-----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, N9PD0YC3GS9dRwJ0pPHDW/h1jXzkX2sWe7Vj6uSM0Ic6FbwO2yfPWrP6KyCCd8J6 VX/AkP+dcivEcMx1FM74iA== 0000913355-97-000034.txt : 19970401 0000913355-97-000034.hdr.sgml : 19970401 ACCESSION NUMBER: 0000913355-97-000034 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMSCAN HOLDINGS INC CENTRAL INDEX KEY: 0001024729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 133911462 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21827 FILM NUMBER: 97569342 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-K 1 ANNUAL REPORT ON FORM 10-K F O R M 10 - K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 [ ] 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 (I.R.S. Employer Identification incorporation or organization) Number) 80 Grasslands Road Elmsford, New York 10523 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 345-2020 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per phare --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 10, 1997: $71,542,751 Number of shares of the registrant's Common Stock, par value $0.10 per share, outstanding as of March 10, 1997: 21,120,476 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held May 22, 1997, to be filed within 120 days after the end of the fiscal year of the Registrant covered by this Report, are incorporated by reference into Part III of this Report. AMSCAN HOLDINGS, INC. AND SUBSIDIARIES 1996 FORM 10-K Table of Contents Part I Page Item 1 Business .................................................. 3 Item 2 Properties ................................................ 7 Item 3 Legal Proceedings ......................................... 8 Item 4 Submission of Matters to a Vote of Security Holders ....... 8 Item 4a Executive Officers of the Registrant ...................... 9 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ............................ 10 Item 6 Selected Consolidated Financial Data ..................... 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 14 Item 8 Financial Statements and Supplementary Data .............. 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................... 28 Part III Item 10 Directors and Executive Officers of the Registrant ....... 29 Item 11 Executive Compensation ................................... 29 Item 12 Security Ownership of Certain Beneficial Owners and Management ............................................. 29 Item 13 Certain Relationships and Related Transactions ........... 29 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................ 30 Signatures ............................................... 33 -2- PART I ITEM 1. BUSINESS INTRODUCTION Amscan Holdings, Inc. was organized on October 3, 1996 to become the holding company for the businesses previously conducted by the Company's principal subsidiary, Amscan Inc. and certain affiliated companies. In this report, Amscan Inc. and these affiliated companies are called the "Operating and Real Estate Companies." Unless the context otherwise requires, "Company" refers to Amscan Holdings, Inc. and each of the Operating and Real Estate Companies. SUBSIDIARIES The Operating and Real Estate Companies include Amscan Inc., Trisar, Inc., which manufactures and distributes certain of the Company's products, Amscan Distributors (Canada) Ltd. and Amscan Svenska AB, each of which distributes the Company's products, JCS Realty Corp. and SSY Realty Corp., each of which owns certain real estate leased to the Company, Am-Source, Inc., the Company's supplier of plastic plates, cups and bowls, and certain companies located in Great Britain, Australia, Germany and Mexico which distribute the Company's products. THE COMPANY'S BUSINESS The Company is a designer, manufacturer and distributor of seasonal and everyday party goods. The Company's product line consists of approximately 14,000 stock keeping units ("sku's") consisting of paper and plastic party goods, including decorative tableware (such as plates, napkins, cups and tablecovers), accessories (such as invitations and balloons) and novelties (such as games and favors). The Company offers approximately 200 design ensembles, each containing 30 to 150 items. The Company's products are sold in more than 20,000 retail outlets including party goods superstores, discount chains, mass merchandisers and specialty retailers. The Company operates in a single industry segment. The Company offers products in everyday and seasonal designs. Everyday events and celebrations include birthdays, showers, weddings, christenings, graduations, anniversaries, retirements, first communions, bar mitzvahs, confirmations, summer picnics and barbecues and theme parties (such as Hawaiian luaus, Mardi Gras and '50's parties). Seasonal celebrations and events include New Year's, Valentine's Day, St. Patrick's Day, Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and Christmas. SUMMARY FINANCIAL INFORMATION ABOUT THE COMPANY Information about the Company's revenues, operating profits or losses and assets for the last five years is included in this report in Item 6, "Selected Consolidated Financial Data." Because more holidays fall in the fourth quarter of the year than in the other quarters, the Company's business is somewhat seasonal. Sales for the third quarter are generally the highest for