset by the proceeds from short-term working
capital borrowings. 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 in December of 1997 and
the scheduled repayment of debt offset by net proceeds of $59.1 million from
additional borrowings in connection with the acquisition of Anagram, and the
issuance of Common Stock to employees.
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 levels (excluding the effects of the
acquisition of Anagram) 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
19
<PAGE>
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.
LEGAL PROCEEDINGS
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect upon its
financial condition or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement requires all derivatives to be
recognized on the balance sheet at fair value and establishes standards for the
recognition of changes in such fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133
effective January 1, 2001. 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
During 1999, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In the latter half of 1999, the Company completed its
remediation and testing of its computer systems. As a result of those planning
and implementation efforts, the Year 2000 issue did not pose significant
operational problems for the Company's computer systems and the Company
experienced no disruptions with its significant suppliers and subcontractors and
believes those systems successfully responded to the Year 2000 date change. The
Company did not incur significant expenses in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its critical
computer applications and those of its suppliers and vendors throughout the Year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
"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, future capital expenditures
(including the amount and nature
20
<PAGE>
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 by the Company of new product lines, (5) the
introduction of new products by the Company's competitors, (6) the inability of
the Company to increase prices to recover fully future increases in raw material
prices, especially increases in paper prices, (7) the loss of key employees, (8)
changes in general business conditions, (9) other factors which might be
described from time to time in the Company's filings with the Commission, and
(10) 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.
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 1999 were higher than prior quarters and is
primarily attributable to stronger than usual sales as a result of the
celebration of the millennium. 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 from
operations and net income (loss) of the Company for 1999 and 1998 by quarter.
21
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1999
- ----
<S> <C> <C> <C> <C>
Net sales.............................. $76,440 $73,203 $74,853 $81,616
Gross profit........................... 28,320 26,508 27,367 30,331
Income from operations (a)............. 6,344 9,866 11,801 15,769(b)
Net (loss) income (a) ................. (85) 1,929 3,090 5,273(b)
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(c) 11,250 8,509
Net income............................. 2,271 30(c) 3,425 983
</TABLE>
(a) During the first quarter of 1999, the Company's largest customer,
Party City announced that it would be in default of certain
covenants of its credit facility and as a result Amscan maintained a
related allowance for doubtful accounts and sales allowances which
approximated one half of the account and note receivable balance of
$15.8 million due from Party City, including $6.0 million charged to
the provision for doubtful accounts during the first quarter of
1999. Reflecting Party City's improved financial condition, the
provision was decreased by $1.9 million during the third quarter and
the remainder of the provision of $4.1 million was reversed during
the fourth quarter of 1999.
(b) During the fourth quarter of 1999, the Company recorded
non-recurring charges of $1.0 million in association with the
proposed construction of a new distribution facility. The
non-recurring charges represented building costs written-off due to
the relocation of the proposed site.
(c) 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 $0.5 million, and severance and other
costs of $0.6 million.
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 to manage the market risk associated with
fluctuations in interest rates. If market interest rates for the Company's
variable rate indebtedness averaged 2% more than the interest rate actually paid
for the year ended December 31, 1999 and 1998, the Company's interest expense,
after considering the effects of its interest rate swap agreements, would have
increased, and income before income taxes would have decreased, by $1.4 million
and $1.3 million, respectively. 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, 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
22
<PAGE>
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 $1.6 million and $1.1 million for the years ended
December 31, 1999 and 1998, respectively. 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 could change
the U.S. 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.
Name Age Position
---- --- --------
Terence M. O'Toole 41 Director, Chairman of the Board
Sanjeev K. Mehra 41 Director
Joseph P. DiSabato 33 Director
Gerald C. Rittenberg 47 Chief Executive Officer and Director
James M. Harrison 48 President, Chief Financial Officer,
Treasurer and Director
Garry Kieves 51 Senior Vice President
23
<PAGE>
Terence M. O'Toole is a Managing Director of Goldman, Sachs & Co.
("Goldman Sachs") in the Principal Investment Area. He joined Goldman Sachs in
1983. He is a member of Goldman Sachs' Principal Investment Area Investment
Committee and its Stone Street Fund Investment Committee. Mr. O'Toole serves on
the Boards of Directors of AMF Bowling, Inc., Western Wireless Corporation,
VoiceStream Wireless Corporation and several 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 member of
Goldman Sachs' Principal Investment Area Investment Committee and its Stone
Street Fund Investment Committee. Mr. Mehra serves on the Boards of Directors of
Promedco Management Company, Madison River Telephone Company, L.L.C., and
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 Madison River Telephone Company, L.L.C., and
several privately held companies on behalf of Goldman Sachs. He holds a B.S.
from the 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.
Garry 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.
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 all other former and current executive officer of the
Company as of December 31, 1999 whose aggregate salary and bonus for 1999
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")
24
<PAGE>
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").
<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
Officer and Chairman
Gerald C. Rittenberg 1999 $295,000 $450,000 $7,255
Chief Executive Officer 1998 295,000 395,000 6,532
1997 220,000 16.648(c) 3,763
James M. Harrison 1999 $275,000 $400,000 $5,399
President, Chief Financial 1998 275,000 350,000 6,286
Officer and Treasurer 1997 215,000 255,000 $176,041(d) 16.268(e) 3,763
Garry Kieves 1999 $240,000 $5,289
Senior Vice President 1998 72,900(f) 6.648(g) 929
William S. Wilkey 1999 $172,604 $55,125(h) $7,118
Former Senior Vice President 1998 210,000 $50,000 6,532
- Sales and Marketing 1997 200,000 210,000 352,082(i) 16.441(j) 3,763
</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, as well as insurance premiums paid by the Company with
respect to term life insurance for the benefit of the named
executive officer.
(c) Represents the New Options granted to Mr. Rittenberg immediately
following the Merger.
(d) 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.
(e) Represents the New Options and the Rollover Options granted to Mr.
Harrison immediately following the Merger.
(f) Mr. Kieves became an employee and Senior Vice President of the
Company on September 17, 1998.
(g) Represents the New Options granted to Mr. Kieves in connection with
the acquisition of Anagram in 1998. In addition, 10 Common Stock
warrants valued at $225,000 were issued to Mr. Kieves in connection
with the Anagram acquisition.
(h) Effective November 8, 1999, Mr. Wilkey terminated his employment
agreement with Amscan and began serving as a consultant to the
Company. Amounts represent payments received under a consulting
agreement.
25
<PAGE>
(i) 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.
(j) Represents the New Options and the Rollover Options granted to Mr.
Wilkey immediately following the Merger.
OPTION GRANTS TABLE
No options under the Options Documents were issued to directors and
executive officers of the Company during 1999.
FISCAL 1999 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 6.659 9.989 $332,960 $499,440
James M. Harrison 6.508 9.760 344,948 517,422
Garry Kieves 1.3296 5.3184 - -
William S. Wilkey 6.577 9.864 367,987 551,981
</TABLE>
The valuation of unexercised in the money options is based on a
valuation of Company Common Stock of $125,000 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 (the "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
26
<PAGE>
customary benefits including incentive, savings 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 the 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
Securities Exchange Act of 1934 (the "Exchange Act")) that is a Competitor,
other than GS Capital Partners II, L.P. and certain other private investment
funds managed by Goldman, Sach & Co. (collectively, "GSCP"), 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 of 1933 (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 Acquisition, Inc. ("Confetti") immediately prior to the
Merger, 272,728 shares of Company Common Stock in exchange for 60.0 shares of
Common Stock of Confetti ("Confetti Common Stock"), having an aggregate value
equal to 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 at $75,000 per share. Such New Options vest in equal annual
installments over a five-year period and are subject to forfeiture
27
<PAGE>
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 dated as of December 19, 1997 among the
Company, GSCP, the Estate of John A. Svenningsen (the "Estate") and certain
employees of the Company 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 then 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 other than the exercise price.
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 then
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 group (within the meaning of Section
13(d)(3)
28
<PAGE>
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 as to 8.33% on each of
January 1, 1999 and 2000. With respect to the remaining Restricted Stock, the
Stock Restriction Period terminates in equal installments on January 1 of each
of the years 2001 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.
Agreement with William S. Wilkey. Effective November 8, 1999, William
S. Wilkey terminated his employment agreement with the Company dated October 4,
1996 and began serving as a consultant to the Company under an agreement dated
November 8, 1999 and expiring September 30, 2002. Mr. Wilkey will be paid
$220,500 annually for services rendered to the Company under this agreement.
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 borrowed the funds for such payment from the
Company. Such borrowing is evidenced by a personal full recourse note maturing
on March 15, 2009, as amended, accruing interest at 6.65%, compounded annually,
and payable in two annual installments of principal and interest equaling
one-quarter of the bonuses Mr. Wilkey received from the Company corresponding to
the years 1998 and 1999, with the remaining portion of the note and accrued
interest payable at maturity. As of the date hereof, the unpaid principal amount
of this note is $568,711. At the time of the Merger, 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. Such options expire on
December 17, 2007.
29
<PAGE>
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 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. Such options expire on December 17,
2007.
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.
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 up to $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."
Options were granted to Mr. Kieves on terms similar to those granted
pursuant to the Rittenberg Employment Agreement. 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 Common Stock and Option Shares are subject to the terms of the
Stockholders' Agreement.
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 Company Common Stock reserved and available for grant under the Stock
Incentive Plan is 135. 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 a Company Stock Option, any
related Stock
30
<PAGE>
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
has 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.
STOCK PERFORMANCE GRAPH
The Company 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 1999, with the exception of consulting fees paid to William S.
Wilkey, 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 1999 in connection with compensation
paid to the Chief Executive Officer and other executive officers of the Company
named in the Summary Compensation Table. The consulting fees paid to William S.
Wilkey were based on the terms of a consulting agreement negotiated upon
termination of his employment agreement with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To the knowledge of the Company, no relationship of the type described
in Item 402(j)(3) of Regulation S-K existed during 1999 with respect to the
Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Because the Company Common Stock is not registered under the Exchange
Act, none of the Company's directors, officers or stockholders is obligated to
file reports of beneficial ownership of Company Common Stock pursuant to Section
16 of the Exchange Act.
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 and
former executive officer of the Company named in the Summary Compensation Table;
and (iv) all directors, executive officers and former executive officer of the
Company named in the Summary Compensation Table as a group.
