-----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, MNuHomcDUugfNDaYz+lYalNe/V6Bz6ukC7NtM0rqIj6mNfLZctkFlssrxVv0WH5W 9noNYSOTXaD2q7/6kzITtA== 0000913355-03-000152.txt : 20031114 0000913355-03-000152.hdr.sgml : 20031114 20031114130522 ACCESSION NUMBER: 0000913355-03-000152 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-14107 FILM NUMBER: 031002406 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-Q 1 form10q_9302003.txt QUARTERLY REPORT FOR PERIOD ENDED 9-30-2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 000-21827 ----------- AMSCAN HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 13-3911462 (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) Number) 80 Grasslands Road Elmsford, New York 10523 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 345-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- As of November 14, 2003, 1,217.92 shares of Registrant's common stock, par value $0.10 ("Common Stock"), were outstanding. AMSCAN HOLDINGS, INC. FORM 10-Q September 30, 2003 Table of Contents PART I PAGE ITEM 1 FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets at September 30, 2003 and December 31, 2002.................................. 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002.......... 4 Consolidated Statement of Stockholders' Deficit for the Nine Months Ended September 30, 2003............... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002......... 6 Notes to Consolidated Financial Statements................. 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 25 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 31 ITEM 4 CONTROLS AND PROCEDURES.................................... 32 PART II ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................... 33 Signature.............................................................. 34 2 AMSCAN HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts )
September 30, December 31, 2003 2002 --------- --------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents ........................................... $ 9,419 $ 2,400 Accounts receivable, net of allowances .............................. 86,858 74,247 Inventories, net of allowances ...................................... 84,834 93,890 Prepaid expenses and other current assets ........................... 12,413 15,233 --------- --------- Total current assets ......................................... 193,524 185,770 Property, plant and equipment, net ....................................... 98,105 100,304 Goodwill, net ............................................................ 72,281 74,251 Notes receivable from officers ........................................... 1,942 Other assets, net ........................................................ 9,965 10,230 --------- --------- Total assets ................................................. $ 373,875 $ 372,497 ========= ========= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable .................................................... $ 30,120 $ 39,245 Accrued expenses .................................................... 23,241 21,524 Income taxes payable ................................................ 3,803 2,525 Current portion of long-term obligations ............................ 3,133 3,220 --------- --------- Total current liabilities .................................... 60,297 66,514 Long-term obligations, excluding current portion ......................... 293,082 295,420 Deferred income tax liabilities .......................................... 16,534 17,360 Other .................................................................... 2,332 2,317 --------- --------- Total liabilities ............................................ 372,245 381,611 Redeemable convertible preferred stock ($0.10 par value; 100.00 shares authorized; 44.94 and 42.40 shares issued and outstanding) .......... 6,945 6,646 Redeemable Common Stock .................................................. 8,745 30,523 Commitments and Contingencies Stockholders' deficit: Common Stock ($0.10 par value; 3,000.00 shares authorized; 1,217.92 and 1,233.27 shares issued and outstanding, respectively) -- -- Additional paid-in capital .......................................... 27,535 14,814 Unamortized restricted Common Stock awards .......................... (194) (323) Notes receivable from stockholders .................................. (669) (638) Deficit ............................................................. (39,789) (57,551) Accumulated other comprehensive loss ................................ (943) (2,585) --------- --------- Total stockholders' deficit .................................. (14,060) (46,283) --------- --------- Total liabilities, redeemable convertible preferred and Common Stock and stockholders' deficit ............................ $ 373,875 $ 372,497 ========= =========
Note: The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date. See accompanying notes to consolidated financial statements. 3 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2003 2002 2003 2002 --------- --------- --------- --------- Net sales ..................................... $ 103,220 $ 100,226 $ 304,060 $ 290,263 Cost of sales ................................. 68,242 65,761 204,161 189,416 --------- --------- --------- --------- Gross profit ......................... 34,978 34,465 99,899 100,847 Operating expenses: Selling expenses ........................... 9,206 8,984 27,322 25,810 General and administrative expenses ........ 8,067 7,901 23,896 23,707 Art and development costs .................. 2,322 2,486 7,145 7,462 Provision for doubtful accounts ............ 772 347 2,761 1,462 Restructuring charges ...................... 233 610 1,007 796 --------- --------- --------- --------- Total operating expenses ............. 20,600 20,328 62,131 59,237 --------- --------- --------- --------- Income from operations ............... 14,378 14,137 37,768 41,610 Interest expense, net ......................... 6,681 5,430 19,877 16,188 Gain on sale of available-for-sale securities . (1,022) (1,022) Other expense (income), net ................... 12 (364) (45) (386) --------- --------- --------- --------- Income before income taxes and minority interests ................ 8,707 9,071 18,958 25,808 Income tax expense ............................ 3,439 3,583 7,488 10,194 Minority interests ............................ 42 52 76 7 --------- --------- --------- --------- Net income ........................... 5,226 5,436 11,394 15,607 Dividend on redeemable convertible preferred stock ................... 102 95 299 280 --------- --------- --------- --------- Net income applicable to common shares $ 5,124 $ 5,341 $ 11,095 $ 15,327 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Nine Months Ended September 30, 2003 (Dollars in thousands) (Unaudited)
Unamortized Common Restricted Notes Accumulated Stock Additional Common Receivable Other Common Par Paid-in Stock from Comprehensive Shares Value Capital Awards Stockholders Deficit Loss Total ------ ----- ------- ------ ------------ ------- ---- ----- Balance at December 31, 2002 ...... 1,233.27 $ -- $ 14,814 $ (323) $ (638) $ (57,551) $(2,585) $(46,283) Net income ........................ 11,394 11,394 Net change in cumulative translation adjustment ....... 1,232 1,232 Change in fair value of available-for-sale securities, net of income taxes .......... 912 912 Reclassification adjustment for available-for-sale securities sold during the period, net of income taxes .................. (618) (618) Change in fair value of interest rate swap and foreign exchange contracts, net of income taxes ................. 116 116 -------- Comprehensive income ...... 13,036 Exercise of stock options, including tax benefits of $79 .............. 6.65 910 910 Amortization of restricted Common Stock awards .......... 129 129 Increase in redeemable Common Stock due to exercise of stock options and vesting of restricted Common Stock award ........................ (1,537) (1,537) Decrease in redeemable Common Stock due to expiration of redemption feature ........... 13,597 6,000 19,597 Decrease in redeemable Common Stock due to change in market value of Common Stock ........ 50 368 418 Purchase and retirement of Common Stock held by officers ..................... (22.0) Redeemable convertible preferred stock dividend ..... (299) (299) Accretion of interest income on notes receivable from stockholders ................. (31) (31) -------- --------- -------- ------ ------ --------- ------- -------- Balance at September 30, 2003 ..... 1,217.92 $ -- $ 27,535 $ (194) $ (669) $ (39,789) $ (943) $(14,060) ======== ========= ======== ====== ====== ========= ======= ========
See accompanying notes to consolidated financial statements. 5 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended ----------------- September 30, ------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income ....................................................................... $ 11,394 $ 15,607 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................ 12,033 9,852 Amortization of deferred financing costs ..................................... 1,570 843 Amortization of restricted Common Stock awards ............................... 129 177 Provision for doubtful accounts .............................................. 2,761 1,462 Deferred income tax expense .................................................. 2,444 4,462 Gain on sale of available-for-sale securities ................................ (1,022) Loss (gain) on disposal of property and equipment ............................ 118 (311) Non-cash restructuring charges ............................................... 104 Changes in operating assets and liabilities, net of acquisition: Increase in accounts receivable .......................................... (15,372) (13,530) Decrease (increase) in inventories ....................................... 9,056 (9,311) Decrease (increase) in prepaid expenses and other current assets ......... 970 (2,390) (Decrease) increase in accounts payable, accrued expenses and income taxes payable ............................................................ (6,112) 7,028 Other, net ............................................................... (297) (2,042) -------- -------- Net cash provided by operating activities ................................ 17,776 11,847 Cash flows from investing activities: Cash paid in connection with acquisition ......................................... (13,547) Capital expenditures ............................................................. (10,081) (11,396) Proceeds from sale of available-for-sale securities .............................. 1,443 Proceeds from disposal of property and equipment ................................. 198 515 -------- -------- Net cash used in investing activities .................................... (8,440) (24,428) Cash flows from financing activities: Proceeds from short-term obligations ............................................. 16,300 Repayment of loans, notes payable and long-term obligations ...................... (2,788) (2,535) Proceeds from exercise of stock options .......................................... 831 Purchase of Common Stock from officers ........................................... (3,300) Repayment of notes receivable from officers ...................................... 1,990 -------- -------- Net cash (used in) provided by financing activities ...................... (3,267) 13,765 Effect of exchange rate changes on cash and cash equivalents ........................ 950 (248) -------- -------- Net increase in cash and cash equivalents ................................ 7,019 936 Cash and cash equivalents at beginning of period .................................... 2,400 1,016 -------- -------- Cash and cash equivalents at end of period .......................................... $ 9,419 $ 1,952 ======== ======== Supplemental Disclosures: Interest paid ............................................................ $ 14,451 $ 12,487 Income taxes paid ........................................................ $ 4,013 $ 5,851
See accompanying notes to consolidated financial statements. 6 AMSCAN HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Dollars in thousands) (Unaudited) Supplemental information on non-cash activities: In July 2003, the Company purchased 6 shares of Common Stock from its President at a price of $150 per share, for an aggregate cash purchase price of $900. The President used a portion of the proceeds to repay his outstanding loan balance of $402. The Company retired the 6 shares of Common Stock. In June 2003, the Company purchased 16 shares of Common Stock from the Chief Executive Officer at a price of $150 per share, for an aggregate cash purchase price $2,400. The Chief Executive Officer used a portion of the proceeds to repay his outstanding loan balance of $1,588. The Company retired the 16 shares of Common Stock. In April 2003, a former officer's right to put 120 shares of Common Stock back to the Company expired and, as a result, the Company recorded a decrease in redeemable Common Stock and a decrease in stockholders' deficit of $18,600 (a $12,600 increase in additional paid-in capital and a $6,000 decrease in accumulated deficit). The former officer's right to put an additional 6.648 shares back to the Company expired in July 2003 and, as a result, the Company recorded a decrease in redeemable Common Stock and an increase in additional paid-in capital of $997. In February 2002, the Company issued 96.774 shares of its Common Stock, at a value of $155 per share, to American Greetings Corporation ("American Greetings") in connection with the acquisition of M&D Industries, Inc., formerly known as M&D Balloons, Inc. ("M&D Industries") (see Note 10). In January 2002, 3.0 shares of restricted Common Stock aggregating $465 were issued to an officer of the Company, subject to future vesting provisions. See accompanying notes to consolidated financial statements. 7 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan Holdings" and, together with its subsidiaries, "Amscan," "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. AHI designs, manufactures, contracts for manufacture and distributes party goods, including metallic balloons, gifts and stationery, principally in North America, South America, Europe, Asia and Australia. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Amscan Holdings and its majority-owned and controlled entities. All material intercompany balances and transactions have been eliminated in consolidation. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. The results of operations may be affected by seasonal factors such as the timing of holidays or industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in Amscan Holdings' Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission. NOTE 3 - INVENTORIES Inventories consisted of the following (dollars in thousands):
September 30, December 31, 2003 2002 -------- -------- Finished goods ..................................... $ 72,443 $ 80,783 Raw materials ...................................... 9,061 8,763 Work-in-process .................................... 6,365 7,722 -------- -------- 87,869 97,268 Less: reserve for slow moving and obsolete inventory (3,035) (3,378) -------- -------- $ 84,834 $ 93,890 ======== ========
Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or market. NOTE 4 - INCOME TAXES The consolidated income tax expense for the three and nine months ended September 30, 2003 and 2002 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2003 and 2002, respectively. The differences between the consolidated effective income tax rates and the U.S. Federal statutory rate are primarily attributable to state income taxes and the effects of foreign operations. 8 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) NOTE 5 - COMPREHENSIVE INCOME (LOSS) Comprehensive income consisted of the following (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income ......................................................... $ 5,226 $ 5,436 $ 11,394 $ 15,607 Net change in cumulative translation adjustment .................... (44) (10) 1,232 945 Change in fair value of available-for-sale securities, net of income taxes of $558 and $596, respectively ............................ 854 912 Reclassification adjustment for available-for-sale securities sold during the period, net of income taxes of $(404) ................ (618) (618) Change in fair value of the Company's interest rate swap contract, net of income taxes of $90, $(225), $36 and $(415), respectively .................................................... 138 (345) 55 (636) Change in fair value of the Company's foreign exchange contracts, net of income taxes of $173, $84, $40 and $(104), respectively ............................................ 264 129 61 (159) ------- -------- -------- -------- $ 5,820 $ 5,210 $ 13,036 $ 15,757 ======= ======== ======== ========
Accumulated other comprehensive loss consisted of the following (dollars in thousands):
September 30, December 31, 2003 2002 ------- ------- Cumulative translation adjustment ........................................... $ (243) $(1,475) Unrealized gain on available-for-sale securities, net of income taxes of $192 294 Interest rate swap contract qualifying as a hedge, net of income taxes of $(385) and $(421), respectively .......................................... (589) (644) Foreign exchange contracts qualifying as hedges, net of income taxes of $(265) and $(305), respectively ....................................... (405) (466) ------- ------- $ (943) $(2,585) ======= =======
NOTE 6 - GAIN ON SALE OF AVAILABLE-FOR-SALE SECURITIES During the three months ended September 30, 2003, the Company sold a portion of the common stock of a customer which it had received in connection with the customer's reorganization in bankruptcy. The Company received net proceeds of approximately $1.4 million and recognized a gain of approximately $1.0 million. NOTE 7 - CAPITAL STOCK Under the terms of its stockholders' agreement ("Stockholders' Agreement"), the Company can be required to purchase all of the shares held by an employee stockholder for a period of one year after the employee's death or three months after his disability, at a price determined by a market valuation, and for a period of three months following termination of employment by the Company, at the lower of the share's cost, as defined, or the market valuation. At September 30, 2003 and December 31, 2002, there were 58.30 and 196.92 shares, respectively, of fully paid and vested Common Stock subject to such put provisions. The shares are recorded as redeemable Common Stock, at their estimated market value, with a corresponding adjustment to stockholders' deficit. 9 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) On January 10, 2003, an executive officer of a wholly-owned subsidiary and stockholder terminated his employment with the Company and, on April 9, 2003, exercised options to purchase 6.648 shares of the Company's Common Stock at $125,000 per share or for $831,000. On April 10, 2003, the former officer's right to put 120 shares of Common Stock back to the Company expired and, as a result, the Company recorded a decrease in redeemable Common Stock and a decrease in stockholders' deficit of $18,600,000 (a $12,600,000 increase in additional 6.648 shares back to the Company expired in July 2003 and as a result, the Company recorded a decrease in redeemable Common Stock and an increase in additional paid-in capital of $997,000. At September 30, 2003 and December 31, 2002, officers of the Company held 3.00 and 6.38 shares of Common Stock, respectively, subject to the vesting provisions of their employment agreements (the "Restricted Stock"). The 3.00 shares of Restricted Stock outstanding at September 30, 2003 will vest in December 2004. During the three and nine months ended September 30, 2003 and 2002, the Company recorded the amortization of Restricted Stock of $39,000, $129,000, $59,000, and $177,000 respectively, as compensation expense, which is included in general and administrative expenses in the Company's consolidated statements of income. At September 30, 2003 and December 31, 2002, the Company held notes receivable from a former and current officer totaling $669,000 and $638,000, respectively. These notes arose in connection with the issuance of shares of Common Stock to the officers. The notes bear interest at 6.65% and LIBOR plus 2%, respectively, and mature in March 2009 and January 2004, respectively. The notes receivable are shown on the consolidated balance sheets as an increase in stockholders' deficit. In July 2003, the Company purchased 6 shares of Common Stock from its President at a price of $150,000 per share, for an aggregate cost of $900,000. The President used a portion of the proceeds to repay his outstanding loan balance of $402,000. The Company retired the 6 shares of Common Stock. In June 2003, the Company purchased 16 shares of Common Stock from its Chief Executive Officer at a price of $150,000 per share, for an aggregate cost of $2,400,000. The Chief Executive Officer used a portion of the proceeds to repay his outstanding loan balance of $1,588,000. The Company retired the 16 shares of Common Stock. In June 2003, the Stock Incentive Plan was amended by the Board of Directors increasing the total number of shares of Common Stock reserved and available for grant from 150 to 200. In June 2003, the Chief Executive Officer and the President were each granted options to purchase 25 shares of Common Stock at $150,000 per share. In February 2002, the Company issued 96.774 shares of its Common Stock, valued at $155,000 per share, or a total of $15,000,000, to American Greetings Corporation ("American Greetings") in connection with the acquisition of M&D Industries (see Note 10). On March 30, 2001, the Board of Directors authorized 500 shares of preferred stock, $0.10 par value, and designated 100 shares as Series A Redeemable Convertible Preferred Stock ("Series A Redeemable Convertible Preferred Stock"). Also on March 30, 2001, the Company issued 40 shares of Series A Redeemable Convertible Preferred Stock to GS Capital Partners II, L.P. and certain other private investment funds managed by Goldman, Sachs & Co. (collectively, "GSCP") for proceeds of $6,000,000. Dividends are cumulative and payable annually, at 6% per annum. On March 30, 2003 and 2002, the annual dividend was distributed in additional shares of Series A Redeemable Convertible Preferred Stock. Dividends payable on or prior to March 30, 2004, are payable in additional shares of Series A Redeemable Convertible Preferred Stock. Subsequent to March 30, 2004, dividends are payable, at the option of the Company, either in cash or additional shares of Series A Redeemable Convertible 10 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) Preferred Stock. Each share of Series A Redeemable Convertible Preferred Stock is convertible at the option of the holder, at any time, into one share of Common Stock of the Company, $0.10 par value, subject to adjustment for the effects of subsequent Common Stock splits or stock dividends. The Series A Redeemable Convertible Preferred Stock is not redeemable on or prior to March 30, 2004. To the extent the Company shall have funds legally available to redeem these shares, the Company may redeem these shares, in whole or, with the consent of the holders of a majority of the outstanding Series A Redeemable Convertible Preferred Stock, in part, at a redemption price of $150,000 per share, in cash, together with accrued and unpaid dividends. To the extent the Company shall have funds legally available to redeem these shares on March 30, 2008, the Company is required to redeem all outstanding shares of Series A Redeemable Convertible Preferred Stock at a redemption price per share equal to $150,000 in cash, together with accrued and unpaid dividends. The holders of the Series A Redeemable Convertible Preferred Stock have liquidation rights equal to their original investment plus accrued but unpaid dividends. The Company has not paid any dividends on its 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. NOTE 8 - SEGMENT INFORMATION Industry Segment - ---------------- The Company manages its operations as one industry segment which involves the design, manufacture, contract for manufacture and distribution of party goods, including metallic balloons, gifts and stationery. 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 foreign markets. No single foreign operation is significant to the Company's consolidated operations. Sales between geographic areas are made at cost plus a share of operating profit. The Company's geographic area data are as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ THREE MONTHS ENDED SEPTEMBER 30, 2003 Sales to unaffiliated customers ................. $ 87,431 $ 15,789 $ 103,220 Sales between geographic areas .................. 5,450 $ (5,450) -- ---------- ---------- -------- --------- Net sales ....................................... $ 92,881 $ 15,789 $ (5,450) $ 103,220 ========== ========== ======== ========= Income from operations .......................... $ 12,566 $ 1,546 $ 266 $ 14,378 ========== ========== ======== Interest expense, net ........................... 6,681 Gain on sale of available-for-sale securities ... (1,022) Other expense, net .............................. 12 --------- Income before income taxes and minority interests $ 8,707 ========= Long-lived assets, net at September 30, 2003 .... $ 172,013 $ 8,338 $ 180,351 ========== ========== =========