the year because the Company begins to ship seasonal holiday merchandise in that quarter. The Company does business in the United States and in other geographic areas of the world. Information about the Company's revenues, operating profits or losses and assets relating to geographic areas outside the United States is included in Note (14) to the Company's 1996 Consolidated Financial Statements which are included under Item 14 of this report. This information is presented for 1996, 1995 and 1994. -3- THE COMPANY'S PRODUCTS The categories of products which the Company offers are tableware, accessories and novelties. The percentages of net sales for each product category for the last three years are set forth in this table: 1994 1995 1996 ---- ---- ---- Tableware 58% 60% 59% Accessories 26% 24% 25% Novelties 16% 16% 16% This table sets forth the principal products in each of the three categories: TABLEWARE ACCESSORIES NOVELTIES - --------- ----------- --------- Solid Color Balloons Buttons Paper and Plastic Cups Banners Candles Paper and Plastic Plates Cascades Cocktail Picks Paper and Plastic Tablecovers Confetti Games Plastic Cutlery Crepe Mugs Cutouts Noise Makers Decorated Decorative Tissues Party Favors Paper Cups Flags Party Hats Paper Napkins Gift Bags Pom Poms Paper Plates Gift Wrap T-shirts Paper Tablecovers Guest Towels Honeycomb Centerpieces Invitations and Notes Ribbons and Bows Signs THE DESIGN PROCESS The Company's in-house design staff produces and manages the Company's party goods. Approximately 60 of the Company's employees design the Company's products. From the designs and concepts developed by these artists, the Company selects those it believes best to replace approximately one-third of its designed product ensembles each year. THE MANUFACTURING PROCESS Printing, forming, folding and packaging equipment support the Company's manufacturing operation, which are vertically integrated. Company facilities in Kentucky, New York, Rhode Island and California produce paper and plastic plates, napkins, cups and other party and novelty items. Approximately 50% of the Company's sales in 1996 were of items manufactured by the Company. The Company generally uses its manufacturing equipment on the basis of at least two shifts per day in order to lower its production costs per item. In addition, the Company manufactures products for third parties. The Company can adjust the amount it manufactures for others over a relatively short period of time. Manufacturing products for others helps the Company maintain a satisfactory level of equipment utilization. The Company believes its -4- existing facilities provide sufficient production capacity for its present needs and for its anticipated needs at least for the next year. The principal raw materials used by the Company in its products are paper and plastic. While the Company currently purchases such raw materials from a relatively small number of sources, paper and plastic are available from a number of sources. The Company's current suppliers could be replaced by the Company without adversely affecting its operations in any material respect. The Company sources the remainder of its products from contract manufacturers, the majority of whom are located in China and elsewhere in the Far East. The two largest such suppliers have exclusive supply arrangements with the Company and represent relationships which have been in place for more than ten years. The Company's business does not depend on any single source for products manufactured for the Company by others. THE SELLING PROCESS Approximately 50 sales professionals who have, on average, been affiliated with the Company for over 5 years, sell the Company's products in the United States. International customers are serviced by individuals who are generally employees of the Company's foreign subsidiaries. The Company ships its products from distribution warehouses which use computer assisted systems. Everyday products are shipped either from California or New York in order to achieve the most economical freight costs while providing fast delivery of goods. To control inventory investment, seasonal products are shipped out of a central warehouse located in New York. Products for foreign markets are shipped from the Company's distribution warehouses in Canada, Mexico, England and Australia. COMPETITION The Company competes on the basis of diversity and quality of its product designs, breadth of product line, product availability, price, reputation and customer service. The Company has many competitors with respect to one or more of its products. Competitors include smaller independent specialty manufacturers and other companies which have financial resources greater than those of the Company. Certain competitors control licenses for widely recognized images, such as cartoon or motion picture characters, which could provide them from time to time with a competitive advantage. The Company believes, however, that there are few competitors which manufacture and distribute products with the complexity of design and breadth of product offerings that the Company does. In addition, the Company knows of no competitor who utilizes design styles across product categories to provide consumers with coordinated products in the variety that the Company offers. Furthermore, the