31
<PAGE>
<TABLE>
<CAPTION>
Shares of Company Percentage
Common Stock of Class
Name of Beneficial Owner Beneficially Owned Outstanding(a)
- ------------------------ ------------------ --------------
<S> <C> <C>
Gerald C. Rittenberg (b)....................... 66.6590 5.9%
James M. Harrison (c).......................... 21.5080 1.9
Garry Kieves, Garry Kieves Retained
Annuity Trust and Garry Kieves
Irrevocable Trust, in aggregate (d)......... 131.3296 11.5
Terence M. O'Toole (e)......................... -- --
Sanjeev K. Mehra (f)........................... -- --
Joseph P. DiSabato (g)......................... -- --
William S. Wilkey (h).......................... 13.2460 1.2
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. (i)............... 825.0 72.9
and other GSCP funds
85 Broad Street
New York, New York 10004
All directors, executive officers and William
S. Wilkey as a group (7 persons) (j)......... 232.7426 20.0
</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.
(b) Includes 6.6590 shares which could be acquired by Mr. Rittenberg
within 60 days upon exercise of options.
(c) Includes 6.5080 shares which could be acquired by Mr. Harrison
within 60 days upon exercise of options.
(d) Includes 1.3296 shares which could be acquired by Mr. Kieves within
60 days upon exercise of options and 10 shares that could be
acquired upon exercise of warrants.
(e) 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, if any.
32
<PAGE>
(f) 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, if any.
(g) 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, except to the extent of his
pecuniary interest therein, if any.
(h) Includes 6.5770 shares which could be acquired by Mr. Wilkey within
60 days upon exercise of options.
(i) 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. Affiliates of The Goldman Sachs Group, Inc. are
the general or managing partners of the "GSCP Fund Partners" and
have full voting power with respect to the holdings of such
partnerships.
(j) Includes 21.0726 shares which could be acquired by the executive
officers and Mr. Wilkey within 60 days upon exercise of options and
10 shares which could be acquired by Mr. Kieves upon exercise of
warrants.
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
33
<PAGE>
are no longer any registrable securities outstanding (as determined under the
Stockholders' Agreement) and (2) the twentieth anniversary of the Stockholders'
Agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, the Company leased a warehouse in Temecula, California
from the Estate. Rent payments related to this warehouse were $248,000 for the
nine months ended September 30, 1999. In September 1999, Amscan agreed to
terminate the lease and received an incentive payment of $0.2 million from the
Estate.
Amscan believes these rent payments were 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.
Amscan 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. At
December 31, 1999, Amscan had two interest rate swap contracts outstanding with
GSCM. On September 30, 1998, Amscan entered into a three year interest rate swap
contract for a notional amount of $35,000,000 with GSCM at an interest rate of
4.808% plus a spread based on certain defined ratios (7.18% at December 31,
1999). On September 17, 1999, Amscan entered into a two year interest rate swap
contract for a notional amount of $31,000,000 at an interest rate of 6.424% plus
a spread based on certain defined ratios (8.80% at December 31, 1999). Net
settlements received from GSCM under the swap contracts for the year ended
December 31, 1999 totaled $129,000.
On October 1, 1999, Amscan granted a $1,000,000 line of credit,
expiring December 31, 2001, to Mr. Gerald C. Rittenberg. Amounts borrowed under
the line are evidenced by a note and are secured by a lien on the equity
interests which Mr. Rittenberg has in Amscan. In addition, amounts borrowed bear
interest at Amscan's incremental borrowing rate in effect during the term such
loan is outstanding with interest payable on a quarterly basis. At December 31,
1999, borrowings under this line totaled $600,000 and bore interest at 9.75%.
Under the merger agreement providing for the Merger, Amscan 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, which are affiliates of Goldman Sachs and The Goldman
Sachs Group, Inc. may each be deemed to be an "affiliate" of GSCP and the
Company. See "Ownership of Capital Stock." 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.
34
<PAGE>
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 Consolidated Financial Statements and Financial
Statement Schedule which appears on page F-1 herein.
3. Exhibits
Exhibit
Number Description
------ -----------
2(a) 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(b) 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 the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
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) 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(c) Amended Articles of Incorporation of Anagram International,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(d) By-laws of Anagram International, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Current Report on
Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(e) Articles of Incorporation of Anagram International Holdings,
Inc. (incorporated by reference to Exhibit 3.3 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(f) By-laws of Anagram International Holdings, Inc. (incorporated
by reference to Exhibit 3.4 to the Registrant's Current Report
on Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(g) Articles of Organization of Anagram International, LLC
(incorporated by reference to Exhibit 3.5 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
35
<PAGE>
3(h) Operating Agreement of Anagram International, LLC
(incorporated by reference to Exhibit 3.6 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
3(i) Certificate of Formation of Anagram Eden Prairie Property
Holdings LLC (incorporated by reference to Exhibit 3.7 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
4(a) 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(b) 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 the Registrant's Current Report on Form 8-K dated September
17, 1998 (Commission File No. 000-21827))
4(c) 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 the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
4(d) 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 the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
4(e) 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 the Registrant's Current Report
on Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
4(f) 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 the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
9 Voting Agreement, dated August 10, 1997 among Confetti
Acquisition, Inc., the Estate of John A. Svenningsen and
Christine Svenningsen (incorporated by reference to Exhibit
2.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(a) 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))
36
<PAGE>
10(b) Tax Indemnification Agreement between Amscan Holdings, Inc.,
and John A. Svenningsen, dated as of December 18, 1996
(incorporated by reference to Exhibit 10(j) to the
Registrant's 1996 Annual Report on Form 10-K (Commission File
No. 000-21827))
10(c) 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 Statement on
Form S-4 (Registration No. 333-40235))
10(d) 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(e) 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(f) 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(g) 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(h) 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(i) 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))
10(j) Amscan Holdings, Inc. 1997 Stock Incentive Plan (incorporated
by reference to Exhibit 10.7 Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(k) 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 the Registrant's Current Report
on Form 8-K dated August 6, 1998 (Commission File No.
000-21827))
10(l) Employment Agreement, dated as of August 6, 1998, by and among
the Company and Garry Kieves (incorporated by reference to
Exhibit 99.1 to the Regsitrant's Current Report on Form 8-K
dated August 6, 1998 (Commission File No. 000-21827))
37
<PAGE>
10(m) Line of Credit Agreement, dated October 1, 1999, by and among
the Company and Gerald C. Rittenberg
10(n) Consulting Agreement dated November 8, 1999, by and among the
Company and William Wilkey
10(o) Amended Full Recourse Secured Promissory Note dated November
8, 1999, by and among the Company and William Wilkey
12 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
(b) Reports on Form 8-K.
Not applicable.
38
<PAGE>
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
-------------------------
James M. Harrison
Date: March 29, 2000
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.
Signature Title Date
--------- ----- ----
/s/ Terence M. O'Toole Chairman of the Board of March 29, 2000
- ------------------------ Directors
Terence M. O'Toole
Director
- ------------------------
Sanjeev K. Mehra
Director
- ------------------------
Joseph P. DiSabato
/s/ Gerald C. Rittenberg Chief Executive Officer and March 29, 2000
- ------------------------ Director
Gerald C. Rittenberg
President, Chief Financial
/s/ James M. Harrison Officer,Treasurer and Director March 29, 2000
- ------------------------ (principal financial officer)
James M. Harrison
/s/ Michael A. Correale Controller March 29, 2000
- ------------------------ (principal accounting officer)
Michael A. Correale
<PAGE>
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, 1999
Consolidated Financial Statements as of December 31, 1999 and 1998 and for each
of the years in the three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
Page
----
<S> <C>
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, 1999:
Schedule II - Valuation and Qualifying Accounts ................................ F-33
</TABLE>
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 therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Amscan Holdings,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' (deficit) equity and cash flows for each of the two
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule as of and for each of the two years in the period
ended December 31, 1999, 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of Amscan
Holdings, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule as of and for each of the two years in the period ended December 31,
1999, 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 15, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' (deficit) equity and cash flows for the year ended December 31,
1997. In connection with our audit 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 the year 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of Amscan Holdings,
Inc. and subsidiaries and their cash flows for the year 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 period
described above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Stamford, Connecticut
February 13, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
----------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 849 $ 1,117
Accounts receivable, net of allowances of $6,172 and $6,875, respectively.............. 56,896 49,339
Inventories............................................................................ 59,193 54,691
Prepaid expenses and other current assets.............................................. 11,802 9,113
---------- -----------
Total current assets............................................................. 128,740 114,260
Property, plant and equipment, net........................................................ 61,709 59,260
Intangible assets, net.................................................................... 63,331 66,500
Other assets, net......................................................................... 9,707 8,832
---------- -----------
Total assets..................................................................... $263,487 $248,852
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Loans and notes payable................................................................ $ 4,688 $ 9,628
Accounts payable....................................................................... 18,967 11,494
Accrued expenses....................................................................... 16,332 17,520
Income taxes payable................................................................... 2,963 593
Current portion of long-term obligations............................................... 3,562 3,549
---------- ----------
Total current liabilities........................................................ 46,512 42,784
Long-term obligations, excluding current portion.......................................... 266,891 270,127
Deferred income tax liabilities........................................................... 12,001 8,128
Other..................................................................................... 3,030 3,553
---------- ----------
Total liabilities................................................................ 328,434 324,592
Redeemable Common Stock................................................................... 23,582 19,547
Commitments and Contingencies.............................................................
