-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ImfiXXdQkJBWbsdoJwzX59HxNneeQkQ3eIuJFwLspzCRc7A2a8t7NZIDZsp9kolK QWlY/ofgFsESexwKZFCZVg== 0000913355-00-000035.txt : 20000411 0000913355-00-000035.hdr.sgml : 20000411 ACCESSION NUMBER: 0000913355-00-000035 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-14107 FILM NUMBER: 583447 BUSINESS ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 BUSINESS PHONE: 9143452020 MAIL ADDRESS: STREET 1: 80 GRASSLANDS ROAD CITY: ELMSFORD STATE: NY ZIP: 10523 10-K405 1 1999 ANNUAL REPORT ON FORM 10-K 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 -------------------- Commission file number 000-21827 --------------------- 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. 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 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 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 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:
Tableware Accessories Novelties - --------- ----------- --------- 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
The Company supplies party goods and gifts for the following types of occasions:
Seasonal Everyday Themes - -------- -------- ------ New Year's Anniversaries Fall Valentine's Day Bar Mitzvahs Fiesta St. Patrick's Day Birthdays Fifties Rock-and-Roll Easter Christenings Hawaiian Luau Passover Confirmations Mardi Gras Fourth of July First Communions Patriotic Halloween Graduations Religious Thanksgiving Retirements Sports Hanukkah Showers Summer Fun Christmas Weddings
5 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 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 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 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:
Owned or Leased Location Principal Activity Square Feet (with Expiration Date) -------- ------------------ ----------- ---------------------- 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)
(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 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 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."
Years Ended December 31, ----------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollars in thousands) Statements of Operations Data (1): 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
11
December 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollars in thousands) Balance Sheet Data: 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 ========= ========= ========= ========= =========
- ------------------ (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. 12 (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.
Years Ended December 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- ------- -------- -------- 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 ======== ======== ======== ======== ========
(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 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 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 PERCENTAGE OF NET SALES
Years Ended December 31, ------------------------ 1999 1998 ------ ------ 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% ====== ======
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 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 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 PERCENTAGE OF NET SALES
Years Ended December 31, ------------------------ 1998 1997 ------ ------ 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)% ====== ======
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 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 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 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 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
For the Three Months Ended ----------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1999 - ---- 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
(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 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 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 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").
Long Term Compensation No. of Securities Under- All Other Name and Principal Position Year Salary Bonus (a) Other lying Options Granted Compensation (b) - --------------------------- ---- ------ --------- ----- --------------------- ---------------- 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
(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 (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
Number of Securities Value of Unexercised In the Money Underlying Unexercised Options Options at Fiscal Year End ------------------------------ -------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- 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
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 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 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 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 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 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
Shares of Company Percentage Common Stock of Class Name of Beneficial Owner Beneficially Owned Outstanding(a) - ------------------------ ------------------ -------------- 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
(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 (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 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 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 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 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 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 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 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:
Page ---- Reports of Independent Auditors.................................................. F-2 Consolidated Balance Sheets .................................................... F-4 Consolidated Statements of Operations ........................................... F-5 Consolidated Statements of Stockholders' (Deficit) Equity ....................... F-6 Consolidated Statements of Cash Flows ........................................... F-7 Notes to Consolidated Financial Statements ...................................... F-9 Financial Statement Schedule for the three years ended December 31, 1999: Schedule II - Valuation and Qualifying Accounts ................................ F-33
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 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 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
AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31, ---------------------- 1999 1998 ---- ---- ASSETS 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 ======== ========
See accompanying notes to consolidated financial statements. F-4
AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- 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) ========= ========= ==========
See accompanying notes to consolidated financial statements. F-5 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
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 ----- ------- --- ------------ -------- ---- ----- ----- 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) ======= ======= ======== ======= ======== ====== ======== ========
See accompanying notes to consolidated financial statements. F-6
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: 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
See accompanying notes to consolidated financial statements. F-7 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 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 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 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 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 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):
1999 1998 -------- -------- 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 ======== ========
F-13 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):
Estimated 1999 1998 Useful Lives -------- -------- ------------ 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 ======== ========
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):
1999 1998 ------- ------ 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 ======= =======
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 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):
Notional Additional Interest Date of contract Amount Term Fixed Rate Expense ---------------- ------ ---- ---------- ------- 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 ====
NOTE 6 - LONG-TERM INDEBTEDNESS Long-term indebtedness at December 31, 1999 and 1998 consisted of the following (dollars in thousands):
1999 1998 ---- ---- 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 ========= =========
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 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 AMSCAN HOLDINGS, INC. Notes to Consolidated Financial Statements (continued) December 31, 1999 (reduction of) interest expense, were as follows (dollars in thousands):
Additional (Reduction of) Interest Expense Notional ---------------- Date of contract Amount Term Fixed Rate 1999 1998 ---------------- ------ ---- ---------- ---- ---- 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 ==== ====
(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):
Mortgage, Notes Capital and Loans Lease Obligations Total --------- ----------------- ----- 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 ======== ====== ========
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 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:
Average Average Fair Market Options Exercise Price Value at Grant Date ------- -------------- ------------------- Activity: Rollover Options Granted.............. 16.030 $ 55,916 $ 39,018 Granted............................... 85.146 75,000 26,737 -------- Outstanding at December 31, 1997............ 101.176 Granted............................... 4.450 75,000 26,737 Granted............................... 6.648 125,000 24,562 Canceled.............................. (0.555) 75,000 -------- 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
F-18 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):
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Net income (loss): As reported....................................................... $10,207 $6,709 $(182) SFAS No. 123 pro forma............................................ $9,793 $6,355 $(249)
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):
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Domestic ........................................................ $14,035 $10,945 $6,655 Foreign ......................................................... 3,345 659 1,021 ------- ------- ------ Total ........................................................... $17,380 $11,604 $7,676 ======= ======= ======
The provision for income taxes consisted of the following (dollars in thousands):
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Current: 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 ====== ====== ======
F-19 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):
1999 1998 ------- ------ Current deferred tax assets: 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 ======= ======
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:
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- 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% ==== ==== ====
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 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 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 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):
Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ 1999 ---- 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 ========= ========= =========
F-23 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 AMSCAN HOLDINGS, INC. Notes to Consolidated Financial Statements (continued) December 31, 1999 CONSOLIDATING BALANCE SHEET December 31, 1999 (Dollars in thousands) (Unaudited)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ ASSETS Current assets: 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 ========= ========= ========= =========
F-25 AMSCAN HOLDINGS, INC. Notes to Consolidated Financial Statements (continued) December 31, 1999 CONSOLIDATING BALANCE SHEET December 31, 1998 (Dollars in thousands) (Unaudited)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ......................................... $ 523 $ 594 $ 1,117 Accounts receivable, net .......................................... 42,636 6,703 49,339 Inventories ....................................................... 47,948 6,869 $ (126) 54,691 Prepaid and other current assets .................................. 8,661 452 9,113 --------- --------- --------- --------- Total current assets .............................................. 99,768 14,618 (126) 114,260 Property, plant and equipment, net ..................................... 57,729 1,531 59,260 Intangible assets, net ................................................. 54,680 11,820 66,500 Other assets, net ...................................................... 28,781 653 (20,602) 8,832 --------- --------- --------- --------- Total assets ...................................................... $ 240,958 $ 28,622 $ (20,728) $ 248,852 ========= ========= ========= ========= LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Loans and notes payable ........................................... $ 9,600 $ 28 $ 9,628 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 ========= ========= ========= =========
F-26 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ 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 ========= ========= ========= =========
F-27 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ 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 ========= ========= ========= =========
F-28 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ 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) ========= ========= ========= =========
F-29 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Cash flows from operating activities: 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 ======== ======== ======== ========
F-30 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income ............................................................ $ 6,542 $ 172 $ (5) $ 6,709 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...................................... 7,954 547 8,501 Amortization of deferred financing costs ........................... 748 748 Loss (gain) on disposal of property and equipment .................. 2 (24) (22) Provision for doubtful accounts .................................... 2,767 569 3,336 Restructuring charges .............................................. 1,999 401 2,400 Amortization of Restricted Common Stock award ...................... 260 260 Deferred income tax provision (benefit) ........................... 2,469 (28) 2,441 Changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable ................... (1,138) 14 (1,124) Decrease in inventories ...................................... 4,701 2,026 126 6,853 Decrease in prepaid 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 ========= ========= ========= =========
F-31 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)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Cash flows from operating activities: Net (loss) income ..................................................... $ (182) $ 320 $ (320) $ (182) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ...................................... 5,864 381 6,245 Amortization of deferred financing costs ........................... 13 13 Gain on disposal of property and equipment ......................... (31) (31) Provision for doubtful accounts .................................... 3,419 356 3,775 Amortization of Restricted Common Stock award ...................... 290 290 Deferred income tax provision ...................................... 1,625 (60) 1,565 Changes in operating assets and liabilities, net of acquisitions: Increase in accounts receivable .............................. (14,915) (954) (15,869) Increase in inventories ...................................... (3,773) (2,098) (5,871) Decrease in prepaid and other current assets, and other net ................................................. 4,042 2,234 6,276 Decrease (increase) in other assets, 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 ========= ========= ========= =========
F-32 SCHEDULE II AMSCAN HOLDINGS, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999, 1998, and 1997 (Dollars in thousands)
Beginning Ending Balance Write-offs Additions Balance ------- ---------- --------- ------- Allowance for Doubtful Accounts: For the year ended: 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
(1) Includes approximately $3,305 of an allowance for doubtful accounts in connection with receivables purchased in the 1998 acquisition of Anagram. F-33 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)) 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)) 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 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 EX-10.M 2 PROMISSORY NOTE AND GRID LOAN AGREEMENT 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 EX-10.N 3 CONSULTING AGREEMENT 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"). (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- 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- 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- 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- 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- 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- 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- 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- EX-10.O 4 PROMISSORY NOTE 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 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- 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- 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- 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- 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-
Schedule 1 Principal Date of Amount of Amount of Date of Notation Borrowing Borrowing Repayment Repayment Made By - ----------------- ----------------- ---------------- ------------------ ----------------- Dec. 19, 1997 $ 500,000.00
EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Amscan Holdings, Inc. Ratio of earnings to fixed charges (In thousands, except ratio data)
Years Ended December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- -------- ------- ------- 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
EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 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 EX-23.2 7 CONSENT OF KPMG LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 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. 0001024729 AMSCAN HOLDINGS, INC. 1,000 12-MOS Dec-31-1999 Jan-01-1999 Dec-31-1999 849 0 63,068 (6,172) 59,193 128,740 104,586 (42,877) 263,487 46,512 266,891 0 0 0 (88,529) 263,487 306,112 306,112 193,586 193,586 68,746 2,906 26,365 17,380 7,100 10,207 0 0 0 10,207 0.00 0.00
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