11 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited)
Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ THREE MONTHS ENDED SEPTEMBER 30, 2002 Sales to unaffiliated customers ................. $ 85,574 $ 14,652 $ 100,226 Sales between geographic areas .................. 6,489 $ (6,489) -- --------- -------- ---------- --------- Net sales ....................................... $ 92,063 $ 14,652 $ (6,489) $ 100,226 ========= ======== ========== ========= Income from operations .......................... $ 12,847 $ 1,137 $ 153 $ 14,137 ========= ========= ========== Interest expense, net ........................... 5,430 Other income, net ............................... (364) --------- Income before income taxes and minority interests $ 9,071 ========= Long-lived assets, net at September 30, 2002 .... $ 177,693 $ 6,746 $ 184,439 ========= ======== ========= Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ NINE MONTHS ENDED SEPTEMBER 30, 2003 Sales to unaffiliated customers ................. $ 262,031 $ 42,029 $ 304,060 Sales between geographic areas .................. 15,063 $ (15,063) -- --------- -------- ---------- --------- Net sales ....................................... $ 277,094 $ 42,029 $ (15,063) $ 304,060 ========= ======== ========== ========= Income from operations .......................... $ 34,525 $ 2,326 $ 917 $ 37,768 ========= ======== ========== Interest expense, net ........................... 19,877 Gain on sale of available-for-sale securities ... (1,022) Other income, net ............................... (45) --------- Income before income taxes and minority interests $ 18,958 ========= Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ NINE MONTHS ENDED SEPTEMBER 30, 2002 Sales to unaffiliated customers ................. $ 250,406 $ 39,857 $ 290,263 Sales between geographic areas .................. 17,774 $ (17,774) -- --------- -------- ---------- --------- Net sales ....................................... $ 268,180 $ 39,857 $ (17,774) $ 290,263 ========= ======== ========== ========= Income from operations .......................... $ 39,310 $ 1,680 $ 620 $ 41,610 ========= ======== ========== Interest expense, net ........................... 16,188 Other income, net ............................... (386) --------- Income before income taxes and minority interests $ 25,808 =========
NOTE 9 - LEGAL PROCEEDINGS The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations. 12 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) NOTE 10 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In July 2002, Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No. 146"), was issued. SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF No. 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date an entity committed to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial statements. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB 51" ("FIN No. 46"). FIN No. 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights ("VIE's") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. The consolidation provisions of FIN No. 46 apply immediately to variable interests in VIE's created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for fiscal years that begin after June 15, 2003. The Company is currently evaluating the effect the adoption of the provisions of FIN 46 will have on its consolidated financial condition or results of operations. 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 consolidated financial statements of the Company. NOTE 11-ACQUISITION On February 19, 2002, the Company purchased all of the outstanding common stock of M&D Industries, a Manteno, Illinois-based manufacturer of metallic and plastic balloons, from American Greetings for $27,500,000 plus certain other related costs of $1,048,000. The Company financed the acquisition by borrowing $13,289,000 in the first quarter of 2002 (and an additional $258,000 in the second quarter of 2002) under its revolving credit facility and issuing 96.774 shares of its Common Stock to American Greetings. The Company purchased M&D Industries to supplement its existing balloon operations. American Greetings continues to distribute metallic balloons under a supply agreement with the Company. The acquisition has been accounted for under the provisions of SFAS No. 141, "Business Combinations," and, accordingly, the operating results of M&D Industries have been included in the Company's consolidated financial statements since the date of acquisition. The purchase price has been allocated based upon the estimated fair value of net assets acquired at the date of acquisition. Such allocations were based on studies and valuations. The excess of the purchase price over tangible net assets acquired has been allocated to intangible assets consisting of licensing agreements in the amount of $1,070,000, which are being amortized using the straight-line method over the lives of the contracts (one to three years with an average life of 2.7 years), and goodwill in the amount of $15,606,000, which is not being amortized. The following unaudited pro forma information assumes the M&D Industries acquisition had occurred on 13 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) January 1, 2002. The pro forma information, as presented below, is not necessarily indicative of the results that would have been obtained had the transaction occurred on January 1, 2002, nor is it necessarily indicative of the Company's future results (dollars in thousands): Nine Months Ended September 30, ------------------- 2002 ---- Net sales................ $294,370 Net income............... $ 16,000 The net income amount reflects adjustments for interest expense from additional borrowings necessary to finance the acquisition and amortization of other intangible assets and income tax effects based upon a pro forma effective tax rate of 39.5%. The pro forma information gives effect only to the adjustments described above and does not reflect management's estimate of any anticipated cost savings or other benefits as a result of the acquisition. During the three and nine months ended September 30, 2003, the Company sold $2,387,000 and $4,636,000 respectively, of metallic balloons and other party goods to American Greetings. During the three and nine months ended September 30, 2002, the Company sold $978,000 and $4,494,000, respectively, of metallic balloons and other party goods to American Greetings. Trade accounts receivable from American Greetings at September 30, 2003 and December 31, 2002 were $2,104,000 and $2,632,000, respectively. NOTE 12 - RESTRUCTURING CHARGES During the three and nine months ended September 30, 2003 and 2002, the Company incurred charges of $233,000, $1,007,000, $610,000 and $796,000, respectively, resulting from the consolidation of certain domestic and foreign distribution operations and the integration of M&D Industries into its balloon operations. The consolidation of our domestic distribution operations may result in additional restructuring charges in subsequent periods. NOTE 13 - STOCK OPTION PLAN The Company accounts for stock based awards in accordance with the provisions of Statement of Financial Accounting Standards No. 123 ("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 continue to apply the intrinsic value method of APB No. 25 for awards granted under its stock-based compensation plans and has provided the pro forma disclosures required by SFAS No. 123. Accordingly, no compensation cost has been recognized in 14 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) connection with the issuance of options under the 1997 Stock Incentive Plan as all options were granted with exercise prices equal to 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 would have been reduced to amounts indicated below (dollars in thousands):
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income: As reported ...................................... $ 5,226 $ 5,436 $11,394 $15,607 Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax of $69, $84, $139, and $253, respectively ............... 106 129 213 388 ------- ------- ------- ------- SFAS No. 123 pro forma net income ............. $ 5,120 $ 5,307 $11,181 $15,219 ======= ======= ======= =======
NOTE 14 - PROVISION FOR DOUBTFUL ACCOUNTS During the second quarter of 2003, a customer filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. This customer accounted for approximately 1.5% and 2.6% of the Company's consolidated net sales for the three and nine months ended September 30, 2003, respectively, and at September 30, 2003, the pre-petition, gross account receivable balance due from this customer totaled approximately $4,200,000. The Company has charged a total of $3.3 million to the provision for doubtful accounts, of which approximately $1,500,000, $1,600,000 and $200,000 were charged during the fourth quarter of 2002 and the second and third quarters of 2003, respectively. The Company does not believe the potential loss of this customer will have a material adverse effect on the Company's future results of operations or its financial condition. NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION On December 20, 2002, Amscan amended and restated its credit facility with various lenders (the "Lenders"), and with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole bookrunner and syndication agent. Under the terms of the Second Amended and Restated Credit and Guaranty Agreement (the "Credit Agreement"), the Lenders agreed to amend and restate the Company's then existing bank credit agreements (the "Bank Credit Facilities") in their entirety and to provide a $200,000,000 senior secured facility consisting of a $170,000,000 term loan (the "Term Loan") and up to $30,000,000 aggregate principal amount of revolving loans (the "Revolver"). The proceeds of the Term Loan were used to redesignate and replace the Company's AXEL term loan and revolver borrowings existing under the Bank Credit Facilities at the closing date and to pay certain fees and expenses associated with the refinancing. On December 19, 1997, the Company also issued $110,000,000 aggregate principal amount of 9.875% senior subordinated notes (the `Notes") due in December 2007. 15 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) The repayment of the borrowings under the Credit Agreement and Notes are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the "Guarantors"): o Amscan Inc. o Am-Source, LLC o Anagram Eden Prairie Property Holdings LLC o Anagram International Holdings, Inc. o Anagram International, Inc. o Anagram International, LLC o JCS Realty Corp. o M&D Industries, Inc. o SSY Realty Corp. o Trisar, Inc. Non-guarantor subsidiaries ("Non-guarantors") include the following: o Amscan Distributors (Canada) Ltd. o Amscan de Mexico, S.A. de C.V. o Amscan Holdings Limited o Amscan Partyartikel GmbH o Amscan (Asia-Pacific) Pty. Ltd. o Amscan Svenska AB o Anagram Espana, S.A. o Anagram France S.C.S. o Anagram International (Japan) Co., Ltd. o Anagram Mexico S. de R.L. de C.V. The following information presents consolidating balance sheets as of September 30, 2003 and December 31, 2002, and the related consolidating statements of income for the three and nine months ended June 30, 2003 and 2002 and consolidating statements of cash flows for the nine months ended September 30, 2003 and 2002 for the combined Guarantors and the combined Non-guarantors and elimination entries necessary to consolidate the entities comprising the combined companies. 16 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING BALANCE SHEET September 30, 2003 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................. $ 8,970 $ 449 $ 9,419 Accounts receivable, net of allowances .................... 71,014 15,844 86,858 Inventories, net of allowances ............................ 74,076 11,648 $ (890) 84,834 Prepaid expenses and other current assets ................. 10,624 2,000 (211) 12,413 --------- --------- --------- --------- Total current assets ................................... 164,684 29,941 (1,101) 193,524 Property, plant and equipment, net ........................... 96,482 1,623 98,105 Goodwill, net ................................................ 66,454 5,827 72,281 Other assets, net ............................................ 37,417 1,287 (28,739) 9,965 --------- --------- --------- --------- Total assets ........................................... $ 365,037 $ 38,678 $ (29,840) $ 373,875 ========= ========= ========= ========= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable .......................................... $ 28,310 $ 1,810 $ 30,120 Accrued expenses .......................................... 16,455 6,786 23,241 Income taxes payable ...................................... 4,007 $ (204) 3,803 Current portion of long-term obligations .................. 3,016 117 3,133 --------- --------- --------- --------- Total current liabilities .............................. 51,788 8,713 (204) 60,297 Long-term obligations, excluding current portion ............. 292,969 113 293,082 Deferred income tax liabilities .............................. 16,534 16,534 Other ........................................................ 1,219 17,279 (16,166) 2,332 --------- --------- --------- --------- Total liabilities ...................................... 362,510 26,105 (16,370) 372,245 Redeemable convertible preferred stock ....................... 6,945 6,945 Redeemable Common Stock ...................................... 8,745 8,745 Commitments and Contingencies Stockholders' (deficit) equity: Common Stock .............................................. 339 (339) -- Additional paid-in capital ................................ 27,535 658 (658) 27,535 Unamortized restricted Common Stock awards ................................................. (194) (194) Notes receivable from stockholders ........................ (669) (669) (Deficit) retained earnings ............................... (38,892) 12,161 (13,058) (39,789) Accumulated other comprehensive loss ...................... (943) (585) 585 (943) --------- --------- --------- --------- Total stockholders' (deficit) equity .............. (13,163) 12,573 (13,470) (14,060) --------- --------- --------- --------- Total liabilities, redeemable convertible preferred and Common Stock and stockholders' (deficit) equity ................ $ 365,037 $ 38,678 $ (29,840) $ 373,875 ========= ========= ========= =========
17 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING BALANCE SHEET December 31, 2002 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................. $ 1,483 $ 917 $ 2,400 Accounts receivable, net of allowances .................... 62,520 11,727 74,247 Inventories, net of allowances ............................ 83,659 11,138 $ (907) 93,890 Prepaid expenses and other current assets ................. 13,411 2,280 (458) 15,233 --------- --------- ---------- --------- Total current assets ................................... 161,073 26,062 (1,365) 185,770 Property, plant and equipment, net ........................... 98,951 1,353 100,304 Goodwill, net ................................................ 68,611 5,640 74,251 Notes receivable from officers ............................... 1,942 1,942 Other assets, net ............................................ 34,788 627 (25,185) 10,230 --------- --------- ---------- --------- Total assets ........................................... $ 365,365 $ 33,682 $ (26,550) $ 372,497 ========= ========= ========== ========= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable .......................................... $ 37,813 $ 1,432 $ 39,245 Accrued expenses .......................................... 15,937 5,587 21,524 Income taxes payable ...................................... 3,037 $ (512) 2,525 Current portion of long-term obligations .................. 3,052 168 3,220 --------- --------- ---------- --------- Total current liabilities .............................. 59,839 7,187 (512) 66,514 Long-term obligations, excluding current portion ............. 295,274 146 295,420 Deferred income tax liabilities .............................. 17,360 17,360 Other ........................................................ 1,153 16,052 (14,888) 2,317 --------- --------- ---------- --------- Total liabilities ............................................ 373,626 23,385 (15,400) 381,611 Redeemable convertible preferred stock ....................... 6,646 6,646 Redeemable Common Stock ...................................... 30,523 30,523 Commitments and Contingencies Stockholders' (deficit) equity: Common Stock .............................................. 339 (339) -- Additional paid-in capital ................................ 14,814 658 (658) 14,814 Unamortized restricted Common Stock awards ................................................. (323) (323) Notes receivable from stockholders ........................ (638) (638) (Deficit) retained earnings ............................... (56,698) 11,198 (12,051) (57,551) Accumulated other comprehensive loss ...................... (2,585) (1,898) 1,898 (2,585) --------- --------- ---------- --------- Total stockholders' (deficit) equity .............. (45,430) 10,297 (11,150) (46,283) --------- --------- ---------- --------- Total liabilities, redeemable convertible preferred and Common Stock and stockholders' (deficit) equity ................ $ 365,365 $ 33,682 $ (26,550) $ 372,497 ========= ========= ========== =========
18 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF INCOME For the Three Months Ended September 30, 2003 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Net sales ..................................... $ 92,881 $ 15,789 $ (5,450) $ 103,220 Cost of sales ................................. 62,861 10,797 (5,416) 68,242 --------- --------- --------- --------- Gross profit ......................... 30,020 4,992 (34) 34,978 Operating expenses: Selling expenses .......................... 7,578 1,628 9,206 General and administrative expenses ....... 6,729 1,638 (300) 8,067 Art and development costs ................. 2,322 2,322 Provision for doubtful accounts ........... 592 180 772 Restructuring charges ..................... 233 233 --------- --------- --------- --------- Total operating expenses ............. 17,454 3,446 (300) 20,600 --------- --------- --------- --------- Income from operations ............... 12,566 1,546 266 14,378 Interest expense, net ......................... 6,494 187 6,681 Gain on sale of available-for-sale securities . (1,022) (1,022) Other (income) expense, net ................... (1,082) (23) 1,117 12 --------- --------- --------- --------- Income before income taxes and minority interests ................. 8,176 1,382 (851) 8,707 Income tax expense ............................ 2,929 523 (13) 3,439 Minority interests ............................ 42 42 --------- --------- --------- --------- Net income ........................... 5,247 817 (838) 5,226 Dividend on redeemable convertible preferred stock ................... 102 102 --------- --------- --------- --------- Net income applicable to common shares $ 5,145 $ 817 $ (838) $ 5,124 ========= ========= ========= =========
19 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF INCOME For the Three Months Ended September 30, 2002 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Net sales ..................................... $ 92,063 $ 14,652 $ (6,489) $ 100,226 Cost of sales ................................. 61,932 10,231 (6,402) 65,761 --------- --------- --------- --------- Gross profit ......................... 30,131 4,421 (87) 34,465 Operating expenses: Selling expenses .......................... 7,366 1,618 8,984 General and administrative expenses ....... 6,643 1,498 (240) 7,901 Art and development costs ................. 2,486 2,486 Provision for doubtful accounts ........... 244 103 347 Restructuring charges ..................... 545 65 610 --------- --------- --------- --------- Total operating expenses ............. 17,284 3,284 (240) 20,328 --------- --------- --------- --------- Income from operations ............... 12,847 1,137 153 14,137 Interest expense, net ......................... 5,274 156 5,430 Other (income) expense, net ................... (1,199) (12) 847 (364) --------- --------- --------- --------- Income before income taxes and minority interests ............. 8,772 993 (694) 9,071 Income tax expense ............................ 3,249 334 3,583 Minority interests ............................ 52 52 --------- --------- --------- --------- Net income ........................... 5,523 607 (694) 5,436 Dividend requirement on redeemable convertible preferred stock ....... 95 95 --------- --------- --------- --------- Net income applicable to common shares $ 5,428 $ 607 $ (694) $ 5,341 ========= ========= ========= =========
20 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF INCOME For the Nine Months Ended September 30, 2003 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Net sales ..................................... $ 277,094 $ 42,029 $ (15,063) $ 304,060 Cost of sales ................................. 189,805 29,436 (15,080) 204,161 --------- --------- --------- --------- Gross profit ......................... 87,289 12,593 17 99,899 Operating expenses: Selling expenses .......................... 22,649 4,673 27,322 General and administrative expenses ....... 19,710 5,086 (900) 23,896 Art and development costs ................. 7,145 7,145 Provision for doubtful accounts ........... 2,280 481 2,761 Restructuring charges ..................... 980 27 1,007 --------- --------- --------- --------- Total operating expenses ............. 52,764 10,267 (900) 62,131 --------- --------- --------- --------- Income from operations ............... 34,525 2,326 917 37,768 Interest expense, net ......................... 19,375 502 19,877 Gain on sale of available-for-sale securities . (1,022) (1,022) Other (income) expense, net ................... (1,912) 4 1,863 (45) --------- --------- --------- --------- Income before income taxes and minority interests ............. 18,084 1,820 (946) 18,958 Income tax expense ............................ 6,700 781 7 7,488 Minority interests ............................ 76 76 --------- --------- --------- --------- Net income ........................... 11,384 963 (953) 11,394 Dividend on redeemable convertible preferred stock ................... 299 299 --------- --------- --------- --------- Net income applicable to common shares $ 11,085 $ 963 $ (953) $ 11,095 ========= ========= ========= =========