Stockholders' deficit:
Common Stock........................................................................... - -
Additional paid-in capital............................................................. 225 225
Unamortized restricted Common Stock award, net......................................... (405) (575)
Notes receivable from stockholders..................................................... (664) (718)
Deficit ............................................................................... (86,797) (92,969)
Accumulated other comprehensive loss................................................... (888) (1,250)
----------- ----------
Total stockholders' deficit...................................................... (88,529) (95,287)
--------- ---------
Total liabilities, redeemable Common Stock and stockholders' deficit............. $263,487 $248,852
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales.................................................................. $306,112 $235,294 $209,931
Cost of sales.............................................................. 193,586 150,456 136,571
--------- --------- ---------
Gross profit.................................................... 112,526 84,838 73,360
Operating expenses:
Selling expenses........................................................ 24,455 17,202 13,726
General and administrative expenses..................................... 33,249 23,432 20,772
Art and development costs............................................... 10,047 7,356 5,282
Non-recurring charges................................................... 995
Restructuring charges................................................... 2,400
Non-recurring charges in connection with the Merger..................... 22,083
--------- --------- ----------
Total operating expenses........................................ 68,746 50,390 61,863
--------- --------- ----------
Income from operations.......................................... 43,780 34,448 11,497
Interest expense, net...................................................... 26,365 22,965 3,892
Other expense (income), net................................................ 35 (121) (71)
--------- --------- ----------
Income before income taxes and minority interests.......................... 17,380 11,604 7,676
Income tax expense......................................................... 7,100 4,816 7,665
Minority interests......................................................... 73 79 193
--------- --------- ----------
Net income (loss)................................................. $ 10,207 $ 6,709 $ (182)
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(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 Stockholders (Deficit) Loss Stock Total
----- ------- --- ------------ -------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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 stockholders 32 32
------ ------ ------ ------ ------ ------ -------- --------
Balance at December 31, 1998 ..... - 225 (575) (718) (92,969) (1,250) - (95,287)
Net income .................... 10,207 10,207
Net change in cumulative
translation adjustment ..... 362 362
--------
Comprehensive income .... 10,569
Accretion in Redeemable
Common Stock ............... (4,035) (4,035)
Amortization of restricted
Common Stock award ......... 170 170
Payments received on notes 54 54
receivable from stockholders ------- ------- -------- ------- -------- ------- -------- --------
Balance at December 31, 1999 ..... $ - $ 225 $ (405) $ (664) $(86,797) $ (888) - $ (88,529)
======= ======= ======== ======= ======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss)....................................................... $10,207 $6,709 $ (182)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................................... 12,931 8,501 6,245
Amortization of deferred financing costs.............................. 870 748 13
Loss (gain) on disposal of property and equipment..................... 86 (22) (31)
Provision for doubtful accounts....................................... 2,906 3,336 3,775
Restructuring and other non-recurring charges......................... 995 2,400
Amortization of Restricted Common Stock award......................... 170 260 290
Deferred income tax provision......................................... 3,764 2,441 1,565
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable..................................... (14,297) (1,124) (15,869)
(Increase) decrease in inventories.................................. (4,612) 6,853 (5,871)
(Increase) decrease in prepaid expenses and other current assets
and other, net................................................. (639) 2,078 6,276
(Increase) decrease in other assets, net............................ (1,525) (490) 2,863
Increase (decrease) in accounts payable, accrued expenses
and income taxes payable......................................... 8,579 (8,928) 5,095
------- ------ ------
Net cash provided by operating activities....................... 19,435 22,762 4,169
Cash flows from investing activities:
Cash paid for acquisitions.............................................. (78,382)
Capital expenditures.................................................... (11,632) (7,514) (10,237)
Proceeds from disposal of property, plant and equipment................. 216 2,769 140
--------- --------- ---------
Net cash used in investing activities...................................... (11,416) (83,127) (10,097)
Cash flows from financing activities:
Net proceeds from sale of Capital Stock................................. 181 4,524
Capital contributions................................................... 7,500
Issuance of Common Stock in connection with the Merger.................. 61,875
Payments to acquire Common Stock in the Merger and treasury stock....... (29) (93,155) (142,963)
Proceeds from loans, notes payable and long-term obligations
net of debt issuance costs of $964 and $5,500 in 1998 and
1997, respectively................................................... 450 59,064 237,062
Repayment of loans, notes payable and long-term obligations............. (9,242) (15,917) (51,811)
Repayment of indebtedness to Principal Stockholder...................... (182)
Other................................................................... 54 65 .
--------- --------- ---------
Net cash (used in) provided by financing activities............. (8,767) (49,762) 116,005
Effect of exchange rate changes on cash................................. 480 ( 295) (127)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents............ (268) (110,422) 109,950
Cash and cash equivalents at beginning of year............................. 1,117 111,539 1,589
--------- --------- ---------
Cash and cash equivalents at end of year................................... $ 849 $ 1,117 $ 111,539
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................ $ 25,278 $ 23,174 $ 3,598
Income taxes.................................................... $ 950 $ 2,558 $ 6,604
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
Supplemental information on noncash activities (dollars in thousands):
Capital lease obligations of $651, $200 and $59 were incurred in 1999, 1998 and
1997, respectively.
Cash consideration due to stockholders as a result of the Merger totaled
$235,916 of which $59 and $88 was payable at December 31, 1999 and 1998,
respectively.
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 11) valued at $12,600 and issued warrants to purchase 10 shares
of the Company's Common Stock for $125 per share valued at $225 (expiring on
September 17, 2008) to the former owner of Anagram International, Inc.
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, at that time, in exchange for notes aggregating
$750.
See accompanying notes to consolidatedfinancial statements.
F-8
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999
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 agreement between the Company and the underwriters associated with
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,
at that time, purchased an aggregate of 10 shares of Company Common Stock
following the Merger (see Note 11). 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.
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 was accounted for as a
recapitalization and, accordingly, the historical basis of the Company's assets
and liabilities was not 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.
F-9
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Amscan
Holdings and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
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 11)
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 principally amortized on a straight-line basis over 25 years.
The following summarized unaudited pro forma financial information
assumes the Acquisition had occurred on January 1, 1998 and 1997 (dollars in
thousands):
Years Ended December 31,
------------------------
1998 1997
---- ----
Net sales .............................. $278,754 $272,729
Net income ........................... $4,843 $56
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 date 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 30 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.
F-10
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
The results of operations for the acquisitions of the additional 25%
interest in Amscan Holdings Limited and Ya Otta 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 (principally on the first-in, first-out method) or market.
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. 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 $63,331,000 and $66,500,000 at December 31, 1999
and 1998, 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 25 to 30
years. Accumulated amortization was $6,362,000 and $2,637,000 at December 31,
1999 and 1998, 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.
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.
F-11
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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. Payments or
receipts are accrued as interest rates change and are recorded as adjustments to
interest expense.
INCOME TAXES
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 accounts for stock based awards in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". 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 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 disclosures required by SFAS No. 123 (see Note 9).
ACCUMULATIVE OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss at December 31, 1999, 1998 and
1997 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 in comprehensive income (loss) and are included as
a component of accumulated other comprehensive loss.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting
F-12
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
for Derivative Instruments and Hedging Activities." 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, 2000. The Company expects to adopt SFAS No. 133
effective January 1, 2001. 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.
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,
1999 and 1998, Party City Corporation ("Party City") the Company's largest
customer with 391 corporate and franchise stores, accounted for 21% and 22%,
respectively, of consolidated accounts receivable, net. For the years ended
December 31, 1999, 1998 and 1997, sales to Party City's corporate stores
represented 10%, 13% and 7% of consolidated net sales, respectively. For the
years ended December 31, 1999, 1998 and 1997, sales to Party City's franchise
stores represented 9%, 10% and 12% of consolidated net sales, respectively. No
other group or combination of customers subjected the Company to a concentration
of credit risk. During the first quarter of 1999, Party City experienced
financial difficulties which were addressed during the fourth quarter of 1999
through new financing arrangements. Additionally, Party City entered into an
agreement with its trade vendors, including Amscan, whereby, among other things,
the vendors have received promissory notes for one-third of their then existing
accounts receivable balances. The Company has reclassified the amount of the
notes ($2.2 million at December 31, 1999) from accounts receivable to prepaid
expenses and other current assets upon receipt of this promissory note. The
promissory notes have been paid in January 2000. Although the Company believes
its relationships with Party City and its franchisees are good, if they were to
reduce their volume of purchases from the Company significantly, the Company's
financial condition and results of operations could be materially adversely
affected.
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 accounting principles generally accepted in the United States. Actual
results could differ from those estimates.
NOTE 3 - INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Finished goods...................................................... $50,278 $48,093
Raw materials....................................................... 6,706 4,845
Work-in process..................................................... 4,238 3,345
-------- --------
61,222 56,283
Less: reserve for slow moving and obsolete inventory............... (2,029) (1,592)
-------- --------
$59,193 $54,691
======== ========
</TABLE>
F-13
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Major classifications of property, plant and equipment at December 31,
1999 and 1998 consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Lives
-------- -------- ------------
<S> <C> <C> <C>
Machinery and equipment........................................... $63,356 $56,025 3-15
Buildings......................................................... 12,010 11,989 31-40
Data processing equipment......................................... 19,618 15,300 5
Leasehold improvements............................................ 3,786 4,475 2-20
Furniture and fixtures............................................ 3,579 3,510 10
Land.............................................................. 2,237 2,237
-------- --------
104,586 93,536
Less: accumulated depreciation and amortization.................. (42,877) (34,276)
-------- --------
$ 61,709 $ 59,260
======== ========
</TABLE>
Depreciation and amortization expense was $9,271,000, $7,179,000 and
$5,980,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 5 - LOANS AND NOTES PAYABLE
Loans and notes payable outstanding at December 31, 1999 and 1998
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<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%
(9.75% and 9.0% at December 31, 1999 and 1998, respectively)................ 3,500 500
Revolving credit line with interest at the prime rate plus 0.75%
(9.25% and 8.5% at December 31, 1999 and 1998, respectively)................ 710 100
Revolving credit line with interest at LIBOR plus 1.0%
(7.0% at December 31, 1999)................................................ 375
Revolving credit line with interest at the U.K. bank rate plus 1.75%
(7.5% and 9.0% at December 31, 1999 and 1998, respectively)................. 103 28
------- -------
$4,688 $9,628
======= =======
</TABLE>
Upon consummation of the Merger on December 19, 1997, the Company
entered into Bank Credit Facilities (see Note 6) which include a $50,000,000
revolving credit facility (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 Facility's credit agreements to
provide for, among other things, the additional senior term debt.
In addition to the Revolving Credit Facility, the Company has a
$400,000 Canadian dollar denominated revolving credit facility which bears
interest at the Canadian prime rate and expires on August 24, 2000, a $1,000,000
British Pound Sterling denominated revolving credit facility which bears
interest at the U.K. base rate
F-14
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
plus 1.75% and expires on May 26, 2000 and $1,000,000 revolving credit facility
which bears interest at LIBOR plus 1.0% and expires on January 31, 2001. No
borrowings were outstanding under the Canadian dollar denominated revolving
credit facility at December 31, 1999 and 1998.
The weighted average interest rates on loans and notes payable
outstanding at December 31, 1999 and 1998 were 9.40% and 7.98%, respectively.
Prior to the Merger, the Company maintained three interest rate swap
contracts covering $25,000,000 of outstanding obligations 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 year ended December 31, 1997 which have been recorded as additional
interest expense, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Notional Additional Interest
Date of contract Amount Term Fixed Rate Expense
---------------- ------ ---- ---------- -------
<S> <C> <C> <C> <C>
September 28, 1994....... $ 5,000 10 years 7.945% $109
May 12, 1995............. $ 10,000 5 years 6.590% 70
July 20, 1995............ $ 10,000 10 years 6.750% 102
----
$281
====
</TABLE>
NOTE 6 - LONG-TERM INDEBTEDNESS
Long-term indebtedness at December 31, 1999 and 1998 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Senior Subordinated Notes (a).............................................. $110,000 $110,000
Term loan (b).............................................................. 154,057 155,629
Mortgage obligation (c).................................................... 2,814 3,407
Note to former shareholder and other (d) .................................. 734 922
Capital lease obligations (e).............................................. 2,848 3,718
--------- ---------
Total long-term obligations........................................ 270,453 273,676
Less: current portion...................................................... (3,562) (3,549)
--------- ---------
Long-term obligations, excluding current portion........................... $266,891 $270,127
========= =========
</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 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. The Company may
prepay, in whole or in part, borrowings under the Term Loan. Call protection
provisions 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
F-15
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
guaranteed by the Company's domestic subsidiaries (the "Guarantors") (see Note
15). 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 Company may not have
the financial resources to repay all of its obligations under the Bank
Credit Facilities, 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, 1999 and 1998, the floating interest rate on the
Term Loan was 8.52% and 7.68%, 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 one-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 is
currently involved in three interest rate swap transactions with Goldman
Sachs Capital Markets, L.P. ("GSCM") and a financial institution covering
$123,330,000 of its outstanding borrowings under the Term Loan. 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 years ended December 31, 1999
and 1998, respectively, which have been recorded as additional
F-16
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(reduction of) interest expense, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Additional (Reduction of)
Interest Expense
Notional ----------------
Date of contract Amount Term Fixed Rate 1999 1998
---------------- ------ ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
December 31, 1997........ $57,330 3 years 8.36% $868 $677
September 30, 1998....... $35,000 3 years 7.18% (203) (44)
September 17, 1999....... $31,000 2 years 8.80% 74
---- ----
$739 $633
==== ====
</TABLE>
(c) At December 31, 1999 and 1998, the Company had a mortgage obligation
payable to a financial institution relating to a distribution facility due
September 13, 2004. The mortgage was collateralized by the related real
estate asset of the Company and its interest rate was 8.51% at December 31,
1999 and 1998.
(d) In conjunction with the acquisition of Amscan Holdings Limited in 1998, the
Company issued a non-interest bearing note to the former shareholder which
is payable through April 2004 (see Note 1). At December 31, 1999 and 1998,
the note to the former shareholder was $493,000 and $589,000, respectively.
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 9.50%. which
extend to 2003.
At December 31, 1999, principal maturities of long-term obligations
(including interest) consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage, Notes Capital
and Loans Lease Obligations Total
--------- ----------------- -----
<S> <C> <C> <C>
2000.......................................... $ 2,603 $ 1,323 $ 3,926
2001.......................................... 2,563 1,571 4,134
2002.......................................... 2,431 154 2,585
2003.......................................... 51,549 37 51,586
2004.......................................... 99,047 - 99,047
Thereafter.................................... 110,000 - 110,000
--------- ------- ---------
268,193 3,085 271,278
Amount representing interest.................. (588) (237) (825)
--------- ------- ---------
Long-term obligations......................... $267,605 $2,848 $270,453
======== ====== ========
</TABLE>
NOTE 7 - NON-RECURRING ITEMS
During the fourth quarter of 1999, the Company recorded non-recurring
charges of $1.0 million in association with the proposed construction of a new
distribution facility. The non-recurring charges represented building costs
written-off due to the relocation of the proposed site.
In the second quarter of 1998 the Company recorded a charge of $2.4
million for the restructuring of its distribution operations which included the
closure of distribution facilities in California and Canada. The restructuring
was substantially completed by December 1998 and included the elimination of
approximately 100 positions and the sale of the Canadian facility. The
restructuring charges were comprised of the non-cash write-down of $1.3 million
relating to property, plant and equipment, the accrual of future lease
obligations of $0.5 million and severance and other costs of $0.6 million.
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.
F-17
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
NOTE 8 - 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, 1999, 1998 and 1997 totaled $1,906,000
$1,822,000, and $1,432,000, respectively.
No shares of Company Common Stock were issued under the Employee Stock
Ownership Plan (the "ESOP") during the year ended December 31, 1997. In
connection with the Merger in 1997, the ESOP shares were converted to cash and
the ESOP plan and assets were merged into the profit-sharing plan.
NOTE 9 - 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 December 31,
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 in 1997 (see Note 7).
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Average Average Fair Market
Options Exercise Price Value at Grant Date
------- -------------- -------------------
Activity:
<S> <C> <C> <C>
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
--------
Outstanding at December 31, 1998............ 111.719
Granted............................... 20.680 125,000 44,562
Canceled.............................. (2.444) 93,387
--------
Outstanding at December 31, 1999............ 129.955
=======
Exercisable at December 31, 1997............ - -
Exercisable at December 31, 1998............ 20.124 71,961
Exercisable at December 31, 1999............ 42.018 73,713
</TABLE>
F-18
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
The average exercise price for options outstanding as of December 31,
1999 was $82,652 with exercise prices ranging from $54,545 to $125,000. The
average remaining contractual life of those options was 8.4 years.
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 (increased) to amounts
indicated below (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Net income (loss):
<S> <C> <C> <C>
As reported....................................................... $10,207 $6,709 $(182)
SFAS No. 123 pro forma............................................ $9,793 $6,355 $(249)
</TABLE>
It has been assumed that the estimated fair value of the options
granted in 1999, 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 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.
NOTE 10- INCOME TAXES
A summary of domestic and foreign pre-tax income follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic ........................................................ $14,035 $10,945 $6,655
Foreign ......................................................... 3,345 659 1,021
------- ------- ------
Total ........................................................... $17,380 $11,604 $7,676
======= ======= ======
</TABLE>
The provision for income taxes consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Current:
<S> <C> <C> <C>
Federal .................................................. $1,734 $ 1,648 $4,222
State..................................................... 490 455 1,174
Foreign................................................... 1,112 272 704
------- ------- -------
Total current provision................................. 3,336 2,375 6,100
Deferred:
Federal................................................... 2,745 1,911 1,250
State..................................................... 772 542 375
Foreign................................................... 247 (12) (60)
------- ------- -------
Total deferred provision................................ 3,764 2,441 1,565
------- ------- -------
Income tax expense............................................... $7,100 $4,816 $7,665
====== ====== ======
</TABLE>
F-19
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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>
1999 1998
------- ------
Current deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts.................................................. $1,331 $1,434
Accrued liabilities.............................................................. 312 454
Inventories...................................................................... 1,158 1,052
Charitable contributions carryforward............................................ 1,222 640
Other............................................................................ 286 373
------ ------
Current deferred tax assets (included in
prepaid expenses and other current assets)................................ $4,309 $3,953
====== ======
Non-current deferred tax liabilities, net:
Property, plant and equipment.................................................... $12,275 $8,762
Future taxable income resulting from a change in
accounting method for tax purposes.......................................... 219 438
Royalty reserves................................................................. (462) (620)
Other............................................................................ (31) (452)
------- ------
Non-current deferred tax liabilities, net................................... $12,001 $8,128
======= ======
</TABLE>
A non-current foreign deferred tax asset of $533,000 and $780,000 at
December 31, 1999 and 1998, respectively, is attributable to non-current
obligations recognized in connection with the Acquisition and is included in
non-current 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,
------------------------
1999 1998 1997
---- ---- ----
<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
State income tax, net of federal tax benefit ......................... 4.8 6.1 20.2
Other ................................................................. 1.1 0.4 (6.5)
----- --- ------
Effective income tax rate ............................................. 40.9% 41.5% 99.9%
==== ==== ====
</TABLE>
At December 31, 1999, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $11,800,000. No
provision has been made for U.S. or foreign withholding taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations. It is
not practical to estimate the amount of additional tax that might be payable on
these foreign earnings in the event of distribution or sale; however, under
existing law, foreign tax credits would be available to substantially reduce
incremental U.S. taxes payable on amounts repatriated.
F-20
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
NOTE 11- CAPITAL STOCK
At December 31, 1999 and December 31, 1998, respectively, the Company's
authorized capital stock consisted of 5,000,000 shares of preferred stock, $0.10
par value, of which no shares were issued or outstanding, and 3,000 shares of
common stock, $0.10 par value, of which 1,132.41 shares were issued and
outstanding.
At December 31, 1999 and 1998, the Company held three notes receivable
with balances totaling $664,000 and $718,000, respectively, from two officers
and a former officer of the Company. These notes arose in connection with the
Merger in 1997 whereby the Company lent the officers, at that time, money to
acquire an aggregate of 10 shares of Common Stock at the then fair market value.
The notes from the current officers bear interest at 6.07% and mature in
December 2000. The note from the former officer bears interest at 6.65% and
matures in March 2009. The notes receivable are shown on the balance sheets as a
reduction in stockholders' deficit.
At December 31, 1999, there were 200.74 shares of Common Stock held by
employees of which 3.33 shares were not yet fully paid and 8.75 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, 1999, and 1998, the aggregate
amount that may be payable by the Company to employee stockholders based on
fully paid and vested shares, is approximately $23,582,000 and has been
classified as redeemable common stock ("Redeemable Common Stock").
NOTE 12- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
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, 1999 and 1998, 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):
1999 1998
------ ------
Machinery and equipment ..................... $7,102 $7,243
Less: accumulated amortization ............. (3,107) (2,749)
------ ------
$3,995 $4,494
====== ======
Amortization of assets held under capitalized leases is included in
depreciation expense.
The Company has several noncancelable operating leases 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, 1999, the Company also has a non-cancelable operating
lease with a real estate entity owned by an employee for warehouse space that
expires in July 2003. Future minimum lease payments under this lease total
$42,000 for each of the years ended December 31, 2000, 2001, and 2002 and
$23,000 for the year ended December 31, 2003.
F-21
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
At December 31, 1999, future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
2000 ................................................. $ 9,545
2001 ................................................. 8,791
2002 ................................................. 7,163
2003 ................................................. 4,754
2004 ................................................. 3,128
Thereafter ........................................... 19,106
--------
$52,487
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$9,038,000, $7,601,000, and $6,844,000, respectively, of which $166,000,
$233,000, and $2,089,000, respectively, related to leases with related parties.
In addition, during 1999, the Company terminated its operating lease with real
estate entities owned by the Estate for warehouse space that expired on December
31, 2000. As an incentive to terminate the lease prior to its expiration, the
Company received a fee of $200,000.
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, 1999 future minimum royalties payable was as follows
(dollars in thousands):
2000................................... $1,371
2001................................... 841
2002................................... 300
------
$2,512
======
LEGAL PROCEEDINGS
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect upon its
financial condition or results of operations.
RELATED PARTY TRANSACTIONS
On October 1, 1999, the Company issued a $1,000,000 line of credit,
expiring December 31, 2001, to the chief executive officer of the Company.
Amounts borrowed are secured by a lien on the equity interests which the chief
executive officer has in the Company. In addition, amounts borrowed bear
interest at the Company's incremental borrowing rate in effect during the time
such loan is outstanding and interest shall be due and payable on a quarterly
basis. At December 31, 1999, the chief executive officer had borrowings
outstanding of $600,000 under this line of credit (interest at 9.75% at December
31, 1999) and the borrowings have been included in non-current other assets,
net.