21 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF INCOME For the Nine Months Ended September 30, 2002 (Dollars in thousands)
Amscan Holdings and Combined Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Net sales ..................................... $ 268,180 $ 39,857 $ (17,774) $ 290,263 Cost of sales ................................. 178,791 28,299 (17,674) 189,416 --------- --------- --------- --------- Gross profit ......................... 89,389 11,558 (100) 100,847 Operating expenses: Selling expenses .......................... 21,300 4,510 25,810 General and administrative expenses ....... 19,954 4,473 (720) 23,707 Art and development costs ................. 7,462 7,462 Provision for doubtful accounts ........... 725 737 1,462 Restructuring charges ..................... 638 158 796 --------- --------- --------- --------- Total operating expenses ............. 50,079 9,878 (720) 59,237 --------- --------- --------- --------- Income from operations ............... 39,310 1,680 620 41,610 Interest expense, net ......................... 15,716 472 16,188 Other (income) expense, net ................... (1,808) (18) 1,440 (386) --------- --------- --------- --------- Income before income taxes and minority interests ............. 25,402 1,226 (820) 25,808 Income tax expense ............................ 9,695 499 10,194 Minority interests ............................ 7 7 --------- --------- --------- --------- Net income ........................... 15,707 720 (820) 15,607 Dividend requirement on redeemable convertible preferred stock ....... 280 280 --------- --------- --------- --------- Net income applicable to common shares $ 15,427 $ 720 $ (820) $ 15,327 ========= ========= ========= =========
22 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, 2003 (Dollars in thousands)
Amscan Holdings Combined and Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income ................................................. $ 11,384 $ 963 $ (953) $ 11,394 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................... 11,630 403 12,033 Amortization of deferred financing costs ................ 1,570 1,570 Amortization of restricted Common Stock awards .......... 129 129 Provision for doubtful accounts ......................... 2,280 481 2,761 Deferred income tax expense ............................. 2,444 2,444 Gain on sale of available-for-sale securities ........... (1,022) (1,022) Loss on disposal of property and equipment .............. 110 8 118 Non-cash restructuring charges .......................... 104 104 Changes in operating assets and liabilities, net of acquisition: Increase in accounts receivable ................... (10,774) (4,598) (15,372) Decrease (increase) in inventories ................ 9,583 (510) (17) 9,056 Decrease in prepaid expenses and other current assets ......................................... 937 33 970 (Decrease) increase in accounts payable, accrued expenses and income taxes payable .............. (8,039) 1,920 7 (6,112) Other, net ......................................... (1,830) 570 963 (297) -------- -------- ------- -------- Net cash provided by (used in) operating activities 18,506 (730) -- 17,776 Cash flows from investing activities: Capital expenditures ....................................... (9,444) (637) (10,081) Proceeds from sale of available-for-sale securities ........ 1,443 1,443 Proceeds from disposal of property and equipment ........... 128 70 198 -------- -------- ------- -------- Net cash used in investing activities ............. (7,873) (567) -- (8,440) Cash flows from financing activities: Repayment of loans, notes payable and long-term obligations ............................................ (2,655) (133) (2,788) Proceeds from exercise of stock options .................... 831 831 Purchase of Common Stock from officers ..................... (3,300) (3,300) Repayment of notes receivable from officers ................ 1,990 1,990 -------- -------- ------- -------- Net cash used in financing activities ............. (3,134) (133) -- (3,267) Effect of exchange rate changes on cash and cash equivalents .. (12) 962 950 -------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents ............................. 7,487 (468) 7,019 Cash and cash equivalents at beginning of period .............. 1,483 917 2,400 -------- -------- ------- -------- Cash and cash equivalents at end of period .................... $ 8,970 $ 449 $ -- $ 9,419 ======== ======== ======= ========
23 AMSCAN HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, 2002 (Dollars in thousands)
Amscan Holdings Combined and Combined Non- Guarantors Guarantors Eliminations Consolidated ---------- ---------- ------------ ------------ Cash flows from operating activities: Net income .................................................. $ 15,707 $ 720 $ (820) $ 15,607 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 9,557 295 9,852 Amortization of deferred financing costs ................. 843 843 Amortization of restricted Common Stock awards ........... 177 177 Provision for doubtful accounts .......................... 725 737 1,462 Deferred income tax expense .............................. 4,462 4,462 (Gain) loss on disposal of equipment ..................... (346) 35 (311) Changes in operating assets and liabilities, net of acquisition: Increase in accounts receivable .................... (9,013) (4,517) (13,530) (Increase) decrease in inventories ................. (7,494) (1,917) 100 (9,311) Increase in prepaid expenses and other current assets .......................................... (1,748) (642) (2,390) Increase in accounts payable, accrued expenses and income taxes payable ........................ 5,317 1,711 7,028 Other, net .......................................... (5,952) 3,190 720 (2,042) -------- -------- ------- -------- Net cash provided by (used in) operating activities 12,235 (388) -- 11,847 Cash flows from investing activities: Cash paid in connection with acquisition .................... (13,547) (13,547) Capital expenditures ........................................ (11,129) (267) (11,396) Proceeds from disposal of property and equipment ............ 481 34 515 -------- -------- ------- -------- Net cash used in investing activities .............. (24,195) (233) -- (24,428) Cash flows from financing activities: Proceeds from short-term obligations ........................ 16,300 16,300 Repayment of loans, notes payable and long-term obligations ................................. (2,523) (12) (2,535) -------- -------- ------- -------- Net cash provided by (used in) financing activities 13,777 (12) -- 13,765 Effect of exchange rate changes on cash and cash equivalents ... (671) 423 (248) -------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents 1,146 (210) 936 Cash and cash equivalents at beginning of period ............... 60 956 1,016 -------- -------- ------- -------- Cash and cash equivalents at end of period ..................... $ 1,206 $ 746 $ -- $ 1,952 ======== ======== ======= ========
24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Percentage of Net Sales - -----------------------
Three Months Ended ------------------ September 30, ------------- 2003 2002 ------ ------ Net sales................................................... 100.0% 100.0% Cost of sales............................................... 66.1 65.6 ------ ------ Gross profit......................................... 33.9 34.4 Operating expenses: Selling expenses........................................ 8.9 9.0 General and administrative expenses..................... 7.8 7.9 Art and development costs............................... 2.3 2.5 Provision for doubtful accounts......................... 0.7 0.3 Restructuring charges................................... 0.3 0.6 ------ ------ Total operating expenses............................. 20.0 20.3 ------ ------ Income from operations............................... 13.9 14.1 Interest expense, net....................................... 6.5 5.4 Gain on sale of available-for-sale securities............... (1.0) Other income, net........................................... (0.4) ------ ------ Income before income taxes and minority interests.... 8.4 9.1 Income tax expense.......................................... 3.3 3.6 Minority interests.......................................... 0.1 ------ ------ Net income........................................... 5.1% 5.4% ====== ======
Net sales of $103.2 million for the quarter ended September 30, 2003 were $3.0 million higher than net sales for the quarter ended September 30, 2002. During the third quarter of 2003, the Company's domestic sales of party goods, including metallic balloons, were comparable to sales during the third quarter of 2002. Domestic sales performance during the third quarter of 2003 continued to be adversely affected by general economic conditions resulting in a weak retail environment. Contract manufacturing during the third quarter increased by 18.3% over the third quarter of 2002. International net sales reported for the three months ended September 30, 2003 were 7.8% higher as compared to the corresponding period in 2002 primarily due to an increase in volume combined with favorable foreign currency exchange fluctuations. Gross profit margin for the quarter ended September 30, 2003, of 33.9% was 0.5% lower than during the quarter ended September 30, 2002. The decrease in gross profit margin during the third quarter of 2003 reflects the increase in contract manufacturing and the additional depreciation, amortization and equipment rental costs associated with the new distribution facility that became operational in the fourth quarter of 2002, partially offset by the operating efficiencies from the transition to the new distribution facility. Selling expenses of $9.2 million for the quarter ended September 30, 2003 were $0.2 million higher than in the corresponding period in 2002. However, as a percent of sales, selling expenses were 8.9%, or 0.1% less than in the corresponding period in 2002, reflecting the further leveraging of our sales infrastructure and the maturation of our specialty sales force. General and administrative expenses of $8.1 million for the quarter ended September 30, 2003 were $0.2 million higher than the corresponding period in 2002. As a percentage of sales, general and administrative expenses were 7.8% for the third quarter of 2003, or 0.1% lower than in the corresponding period in 2002. The net decrease in general and administrative expenses as a percentage of sales principally reflects synergies realized from the consolidation of the administrative functions of M&D Industries, Inc., ("M&D Industries") into the Company's existing operations, partially offset by higher insurance and occupancy costs. 25 Art and development costs of $2.3 million for the quarter ended September 30, 2003 were $0.2 million lower as compared to 2002, principally due to synergies realized from the consolidation of M&D Industries' art and development departments into the Company's existing operations. As a percentage of sales, art and development costs were 2.3% for the third quarter of 2003 and 2.5% for the third quarter of 2002. During the second quarter of 2003, a customer filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and as a result, the Company charged an additional $0.2 million to the provision for doubtful accounts during the third quarter of 2003. This customer accounted for approximately 1.5% of the Company's consolidated net sales for the three months ended September 30, 2003. The Company does not believe the potential loss of this customer will have a material adverse effect on the Company's future results of operations or its financial condition. During the three months ended September 30, 2003 and 2002, the Company incurred restructuring charges of $0.2 million and $0.6 million, respectively, resulting from the consolidation of certain domestic and foreign distribution operations, and during 2003, the ongoing integration of M&D Industries into our balloon operations. The consolidation of our domestic distribution operations may result in additional restructuring charges in subsequent periods. During the three months ended September 30, 2003, the Company sold a portion of the common stock of a customer which it had received in connection with the customer's reorganization in bankruptcy. The Company received net proceeds of approximately $1.4 million and recognized a gain of approximately $1.0 million. Interest expense, net, of $6.7 million for the three months ended September 30, 2003 was $1.3 million higher than for the three months ended September 30, 2002, principally due to the impact of higher average borrowings and a higher average effective interest rate (8.9% in 2003 versus 7.3% in 2002). Income taxes for the third quarter of 2003 and 2002 were based upon estimated consolidated effective income tax rates of 39.5% for the years ending December 31, 2003 and 2002. 26 Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Percentage of Net Sales - -----------------------
Nine Months Ended September 30, ------------------------------- 2003 2002 ------ ------ Net sales.................................................... 100.0% 100.0% Cost of sales................................................ 67.1 65.3 ------ ------ Gross profit.......................................... 32.9 34.7 Operating expenses: Selling expenses......................................... 9.0 8.9 General and administrative expenses...................... 7.9 8.1 Art and development costs................................ 2.4 2.6 Provision for doubtful accounts.......................... 0.9 0.5 Restructuring charges.................................... 0.3 0.3 ------ ------ Total operating expenses.............................. 20.5 20.4 ------ ------ Income from operations................................ 12.4 14.3 Interest expense, net........................................ 6.5 5.5 Gain on sale of available-for-sale securities................ (0.3) Other income, net............................................ (0.1) ------ ------ Income before income taxes and minority interests..... 6.2 8.9 Income tax expense........................................... 2.5 3.5 Minority interests........................................... ------ ------ Net income............................................ 3.7% 5.4% ====== ======
Net sales of $304.1 million for the nine months ended September 30, 2003 were $13.8 million higher than net sales for the nine months ended September 30, 2002. During the nine months ended September 30, 2003, the Company's domestic sales of party goods, including metallic balloons, grew by 3.6% over the corresponding period in 2002. Domestic sales performance during the nine months ended September 30, 2003 were adversely affected by general economic conditions resulting in a weak retail environment and, during the first quarter of 2003, severe weather conditions. Contract manufacturing during the nine months ended September 30, 2003 increased by 15.6% over the corresponding period in 2002. International net sales reported for the nine months ended September 30, 2003 increased by 5.4%, principally as a result of favorable foreign currency exchange fluctuations partially offset by a small decrease in volume. Gross profit margin for the nine months ended September 30, 2003, of 32.9% was 1.8% lower than during the nine months ended September 30, 2002. Gross profit margin for the nine months ended September 30, 2003 reflects the impact of product sales and customer mix (particularly solid color tableware and contract manufacturing) and additional depreciation and amortization and equipment rental costs associated with the new distribution facility that became operational in the fourth quarter of 2002. Gross profit margin for the nine months ended September 30, 2003 also reflects additional production costs incurred during the first and second quarters of 2003 in connection with the integration of the M&D Industries into the Company's balloon operations, additional distribution costs incurred as a result of severe weather conditions during the first quarter of 2003 and redundant costs arising from the Company's transition from four to three east coast distribution facilities, partially offset by operating efficiencies from the transition to new distribution facility. Selling expenses of $27.3 million for the nine months ended September 30, 2003 were $1.5 million higher than in the corresponding period in 2002 principally due to the inclusion of the operating results of M&D Industries for two additional months in 2003 and the continued development of the Company's specialty sales force. Selling expenses, as a percentage of net sales, increased from 8.9% to 9.0%. General and administrative expenses of $23.9 million for the nine months ended September 30, 2003 were relatively consistent with the corresponding period in 2002 as increased insurance and occupancy costs were offset 27 by synergies realized from the consolidation of M&D Industries' administrative functions into the Company's existing operations. As a percentage of sales, general and administrative expenses decreased by 0.2% to 7.9%. Art and development costs of $7.1 million for the nine months ended September 30, 2003 were $0.3 million lower than for the corresponding period in 2002, principally due to synergies realized from the integration of M&D Industries' art and development departments into the Company's existing operations. As a percentage of sales, art and development costs were 2.4% for the nine months ended September 30, 2003 and 2.6% for the corresponding period in 2002. During the second quarter of 2003, a customer filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and as a result, the Company charged $1.8 million to the provision for doubtful accounts during the nine months ended September 30, 2003. This customer accounted for approximately 2.6% of the Company's consolidated net sales for the nine months ended September 30, 2003. The Company does not believe the potential loss of this customer will have a material adverse effect on the Company's future results of operations or its financial condition. During the nine months ended September 30, 2003 and 2002, the Company incurred restructuring charges of $1.0 million and $0.8 million, respectively, resulting from the consolidation of certain domestic and foreign distribution operations, and during 2003, the ongoing integration of M&D Industries into our balloon operations. The consolidation of our domestic distribution operations may result in additional restructuring charges in subsequent periods. During the nine months ended September 30, 2003, the Company sold a portion of the common stock of a customer which it had received in connection with the customer's reorganization in bankruptcy. The Company received net proceeds of approximately $1.4 million and recognized a gain of $1.0 million. Interest expense, net, of $19.9 million for the nine months ended September 30, 2003 was $3.7 million higher than in the corresponding period in 2002 and reflects the impact of higher average borrowings and a higher average effective interest rate (8.7% in 2003 versus 7.3% in 2002). Income taxes for the nine months ended September 30, 2003 and 2002 were based upon estimated consolidated effective income tax rates of 39.5% for the years ending December 31, 2003 and 2002. Liquidity and Capital Resources - ------------------------------- On December 20, 2002, we amended and restated our existing credit facility with various lenders (the "Lenders"), with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole bookrunner and syndication agent. Under the terms of the Second Amended and Restated Credit and Guaranty Agreement (the "Credit Agreement"), the Lenders agreed to amend and restate the Company's existing bank credit agreements in their entirety and to provide a $200,000,000 senior secured facility consisting of a $170,000,000 term loan (the "Term Loan") and up to $30,000,000 aggregate principal amount of revolving loans (the "Revolver"). The proceeds of the Term Loan were used to redesignate and replace the Company's AXEL term loan of $148.5 million and revolver borrowings of $16.0 million existing at the closing date and to pay certain fees and expenses associated with the refinancing. The Term Loan was funded at a 1.0% original issue discount and provides for amortization (in quarterly installments) of 1.0% per annum through June 15, 2006, and will then amortize in equal quarterly payments through June 15, 2007. The Term Loan bears interest, at the option of the Company, at the index rate plus 3.50% per annum or at LIBOR plus 4.50% per annum, with a LIBOR floor of 2.0%. At September 30, 2003, the Term Loan, net of unamortized discount, was $167,347,000 and the floating interest rate on the Term Loan was 6.50%. The Company is required to make prepayments under the Credit Agreement based upon the net proceeds from certain asset sales and insurance or condemnation awards, the issuances of certain debt and equity securities, and based on annual cash flows, as defined. 