NOTE 13 - 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.
F-22
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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 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.
The Company's geographic area data for each of the three fiscal years
ended December 31, 1999, 1998 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
1999
----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers ................................. $ 258,304 $ 47,808 $ 306,112
Sales between geographic areas .................................. 20,977 - $ (20,977) -
--------- --------- --------- ---------
Net sales ....................................................... $ 279,281 $ 47,808 $ (20,977) $ 306,112
========= ========= ========= =========
Income from operations .......................................... $ 39,609 $ 4,171 $ 43,780
========= =========
Interest expense, net ........................................... 26,365
Other expense, net .............................................. 35
---------
Income before income taxes and minority
interests ................................................... $ 17,380
=========
Long-lived assets ............................................... $ 127,062 $ 7,685 $ 134,747
========= ========= =========
Domestic Foreign Eliminations Consolidated
--------- ------- ------------ ------------
1998
----
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
========= ========= =========
Domestic Foreign Eliminations Consolidated
--------- --------- ------------ ------------
1997
----
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>
F-23
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
NOTE 14 - 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, 1999 and 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, 1999 and 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, 1999 and 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, 1999 and 1998, would result in a gain (loss) of $0.9 million and
$(1.6) million, respectively.
NOTE 15 - 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:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan Svenska AB
o Amscan de Mexico, S.A. de C.V.
o Anagram International (Japan) Co., Ltd.
o Anagram Mexico S. de R.L. de C.V.
o Anagram Espana, S.A.
o Anagram France S.C.S.
The following consolidating information presents consolidating balance
sheets as of December 31, 1999 and 1998, and the related consolidating
statements of operations and cash flows for each of the years in the three-year
period ended December 31, 1999 for the combined Guarantors and the combined
non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
F-24
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
CONSOLIDATING BALANCE SHEET
December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ...................................... $ 141 $ 708 $ 849
Accounts receivable, net ....................................... 46,212 10,684 56,896
Inventories .................................................... 53,486 6,207 $ (500) 59,193
Prepaid expenses and other current assets ...................... 10,809 993 11,802
--------- --------- --------- ---------
Total current assets ........................................... 110,648 18,592 (500) 128,740
Property, plant and equipment, net .................................. 60,502 1,207 61,709
Intangible assets, net .............................................. 57,595 5,736 63,331
Other assets, net ................................................... 25,354 965 (16,612) 9,707
--------- --------- --------- ---------
Total assets ................................................... $ 254,099 $ 26,500 $ (17,112) $ 263,487
========= ========= ========= =========
LIABILITIES, REDEEMABLE COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable ........................................ $ 4,585 $ 103 $ 4,688
Accounts payable ............................................... 17,611 1,356 18,967
Accrued expenses ............................................... 11,685 4,647 16,332
Income taxes payable ........................................... 2,279 684 2,963
Current portion of long-term
obligations .................................................. 3,443 119 3,562
--------- --------- --------- ---------
Total current liabilities ...................................... 39,603 6,909 46,512
Long-term obligations, excluding
current portion ................................................... 266,517 374 266,891
Deferred tax liabilities ............................................ 11,989 12 12,001
Other ............................................................... 437 9,641 $ (7,048) 3,030
--------- --------- --------- ---------
Total liabilities .............................................. 318,546 16,936 (7,048) 328,434
Redeemable Common Stock ............................................. 23,582 23,582
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................................... 339 (339) --
Additional paid-in capital ..................................... 225 658 (658) 225
Unamortized restricted Common Stock
Award, net .................................................. (405) (405)
Notes receivable from stockholders ............................. (664) (664)
(Deficit) retained earnings .................................... (86,297) 9,188 (9,688) (86,797)
Accumulated other comprehensive loss ........................... (888) (621) 621 (888)
--------- --------- --------- ---------
Total stockholders' (deficit) equity ....................... (88,029) 9,564 (10,064) (88,529)
--------- --------- --------- ---------
Total liabilities, redeemable Common
Stock and stockholders' (deficit) equity ................ $ 254,099 $ 26,500 $ (17,112) $ 263,487
========= ========= ========= =========
</TABLE>
F-25
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
CONSOLIDATING BALANCE SHEET
December 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
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
Accounts payable .................................................. 10,671 823 11,494
Accrued expenses .................................................. 13,034 4,486 17,520
Income taxes payable .............................................. 458 135 593
Current portion 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
Commitments and Contingencies ..........................................
Stockholders' (deficit) equity:
Common Stock ...................................................... 339 (339) --
Additional paid-in capital ........................................ 225 658 (658) 225
Unamortized restricted Common Stock
Award, net ..................................................... (575) (575)
Notes receivable from stockholders ................................ (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 and stockholders' (deficit) equity ................... $ 240,958 $ 28,622 $ (20,728) $ 248,852
========= ========= ========= =========
</TABLE>
F-26
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales .............................................................. $ 279,988 $ 47,477 $ (21,353) $ 306,112
Cost of sales .......................................................... 182,985 31,952 (21,351) 193,586
--------- --------- --------- ---------
Gross profit .................................................. 97,003 15,525 (2) 112,526
Operating expenses:
Selling expenses ................................................... 19,015 5,440 24,455
General and administrative
expenses ......................................................... 27,536 5,905 (192) 33,249
Art and development costs .......................................... 10,047 10,047
Non-recurring charges .............................................. 995 995
--------- --------- --------- ---------
Income from operations ........................................ 39,410 4,180 190 43,780
Interest expense, net .................................................. 25,735 630 26,365
Other (income) expense, net ............................................ (2,513) 193 2,355 35
--------- --------- --------- ---------
Income before income taxes
and minority interests ..................................... 16,188 3,357 (2,165) 17,380
Income taxes ........................................................... 5,979 1,121 7,100
Minority interests ..................................................... 73 73
--------- --------- --------- ---------
Net income .................................................... $ 10,209 $ 2,163 $ (2,165) $ 10,207
========= ========= ========= =========
</TABLE>
F-27
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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 ................................................... 13,408 3,794 17,202
General and administrative
expenses ......................................................... 18,788 4,836 (192) 23,432
Art and development costs .......................................... 7,356 7,356
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-28
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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-29
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income .......................................................... $ 10,209 $ 2,163 $ (2,165) $ 10,207
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization .................................... 12,327 604 12,931
Amortization of deferred financing costs ......................... 870 870
(Gain) loss on disposal of property and equipment ................ (2) 88 86
Provision for doubtful accounts .................................. 2,288 618 2,906
Non-recurring charges ............................................ 995 995
Amortization of Restricted Common Stock award .................... 170 170
Deferred income tax provision .................................... 3,517 247 3,764
Changes in operating assets and liabilities:
Increase in accounts receivable ............................ (9,701) (4,596) (14,297)
(Increase) decrease in inventories ......................... (5,270) 656 2 (4,612)
Decrease (increase) in prepaid expenses and other
current assets and other, net ........................... 38 (677) (639)
(Increase) decrease in other assets ........................ (8,293) 4,605 2,163 (1,525)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable ....................... 12,765 (4,186) 8,579
-------- -------- -------- --------
Net cash provided by (used in) operating activities ........ 19,913 (478) -- 19,435
Cash flows from investing activities:
Capital expenditures ................................................ (11,459) (173) (11,632)
Proceeds from disposal of property and equipment .................... 201 15 216
-------- -------- -------- --------
Net cash used in investing activities ...................... (11,258) (158) (11,416)
Cash flows from financing activities:
Payments to acquire Common Stock in the Merger ...................... (29) (29)
Proceeds from loans, notes payable and long-term obligations ........ 375 75 450
Repayment of loans, notes payable and long-term obligations ......... (9,116) (126) (9,242)
Other ............................................................... 729 (675) 54
-------- -------- -------- --------
Net cash used in financing activities ...................... (8,041) (726) -- (8,767)
Effect of exchange rate changes on cash ............................. (996) 1,476 480
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents .............................................. (382) 114 (268)
Cash and cash equivalents at beginning of year ......................... 523 594 1,117
-------- -------- -------- --------
Cash and cash equivalents at end of year................................ $ 141 $ 708 $ -- $ 849
======== ======== ======== ========
</TABLE>
F-30
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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
---------- ---------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
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 expenses 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)
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-31
<PAGE>
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (continued)
December 31, 1999
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
---------- ---------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
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, net ..................... 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-32
<PAGE>
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
Allowance for Doubtful Accounts:
For the year ended:
<S> <C> <C> <C> <C>
December 31, 1997.................................... $4,138 $ 2,220 $3,775 $5,693
December 31, 1998.................................... 5,693 5,459 6,641 (1) 6,875
December 31, 1999.................................... 6,875 3,609 2,906 6,172
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
Inventory Reserves:
For the year ended:
December 31, 1997.................................... $1,685 $1,562 $1,039 $1,162
December 31, 1998.................................... 1,162 906 1,336 1,592
December 31, 1999.................................... 1,592 1,824 2,261 2,029
</TABLE>
(1) Includes approximately $3,305 of an allowance for doubtful accounts in
connection with receivables purchased in the 1998 acquisition of Anagram.
F-33
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2(a) 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(b) 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 the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
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) 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(c) Amended Articles of Incorporation of Anagram International,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(d) By-laws of Anagram International, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Current Report on
Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(e) Articles of Incorporation of Anagram International Holdings,
Inc. (incorporated by reference to Exhibit 3.3 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
3(f) By-laws of Anagram International Holdings, Inc. (incorporated
by reference to Exhibit 3.4 to the Registrant's Current Report
on Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(g) Articles of Organization of Anagram International, LLC
(incorporated by reference to Exhibit 3.5 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
3(h) Operating Agreement of Anagram International, LLC
(incorporated by reference to Exhibit 3.6 to the Registrant's
Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
<PAGE>
3(i) Certificate of Formation of Anagram Eden Prairie Property
Holdings LLC (incorporated by reference to Exhibit 3.7 to the
Registrant's Current Report on Form 8-K dated September 17,
1998 (Commission File No. 000-21827))
4(a) 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(b) 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 the Registrant's Current Report on Form 8-K dated September
17, 1998 (Commission File No. 000-21827))
4(c) 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 the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission
File No. 000-21827))
4(d) 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 the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
4(e) 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 the Registrant's Current Report
on Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
4(f) 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 the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
9 Voting Agreement, dated August 10, 1997 among Confetti
Acquisition, Inc., the Estate of John A. Svenningsen and
Christine Svenningsen (incorporated by reference to Exhibit
2.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(a) 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(b) Tax Indemnification Agreement between Amscan Holdings, Inc.,
and John A. Svenningsen, dated as of December 18, 1996
(incorporated by reference to Exhibit 10(j) to the
Registrant's 1996 Annual Report on Form 10-K (Commission File
No. 000-21827))
<PAGE>
10(c) 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 Statement on
Form S-4 (Registration No. 333-40235))
10(d) 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(e) 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(f) 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(g) 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(h) 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(i) 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))
10(j) Amscan Holdings, Inc. 1997 Stock Incentive Plan (incorporated
by reference to Exhibit 10.7 Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(k) 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 the Registrant's Current Report
on Form 8-K dated August 6, 1998 (Commission File No.
000-21827))
10(l) Employment Agreement, dated as of August 6, 1998, by and among
the Company and Garry Kieves (incorporated by reference to
Exhibit 99.1 to the Regsitrant's Current Report on Form 8-K
dated August 6, 1998 (Commission File No. 000-21827))
10(m) Line of Credit Agreement, dated October 1, 1999, by and among
the Company and Gerald C. Rittenberg
10(n) Consulting Agreement dated November 8, 1999, by and among the
Company and William Wilkey
<PAGE>
10(o) Amended Full Recourse Secured Promissory Note dated November
8, 1999, by and among the Company and William Wilkey
12 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
Exhibit 10(m)
PROMISSORY NOTE AND GRID LOAN AGREEMENT
Whereas, Gerald C. Rittenberg is the Chief Executive Officer of Amscan Holdings,
Inc. ("Amscan") and Mr. Rittenberg wishes to borrow from time to time from
Amscan up to one million dollars ($1,000,000)
and
Whereas, Amscan is willing to lend to Mr. Rittenberg such amounts on the terms
and conditions set forth below, the parties agree as follows:
Amscan will lend to Mr. Rittenberg such amounts as he may request from time to
time in increments of $100,000, up to a total of $1,000,000. Repayments of
borrowings hereunder shall likewise be in increments of $100,000. Such
borrowings and repayments shall be recorded on the form of Grid Loan Note
attached hereto.
Any amounts borrowed hereunder, shall bear interest at Amscan's incremental
borrowing rate in effect during the time such loan amount is outstanding.
Interest shall be due and payable on the third business day following the end of
each calendar quarter.
Furthermore, any amounts due under any borrowing, including interest, shall be
secured by a lien on the equity interests which Mr. Rittenberg has in Amscan.
Mr. Rittenberg agrees that he shall execute for the benefit of Amscan such
documents and perform such acts, as necessary to perfect Amscan's security
interest in this equity collateral. Notwithstanding such lien, Mr. Rittenberg
shall also remain personally liable for any amounts outstanding hereunder along
with accrued interest.
In the event of a default represented by failure to pay any amounts when due,
Amscan reserves the right to pursue such personal recourse at its election
irrespective of the equity lien.
This agreement shall terminate and all amounts due hereunder including accrued
interest shall be due and payable upon the earlier of Mr. Rittenberg's
termination of employment for any reason or December 31, 2001.
Dated October 1, 1999
/s/ Terrence O'Toole /s/ Gerald C. Rittenberg
- -------------------------------- ----------------------------------
Amscan Holdings Inc. Gerald C. Rittenberg
by: Terrence O'Toole, Chairman
Exhibit 10(n)
CONSULTING AGREEMENT
CONSULTING AGREEMENT ("Agreement") made as of Nov. 8, 1999 by and
between AMSCAN INC., a New York corporation with a principal place of business
at 80 Grasslands Road, Elmsford, New York 10523 (the "Company") and WILLIAM S.
WILKEY, an individual residing at 123 Harbor Drive, Unit 212, Stamford,
Connecticut 06902 (the "Consultant").
WHEREAS, Consultant has previously rendered services to the Company as
an officer and employee of the Company; and
WHEREAS, the employment relationship between the Company and the
Consultant has terminated; and
WHEREAS, the Company desires to continue to benefit from the knowledge
and expertise of the Consultant and thereby wishes to retain the consulting
services of the Consultant and the Consultant is willing to provide certain
consulting services to the Company relating to the marketing and sale of the
Company's products;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
agree as follows:
1. APPOINTMENT. The Company hereby retains the Consultant during the Term, as
defined in Section 2, to render to the Company, its subsidiaries and
affiliates, services of an advisory or consultative nature in the area of
sales, marketing, pricing and customer relations so that the Company may
have the benefit of the experience, knowledge and contacts gained by the
Consultant as an employee and officer of the Company (the "Services") and
career with the industry. Consultant hereby agrees to render to the Company
the Services during the Term in accordance with the terms and provisions of
this Agreement.
2. TERM.
(a) TERM. The term of this Agreement shall commence as of the date hereof
and shall, unless sooner terminated as provided herein, continue in
full force and effect until September 30, 2002 (the "Term").
<PAGE>
(b) TERMINATION. Notwithstanding the foregoing, the Consultant's retention
by the Company hereunder shall terminate upon the occurrence of any of
the following events:
(i) the mutual agreement, in writing, at any time, by the
Consultant and the Company to terminate such retention;
(ii) the death of the Consultant;
(iii) the unilateral cessation or discontinuance by the
Consultant of his rendering the Services to the Company;
(iv) upon thirty (30) days written notice by the Company and the
payment of the amount set forth in Paragraph 2(e); or
(v) the termination of the Consultant's retention by the
Company, for "Cause", as hereinafter defined.
(c) TERMINATION FOR CAUSE. For the purposes of this Agreement, "Cause"
shall mean any of the following:
(i) the violation by the Consultant of any law or the
commission by the Consultant of any crime or an act of
fraud against the Company;
(ii) a breach of any of the terms of the Separation Agreement
between the Company and the Consultant dated as of the date
hereof;
(iii) any material breach of this Agreement; or
(iv) any conduct on the part of the Consultant which has a
material adverse effect upon the performance by the
Consultant of his duties hereunder or a material adverse
effect upon the relationship of any customers and/or
employees of the Company or potential customers or
employees of the Company with the Company.
(d) NO RIGHTS AFTER TERMINATION. Upon the termination of the Consultant's
retention hereunder, whether at the natural end of the Term or in the
event of the earlier termination of the Term as provided herein, the
Consultant shall have no further rights under this Agreement, except
as expressly set forth herein. Nothing herein contained shall be
deemed to preclude the Company from enforcing any remedies available
to it at law or equity in consequence
-2-
<PAGE>
of a breach by the Consultant of his obligations to the Company or
available to the Company under the provisions of this Agreement,
including without limitation, the enforcement of any confidentiality
obligations or restrictive covenants hereunder, all of which shall
survive the termination of the Term and the termination of the
Consultant's retention hereunder by the Company.
(e) Upon termination of this Agreement pursuant to Paragraph 2(b)(iv),
Consultant shall be entitled to receive an amount equal to the
compensation payable for the remaining term of this Agreement.
3. STOCKHOLDERS' AGREEMENT.
(a) WAIVER OF CALL RIGHTS. The Company agrees that during the term of this
Agreement, it shall not exercise its "call rights" pursuant to
Paragraph 4.1 of that certain Stockholders Agreement, dated December
19, 1997, as amended by Amendment No. 1 dated as of August 6, 1998
(the "Stockholders' Agreement") among the Company and its
stockholders.
(b) EFFECT OF TERMINATION ON STOCKHOLDERS AGREEMENT. The parties hereby
expressly agree that the termination of the Company's retention of the
Consultant hereunder, whether upon the natural expiration of the Term
or pursuant to the provisions of clause (b) or clause (c) above, shall
result in the Company immediately having the right to exercise its
call rights set forth in Paragraph 4.1 of the Stockholders Agreement.
4. PERFORMANCE OF SERVICES.
(a) SERVICES. During the Term, the Consultant shall devote such business
time, skill and efforts to the affairs of the Company as the Company
shall reasonably determine is necessary to permit the faithful and
diligent performance of his duties hereunder.
(b) COMMUNICATIONS WITH COMPANY AND PERSONNEL. Notwithstanding anything to
the contrary otherwise contained herein, all communication by the
Consultant with the Company, its employees, customers and suppliers
shall be made exclusively through Gerry Rittenberg unless otherwise
specifically requested by Mr. Rittenberg.
(c) INDEPENDENT CONTRACTOR. The Consultant shall at all times act strictly
and exclusively as an independent contractor and shall not be
considered as having employee status under any law, regulation or
ordinance or as being
-3-
<PAGE>
entitled to participate in or benefit under any plan or program
established at any time by the Company for its employees. The
Consultant shall have no managerial authority or responsibility of an
officer or supervisor of the Company. The Consultant shall not have
any authority to bind the Company to any contract or to commit the
Company in any manner whatsoever. The Consultant shall not hold
himself out as representative or agent of the Company.
(d) APPLICABLE LAWS. The Consultant shall perform the Services in
conformity with all applicable laws, regulations, decrees, policies
and orders and shall at all times provide the Services in a
professional manner.
5. COMPENSATION. The Company agrees to pay, and the Consultant agrees to
accept, in full consideration for the performance by Consultant of the
Services, annual compensation of $220,500. Such compensation shall be
payable in monthly installments. In the event of the termination of the
Consultant's retention hereunder before the end of any 12 month period, the
compensation for the year of termination shall be pro-rated to the date of
termination.
6. RESTRICTIVE COVENANT. In consideration of his special and unique services,
as Executive Vice President of Sales while employed by the Company and his
position as a key executive officer of the Company and as a result of his
retention as Consultant hereunder, Consultant has been brought and will be
brought into close contact with trade secrets, proprietary information and
other confidential material and assets of the Company and Consultant
covenants and agrees as follows with the Company:
(a) For the purposes of this Agreement, the term "Confidential
Information" shall mean any data, proprietary information, financial
information, trade secrets, and other materials and information,
including, without limitation, contracts, customer lists, supplier
lists, and the names of representatives of customers and suppliers
responsible for entering into contracts with the Company information
as to specific customer needs, requirements and purchasing history
pricing information, information relating to costs, marketing,
selling, customers and suppliers, servicing, technology, plans,
processes, techniques, inventions, discoveries, designs, patterns or
devices in any way concerning the operation of the Company's business.
The term Confidential Information does not include any information
which (i) at the time of disclosure is generally available to the
public (other than as a result of a disclosure directly or indirectly
by Consultant, or (ii) has been
-4-
<PAGE>
independently acquired or developed by a third party not obligated to
keep such information confidential.
(b) Consultant hereby agrees that during the term of this Agreement and at
all times thereafter that he: (i) will keep confidential and protect
all Confidential Information (as hereinabove defined) known to him or
in his possession, (ii) will not disclose any Confidential Information
to any person or entity, except as may be required in the performance
by him of his duties as of the Company, (iii) will not use any
Confidential Information except for the exclusive benefit of the
Company and (iv) will return any Confidential Information and/or
documents containing Confidential Information at the end of the term
or at any time at the Company's request.