28 The Revolver expires on June 15, 2007, and bears interest, at the option of the Company, at the index rate plus, based on performance, a margin ranging from 2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a margin ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At September 30, 2003, the Company had no borrowings under the Revolver. Standby letters of credit totaling $6.9 million were outstanding and the Company had borrowing capacity of approximately $23.1 million under the terms of the Revolver at September 30, 2003. The Term Loan and borrowings under the Revolver are secured by a first priority lien on substantially all of the Company's assets and are guaranteed by the Company's domestic subsidiaries. The Company is required to maintain certain financial ratios during the term of the Credit Agreement, including leverage and interest coverage ratios. At September 30, 2003, the Company had $110,000,000 of senior subordinated notes (the "Notes") outstanding. The Notes bear interest at a rate of 9.875% per annum and mature in December 2007. Interest is payable semi-annually on June 15 and December 15 of each year. The Notes are redeemable at the option of the Company, in whole or in part, at redemption prices ranging from 104.937% to 100%, plus accrued and unpaid interest to the date of redemption. Upon the occurrence of a Change of Control, as defined in the note indenture, the Company will be obligated to make an offer to purchase the Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount of the 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 Credit Agreement, the note indenture and the other indebtedness that would become payable upon the occurrence of such Change of Control. In addition to the Revolver, the Company has a 400,000 Canadian dollar denominated revolving credit facility which bears interest at the Canadian prime rate plus 0.6% and expires on April 30, 2004, a 1.0 million British Pound Sterling denominated revolving credit facility which bears interest at the U.K. base rate plus 1.75% and expires on June 1, 2004 and a $1.0 million revolving credit facility which bears interest at LIBOR plus 1.0% and expires on December 31, 2003. We expect to renew these revolving credit facilities upon expiration. No borrowings were outstanding under these revolving credit facilities at September 30, 2003. The Company financed the cost to purchase property in 2000 and to construct a new domestic distribution facility completed in 2001 (total cost of $30.2 million) using borrowings under the then existing revolving credit facility and, in 2001, the proceeds from the issuance of the Series A Redeemable Convertible Preferred Stock of $6.0 million (noted below) and long-term borrowings consisting of a first and second lien mortgage note in the original principal amount of $10.0 million each with a financial institution and the New York State Job Development Authority, respectively. The first lien mortgage note bears interest at LIBOR plus 2.75%. However, the Company has utilized an interest rate swap agreement to effectively fix the loan rate at 8.40% for the term of the loan. The second lien mortgage note bears interest at the rate of 3.31%, and is subject to review and adjustment semi-annually based on the New York State Job Development Authority's confidential internal protocols. Both notes are for a term of 96 months and require monthly payments based on a 180-month amortization period with balloon payments upon maturity in January 2010. On March 30, 2001, the Board of Directors authorized 500 shares of preferred stock, $0.10 par value, and designated 100 shares as Series A Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company issued 40 shares of Series A Redeemable Convertible Preferred Stock to GS Capital Partners II, L.P. and certain other private investment funds managed by Goldman, Sachs & Co. (collectively, "GSCP") for proceeds of $6.0 million. Dividends are cumulative and payable annually at 6% per annum. Dividends payable on or prior to March 30, 2004, are payable in additional shares of Series A Redeemable Convertible Preferred Stock based on a value of $150,000 per share. Subsequent to March 30, 2004, dividends are payable, at the option of the Company, either in cash or additional shares of Series A Redeemable Convertible Preferred Stock. On March 30, 2003, the annual dividend was distributed in additional shares of Series A Redeemable Convertible Preferred Stock. At September 30, 2003, 44.94 shares of Series A Redeemable Convertible Preferred Stock were issued and outstanding. 29 On February 19, 2002, the Company purchased all of the outstanding Common Stock of M&D Industries, a Manteno, Illinois-based manufacturer of metallic and plastic balloons, from American Greetings Corporation ("American Greetings") for $27.5 million plus related costs. The Company financed the acquisition by borrowing $13.5 million under its then existing revolving credit facility and issuing 96.774 shares of its Common Stock to American Greetings, at a value of $155,000 per share. American Greetings continues to distribute metallic balloons under a supply agreement with the Company. The Company has several non-cancelable operating leases principally for office, distribution and manufacturing facilities, showrooms and warehouse equipment. These leases expire on various dates through 2017 and generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance costs. Rent expense for the nine months ended September 30, 2003 and 2002, totaled $9.3 million and $8.0 million, respectively. The minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2003, approximate $12.9 million. On June 13, 2002, the Company filed a registration statement with the Commission for an IPO of its Common Stock. However, during the fourth quarter of 2002, the Company decided not to pursue the IPO, which resulted in a $0.8 million write-off of costs associated with the offering. On March 12, 2003, the Company filed a Form RW with the Securities and Exchange Commission withdrawing its registration statement for the IPO. The Credit Agreement and the Notes 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. At September 30, 2003, the Company did not have material commitments for capital expenditures or other acquisitions. Based upon the current level of operations and anticipated growth, the Company anticipates that its operating cash flow, together with available borrowings under the Revolver will be adequate to meet anticipated future requirements for working capital and operating expenses for at least the next 12 months. However, the Company's ability to make scheduled 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. Cash Flow Data - Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 - -------------------------------------------------------------------------------- Net cash provided by operating activities during the nine months ended September 30, 2003 and 2002, totaled $17.8 million and $11.8 million, respectively. Net cash flow provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2003 and 2002, was $29.6 million and $32.1 million, respectively. Changes in operating assets and liabilities, net of acquisition for the nine months ended September 30, 2003 and 2002, resulted in the use of cash of $11.8 million and $20.3 million, respectively. The reduction in the use of cash in 2003 principally reflects the Company's efforts to reduce its investment in working capital. Net cash used in investing activities during the nine months ended September 30, 2003 of $8.4 million consisted principally of additional investments in distribution and manufacturing equipment and other assets, partially offset by proceeds received from the disposal of equipment and the sale of a portion of the Company's investment in the common stock of a customer received in connection with the customer's reorganization in bankruptcy. Net cash used in investing activities during the nine months ended September 30, 2002 of $24.4 million consisted of $13.5 million relating to the acquisition of M&D Balloons and $11.4 million of costs associated with the new domestic distribution facility as well as additional investments in data processing and manufacturing equipment, partially offset by proceeds from disposal of property and equipment. During the nine months ended September 30, 2003, net cash used in financing activities of $3.3 million consisted of the scheduled payments on the Term Loan and other long-term obligations and the purchase of Common Stock from both the Company's Chief Executive Officer and President, partially offset by proceeds from the exercise of stock options and the repayment of the notes receivable by both the Chief Executive Officer and 30 President. During the comparable period in 2002, net cash provided by financing activities of $13.8 million consisted of proceeds from short-term borrowings, including $13.5 million used to finance the acquisition of M&D Balloons, partially offset by the scheduled payments of the Term Loan and other long-term obligations. 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 on its financial condition or future results of operations. "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 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) introduction of new product lines by the Company, (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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we utilize interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the three months ended September 30, 2003 and 2002, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before income taxes and minority interest would have decreased, by $0.9 million in each of the periods. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the nine months ended September 30, 2003 and 2002, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before income taxes and minority interest would have decreased, by $2.6 million and $2.5 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest 31 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 our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure. Our 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 our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $0.5 million and $0.4 million, for the three months ended September 30, 2003 and 2002, respectively. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $1.3 million and $1.2 million for the nine months ended September 30, 2003 and 2002, respectively. These calculations assume 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 may also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our 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 4. CONTROLS AND PROCEDURES Based on an evaluation of the effectiveness of the Company's disclosure controls and procedures performed by the Company's management, with the participation of the Company's Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report, the Company's Chief Executive Officer and its Chief Financial Officer concluded that the Company's disclosure controls and procedures have been effective. As used herein, "disclosure controls and procedures" means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during the Company's fiscal quarter ended September 30, 2003 that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 32 PART II ------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10 (a) Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended to June 2003. 10 (b) Employment Agreement, dated as of June 19, 2003, by and among the Company and Gerald C. Rittenberg. 10 (c) Employment Agreement, dated as of June 19, 2003, by and among the Company and James M. Harrison. 31(1) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer. 31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. 32 Section 1350 Certification. b) Reports on Form 8-K None. 33 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMSCAN HOLDINGS, INC. By: /s/ Michael A. Correale ----------------------- Michael A. Correale Chief Financial Officer (on behalf of the registrant and as Date: November 14, 2003 principal financial and accounting ----------------- officer) EXHIBIT INDEX No. Description --- ----------- 10 (a) Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended to June 2003. 10 (b) Employment Agreement, dated as of June 19, 2003, by and among the Company and Gerald C. Rittenberg. 10 (c) Employment Agreement, dated as of June 19, 2003, by and among the Company and James M. Harrison. 31(1) Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer. 31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. 32 Section 1350 Certification. EX-10 3 exhibit10_a.txt 1997 STOCK INCENTIVE PLAN SECTION AMSCAN HOLDINGS, INC. 1997 STOCK INCENTIVE PLAN SECTION (As amended to June 2000) 1. Purpose; Definitions The purpose of the Plan is to give Amscan Holdings, Inc. (the "Company") and its Affiliates (each as defined below) a competitive advantage in attracting, retaining and motivating officers, employees, consultants and directors, and to provide the Company and its subsidiaries with a stock plan providing incentives linked to the financial results of the Company's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: "Affiliate" of a Person means a Person directly or indirectly controlled by, controlling or under common control with such Person. "Award" means a Stock Appreciation Right, Stock Option or Restricted Stock. "Award Agreement" means a Restricted Stock Agreement or Option Agreement. An Award Agreement may consist of provisions of an employment agreement. "Board" means the Board of Directors of the Company. "Change in Control" shall mean (1) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than GSCP (as defined in the Stockholders' Agreement) and their Affiliates of a majority of the outstanding voting stock of the Company or (2) the sale of 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, other than to a Person (or group of Persons) a majority of the outstanding voting stock (or other voting interests) of which are beneficially owned by GSCP and their Affiliates. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. "Committee" means (a) before an IPO, the Executive Committee of the Board, or such other committee of the Board as the Board may designate for such purpose under the Plan, and (b) after an IPO, such committee of the Board as the Board may designate, which shall be composed of not less than two Non-Employee Directors, each of whom shall be appointed by and serve at the pleasure of the Board. "Common Stock" means the Common Stock, par value $0.10 per share, of the Company. "Company" means Amscan Holdings, Inc., a Delaware corporation. "Employment" means, unless otherwise defined in an applicable Restricted Stock Agreement, Option Agreement or Employment Agreement, employment with, or service as a director of or as a consultant to, the Company or any of its Affiliates. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. "Fair Market Value" of the Common Stock means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or, if not so listed, on the Nasdaq National Market. If such sales prices are not so available, the Fair Market Value of the Common Stock shall be determined by the Committee in good faith. "IPO" means the consummation of a registered underwritten public offering or offerings of Common Stock with gross proceeds to the Company in the aggregate of at least $50 million. "Incentive Stock Option" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. "Nasdaq" means The Nasdaq Stock Market, Inc. "Non-Employee Director" means a member of the Board who qualifies as a Non-Employee Director as defined in Rule 16b--3(b)(3), as promulgated by the SEC under the Exchange Act, or any successor definition adopted by the SEC. "Nonqualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Option Agreement" means an agreement setting forth the terms and conditions of an Award of Stock Options and, if applicable, Stock Appreciation Rights. 2 "Participant" has the meaning set forth in Section 4. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, government (or any department or agency thereof) or other entity. "Plan" means the Amscan Holdings, Inc. 1997 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. "Plan Shares" has the meaning set forth in Section 12(b). "Restricted Stock" means an Award granted under Section 7. "Restricted Stock Agreement" means an agreement setting forth the terms and conditions of an Award of Restricted Stock. "Rule 13d-3" means Rule 13d-3, as promulgated by the SEC under the Exchange Act, as amended from time to time. "SEC" means the Securities and Exchange Commission or any successor agency. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor thereto. "Stock Appreciation Right" means a right granted under Section 6. "Stock Option" means an option granted under Section 5. "Stockholders' Agreement" has the meaning as set forth in Section 12(a). In addition, certain other terms used herein have definitions otherwise ascribed to them herein. SECTION 2. Administration The Plan shall be administered by the Committee, or, if no Committee has been designated or appointed, by the Board (in which case all references herein to the Committee shall include the Board). Among other things, the Committee shall have the authority, subject to the terms of the Plan, to: 3 (a) select the Participants to whom Awards may from time to time be granted; (b) determine whether and to what extent Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights and Restricted Stock or any combination thereof are to be granted hereunder; (c) determine the number of shares of Common Stock to be covered by each Award granted hereunder; (d) determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price, any vesting conditions, restrictions or limitations (which may be related to the performance of the Participant, the Company or any of its Affiliates)) and any acceleration of vesting or waiver of forfeiture regarding any Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine; (e) modify, amend or adjust the terms and conditions of any Award, at any time or from time to time; (f) determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred; (g) determine under what circumstances an Award may be settled in cash or Common Stock under Section 5(g); (h) adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; (i) interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto); and (j) otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of the Plan or an Award (or related Award Agreement) granted hereunder shall be determined by the Committee. Any determination made by the Committee pursuant to 4 the provisions of the Plan with respect to the Plan, any Award or Award Agreement shall be made in the sole discretion of the Committee and, with respect to an Award, at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee shall be final and binding on all persons, including the Company and the Participants. SECTION 3. Common Stock Subject to Plan The total number of shares of Common Stock reserved and available for grant under the Plan shall be 200. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. If any shares of Restricted Stock are forfeited or if any Stock Option (and related Stock Appreciation Right, if any) terminates without being exercised, or if any Stock Appreciation Right is exercised for cash, the shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, spinoff, stock dividend, stock split, reverse stock split, extraordinary distribution with respect to the Common Stock or other change in corporate structure affecting the Common Stock, the Committee or the Board may make such substitution or adjustment in the aggregate number and kind of shares or other property reserved for issuance under the Plan, in the number, kind and Exercise Price (as defined herein) of shares or other property subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares or other property subject to Restricted Stock Awards, and/or such other equitable substitution or adjustments as it may determine to be fair and appropriate in its sole discretion. Any such adjusted Exercise Price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. Participants Officers, employees, consultants and non-employee directors of the Company and its Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Affiliates shall be "Participants" eligible to be granted Awards under the Plan. 5 SECTION 5. Stock Options The Committee shall have the authority to grant any Participant Incentive Stock Options, Nonqualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Nonqualified Stock Option. Stock Options shall be evidenced by Option Agreements, which shall include such terms and provisions as the Committee may determine from time to time. An Option Agreement shall expressly indicate whether it is intended to be an agreement for an Incentive Stock Option or a Nonqualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a Participant in any grant of a Stock Option, determines the number of shares of Common Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option, or on such other date as the Committee may determine. The Company shall notify a Participant of any grant of a Stock Option, and a written Option Agreement shall be duly executed and delivered by the Company to the Participant. Subject to Section 12(a), such agreement shall become effective upon execution by the Company and the Participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any Incentive Stock Option under such Section 422. Stock Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Exercise Price. The price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the Option Agreement (the "Exercise Price"). (b) Option Term. The term of each Stock Option shall be fixed by the Committee. Absent any such term being fixed by the Committee, pursuant to an Option Agreement or otherwise, such term shall be ten years. 6 (c) Exercisability. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) Method of Exercise. Subject to the provisions of this Section 5, vested Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Company may accept. If approved by the Committee, payment, in full or in part, may also be made in the form of unrestricted Common Stock already owned by the Participant of the same class as the Common Stock subject to the Stock Option (based on the Fair Market Value of the Common Stock on the date the Stock Option is exercised); provided, however, that, in the case of an Incentive Stock Option the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted. In the discretion of the Committee, after an IPO, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price, and, if requested by the Company, the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. In addition, in the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by instructing the Committee to withhold a number of such shares having a Fair Market Value on the date of exercise equal to the aggregate exercise price of such Stock Option. No shares of Common Stock shall be issued until full payment therefor has been made. Except as otherwise provided in 7 the Stockholders' Agreement or the applicable Option Agreement, subject to a Participant's compliance with Section 12(a) hereof, a Participant shall have all of the rights of a stockholder of the Company holding the class or series of Common Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends and distributions), when the Participant has given written notice of exercise, has paid in full for such shares and, if requested, has given the representations referred to in Section 12(c). (e) Nontransferability of Stock Options. No Stock Option shall be transferable by the Participant other than (i) by will or by the laws of descent and distribution or (ii) in the case of a Nonqualified Stock Option, as otherwise expressly permitted under the applicable Option Agreement including, if so permitted, pursuant to a qualified domestic relations order (as defined in the Code) or pursuant to a gift to such Participant's spouse, children, grandchildren or other living descendants, whether directly or indirectly or by means of a trust, partnership, limited liability company or otherwise. All Stock Options shall be exercisable, subject to the terms of this Plan, during the Participant's lifetime, only by the Participant or any person to whom such Stock Option is transferred pursuant to the preceding sentence, including such Participant's guardian, legal representative and other transferee. The term "Participant" includes the estate of the Participant or the legal representative of the Participant named in the Option Agreement and any person to whom an Option is otherwise transferred in accordance with this Section 5(e), by will or the laws of descent and distribution; provided, however, that references herein to Employment of a Participant or termination of Employment of a Participant shall continue to refer to the Employment or termination of Employment of the applicable grantee of an Award hereunder. (f) Termination of Employment. Except as otherwise provided by the Committee or in the applicable Option Agreement, upon the Participant's death or when the Participant's Employment is terminated for any reason, the Participant: a. shall forfeit all Stock Options that have not previously vested; b. shall have three months to exercise the Participant's vested Stock Options that are vested on the date of the Participant's termination of Employment if such termination is for any reason other than the Participant's death; and 8 c. shall have one year to exercise the Participant's vested Stock Options that are vested on the date of death if the Participant's termination of Employment is due to the Participant's death. Any vested Stock Options not exercised within the permissible period of time shall be forfeited by the Participant. Notwithstanding any of the foregoing, the Participant shall not be permitted to exercise any Stock Option at a time beyond the initial option term. (g) Cashing Out of Stock Option. On receipt of written notice of exercise, the Committee may elect to cash out all or any portion of the shares of Common Stock for which a Stock Option is being exercised by paying the Participant an amount, in cash or Common Stock, equal to the excess of the Fair Market Value of one share of Common Stock over the Exercise Price per share times the number of shares of Common Stock for which the Option is being exercised on the effective date of such cashout. SECTION 6. Stock Appreciation Rights (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Nonqualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. In either case, the terms and conditions of a Stock Appreciation Right shall be set forth in the Option Agreement for the related Stock Option or an amendment thereto. A Stock Appreciation Right may be exercised by a Participant in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised 9 (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6; (ii) upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive an amount equal to the product of (a) the excess of the Fair Market Value of one share of Common Stock over the Exercise Price per share specified in the related Stock Option times (b) the number of shares in respect of which the Stock Appreciation Right shall have been exercised, in cash, shares of Common Stock or both, with the Committee having the right to determine the form of payment; (iii) Stock Appreciation Rights shall be transferable only with the related Stock Option in accordance with Section 5(e); and (iv) upon the exercise of a Stock Appreciation Right (other than an exercise for cash), the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Common Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise. SECTION 7. Restricted Stock The Committee shall determine the Participants to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares to be awarded to any Participant, the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and restrictions on transfer and any other terms and conditions of the Awards (including provisions (i) relating to placing legends on certificates representing shares of Restricted Stock, (ii) permitting the Company to require that shares of Restricted Stock be held in custody by the Company with a stock power from the owner thereof until restrictions lapse and (iii) relating to any rights to purchase the Restricted Stock on the part of the Company and 10 its Affiliates), in addition to those contained in the Stockholders' Agreement. The terms and conditions of Restricted Stock Awards shall be set forth in a Restricted Stock Agreement, which shall include such terms and provisions as the Committee may determine from time to time. Except as provided in this Section 7, the Restricted Stock Agreement, the Stockholders' Agreement and any other relevant agreements, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Common Stock that is the subject of the Restricted Stock Award, including, if applicable, the right to vote the shares and, subject to the following sentence, the right to receive any cash dividends or distributions (but, subject to the third paragraph of Section 3, not the right to receive non-cash dividends or distributions). If so determined by the Committee in the applicable Restricted Stock Agreement, cash dividends and distributions on the class or series of Common Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting conditions applicable only to dividends and distributions. SECTION 8. Tax Offset Bonuses At the time an Award is made hereunder or at any time thereafter, the Committee may grant to the Participant receiving such Award the right to receive a cash payment in an amount specified by the Committee, to be paid at such time or times (if ever) as the Award results in compensation income to the Participant, for the purpose of assisting the Participant to pay the resulting taxes, all as determined by the Committee, and on such other terms and conditions as the Committee shall determine. SECTION 9. Change in Control Provisions Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in the applicable Award Agreement or the Stockholders' Agreement, in the event of a Change in Control: (a) immediately prior to the occurrence of a Change in Control, all Stock Options and Stock Appreciation Rights outstanding as of such date, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; and 11 (b) the restrictions and deferral limitations applicable to any Restricted Stock (and any dividends or distributions in respect of Restricted Stock) shall lapse, and such Restricted Stock (and any dividends or distributions in respect of Restricted Stock) shall become free of all restrictions, fully vested and transferable to the full extent of the not theretofore forfeited portion of the original grant. SECTION 10. Term, Amendment and Termination The Plan will terminate ten years after the effective date of the Plan. Awards outstanding as of such date shall not be affected or impaired by the termination of the Plan. The Board may amend, alter, or discontinue the Plan, prospectively or retroactively, but no amendment, alteration or discontinuation shall be made which would impair the rights of any Participant under an Award theretofore granted without the Participant's consent. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall be made which would impair the rights of any Participant thereunder without the Participant's consent. SECTION 11. Unfunded Status of Plan It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 12. General Provisions (a) Stockholders' Agreement. Notwithstanding anything in this Plan to the contrary, unless the Committee determines otherwise, it shall be a condition to receiving any Award under the Plan or transferring any Option in accordance with Section 5(e) or any other transfer permitted under the terms of an Award Agreement or otherwise, that a Participant (or transferee in the case of such transfer) shall become a party to the Stockholders' Agreement, dated as of December 19, 1997, 12 among the Company and certain stockholders of the Company, as amended from time to time (the "Stockholders' Agreement"), and such Participant (or transferee in the case of such transfer) shall become a "Management Investor" thereunder (or such transferee shall become a "Permitted Transferee" of a "Management Investor" thereunder). (b) Awards and Certificates. Shares of Restricted Stock and shares of Common Stock issuable upon the exercise of a Stock Option or Stock Appreciation Right (together, "Plan Shares") shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates. Any certificate issued in respect of Plan Shares shall be registered in the name of such Participant and shall bear appropriate legends referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) of the Amscan Holdings, Inc. 1997 Stock Incentive Plan and a Restricted Stock Agreement and/or an Option Agreement, as the case may be, between the issuer and the registered holder hereof. Copies of such Plan and Agreement are on file at the offices of Amscan Holdings, Inc., 80 Grasslands Road, Elmsford, New York 10523." "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state, and may not be sold or otherwise disposed of except pursuant to an effective registration statement under said Act and applicable state securities laws or an applicable exemption to the registration requirements of such Act and laws." Such shares may bear other legends to the extent the Committee or the Board determines it to be necessary or appropriate, including any required by the Stockholders' Agreement or pursuant to any applicable Restricted Stock Agreement or Option Agreement. If and when all restrictions expire without a prior forfeiture of the Plan Shares theretofore subject to such restrictions, new certificates for such shares shall be delivered to the Participant without the first legend listed above. 13 The Committee may require that any certificates evidencing Plan Shares be held in custody by the Company until the restrictions thereon shall have lapsed and that the Participant deliver a stock power, endorsed in blank, relating to the Plan Shares. (c) Representations and Warranties. The Committee may require each person purchasing or receiving Plan Shares to (i) represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof and (ii) make any other representations and warranties that the Committee deems appropriate. (d) Additional Compensation. Nothing contained in the Plan shall prevent the Company or any of its Affiliates from adopting other or additional compensation arrangements for its employees. (e) No Right of Employment. Adoption of the Plan or grant of any Award shall not confer upon any employee any right to continued Employment, nor shall it interfere in any way with the right of the Company or any of its Affiliate thereof to terminate the Employment of any employee at any time. (f) Withholding Taxes. No later than the date as of which an amount first becomes includible in the gross income of a Participant for federal income tax purposes with respect to any Award under the Plan, such Participant shall pay to the Company or, if appropriate, any of its Affiliates, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. (g) Beneficiaries. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid or by whom any rights of the Participant, after the Participant's death, may be exercised. 14 (h) Pooling of Interests. Notwithstanding any other provision of this Plan, if any right (or the exercise of such right) granted pursuant to this Plan would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant or grants would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such grant or grants Common Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder, or make any other appropriate adjustment. (i) Governing Law. The Plan and all Awards made and actions taken thereunder shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principles of conflicts of law thereof. (j) Compliance with Laws. If any law or any regulation of any commission or agency having jurisdiction shall require the Company or a Participant seeking to exercise Stock Options or Stock Appreciation Rights to take any action with respect to the Plan Shares to be issued upon the exercise of Stock Options or Stock Appreciation Rights then the date upon which the Company shall issue or cause to be issued the certificate or certificates for the Plan Shares shall be postponed until full compliance has been made with all such requirements of law or regulation; provided, that the Company shall use its reasonable efforts to take all necessary action to comply with such requirements of law or regulation. Moreover, in the event that the Company shall determine that, in compliance with the Securities Act or other applicable statutes or regulations, it is necessary to register any of the Plan Shares with respect to which an exercise of a Stock Option or Stock Appreciation Right has been made, or to qualify any such Plan Shares for exemption from any of the requirements of the Securities Act or any other applicable statute or regulation, no Stock Options or Stock Appreciation Rights may be exercised and no Plan Shares shall be issued to the exercising Participant until the required action has been completed; provided, that the Company shall use its reasonable efforts to take all necessary action to comply with such requirements of law or regulation. Notwithstanding anything to the contrary contained herein, neither the Board nor the members of the Committee owes a fiduciary duty to any Participant in his or her capacity as such. 15 SECTION 13. Effective Date of Plan The Plan shall be effective as of the date it is approved by the holders of a majority of the outstanding shares of Common Stock, which approval is evidenced by Section 5.3 under the Stockholders' Agreement. 16 Schedule I Management Investors Options ------- Gerald C. Rittenberg 16.648 James M. Harrison 16.268 William S. Wilkey 16.441 Diane D. Spaar 11.827 Katherine A. Kusnierz 11.577 Morton Fisher 2.383 William Mark 1.280 Angelo Giummarra 2.477 Karen McKenzie 1.477 Keith Johnson 1.280 Howard Harding 1.280 Walter Thompson 1.144 Charles Phillips 0.478 Susan Scott 1.144 Rose Giagrande 1.238 Randy Harris 0.718 Eric Stollman 1.238 Kathleen Rooney 1.238 James Dotti 1.238 Vincent Anastasi 0.794 Michael A. Correale 2.570 Mark Irvine 0.555 Scott Lametto 0.999 Joseph Walter 0.555 Cheryl Considine 0.999 Patrick Venuti 0.555 Dallas Hartman 0.555 Robert Yedowitz 0.555 Nigel Keane 0.555 Connie Weckman 0.555 Ken Danforth 0.555 EX-10 4 exhibit10_b.txt EMPLOYEE AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT (the "Agreement") by and between Amscan Holdings, Inc., a Delaware corporation (the "Company"), and Gerald C. Rittenberg (the "Executive"), dated as of the 19th day of June, 2003. WHEREAS, the Executive serves the Company as its Chief Executive Officer pursuant to an Employment Agreement dated as of August 10, 1997 and amended as of June 15, 2001 (the "Prior Employment Agreement"); and WHEREAS, the Company and the Executive desire to set forth in this new Employment Agreement the terms and conditions under which the Executive will continue to be employed by the Company; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. (a) Initial Term. The Company shall employ the Executive, and the Executive agrees to, and shall, serve the Company, on the terms and conditions set forth in this Agreement, for the period commencing on January 1, 2003 and ending on December 31, 2004 (the "Initial Term"). (b) Extension of Initial Term. The Initial Term of this Agreement will be automatically extended after December 31, 2004 for additional successive periods of one year each, each such extension to be effective immediately after the last day of the term then in effect, with the first such extension period beginning on January 1, 2005 (each such additional period, an "Additional Term") (the Initial Term and any Additional Term thereof pursuant to this Section 1(b) being hereinafter referred to as the "Employment Period"), unless either the Company gives the Executive or the Executive gives the Company not less than twelve months written notice prior to the end of the Initial Term or any such Additional Term of such party's intention not to extend the Employment Period. 2. Position and Duties. (a) During the Employment Period, the Executive shall be Chief Executive Officer of the Company with such duties and responsibilities as are assigned to him by the Board of Directors of the Company (the "Board") consistent with his position as Chief Executive Officer of the Company, including, as the Board may request, without additional compensation, to serve as an officer or director of certain subsidiaries and other affiliated entities of the Company. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full attention and time during normal business hours to the business and affairs of the Company and shall perform his services primarily at the Company's headquarters, wherever the Board may from time to time designate them to be, but in any case, within a 100-mile radius of Elmsford, New York, and shall use his reasonable best efforts to carry out the responsibilities assigned to the Executive faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (i) serve on civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions or (iii) manage personal investments, so long as such activities do not compete with and are not provided to or for any entity that competes with or intends to compete with the Company or any of its subsidiaries and affiliates and do not interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive from the Company an annual base salary ("Annual Base Salary") of $500,000, payable in regular intervals in accordance with the Company's customary payroll practices in effect during the Employment Period; provided that such Annual Base Salary shall be increased by 5% (from the Annual Base Salary theretofore in effect) at the beginning of each Additional Term and shall be payable in accordance with the preceding sentence. (b) Other Compensation. In addition to the Annual Base Salary, the Executive shall be eligible for an annual bonus for each fiscal year of employment hereunder (the "Bonus"). Any Bonus shall be paid no later than the 75th day following the end of the fiscal year to which such Bonus corresponds. The exact amount of the Bonus, if any, payable to the Executive hereunder for fiscal year 2003 shall be determined in accordance with Exhibit A hereto; provided however that the Compensation Committee of the Board may, in its sole discretion, increase the amount of the Bonus above the amount determined in accordance with Exhibit A hereto. The basis for determining the Bonus hereunder for any subsequent fiscal year of employment hereunder shall be determined in the same manner as the Bonus for 2003 as set forth in Exhibit A, except that the EBITDA and Debt Paydown minimum, target, and maximum amounts for each relevant year shall be as established by the Compensation Committee of the Board, not later than the 90th day of the relevant year, after consultation with the Executive. For any fiscal year during which the Executive is employed by the Company for less than the entire year, any Bonus shall be payable on a pro rata basis for the period during which the Executive is employed during such fiscal year (based on the number of days in such fiscal year the Executive was so employed divided by 365), as determined in good faith by the Board; provided, however, that in no event will the Executive be entitled to a Bonus for any fiscal year during which the Executive's employment is terminated during the Employment Period other than as provided in Section 5(c) of this Agreement, if applicable. (c) Other Benefits. During the Employment Period: (i) the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company, and shall be entitled to paid vacation, to the same extent and on the same terms and conditions as peer executives; and (ii) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs provided by the Company (including, to the extent provided, without limitation, medical, prescription, dental, disability, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to the same extent and on the same terms and conditions as peer executives; provided, however, that nothing in this Agreement shall impose on the Company any obligation to offer to the Executive participation in any stock, stock option, restricted stock, bonus or other incentive award, plan, practice, policy or program other than the awards made pursuant to Section 3(b) and the Options granted in accordance with Section 3(e). The term "peer executives" means the President and Senior Vice President in charge of Sales and Marketing of the Company, if such positions exist, and if such positions do not exist, the definition of the term "peer executives" shall be determined by the Board in good faith. -2- (d) Expenses. During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable travel and other expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. (e) Options. Promptly following the execution of this Agreement, the Executive shall be granted options (the "Options") to purchase 25 shares of common stock of the Company, at an exercise price of $150,000 per share, pursuant to an option agreement substantially in the form attached hereto as Exhibit B. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that the Executive has been unable, for a period of (i) 180 consecutive days or (ii) an aggregate of 210 days in a period of 365 consecutive days, to perform his duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive returns to full-time performance of the Executive's duties in accordance with the provisions of Section 2 before such 30th day. In the event of a dispute as to whether Executive has suffered a Disability, the final determination shall be made by a licensed physician selected by the Board of Directors of the Company and acceptable to Executive in Executive's reasonable judgment. (b) Not Death or Disability. The Company may terminate the Executive's employment at any time during the Employment Period with or without Cause. The Executive may terminate his employment at any time during the Employment Period for any reason. (c) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date or the date on which the termination of the Executive's employment by the Company, or by the Executive, is effective, as the case may be. 5. Obligations of the Company Upon Termination. (a) By the Company, Other Than for Death or Disability. If, during the Employment Period, the Company terminates the Executive's employment other than due to the Executive's death or Disability, the Company shall, except as provided in clause (ii) below, pay the amounts described in subparagraph (i) below to the Executive in a lump sum in cash within 30 days after the Date of Termination: (i) The amounts to be paid in a lump sum as described above are: (A) The Executive's accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) any Bonus that the Executive has earned for a prior full fiscal year that has ended prior to the Date of Termination but -3- which has not yet been calculated and paid; (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid (subject to any applicable provisions of any deferred compensation plan with respect to the payment thereof); and (4) any accrued but unpaid vacation pay; and (B) Severance pay equal to the Annual Base Salary; provided, however, that in connection with a termination by the Company other than (1) for Cause or (2) due to the Executive's death or Disability, such severance pay shall be equal to the Annual Base Salary multiplied by the number of years constituting the Post-Termination Restriction Period (as defined in Section 8(a)(ii)). (For example, if the Company, pursuant to its Restriction Election (as defined in Section 8(a)(ii)), elects a two-year Post-Termination Restriction Period, then severance pay will be equal to two times the Annual Base Salary.) (ii) Notwithstanding the foregoing, if the Executive's employment is terminated for Cause, the Executive shall not be entitled to the payments contemplated by clause (i)(B) of this Section 5(a) and the payment to the Executive in connection therewith shall be limited to payment of the Accrued Obligations and the Company shall have no further obligations under this Agreement. For purposes of this Agreement, "Cause" shall mean (1) conviction of the Executive by a court of competent jurisdiction of a felony (excluding felonies under the Motor Vehicle Code); (2) any act of intentional fraud in connection with his duties under this Agreement; (3) any act of gross negligence or wilful misconduct with respect to the Executive's duties under this Agreement; and (4) any act of wilful disobedience in violation of specific reasonable directions of the Board consistent with the Executive's duties. (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay the Accrued Obligations to the Executive or the Executive's estate or legal representative, as applicable, in a lump sum in cash within 30 days of the Date of Termination and the Company shall have no further obligations under this Agreement. (c) Bonus. If (i) the Executive's employment is terminated during the Employment Period (1) by the Company other than for Cause or (2) by reason of the Executive's death or Disability, or (ii) the Employment Period is not renewed at the expiration thereof (other than for Cause), the Company shall pay to the Executive or the Executive's estate or legal representative, as applicable, an amount equal to the Bonus which the Executive would otherwise have been entitled to receive for the fiscal year in which the Executive's employment is so terminated or not renewed, determined on a pro rata basis for the period during which the Executive is employed during such fiscal year (based on the number of days in such fiscal year the Executive was so employed divided by 365), as determined in good faith by the Board. For purposes of this Section 5(c), the Bonus shall be calculated in accordance with Section 3(b) at the end of the fiscal year to which such Bonus would otherwise have corresponded and shall be paid to the Executive no later than 75th day following the end of the fiscal year to which such Bonus corresponds. -4- (d) By the Executive. If the Executive terminates his employment with the Company, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within 30 days of the Date of Termination and the Company shall have no further obligations under this Agreement. (e) Effect of Employment of Executive by Certain Stock or Asset Purchasers. If all or substantially all of the stock or assets of the Company is sold or otherwise disposed of to a third party not affiliated with the Company, and the Executive is not offered employment on substantially similar terms by the Company or one of its continuing affiliates immediately thereafter, then, for all purposes of this Agreement, the Executive's employment shall be deemed to have been terminated by the Company other than for Cause effective as of the date of such sale or other disposition; provided, however, that the Company shall have no obligations to the Executive under this Section 5 if the Executive is hired or offered employment on substantially similar terms by the purchaser of the stock or assets of the Company or if the Executive's employment is continued by the Company. 