(c) As used in this Agreement, the term "Covenant Period" shall mean the
period commencing on the date of this Agreement and ending on the date
that is three (3) years after the last day of Consultant's retention
hereunder. During the Covenant Period, Consultant shall not directly
or indirectly (whether as owner, principal, agent, partner, officer,
employee, independent contractor, consultant, stockholder, or
otherwise), engage or participate or have any financial interest in or
perform services for, any entity which offers any service in
competition with the Company or engage in or perform services in any
business or activity involved in or related to the business which the
Company any of its affiliates is now or may hereafter become engaged
in, any location where such activity would be in competition with the
business of the Company. The Employee acknowledges that the Company
now carries on its business in many trading areas throughout the world
and in particular in the United States and Canada.
(d) During the Covenant Period, Consultant shall not, for himself or with
or as an agent for any other person, firm, corporation or entity,
directly or indirectly, solicit or provide services to or divert or
otherwise interfere with the business relationship of the company with
(i) any person or entity who is a client or customer of the Company at
any time during the Covenant Period or (ii) any potential clients or
customers with whom the Company is actively negotiating at the time of
termination of Consultant's retention hereunder.
(e) During the Covenant Period, Consultant shall not directly or
indirectly, for his own benefit or for the benefit of any other
person, firm, corporation or entity, divert, or attempt to divert,
solicit, recruit, entice or hire away any employees, consultants,
artists or independent contractors of the Company, whether or not any
such person is a full-time, part-time or temporary
-5-
<PAGE>
employee, consultant or independent contractor and whether or not such
person's employment or engagement is for a determined period or at
will, unless such person shall have ceased to be employed by such
entity for a period of at least 12 months. For purposes of the
provision, employees shall be deemed to include independent
contractors.
(f) SEVERABILITY. If a court of competent jurisdiction shall determine
that the covenant contained in this Section 6 shall be enforceable
only if limited to a shorter period of time or to a smaller
geographical area than is herein expressly provided, or otherwise
limited, then and in such event, such covenant shall be deemed to be
limited to the extent so determined to be enforceable, in the same
manner and to the same extent as if such limitations were expressly
provided herein.
7. RIGHTS AND REMEDIES.
(a) REMEDIES. The Consultant acknowledges that he will be performing
unique duties for the Company and that the provisions of Section 6 are
reasonable and necessary for the protection of the Company. Each of
the rights and remedies enumerated herein shall be independent of the
other, and shall be severally enforceable and all of such rights and
remedies shall be in addition to, and not in lieu of, any other rights
and remedies available to the Company under law or in equity.
Consequently, in the event that the Consultant commits a breach, or
threatens to commit a breach, of any of the provisions of Section 6 of
this Agreement, the Company, in addition to any other remedies it may
have at law or in equity, shall have the following rights and
remedies:
(i) The right and remedy to obtain a preliminary or permanent
injunction enjoining such breach or threatened breach, it
being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the
Company and that money damages alone will be difficult to
determine and will provide an inadequate remedy to the
Company; and
(ii) The right and remedy to require the Consultant to account
for and pay over to the Company all compensation, profits,
or other benefits derived or received by the Consultant as
the result of any transactions constituting a breach of any
of the provisions of Section 5 or Section 6 of this
Agreement, and the Consultant hereby agrees to account for
and pay over same to the Company.
-6-
<PAGE>
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successors and
assigns hereto; provided, however, that neither this Agreement nor any of
the rights, duties and obligations of the Consultant shall be assignable,
transferable or subject to delegation without the prior written consent of
the Company and any attempted assignment, transfer or delegation without
such written consent shall be null and void.
9. AMENDMENT. This Agreement may be amended only in writing signed by the
party against which such amendment is sought to be enforced.
10. WAIVERS, ETC. Compliance with any provision hereof may be waived only in
writing signed by the party against which such waiver is sought to be
enforced. No exercise of or failure to exercise any right hereunder, and no
partial or single exercise of any such right, shall operate as a waiver, or
otherwise affect such exercise or any other exercise, of that or any other
right, it being understood that all such rights and all remedies therefor
are intended to be cumulative and not exclusive.
11. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing (including facsimile) and shall be deemed to
have been duly given when delivered by hand, faxed or mailed, certified or
registered mail, return receipt requested and postage prepaid to the
parties at their respective addresses and facsimile numbers set forth
below, or at such other address or facsimile number as the party to be
notified may have otherwise designated, by notice in writing, to the other
party:
(a) If to the Company: Amscan Inc.
80 Grasslands Road
Elmsford, New York 10523
Attention: James M. Harrison
Facsimile No.: 914-345-2056
-7-
<PAGE>
with a copy to: Kurzman & Eisenberg, LLP
One North Broadway
White Plains, New York 10601
Attention: Joel S. Lever, Esq.
Facsimile No.: 914-285-9855
(b) If to the Consultant: Mr. William Wilkey
123 Harbor Drive
Unit 212
Stamford, CT 06902
Facsimile No.:
with a copy to:
--------------------------
--------------------------
--------------------------
12. GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York.
13. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
14. FACSIMILE SIGNATURES. Receipt of facsimile copies of signature pages
hereof, as between the recipient thereof and the party that executed and
sent the same, shall constitute delivery of such signature pages; provided,
however, that originals are promptly delivered by commercial courier
service.
15. SEVERABILITY. If any provision of this Agreement, or the application
thereof to any person, place or circumstance, shall be held to be invalid,
unenforceable or void in any jurisdiction, the remainder of this Agreement
and such provisions as applied to other persons, places and circumstances
shall remain in full force and effect and such holding shall not effect the
validity, legality or enforceability of such provisions in any other
jurisdiction.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date first written above.
AMSCAN INC.
By: /s/ JAMES M. HARRISON
-----------------------------
Name:
Title:
/s/ WILLIAM S. WILKEY
---------------------------------
WILLIAM S. WILKEY
-9-
Exhibit 10(o)
AMENDED FULL RECOURSE SECURED PROMISSORY NOTE
---------------------------------------------
("MANAGEMENT NOTE")
December 19, 1997
$500,000.00 As Amended October 1, 1999
FOR VALUE RECEIVED, the undersigned, William S. Wilkey (the "Management
Investor"), hereby promises to pay to Amscan Holdings, Inc., a Delaware
corporation (the "Company"), or to the legal holder of this Management Note at
the time of payment, the principal sum of FIVE HUNDRED THOUSAND DOLLARS
($500,000.00) in lawful money of the United States of America, plus interest,
compounded annually (computed on the basis of twelve 30-day months), on the
unpaid principal of, accrued and unpaid interest, if any, and other amounts
owing in respect of this Management Note, at a rate of 6.65% per annum
compounding annually. All principal of, accrued and unpaid interest on, and all
fees, expenses and other amounts owing pursuant to the terms of this Management
Note will be due and payable on March 15, 2009.
If the date set for payment of principal or interest hereunder is a
Saturday, Sunday or legal holiday, then such payment shall be made an the next
succeeding business day.
This Management Note, as amended herein, evidences a loan made by the
Company to the Management Investor to facilitate the purchase by the Management
Investor of 6.6666667 shares of Common Stock, par value $0.10 per share, of the
Company (the "Shares," which term shall include any additional shares of common
stock of the Company pledged pursuant to the Stock Pledge Agreement referred to
below) in accordance with the terms of a certain Stock and Option Agreement,
dated as of August 10, 1997, by and among the Management Investor and Confetti
Acquisition, Inc., which has been merged with and into the Company (as such
agreement may be amended from time to time, the "Stock and Option Agreement"),
and this Management Note is the note referred to in Section 1(a)(i) of the Stock
and Option Agreement. This Management Note has been amended as of October 1,
1999 in connection with the termination of the Management Investor's employment
agreement with the Company pursuant to the terms of a Separation Agreement dated
October 1, 1999 (the "Separation Agreement") and the execution of a Consulting
Agreement between the Company and the Management Investor dated October 1, 1999
(the "Consulting Agreement"). Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Stock and Option
Agreement and the Consulting Agreement. Payment of the principal of, interest on
and all other amounts owing in respect of this Management Note is secured
pursuant to the terms of a certain Stock Pledge Agreement dated as of December
19, 1997 between the Management Investor and the Company (as such agreement may
be amended from time to time, the "Stock Pledge Agreement"), reference to which
is made for a description of the Collateral provided thereby and the rights of
the Company and the holder of this Management Note in respect of such
collateral.
This Management Note shall be payable by the Management Investor in an
amount equal to
<PAGE>
one-quarter of any bonus received by the Management Investor from the Company on
the date of receipt of such bonus, on the date of receipt of such bonus
corresponding to the 1998 calendar year. An annual installment shall also be
payable, calculated as set forth above, from the bonus payable to the Management
Investor and referred to in the Separation Agreement. Each of such installments
shall be applied first to all fees and expenses due the Company hereunder, then
to the payment of accrued interest under this Management Note, and then to the
reduction of the outstanding principal amount due under this Management Note.
All remaining principal of, accrued and unpaid interest on, and all fees,
expenses and other amounts owing pursuant to the terms of this Management Note
will be due and payable on March 15, 2009.
This Management Note is subject to the following further terms and
conditions:
SECTION 1. MANDATORY PREPAYMENT ON SALE OF SHARES. If at any time the
Management Investor (or any of the Management Investor's permitted transferees
referred to in clauses (i) and (ii) of Section 2.3.2 of the Stockholders'
Agreement (the "Stockholders Agreement"), dated as of December 19, 1997, as
amended August 6, 1998 among the Management Investor, the Company and certain
other stockholders of the Company (the "Permitted Transferees")) receives any
proceeds from the sale by the Management Investor (or by any of the Management
Investor's Permitted Transferees) of Shares to anyone including a Permitted
Transferee, the Net Proceeds (as defined below in this Section 1) from such sale
of Shares shall be applied to the prepayment first of unpaid fees and expenses
owing hereunder, second to the accrued and unpaid interest hereon and third to
the unpaid principal hereof.
The term "Net Proceeds" shall mean the total proceeds received from the
sale of Shares by the Management Investor and the Management Investor's
Permitted Transferees, minus an amount equal to (x) any federal, state or local
income taxes due and payable in connection with and upon the sale of such Shares
and (y) any brokerage commissions or similar transaction expenses incurred by
reason of the sale of such Shares.