6. Full Settlement. The Company's obligations to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 7. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any company affiliated with the Company and its respective businesses that the Executive obtains during the Executive's employment by the Company (whether before, during or after the Employment Term) and that is not public knowledge (other than as a result of the Executive's violation of this Section 7) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law. 8. Noncompetition; Nonsolicitation. (a) (i) During the Employment Period and during the three-year period (subject to Section 8(a)(ii)) following any termination of the Executive's employment with the Company and any of its affiliates, including due to expiration of the Employment Period (the "Restriction Period"), the Executive shall not directly or indirectly participate in or permit his name directly or indirectly to be used by or become associated with (including as an advisor, representative, agent, promoter, independent contractor, provider of personal services or otherwise) any person, corporation, partnership, firm, association or other enterprise or entity (a "person") that is, or intends to be, engaged in any business which is in competition with any 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 so to operate, compete or become engaged in such business (a "Competitor"). For purposes of this Agreement, the term "participate" includes any direct or indirect interest, whether as an officer, director, -5- employee, partner, sole proprietor, trustee, beneficiary, agent, representative, independent contractor, consultant, advisor, provider of personal services, creditor, or owner (other than by ownership of less than five percent of the stock of a publicly-held corporation whose stock is traded on a national securities exchange or in an over-the-counter market). (ii) In the event the Employment Period is terminated by the Company other than (1) for Cause or (2) due to the Executive's death or Disability, the Company shall elect (a "Restriction Election"), in its sole and absolute discretion (subject to the provisions of Section 5(a)(i)(B)), to limit the remainder of the Restriction Period following such termination to a one, two or three-year period (the "Post-Termination Restriction Period"). If no Restriction Election is made, the Company shall be deemed to have elected a three-year Post-Termination Restriction Period. (b) During the portion of the Restriction Period following any termination of the Executive's employment with the Company and any of its affiliates, the Executive shall not, directly or indirectly, encourage or solicit, or assist any other person or firm in encouraging or soliciting, any person that during the three-year period preceding such termination of the Executive's employment with the Company is or was engaged in a business relationship with the Company, any of its subsidiaries or controlled affiliates to terminate its relationship with the Company or any of its subsidiaries or controlled affiliates or to engage in a business relationship with a Competitor. (c) During the portion of the Restriction Period following any termination of the Executive's employment with the Company and any of its affiliates, the Executive will not, except with the prior written consent of the Company, directly or indirectly, induce any employee of the Company, or any of its subsidiaries or controlled affiliates to terminate employment with such entity, and will not, directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ, offer employment or cause employment to be offered to any person (including employment as an independent contractor) who is or was employed by the Company or any of its respective subsidiaries or controlled affiliates unless such person shall have ceased to be employed by such entity for a period of at least twelve months. For purposes of this Section 8(c), "employment" shall be deemed to include rendering services as an independent contractor and "employees" shall be deemed to include independent contractors. (d) Promptly following the Executive's termination of employment, including due to expiration of the Employment Period, the Executive shall return to the Company all property of the Company and its respective subsidiaries and affiliates, and all copies thereof, in the Executive's possession or under his control, including, without limitation, all Confidential Information in whatever media such Confidential Information is maintained. (e) The Executive acknowledges and agrees that the Restriction Period and the covenants and obligations of the Executive in Section 7 and this Section 8 with respect to non-competition, nonsolicitation and confidentiality and with respect to the property of the Company and its subsidiaries and controlled affiliates, and the territories covered thereby, are fair and reasonable and the result of negotiation. The Executive further acknowledges and agrees that the covenants and obligations of the Executive in Section 7 and this Section 8 with -6- respect to noncompetition, nonsolicitation and confidentiality and with respect to the property of the Company and its subsidiaries and controlled affiliates, and the territories covered thereby, relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company and its subsidiaries and affiliates irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain the Executive from committing any violation of such covenants and obligations. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. If, at the time of enforcement of Section 7 and/or this Section 8, a court holds that any of the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and/or geographical area legally permissible under such circumstances will be substituted for the period, scope and/or area stated herein. 9. Successors. (a) This Agreement is personal to the Executive and shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives and heirs and successors. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 10. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective heirs, successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by overnight courier or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed as follows: If to the Executive: Gerald C. Rittenberg 18 Carey Drive Bedford, NY 10506 Fax no.: If to the Company: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, NY 10523 Attention: Corporate Secretary Fax no.: (914) 345-2056 -7- or to such other address as either party furnishes to the other in writing in accordance with this Section 10(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) Any party's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The Executive acknowledges that this Agreement, together with the Exhibits hereto (and the other agreements referred to herein and therein), supersedes all other agreements and understandings, both written and oral, between the Executive and the Company with respect to the subject matter hereof, including, without limitation, the Prior Employment Agreement, except that Section 4 of the Prior Employment Agreement shall continue in full force and effect and shall not be superseded and replaced by this Agreement. (g) This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall together constitute one and the same instrument. -8- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. AMSCAN HOLDINGS, INC. By: /s/JAMES M. HARRISON ----------------------------- Name: Title: /s/ GERALD C. RITTENTERG --------------------------------- Gerald C. Rittenberg -9- EXHIBIT A DETERMINATION OF 2003 BONUS 1. The minimum, target and maximum amounts of the 2003 Bonus shall be $450,000, $722,000 and $994,000, respectively. 2. (a) Fifty percent of the 2003 Bonus (the "EBITDA Bonus") shall be determined based upon the Company's EBITDA for 2003 (as defined below) as against the following targets, with amounts between those shown interpolated on a straight-line basis:
Minimum Target Maximum ------- ------ ------- EBITDA ....... $ 67,917 $ 71,309 $ 74,702 $ 78,094 $ 81,486 $ 84,879 $ 88,271 ($mms) % Target Bonus 62.3% 74.9% 87.4% 100.0% 112.6% 125.1% 137.7% EBITDA Bonus $225,000 $270,333 $315,667 $361,000 $406,333 $451,666 $497,000
(b) If the minimum EBITDA shown above is not achieved, the EBITDA Bonus shall be zero. In no event shall the EBITDA Bonus exceed $497,000. (c) The Company's EBITDA for 2003 shall mean its Consolidated Adjusted EBITDA (as defined in the Second Amended and Restated Credit and Guaranty Agreement, dated as of December 20, 2002, by and among the Company, certain subsidiaries of the Company, the Lenders party thereto from time to time, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger, Sole Bookrunner and Syndication Agent, General Electric Capital Corporation, as Administrative Agent and as Collateral Agent, and Fleet National Bank, as Documentation Agent, as it may be amended from time to time (the "Credit Agreement")) for fiscal year 2003. 3. (a) The remaining fifty percent of the 2003 Bonus (the "Debt Reduction Bonus") shall be determined based upon the Company's Debt Reduction (as defined below) as against the following targets, with amounts between those shown interpolated on a straight-line basis:
Minimum Target Maximum ------- ------ ------- Debt Reduction $ 22,945 $ 24,997 $ 27,050 $ 29,102 $ 31,154 $ 33,207 $ 35,259 ($mms) % Target Bonus 62.3% 74.9% 87.4% 100.0% 112.6% 125.1% 137.7% Debt Reduction $225,000 $270,333 $315,667 $361,000 $406,333 $451,666 $497,000 Bonus
(b) If the minimum Debt Reduction shown above is not achieved, the Debt Reduction Bonus shall be zero. In no event shall the Debt Reduction Bonus exceed $497,000. -10- (c) The Company's Debt Reduction for 2003 shall mean the aggregate decrease, if any, of the Indebtedness (as defined in the Credit Agreement) of the Company and its consolidated subsidiaries as of the end of fiscal year 2003 from as of the end of fiscal year 2002; provided, that for purposes of the definition of "Indebtedness," short-term account and trade payables of the Company and its subsidiaries ("Payables") shall be deemed to be an amount equal to the product of (a) 57 and (b) the cost of sales for fiscal year 2003 divided by 365 (the "Payable Amount"); provided that if the Board of Directors determines in its sole discretion that an increase or decrease of the Payable Amount is warranted due to circumstances which have caused such Payables to be significantly above or below the product of the number of accounts payable days and the average daily cost of sales for a fiscal year which they have historically represented, then the Payable Amount shall be such other amount as the Board of Directors so determines. For purposes of the foregoing, any Payables or other financial measures for a particular fiscal year shall be as reflected in the audited financial statements of the Company for such fiscal year; provided that cost of sales shall be determined on a basis consistent with "cost of sales" as reflected in the audited financial statements of the Company for fiscal year 2002. -11- EXHIBIT B STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT ("Agreement") dated as of June ___, 2003 by and between Amscan Holdings, Inc., a Delaware corporation (the "Company"), and Gerald C. Rittenberg (the "Employee"). WHEREAS, pursuant to the Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended (the "Plan"), the Committee (as defined in the Plan) has decided to award stock options on the terms and conditions set forth is this Agreement. NOW, THEREFORE, in order to implement the foregoing and in consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: 1. Definitions. ----------- As used in this Agreement, the following terms shall have the meanings ascribed to them below. Any capitalized term used in this Agreement and not defined herein shall have the meaning ascribed to it in the Plan. "Acquisition" shall have the meaning set forth in Section 5.3. "Common Stock" shall mean the Common Stock, par value $0.10 per share, of the Company, subject to adjustment pursuant to the third paragraph of Section 3 of the Plan, under certain circumstances. "Exercise Price" shall have the meaning set forth in Section 2.2. "Grant Date" shall have the meaning set forth in Section 2.1. "Options" shall have the meaning set forth in Section 2.1. "Stockholders' Agreement" shall mean the Stockholders' Agreement, dated as of December 19, 1997, as amended, by and among the Company and certain stockholders and employees of the Company that are signatories thereto. In addition, certain other terms used herein have definitions otherwise ascribed to them herein. 2. Grant and Terms of Options. -------------------------- 2.1. Grant of Options. The Company hereby grants to the Employee as of June ___, 2003 (the "Grant Date") 25 Nonqualified Stock Options (the "Options") to purchase one share of Common Stock per Option on the terms and conditions set forth below, and in reliance upon the representations and covenants of the Employee set forth below. Unless sooner exercised or forfeited as provided for in the Plan or this Agreement, the Options shall expire on the third anniversary of the Grant Date. 2.2. Exercise Price. The exercise price of the Options is $150,000 per share of Common Stock subject thereto (the "Exercise Price"). 2.3. Exercisability. The Options shall vest and become exercisable upon the first to occur, during the Executive's Employment, of the following events: (i) an IPO; (ii) a Change of Control; and (iii) the expiration of two and one-half years from the Grant Date. Options that have become exercisable shall remain exercisable until they terminate as set forth in this Agreement or the Plan. 3. Plan Shares. ----------- 3.1. Transferability of Plan Shares and Option. The Employee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber any Plan Shares or Options, except as provided in the Plan or, in the case of Plan Shares, as provided in Sections 2.3, 2.4 and 2.5 of the Stockholders' Agreement. Any transfer of Plan Shares otherwise permitted pursuant to this Agreement shall remain subject to the terms of the Stockholders' Agreement, and shall not be permitted other than in accordance with the terms thereof, notwithstanding any provision of this Agreement that would otherwise permit such transfer. 4. Employee's Representations, Warranties and Agreements. ----------------------------------------------------- 4.1. The Employee hereby makes to the Company in connection with the grant of the Options, and shall make to the Company in connection with the exercise of any Options and any investment in any Plan Shares, the following representations, warranties and agreements: 4.1.1 Investment Intention; No Resales. The Employee represents and warrants that such Employee is acquiring the Options or Plan Shares, as applicable, for investment purposes only, solely for his own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof or with any present intention of distributing or reselling any Options or Plan Shares, except for such distributions and dispositions as are both explicitly permitted under this Agreement and the Stockholders' Agreement and effected in compliance with the Securities Act, and the rules and regulations thereunder, and all applicable state securities or "blue sky" laws. The Employee agrees and acknowledges that such Employee will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any Options or Plan Shares, or solicit any offers to purchase or otherwise acquire or take a pledge of any Options or Plan Shares, other than transfers, sales, assignments, pledges, hypothecations or other dispositions explicitly permitted by this Agreement and the Stockholders' Agreement and provided that (x) any such transfer, sale, assignment, pledge, hypothecation or other disposition is in accordance with the terms and provisions of this Agreement and the Stockholders' Agreement and (y) (i) the transfer, sale, assignment, pledge, hypothecation or other disposition is pursuant to an effective registration statement under the Securities Act and has been registered under all applicable state securities or "blue sky" laws, or (ii) the Employee shall have furnished the Company with an opinion of counsel (which counsel and the form and substance of which opinion shall be reasonably satisfactory to the Company), -2- to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and the rules and regulations in effect thereunder and under all applicable state securities or "blue sky" laws. 4.1.2 Stock Unregistered. The Employee acknowledges and represents that such Employee has been advised that (i) the Options have not been registered, and the Plan Shares, upon issuance, will not have been registered, under the Securities Act; (ii) the Plan Shares must be held for an indefinite period and such Employee must continue to bear the economic risk of the investment in the Plan Shares unless it is subsequently registered under the Securities Act or an exemption from such registration is available; (iii) there is no, and it is not anticipated that there will be any, public market for the Options or the Plan Shares; (iv) Rule 144 promulgated under the Securities Act ("Rule 144") will not be available with respect to the sales of any securities of the Company, and the Company has made no covenant to make such Rule 144 available; (v) if and when the Options or Plan Shares may be disposed of without registration in reliance on Rule 144, such disposition can be made only in limited amounts in accordance with the terms and conditions of such Rule 144 and, in any event, any such disposition must be in accordance with both this Agreement and the Stockholders' Agreement; (vi) if the Rule 144 exemption is not available, public offer or sale without registration will require the availability of an exemption under the Securities Act; (vii) a restrictive legend or legends as provided for in the Stockholders' Agreement shall be placed on the certificates representing the Plan Shares; (viii) the Stockholders' Agreement restricts the sale or transfer of shares of any Options or Plan Shares other than at specified times and under specified circumstances; and (ix) a notation shall be made in the appropriate records of the Company indicating that the Options or Plan Shares are subject to restrictions on transfer and, if the Company should at some time in the future engage the services of a securities transfer agent, appropriate stop-transfer instructions may be issued to such transfer agent with respect to the Options or Plan Shares. 4.1.3 Additional Investment Representations. The Employee represents and warrants that (i) the Employee's financial situation is such that the Employee can afford to bear the economic risk of holding the Options or Plan Shares, as applicable, for an indefinite period of time and suffer complete loss of the Employee's investment in the Options or Plan Shares, as applicable; (ii) the Employee's knowledge and experience in financial and business matters (and, in particular, with respect to the Company) are such that the Employee is capable of evaluating the merits and risks of the Employee's investment in the Options or Plan Shares, as applicable; (iii) the Employee understands that the Options or Plan Shares, as applicable, are a speculative investment which involves a high degree of risk of loss of the Employee's investment therein, that there are substantial restrictions on the transferability of the Options or Plan Shares, as applicable, and that on the date of this Agreement and for an indefinite period following such date there will be no public market for the Options or Plan Shares, as applicable, and, accordingly, it may not be possible to liquidate the Employee's investment in the Company at all, including in case of emergency; (iv) the Employee and the Employee's representatives, including the Employee's professional, tax and other advisors, have carefully reviewed the financial and other information with respect to the Company, and its subsidiaries supplied to them and the Employee understands and has taken cognizance of (or has been advised by the Employee's representatives as to) all the risks related to an investment in the Options or Plan -3- Shares, as applicable; (v) in making the Employee's decision to invest in the Options or Plan Shares, as applicable, hereunder, the Employee has relied upon independent investigations made by the Employee and, to the extent believed by the Employee to be appropriate, the Employee's representatives, including the Employee's own professional, tax and other advisors; (vi) the Employee and the Employee's representatives have received and read this Agreement, the Plan and the Stockholders' Agreement and all other documents related to and executed or to be executed in connection with the transactions contemplated hereby and thereby, and have been given the opportunity to examine for a reasonable time prior to the date hereof all documents and to ask questions of, and to receive answers from, the Company and their respective representatives concerning the terms and conditions of the investment in the Options or Plan Shares, as applicable, and to obtain any additional information which the Company and its subsidiaries possess or can acquire without unreasonable effort or expense, necessary to verify the accuracy of the information supplied to it, and the Employee and the Employee's representatives have received all additional information requested by them, and no representations have been made to the Employee or such representatives concerning the Options or Plan Shares, their respective affiliates, their businesses or prospects or other matters; and (vii) the Employee is an officer of the Company holding the position of Chief Executive Officer as of the date hereof, is familiar with the operations and businesses of the Company, has access to all material financial and other information available from the Company, and has significant business experience in the party goods or similar business and, in any such case, expects to be an officer of the Company. 