The right of the Management Investor (or any of the Management
Investor's Permitted Transferees) to receive proceeds upon the sale of Shares is
subject to the prior right of the Company (i) in the case of a sale of Shares to
the Company, in lieu of the Company paying the proceeds of such sale to the
Management Investor or any of the Management Investor's Permitted Transferees,
to set off against this Management Note (or apply as a prepayment of this
Management Note) an amount equal to the Net Proceeds of such sale (but not to
exceed the total of all amounts outstanding pursuant to this Management Note),
or (ii) in the case of a sale of Shares to certain other transferees
(collectively, the "Management Transfer Parties") permitted (or not prohibited)
under Section 2.3 (other than transfers without consideration under clauses
(a)(i) and (a)(ii) of Section 2.3.2 thereof), 2.4, 2.5 of the Stockholders
Agreement, in lieu of any of such Management Transfer Parties paying the
purchase price therefor to the Management Investor or any of the Management
Investor's Permitted Transferees, to direct such Management Transfer Parties to
pay an amount equal to the Net Proceeds of such sale to the Company (but not to
exceed the total of all amounts outstanding pursuant to this Management Note)
which shall set off such amount against this Management Note.
-2-
<PAGE>
Concurrently with any prepayment (including by set-off) of any portion
of the principal amount of this Management Note pursuant to this Section 1 or
Section 2 hereof, the Company shall make a notation of such payment hereon. If
full payment of all unpaid principal of, accrued and unpaid interest on and all
fees, expenses and other amounts owing in respect of, this Management Note is
made, this Management Note shall be cancelled. Any partial prepayment (including
by reason of setoff) shall be applied first to unpaid fees and expenses owing
hereunder, second to accrued and unpaid interest hereon and third to the unpaid
principal hereof.
If at any time, or from time to time, on or after the date hereof, the
Management Investor or any of the Management Investor's Permitted Transferees
shall receive or shall otherwise become entitled to receive from the Company any
cash payments, cash dividends or other cash distributions in respect of the
Shares, then, and in each case, the Management Investor and any of the
Management Investor's Permitted Transferees shall, upon the receipt thereof, pay
to the Company an amount equal to the amount of each such payment, dividend or
other cash distribution less an amount of cash equal to the product of such
payment, dividend or other cash distribution multiplied by the maximum marginal
combined United States federal, state and local tax rate applicable to the
Management Investor, and the Company shall apply such amount so received to the
prepayment of fees and expenses owing under, accrued interest on and unpaid
principal of this Management Note in the manner set forth in the first paragraph
of this Section 1, and the Company shall not be obligated to make any such cash
payment, cash dividend or other cash distribution not theretofore made to which
the Management Investor or any of the Management Investor's Permitted
Transferees are otherwise entitled in respect of their Shares and may, in lieu
thereof, set off the amount of such cash payment, cash dividend or other cash
distribution against the accrued interest on and unpaid principal of this
Management Note in the manner set forth in the third paragraph of this Section
1.
In addition to the foregoing, if the Management Investor's Consulting
Agreement is terminated for "cause" (as defined therein) all principal,
interest, fees, expenses and other amounts then owing pursuant to this
Management Note shall become due and payable immediately, and without any
required demand, notice or action on the part of the Company or the holders of
this Management Note.
SECTION 2. PAYMENT AND PREPAYMENT. All payments and prepayments of
principal of and interest on this Management Note shall be made to the Company
or its order, or to the legal holder of this Management Note or such holder's
order, in lawful money of the United States of America at the principal offices
of the Company (or at such other place as the holder hereof shall notify the
Management Investor in writing). The Management Investor may, at its option,
prepay this Management Note in whole or in part at any time or from time to time
without penalty or premium. Any prepayments of any portion of the principal
amount of this Management Note shall be accompanied by payment of all accrued
but unpaid interest hereunder. Upon final payment of principal of, interest on,
and all fees, expenses and other amounts owing in respect of, this Management
Note, it shall be surrendered for cancellation.
SECTION 3. EVENTS OF DEFAULT. Upon the occurrence of any of the
following events ("Events
-3-
<PAGE>
of Default"):
(a) failure to pay any principal of this Management Note,
including any prepayments required hereunder or under the
Stock Pledge Agreement, when due;
(b) failure to pay any interest due (including required
prepayments) under this Management Note and the Stock Pledge
Agreement, when due;
(c) failure of the Management Investor or the Management
Investor's Permitted Transferees to perform such Management
Investor's or the Management Investor's Permitted Transferees'
obligations under the Stock Pledge Agreement that shall remain
unremedied for fifteen (15) days following the date when
notice of such failure is delivered to the Management
Investor;
(d) the failure of the Management Investor to perform his
obligations under the Separation Agreement and/or the
Consulting Agreement, or the material breach of the Separation
Agreement and/or the Consulting Agreement which failure or
breach remains unremedied for the applicable cure periods
provided for therein;
(e) the Management Investor's commencing a voluntary case or other
proceeding seeking liquidation, reorganization or other relief
with respect to him or his debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of the Management Investor
or any substantial part of his property, or consenting to any
such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding
commenced against him, or making a general assignment for the
benefit of creditors, or failing generally to pay his debts as
they become due, or taking any action to authorize any of the
foregoing; or
(f) commencement of an involuntary case or other proceeding
against the Management Investor seeking liquidation,
reorganization or other relief with respect to him or his debt
under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of
the Management Investor or any substantial part of his
property, and such involuntary case or other proceeding
remaining undismissed and unstayed for a period of sixty (60)
days; or any order for relief being entered against the
Management Investor under the federal bankruptcy laws as now
or hereafter in effect;
then, and in any such event, the holder of this Management Note may
declare, by notice of default given to the Management Investor, the entire
principal amount of this Management Note to be forthwith due and payable,
whereupon the entire principal amount of this Management Note outstanding and
any accrued and unpaid interest hereunder shall become due and payable without
presentment, demand, protest, notice of dishonor and all other demands and
notices of any kind, all of which are hereby expressly waived; provided,
however, that in the case of any Event of Default specified in clauses (d) or
(e) above, without any notice to the Management Investor the entire principal
amount of this Management Note and any accrued and unpaid interest thereon shall
become immediately due and payable without
-4-
<PAGE>
presentment, demand, protest, notice of dishonor and all other demands and
notices of any kind, all of which are hereby expressly waived. Upon the
occurrence of an Event of Default, the accrued and unpaid interest hereunder
shall thereafter bear the same rate of interest as on the principal hereunder,
but in no event shall interest be charged that would violate any applicable
usury law. If an Event of Default shall occur hereunder, the Management Investor
shall, subject to Section 4 hereof, pay the costs and expenses of collection,
including reasonable attorneys' fees, incurred by the holder in the enforcement
hereof and the enforcement of the rights and remedies granted by the Stock
Pledge Agreement.
No delay or failure by the holder of this Management Note in the
exercise of any right or remedy shall constitute a waiver thereof, and no single
or partial exercise by the holder hereof of any right or remedy shall preclude
any other or future exercise thereof or the exercise of any other right or
remedy.
SECTION 4. FULL RECOURSE. In addition to recourse against the
Collateral (as such term is defined in the Stock Pledge Agreement) as provided
in the Stock Pledge Agreement, recourse for the payment of the principal of or
interest on this Management Note or for any claim based hereon (including
without limitation, any fees, expenses, costs of collection or other amounts of
whatever nature) shall be had against the Management Investor, his heirs, legal
representatives or assigns, directly or indirectly, by way of set-off or
otherwise; all such liability being, by the acceptance hereof and as part of the
consideration for the issue hereof, expressly acknowledged and affirmed.
SECTION 5. MISCELLANEOUS.
(a) The provisions of this Management Note shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the principles of conflicts of law thereof.
(b) All notices and other communications hereunder shall be in writing
and will be deemed to have been duly given if delivered or mailed in accordance
with the Stock and Option Agreement.
(c) The headings contained in this Management Note are for reference
purposes only and shall not affect in any way the meaning or interpretation of
the provisions hereof.
(d) References in this Management Note to the Company shall include any
successor to the Company and/or any subsequent holder of this Management Note,
as appropriate.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
AMSCAN HOLDINGS, INC.
By: /s/ JAMES M. HARRISON
--------------------------
Name:
Title:
MANAGEMENT INVESTOR
By: /s/ WILLIAM S. WILKEY
--------------------------
Name:
Title:
WITNESS:
- --------------------------
Name:
Address:
-6-
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
Principal
Date of Amount of Amount of Date of Notation
Borrowing Borrowing Repayment Repayment Made By
- ----------------- ----------------- ---------------- ------------------ -----------------
<S> <C>
Dec. 19, 1997 $ 500,000.00
</TABLE>
Exhibit 12
Amscan Holdings, Inc.
Ratio of earnings to fixed charges
(In thousands, except ratio data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Income before taxes and minority interests $17,380 $11,604 $ 7,676 $ 5,732 $19,206
Add: Fixed charges
29,998 26,313 6,512 8,735 6,874
------- ------- ------- ------- -------
Earnings, as adjusted .................... $47,378 $37,917 $14,188 $14,467 $26,080
======= ======= ======= ======= =======
Computation of fixed charges:
Interest expense ...................... $26,985 $23,779 $ 4,231 $ 6,968 $ 6,025
Interest portion of rent
expense ............................. 3,013 2,534 2,281 1,767 849
------- ------- ------- ------- -------
Total fixed charges .................. $29,998 $26,313 $ 6,512 $ 8,735 $ 6,874
======= ======= ======= ======= =======
Ratio of earnings to fixed charges ....... 1.6 x 1.4 x 2.2 x 1.7 x 3.8 x
</TABLE>
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 15, 2000 with
respect to the consolidated financial statements and schedule of Amscan
Holdings, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 24, 2000
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, 1999, filed with the Securities and Exchange Commission.
/s/ KPMG LLP
Stamford, Connecticut
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Amscan Holdings, Inc. as of December 31, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001024729
<NAME> AMSCAN HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 849
<SECURITIES> 0
<RECEIVABLES> 63,068
<ALLOWANCES> (6,172)
<INVENTORY> 59,193
<CURRENT-ASSETS> 128,740
<PP&E> 104,586
<DEPRECIATION> (42,877)
<TOTAL-ASSETS> 263,487
<CURRENT-LIABILITIES> 46,512
<BONDS> 266,891
0
0
<COMMON> 0
<OTHER-SE> (88,529)
<TOTAL-LIABILITY-AND-EQUITY> 263,487
<SALES> 306,112
<TOTAL-REVENUES> 306,112
<CGS> 193,586
<TOTAL-COSTS> 193,586
<OTHER-EXPENSES> 68,746
<LOSS-PROVISION> 2,906
<INTEREST-EXPENSE> 26,365
<INCOME-PRETAX> 17,380
<INCOME-TAX> 7,100
<INCOME-CONTINUING> 10,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,207
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