4.2. Additional Representations. In addition, in connection with the exercise of any Options, the Employee shall make to the Company, in writing, such other representations, warranties and agreements in connection with such exercise and investment in shares of Common Stock as the Committee shall reasonably request. 5. Successors. ---------- 5.1. This Agreement is personal to the Employee and, without the prior written consent of the Company, shall not be assignable by the Employee otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order (as defined in the Code) or (iii) pursuant to a gift to the Employee's spouse, children, grandchildren or other living descendants, whether directly or indirectly or by means of a trust, partnership, limited liability company or otherwise. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives and heirs. 5.2. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 5.3. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise (an "Acquisition")) to all or substantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place (or by substituting for such Options new options, based upon the stock of such successor, having an aggregate spread between the fair market value of the underlying stock and the exercise price thereof, and the same term, immediately after such -4- substitution, equal to the spread on, and the term of, such Options immediately before such substitution), and the Employee hereby agrees to such assumption (or substitution); provided, however, that the Company or such successor may, at its option, at the time of or promptly after such Acquisition, terminate all of its obligations hereunder with respect to the Options and the underlying shares by paying to the Employee or the Employee's successors or assigns an amount equal to the product of (i) the number of Options and (ii) the Fair Market Value per share of the shares underlying such Options at the time of such Acquisition less the amount of such Options' exercise price (but not in excess of such Fair Market Value per share), in either case, in exchange for the Employee's Options. As used in this Agreement, the "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 6. Miscellaneous. 6.1. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without regard to the principles of conflicts of law thereof. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 6.2. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed if to the Employee, at the address or facsimile number set forth on the signature page hereto, and if to the Company: Amscan Holdings, Inc., 80 Grasslands Road, Elmsford, New York 10523, Attention: Secretary, facsimile number 914-345-2056, or to such other addresses as either party furnishes to the other in writing in accordance with this Section 6.2. Notices and communications shall be effective when actually received by the addressee. 6.3. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 6.4. No later than the date as of which an amount first becomes includible in the gross income of the Employee for federal income tax purposes with respect to any Options, the Employee shall pay to the Company, or if appropriate, any of its Affiliates, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Employee. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. -5- 6.5. The Employee's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. 6.6. The Options are granted pursuant to the Plan, which is incorporated herein by reference, and the Options shall, except as otherwise expressly provided herein, be governed by the terms thereof. The Employee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. The Employee and the Company each acknowledges that this Agreement (together with the Stockholders' Agreement, the Plan and the other agreements referred to herein and therein) constitutes the entire agreement and supersedes all other agreements and understandings, both written and oral, among the parties or either of them, with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AMSCAN HOLDINGS, INC. By: ------------------------------------- Name: Title: EMPLOYEE: ----------------------------------------- Name: Title: Facsimile Number: -6- EX-10 5 exhibit10_c.txt EMPLOYEE AGREEMENT EMPLOYMENT AGREEMENT AGREEMENT (the "Agreement") by and between Amscan Holdings, Inc., a Delaware corporation (the "Company"), and James M. Harrison (the "Executive"), dated as of the 19th day of June, 2003. WHEREAS, the Executive serves the Company as its President pursuant to an Employment Agreement dated as of August 10, 1997 and amended as of December 1, 1999 and as of June 15, 2001 (the "Prior Employment Agreement"); and WHEREAS, the Company and the Executive desire to set forth in this new Employment Agreement the terms and conditions under which the Executive will continue to be employed by the Company; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Employment Period. (a) Initial Term. The Company shall employ the Executive, and the Executive agrees to, and shall, serve the Company, on the terms and conditions set forth in this Agreement, for the period commencing on January 1, 2003 and ending on December 31, 2004 (the "Initial Term"). (b) Extension of Initial Term. The Initial Term of this Agreement will be automatically extended after December 31, 2004 for additional successive periods of one year each, each such extension to be effective immediately after the last day of the term then in effect, with the first such extension period beginning on January 1, 2005 (each such additional period, an "Additional Term") (the Initial Term and any Additional Term thereof pursuant to this Section 1(b) being hereinafter referred to as the "Employment Period"), unless either the Company gives the Executive or the Executive gives the Company not less than twelve months written notice prior to the end of the Initial Term or any such Additional Term of such party's intention not to extend the Employment Period. 2. Position and Duties. (a) During the Employment Period, the Executive shall be President of the Company with such duties and responsibilities as are assigned to him by the Board of Directors of the Company (the "Board") consistent with his position as President of the Company, including, as the Board may request, without additional compensation, to serve as an officer or director of certain subsidiaries and other affiliated entities of the Company. (b) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full attention and time during normal business hours to the business and affairs of the Company and shall perform his services primarily at the Company's headquarters, wherever the Board may from time to time designate them to be, but in any case, within a 100-mile radius of Elmsford, New York, and shall use his reasonable best efforts to carry out the responsibilities assigned to the Executive faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to (i) serve on civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions or (iii) manage personal investments, so long as such activities do not compete with and are not provided to or for any entity that competes with or intends to compete with the Company or any of its subsidiaries and affiliates and do not interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive from the Company an annual base salary ("Annual Base Salary") of $450,000, payable in regular intervals in accordance with the Company's customary payroll practices in effect during the Employment Period; provided that such Annual Base Salary shall be increased by 5% (from the Annual Base Salary theretofore in effect) at the beginning of each Additional Term and shall be payable in accordance with the preceding sentence. (b) Other Compensation. In addition to the Annual Base Salary, the Executive shall be eligible for an annual bonus for each fiscal year of employment hereunder (the "Bonus"). Any Bonus shall be paid no later than the 75th day following the end of the fiscal year to which such Bonus corresponds. The exact amount of the Bonus, if any, payable to the Executive hereunder for fiscal year 2003 shall be determined in accordance with Exhibit A hereto; provided however that the Compensation Committee of the Board may, in its sole discretion, increase the amount of the Bonus above the amount determined in accordance with Exhibit A hereto. The basis for determining the Bonus hereunder for any subsequent fiscal year of employment hereunder shall be determined in the same manner as the Bonus for 2003 as set forth in Exhibit A, except that the EBITDA and Debt Paydown minimum, target, and maximum amounts for each relevant year shall be as established by the Compensation Committee of the Board, not later than the 90th day of the relevant year, after consultation with the Executive. For any fiscal year during which the Executive is employed by the Company for less than the entire year, any Bonus shall be payable on a pro rata basis for the period during which the Executive is employed during such fiscal year (based on the number of days in such fiscal year the Executive was so employed divided by 365), as determined in good faith by the Board; provided, however, that in no event will the Executive be entitled to a Bonus for any fiscal year during which the Executive's employment is terminated during the Employment Period other than as provided in Section 5(c) of this Agreement, if applicable. (c) Other Benefits. During the Employment Period: (i) the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs of the Company, and shall be entitled to paid vacation, to the same extent and on the same terms and conditions as peer executives; and (ii) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs provided by the Company (including, to the extent provided, without limitation, medical, prescription, dental, disability, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs) to the same extent and on the same terms and conditions as peer executives; provided, however, that nothing in this Agreement shall impose on the Company any obligation to offer to the Executive participation in any stock, stock option, restricted stock, bonus or other incentive award, plan, practice, policy or program other than the awards made pursuant to Section 3(b) and the Options granted in accordance with Section 3(e). The term "peer executives" means the Chief Executive Officer and Senior Vice President in charge of Sales and Marketing of the Company, if such positions exist, and if such positions do not exist, the definition of the term "peer executives" shall be determined by the Board in good faith. -2- (d) Expenses. During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable travel and other expenses incurred by the Executive in carrying out the Executive's duties under this Agreement, provided that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. (e) Options. Promptly following the execution of this Agreement, the Executive shall be granted options (the "Options") to purchase 25 shares of common stock of the Company, at an exercise price of $150,000 per share, pursuant to an option agreement substantially in the form attached hereto as Exhibit B. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that the Executive has been unable, for a period of (i) 180 consecutive days or (ii) an aggregate of 210 days in a period of 365 consecutive days, to perform his duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive returns to full-time performance of the Executive's duties in accordance with the provisions of Section 2 before such 30th day. In the event of a dispute as to whether Executive has suffered a Disability, the final determination shall be made by a licensed physician selected by the Board of Directors of the Company and acceptable to Executive in Executive's reasonable judgment. (b) Not Death or Disability. The Company may terminate the Executive's employment at any time during the Employment Period with or without Cause. The Executive may terminate his employment at any time during the Employment Period for any reason. (c) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date or the date on which the termination of the Executive's employment by the Company, or by the Executive, is effective, as the case may be. 5. Obligations of the Company Upon Termination. (a) By the Company, Other Than for Death or Disability. If, during the Employment Period, the Company terminates the Executive's employment other than due to the Executive's death or Disability, the Company shall, except as provided in clause (ii) below, pay the amounts described in subparagraph (i) below to the Executive in a lump sum in cash within 30 days after the Date of Termination: (i) The amounts to be paid in a lump sum as described above are: (A) The Executive's accrued but unpaid cash compensation (the "Accrued Obligations"), which shall equal the sum of (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) any Bonus that the Executive has earned for a prior full fiscal year that has ended prior to the Date of Termination but -3- which has not yet been calculated and paid; (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid (subject to any applicable provisions of any deferred compensation plan with respect to the payment thereof); and (4) any accrued but unpaid vacation pay; and (B) Severance pay equal to the Annual Base Salary; provided, however, that in connection with a termination by the Company other than (1) for Cause or (2) due to the Executive's death or Disability, such severance pay shall be equal to the Annual Base Salary multiplied by the number of years constituting the Post-Termination Restriction Period (as defined in Section 8(a)(ii)). (For example, if the Company, pursuant to its Restriction Election (as defined in Section 8(a)(ii)), elects a two-year Post-Termination Restriction Period, then severance pay will be equal to two times the Annual Base Salary.) (ii) Notwithstanding the foregoing, if the Executive's employment is terminated for Cause, the Executive shall not be entitled to the payments contemplated by clause (i)(B) of this Section 5(a) and the payment to the Executive in connection therewith shall be limited to payment of the Accrued Obligations and the Company shall have no further obligations under this Agreement. For purposes of this Agreement, "Cause" shall mean (1) conviction of the Executive by a court of competent jurisdiction of a felony (excluding felonies under the Motor Vehicle Code); (2) any act of intentional fraud in connection with his duties under this Agreement; (3) any act of gross negligence or wilful misconduct with respect to the Executive's duties under this Agreement; and (4) any act of wilful disobedience in violation of specific reasonable directions of the Board consistent with the Executive's duties. (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay the Accrued Obligations to the Executive or the Executive's estate or legal representative, as applicable, in a lump sum in cash within 30 days of the Date of Termination and the Company shall have no further obligations under this Agreement. (c) Bonus. If (i) the Executive's employment is terminated during the Employment Period (1) by the Company other than for Cause or (2) by reason of the Executive's death or Disability, or (ii) the Employment Period is not renewed at the expiration thereof (other than for Cause), the Company shall pay to the Executive or the Executive's estate or legal representative, as applicable, an amount equal to the Bonus which the Executive would otherwise have been entitled to receive for the fiscal year in which the Executive's employment is so terminated or not renewed, determined on a pro rata basis for the period during which the Executive is employed during such fiscal year (based on the number of days in such fiscal year the Executive was so employed divided by 365), as determined in good faith by the Board. For purposes of this Section 5(c), the Bonus shall be calculated in accordance with Section 3(b) at the end of the fiscal year to which such Bonus would otherwise have corresponded and shall be paid to the Executive no later than 75th day following the end of the fiscal year to which such Bonus corresponds. -4- (d) By the Executive. If the Executive terminates his employment with the Company, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within 30 days of the Date of Termination and the Company shall have no further obligations under this Agreement. (e) Effect of Employment of Executive by Certain Stock or Asset Purchasers. If all or substantially all of the stock or assets of the Company is sold or otherwise disposed of to a third party not affiliated with the Company, and the Executive is not offered employment on substantially similar terms by the Company or one of its continuing affiliates immediately thereafter, then, for all purposes of this Agreement, the Executive's employment shall be deemed to have been terminated by the Company other than for Cause effective as of the date of such sale or other disposition; provided, however, that the Company shall have no obligations to the Executive under this Section 5 if the Executive is hired or offered employment on substantially similar terms by the purchaser of the stock or assets of the Company or if the Executive's employment is continued by the Company. 6. Full Settlement. The Company's obligations to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 7. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any company affiliated with the Company and its respective businesses that the Executive obtains during the Executive's employment by the Company (whether before, during or after the Employment Term) and that is not public knowledge (other than as a result of the Executive's violation of this Section 7) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law. 8. Noncompetition; Nonsolicitation. (a) (i) During the Employment Period and during the three-year period (subject to Section 8(a)(ii)) following any termination of the Executive's employment with the Company and any of its affiliates, including due to expiration of the Employment Period (the "Restriction Period"), the Executive shall not directly or indirectly participate in or permit his name directly or indirectly to be used by or become associated with (including as an advisor, representative, agent, promoter, independent contractor, provider of personal services or otherwise) any person, corporation, partnership, firm, association or other enterprise or entity (a "person") that is, or intends to be, engaged in any business which is in competition with any 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 so to operate, compete or become engaged in such business (a "Competitor"). For purposes of this Agreement, the term "participate" includes any direct or indirect interest, whether as an officer, director, -5- employee, partner, sole proprietor, trustee, beneficiary, agent, representative, independent contractor, consultant, advisor, provider of personal services, creditor, or owner (other than by ownership of less than five percent of the stock of a publicly-held corporation whose stock is traded on a national securities exchange or in an over-the-counter market). (ii) In the event the Employment Period is terminated by the Company other than (1) for Cause or (2) due to the Executive's death or Disability, the Company shall elect (a "Restriction Election"), in its sole and absolute discretion (subject to the provisions of Section 5(a)(i)(B)), to limit the remainder of the Restriction Period following such termination to a one, two or three-year period (the "Post-Termination Restriction Period"). If no Restriction Election is made, the Company shall be deemed to have elected a three-year Post-Termination Restriction Period. (b) During the portion of the Restriction Period following any termination of the Executive's employment with the Company and any of its affiliates, the Executive shall not, directly or indirectly, encourage or solicit, or assist any other person or firm in encouraging or soliciting, any person that during the three-year period preceding such termination of the Executive's employment with the Company is or was engaged in a business relationship with the Company, any of its subsidiaries or controlled affiliates to terminate its relationship with the Company or any of its subsidiaries or controlled affiliates or to engage in a business relationship with a Competitor. (c) During the portion of the Restriction Period following any termination of the Executive's employment with the Company and any of its affiliates, the Executive will not, except with the prior written consent of the Company, directly or indirectly, induce any employee of the Company, or any of its subsidiaries or controlled affiliates to terminate employment with such entity, and will not, directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, employ, offer employment or cause employment to be offered to any person (including employment as an independent contractor) who is or was employed by the Company or any of its respective subsidiaries or controlled affiliates unless such person shall have ceased to be employed by such entity for a period of at least twelve months. For purposes of this Section 8(c), "employment" shall be deemed to include rendering services as an independent contractor and "employees" shall be deemed to include independent contractors. (d) Promptly following the Executive's termination of employment, including due to expiration of the Employment Period, the Executive shall return to the Company all property of the Company and its respective subsidiaries and affiliates, and all copies thereof, in the Executive's possession or under his control, including, without limitation, all Confidential Information in whatever media such Confidential Information is maintained. (e) The Executive acknowledges and agrees that the Restriction Period and the covenants and obligations of the Executive in Section 7 and this Section 8 with respect to non-competition, nonsolicitation and confidentiality and with respect to the property of the Company and its subsidiaries and controlled affiliates, and the territories covered thereby, are fair and reasonable and the result of negotiation. The Executive further acknowledges and agrees that the covenants and obligations of the Executive in Section 7 and this Section 8 with -6- respect to noncompetition, nonsolicitation and confidentiality and with respect to the property of the Company and its subsidiaries and controlled affiliates, and the territories covered thereby, relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company and its subsidiaries and affiliates irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain the Executive from committing any violation of such covenants and obligations. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. If, at the time of enforcement of Section 7 and/or this Section 8, a court holds that any of the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope, and/or geographical area legally permissible under such circumstances will be substituted for the period, scope and/or area stated herein. 9. Successors. (a) This Agreement is personal to the Executive and shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives and heirs and successors. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 10. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective heirs, successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by overnight courier or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed as follows: If to the Executive: James M. Harrison 16 High Street East Williston, NY 11596 Fax no.: If to the Company: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, NY 10523 Attention: Corporate Secretary Fax no.: (914) 345-2056 -7- or to such other address as either party furnishes to the other in writing in accordance with this Section 10(b). Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. Without limiting the generality of the foregoing, no later than the date as of which an amount first becomes includible in the gross income of the Executive for federal income tax purposes with respect to any Options or Restricted Stock (as defined in the Prior Employment Agreement), the Executive shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, all federal, state, local and foreign taxes that are required by applicable laws and regulations to be withheld with respect to such amount. Withholding obligations may be (and if the Executive makes no other arrangements, shall be) settled with common stock of the Company, including the shares underlying the Options or the Restricted Stock that gives rise to the withholding obligation. In addition, the obligations of the Company under this Agreement shall be conditional on compliance with this Section 10(d), and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Executive. (e) Any party's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The Executive acknowledges that this Agreement, together with the Exhibits hereto (and the other agreements referred to herein and therein), supersedes all other agreements and understandings, both written and oral, between the Executive and the Company with respect to the subject matter hereof, including, without limitation, the Prior Employment Agreement, except that Sections 4 and 5 of the Prior Employment Agreement shall continue in full force and effect and shall not be superseded and replaced by this Agreement. (g) This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall together constitute one and the same instrument. -8- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. AMSCAN HOLDINGS, INC. By: /s/ GERALD C. RITTENBERG ------------------------------------- Name: Title: /s/ JAMES M. HARRISON ------------------------------------- James M. Harrison -9- EXHIBIT A DETERMINATION OF 2003 BONUS 1. The minimum, target and maximum amounts of the 2003 Bonus shall be $404,502, $649,000 and $893,498, respectively. 2. (a) Fifty percent of the 2003 Bonus (the "EBITDA Bonus") shall be determined based upon the Company's EBITDA for 2003 (as defined below) as against the following targets, with amounts between those shown interpolated on a straight-line basis:
Minimum Target Maximum ------- ------ ------- EBITDA ....... $ 67,917 $ 71,309 $ 74,702 $ 78,094 $ 81,486 $ 84,879 $ 88,271 ($mms) % Target Bonus 62.3% 74.9% 87.4% 100.0% 112.6% 125.1% 137.7% EBITDA Bonus $202,251 $243,000 $283,750 $324,500 $365,249 $405,999 $446,749
(b) If the minimum EBITDA shown above is not achieved, the EBITDA Bonus shall be zero. In no event shall the EBITDA Bonus exceed $446,749. (c) The Company's EBITDA for 2003 shall mean its Consolidated Adjusted EBITDA (as defined in the Second Amended and Restated Credit and Guaranty Agreement, dated as of December 20, 2002, by and among the Company, certain subsidiaries of the Company, the Lenders party thereto from time to time, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger, Sole Bookrunner and Syndication Agent, General Electric Capital Corporation, as Administrative Agent and as Collateral Agent, and Fleet National Bank, as Documentation Agent, as it may be amended from time to time (the "Credit Agreement")) for fiscal year 2003. 3. (a) The remaining fifty percent of the 2003 Bonus (the "Debt Reduction Bonus") shall be determined based upon the Company's Debt Reduction (as defined below) as against the following targets, with amounts between those shown interpolated on a straight-line basis:
Minimum Target Maximum ------- ------ ------- Debt Reduction $ 22,945 $ 24,997 $ 27,050 $ 29,102 $ 31,154 $ 33,207 $ 35,259 ($mms) % Target Bonus 62.3% 74.9% 87.4% 100.0% 112.6% 125.1% 137.7% Debt Reduction $ 202,251 $243,000 $283,750 $324,500 $365,249 $405,999 $446,749 Bonus
(b) If the minimum Debt Reduction shown above is not achieved, the Debt Reduction Bonus shall be zero. In no event shall the Debt Reduction Bonus exceed $446,749. -10- (c) The Company's Debt Reduction for 2003 shall mean the aggregate decrease, if any, of the Indebtedness (as defined in the Credit Agreement) of the Company and its consolidated subsidiaries as of the end of fiscal year 2003 from as of the end of fiscal year 2002; provided, that for purposes of the definition of "Indebtedness," short-term account and trade payables of the Company and its subsidiaries ("Payables") shall be deemed to be an amount equal to the product of (a) 57 and (b) the cost of sales for fiscal year 2003 divided by 365 (the "Payable Amount"); provided that if the Board of Directors determines in its sole discretion that an increase or decrease of the Payable Amount is warranted due to circumstances which have caused such Payables to be significantly above or below the product of the number of accounts payable days and the average daily cost of sales for a fiscal year which they have historically represented, then the Payable Amount shall be such other amount as the Board of Directors so determines. For purposes of the foregoing, any Payables or other financial measures for a particular fiscal year shall be as reflected in the audited financial statements of the Company for such fiscal year; provided that cost of sales shall be determined on a basis consistent with "cost of sales" as reflected in the audited financial statements of the Company for fiscal year 2002. -11- EXHIBIT B STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT ("Agreement") dated as of June ___, 2003 by and between Amscan Holdings, Inc., a Delaware corporation (the "Company"), and James M. Harrison (the "Employee"). WHEREAS, pursuant to the Amscan Holdings, Inc. 1997 Stock Incentive Plan, as amended (the "Plan"), the Committee (as defined in the Plan) has decided to award stock options on the terms and conditions set forth is this Agreement. NOW, THEREFORE, in order to implement the foregoing and in consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: 1. Definitions. ----------- As used in this Agreement, the following terms shall have the meanings ascribed to them below. Any capitalized term used in this Agreement and not defined herein shall have the meaning ascribed to it in the Plan. "Acquisition" shall have the meaning set forth in Section 5.3. "Common Stock" shall mean the Common Stock, par value $0.10 per share, of the Company, subject to adjustment pursuant to the third paragraph of Section 3 of the Plan, under certain circumstances. "Exercise Price" shall have the meaning set forth in Section 2.2. "Grant Date" shall have the meaning set forth in Section 2.1. "Options" shall have the meaning set forth in Section 2.1. "Stockholders' Agreement" shall mean the Stockholders' Agreement, dated as of December 19, 1997, as amended, by and among the Company and certain stockholders and employees of the Company that are signatories thereto. In addition, certain other terms used herein have definitions otherwise ascribed to them herein. 2. Grant and Terms of Options. -------------------------- 2.1. Grant of Options. The Company hereby grants to the Employee as of June ___, 2003 (the "Grant Date") 25 Nonqualified Stock Options (the "Options") to purchase one share of Common Stock per Option on the terms and conditions set forth below, and in reliance upon the representations and covenants of the Employee set forth below. Unless sooner exercised or forfeited as provided for in the Plan or this Agreement, the Options shall expire on the third anniversary of the Grant Date. 2.2. Exercise Price. The exercise price of the Options is $150,000 per share of Common Stock subject thereto (the "Exercise Price"). 2.3. Exercisability. The Options shall vest and become exercisable upon the first to occur, during the Executive's Employment, of the following events: (i) an IPO; (ii) a Change of Control; and (iii) the expiration of two and one-half years from the Grant Date. Options that have become exercisable shall remain exercisable until they terminate as set forth in this Agreement or the Plan. 3. Plan Shares. ----------- 3.1. Transferability of Plan Shares and Option. The Employee shall not be permitted to sell, assign, transfer, pledge or otherwise encumber any Plan Shares or Options, except as provided in the Plan or, in the case of Plan Shares, as provided in Sections 2.3, 2.4 and 2.5 of the Stockholders' Agreement. Any transfer of Plan Shares otherwise permitted pursuant to this Agreement shall remain subject to the terms of the Stockholders' Agreement, and shall not be permitted other than in accordance with the terms thereof, notwithstanding any provision of this Agreement that would otherwise permit such transfer. 4. Employee's Representations, Warranties and Agreements. ----------------------------------------------------- 4.1. The Employee hereby makes to the Company in connection with the grant of the Options, and shall make to the Company in connection with the exercise of any Options and any investment in any Plan Shares, the following representations, warranties and agreements: 4.1.1 Investment Intention; No Resales. The Employee represents and warrants that such Employee is acquiring the Options or Plan Shares, as applicable, for investment purposes only, solely for his own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof or with any present intention of distributing or reselling any Options or Plan Shares, except for such distributions and dispositions as are both explicitly permitted under this Agreement and the Stockholders' Agreement and effected in compliance with the Securities Act, and the rules and regulations thereunder, and all applicable state securities or "blue sky" laws. The Employee agrees and acknowledges that such Employee will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of any Options or Plan Shares, or solicit any offers to purchase or otherwise acquire or take a pledge of any Options or Plan Shares, other than transfers, sales, assignments, pledges, hypothecations or other dispositions explicitly permitted by this Agreement and the Stockholders' Agreement and provided that (x) any such transfer, sale, assignment, pledge, hypothecation or other disposition is in accordance with the terms and provisions of this Agreement and the Stockholders' Agreement and (y) (i) the transfer, sale, assignment, pledge, hypothecation or other disposition is pursuant to an effective registration statement under the Securities Act and has been registered under all applicable state securities or "blue sky" laws, or (ii) the Employee shall have furnished the Company with an opinion of counsel (which counsel and the form and substance of which opinion shall be reasonably satisfactory to the Company), -2- to the effect that no such registration is required because of the availability of an exemption from registration under the Securities Act and the rules and regulations in effect thereunder and under all applicable state securities or "blue sky" laws. 4.1.2 Stock Unregistered. The Employee acknowledges and represents that such Employee has been advised that (i) the Options have not been registered, and the Plan Shares, upon issuance, will not have been registered, under the Securities Act; (ii) the Plan Shares must be held for an indefinite period and such Employee must continue to bear the economic risk of the investment in the Plan Shares unless it is subsequently registered under the Securities Act or an exemption from such registration is available; (iii) there is no, and it is not anticipated that there will be any, public market for the Options or the Plan Shares; (iv) Rule 144 promulgated under the Securities Act ("Rule 144") will not be available with respect to the sales of any securities of the Company, and the Company has made no covenant to make such Rule 144 available; (v) if and when the Options or Plan Shares may be disposed of without registration in reliance on Rule 144, such disposition can be made only in limited amounts in accordance with the terms and conditions of such Rule 144 and, in any event, any such disposition must be in accordance with both this Agreement and the Stockholders' Agreement; (vi) if the Rule 144 exemption is not available, public offer or sale without registration will require the availability of an exemption under the Securities Act; (vii) a restrictive legend or legends as provided for in the Stockholders' Agreement shall be placed on the certificates representing the Plan Shares; (viii) the Stockholders' Agreement restricts the sale or transfer of shares of any Options or Plan Shares other than at specified times and under specified circumstances; and (ix) a notation shall be made in the appropriate records of the Company indicating that the Options or Plan Shares are subject to restrictions on transfer and, if the Company should at some time in the future engage the services of a securities transfer agent, appropriate stop-transfer instructions may be issued to such transfer agent with respect to the Options or Plan Shares. 4.1.3 Additional Investment Representations. The Employee represents and warrants that (i) the Employee's financial situation is such that the Employee can afford to bear the economic risk of holding the Options or Plan Shares, as applicable, for an indefinite period of time and suffer complete loss of the Employee's investment in the Options or Plan Shares, as applicable; (ii) the Employee's knowledge and experience in financial and business matters (and, in particular, with respect to the Company) are such that the Employee is capable of evaluating the merits and risks of the Employee's investment in the Options or Plan Shares, as applicable; (iii) the Employee understands that the Options or Plan Shares, as applicable, are a speculative investment which involves a high degree of risk of loss of the Employee's investment therein, that there are substantial restrictions on the transferability of the Options or Plan Shares, as applicable, and that on the date of this Agreement and for an indefinite period following such date there will be no public market for the Options or Plan Shares, as applicable, and, accordingly, it may not be possible to liquidate the Employee's investment in the Company at all, including in case of emergency; (iv) the Employee and the Employee's representatives, including the Employee's professional, tax and other advisors, have carefully reviewed the financial and other information with respect to the Company, and its subsidiaries supplied to them and the Employee understands and has taken cognizance of (or has been advised by the Employee's representatives as to) all the risks related to an investment in the Options or Plan -3- Shares, as applicable; (v) in making the Employee's decision to invest in the Options or Plan Shares, as applicable, hereunder, the Employee has relied upon independent investigations made by the Employee and, to the extent believed by the Employee to be appropriate, the Employee's representatives, including the Employee's own professional, tax and other advisors; (vi) the Employee and the Employee's representatives have received and read this Agreement, the Plan and the Stockholders' Agreement and all other documents related to and executed or to be executed in connection with the transactions contemplated hereby and thereby, and have been given the opportunity to examine for a reasonable time prior to the date hereof all documents and to ask questions of, and to receive answers from, the Company and their respective representatives concerning the terms and conditions of the investment in the Options or Plan Shares, as applicable, and to obtain any additional information which the Company and its subsidiaries possess or can acquire without unreasonable effort or expense, necessary to verify the accuracy of the information supplied to it, and the Employee and the Employee's representatives have received all additional information requested by them, and no representations have been made to the Employee or such representatives concerning the Options or Plan Shares, their respective affiliates, their businesses or prospects or other matters; and (vii) the Employee is an officer of the Company holding the position of President as of the date hereof, is familiar with the operations and businesses of the Company, has access to all material financial and other information available from the Company, and has significant business experience in the party goods or similar business and, in any such case, expects to be an officer of the Company. 4.2. Additional Representations. In addition, in connection with the exercise of any Options, the Employee shall make to the Company, in writing, such other representations, warranties and agreements in connection with such exercise and investment in shares of Common Stock as the Committee shall reasonably request. 5. Successors. ---------- 5.1. This Agreement is personal to the Employee and, without the prior written consent of the Company, shall not be assignable by the Employee otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order (as defined in the Code) or (iii) pursuant to a gift to the Employee's spouse, children, grandchildren or other living descendants, whether directly or indirectly or by means of a trust, partnership, limited liability company or otherwise. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives and heirs. 5.2. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 5.3. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise (an "Acquisition")) to all or substantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place (or by substituting for such Options new options, based upon the stock of such successor, having an aggregate spread between the fair market value of the underlying stock and the exercise price thereof, and the same term, immediately after such -4- substitution, equal to the spread on, and the term of, such Options immediately before such substitution), and the Employee hereby agrees to such assumption (or substitution); provided, however, that the Company or such successor may, at its option, at the time of or promptly after such Acquisition, terminate all of its obligations hereunder with respect to the Options and the underlying shares by paying to the Employee or the Employee's successors or assigns an amount equal to the product of (i) the number of Options and (ii) the Fair Market Value per share of the shares underlying such Options at the time of such Acquisition less the amount of such Options' exercise price (but not in excess of such Fair Market Value per share), in either case, in exchange for the Employee's Options. As used in this Agreement, the "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 6. Miscellaneous. ------------- 6.1. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without regard to the principles of conflicts of law thereof. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 6.2. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by facsimile (with receipt confirmation), addressed if to the Employee, at the address or facsimile number set forth on the signature page hereto, and if to the Company: Amscan Holdings, Inc., 80 Grasslands Road, Elmsford, New York 10523, Attention: Secretary, facsimile number 914-345-2056, or to such other addresses as either party furnishes to the other in writing in accordance with this Section 6.2. Notices and communications shall be effective when actually received by the addressee. 6.3. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 6.4. No later than the date as of which an amount first becomes includible in the gross income of the Employee for federal income tax purposes with respect to any Options, the Employee shall pay to the Company, or if appropriate, any of its Affiliates, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Employee. The Committee may establish such procedures as it deems appropriate, including making irrevocable elections, for the settlement of withholding obligations with Common Stock. -5- 6.5. The Employee's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. 6.6. The Options are granted pursuant to the Plan, which is incorporated herein by reference, and the Options shall, except as otherwise expressly provided herein, be governed by the terms thereof. The Employee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. The Employee and the Company each acknowledges that this Agreement (together with the Stockholders' Agreement, the Plan and the other agreements referred to herein and therein) constitutes the entire agreement and supersedes all other agreements and understandings, both written and oral, among the parties or either of them, with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AMSCAN HOLDINGS, INC. By: ------------------------------------- Name: Title: EMPLOYEE: ----------------------------------------- Name: Title: Facsimile Number: -6- EX-31 6 exhibit31_1.txt CEO CERTIFICATION Exhibit 31(1) CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 I, Gerald C. Rittenberg, certify that: I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Omitted as permitted by Exchange Act Release No. 47986]; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting; and The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ GERALD C. RITTENBERG ---------------------------------- Gerald C. Rittenberg Chief Executive Officer (Principal executive officer) EX-31 7 exhibit31_2.txt CEO CERTIFICATION Exhibit 31(2) CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 I, Michael A. Correale, certify that: I have reviewed this quarterly report on Form 10-Q of Amscan Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Omitted as permitted by Exchange Act Release No. 47986]; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting; and 2 The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ MICHAEL A. CORREALE ---------------------------------- Michael A. Correale Chief Financial Officer (Principal financial officer) EX-32 8 exhibit32.txt CEO COMPLIANCE CERTIFICATION Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Amscan Holdings, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Gerald C. Rittenberg, Chief Executive Officer and Michael A. Correale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ GERALD C. RITTENBERG --------------------------------- Gerald C. Rittenberg Chief Executive Officer /s/ MICHAEL A. CORREALE ---------------------------------- Michael A. Correale Chief Financial Officer November 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----