Company believes that its design and manufacturing processes create an efficiency in manufacturing that few of its competitors achieve in the production of numerous coordinated products in multiple design types. CUSTOMERS The Company's customers are principally party goods superstores, large discount chains, mass merchandisers and independent card and party retailers. Among this group, the Company's primary customers are party goods superstores. -5- During 1996, sales by the Company to its largest customer, Party City Corporation, amounted to 14.5% of the Company's consolidated net sales. Although the Company believes its relationship with Party City Corporation to be satisfactory, if it lost Party City as a customer, its financial condition and results of operations could be adversely affected. COPYRIGHTS, TRADEMARKS AND LICENSES The Company owns copyrights on the designs it creates and uses. The Company owns trademarks on the words and designs used on or in connection with its products. The Company registers its copyrights with the United States Copyright Office to the extent it deems reasonable. The Company does not believe that the loss of copyrights or trademarks with respect to any particular product or products would have a material adverse effect on the Company. The Company does not depend on licenses to any material degree. As a result, it does not incur any material licensing expenses. EMPLOYEES As of December 31, 1996, the Company had approximately 1,100 employees, none of whom is represented by a labor union. The Company considers its relationship with its employees to be good. -6- ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Elmsford, New York and conducts its principal design, manufacturing and distribution operations at the following facilities:
OWNED OR LEASED LOCATION PRINCIPAL ACTIVITY SQUARE FEET (WITH EXPIRATION DATE) - -------- ------------------ ----------- ---------------------- Elmsford, New York (1) Executive Offices; 45,000 square feet Leased (expiration date: design and art February 28, 2001) production of paper party products and decorations Harriman, New York Manufacture of paper 75,000 square feet Leased (expiration napkins and cups date: March 31, 1999) Providence, Rhode Island Manufacture and 51,000 square feet Leased (expiration distribution of plastic date: June 30, 2008) plates, cups and bowls Louisville, Kentucky Manufacture and 183,000 square feet Leased (expiration distribution of paper date: March 31, 1999) plates Anaheim, California Manufacture of 25,000 square feet Leased (expiration novelty items date: February 28, 1999) Temecula, California (2) Distribution of party 212,000 square feet Leased (expiration products and date: February 28, 2000) decorations Goshen, New York Distribution of party 130,000 square feet Leased (expiration products and date: December 31, 1998) decorations Chester, New York (3) Distribution of party 287,000 square feet Owned products and decorations Newburgh, New York Manufacture and 167,000 square feet Leased (expiration distribution of paper date: November 30, 1999) napkins and cups Montreal, Canada (4) Distribution of party 124,000 square feet Owned products and decorations Milton Keynes, England (5) Distribution of party 36,000 square feet Leased (expiration products and date: July 5, 1997) decorations Melbourne, Australia Distribution of party 10,000 square feet Owned products and decorations
-7- - ------------------- (1) Property leased by the Company from a limited liability company which is 79%-owned by a trust established for the benefit of the children of John A. Svenningsen, the principal stockholder of the Company, 20%-owned by a trust established for the benefit of Mr. Svenningsen's sister's children and 1%-owned by a corporation owned by Mr. Svenningsen. (2) Property leased by the Company from John A. Svenningsen. (3) Property subject to a ten-year mortgage entered into on September 14, 1994 by the Company securing a loan in the original principal amount of $5,925,000 bearing interest at a rate of 8.51%. (4) Property subject to a mortgage made by the Company securing a loan in the original principal amount of $2,088,000. Such mortgage bears an interest rate at the lower of Hong Kong Bank of Canada's Cost of Funds plus 1.6% or Canadian Prime plus 0.5%. The Company believes that its properties have been adequately maintained, are in generally good condition and are suitable for the Company's business as presently conducted. Currently, all properties generally are being used on the basis of two shifts out of a maximum potential capacity of three shifts per day. The Company also believes that upon the expiration of its current leases, it either will be able to secure renewal terms or will enter into leases for alternative locations at market terms. (5) On November 15, 1996, the Company entered into a lease for a 110,000 square foot distribution facility in Milton Keynes, England. The lease commences on August 1, 1997 and expires on July 30, 2017. ITEM 3. LEGAL PROCEEDINGS Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1996, at times when John A. Svenningsen was the holder of all of the Company's outstanding stock, Mr. Svenningsen took certain actions by written consent as the sole stockholder. On October 29, 1996, Mr. Svenningsen consented to the election of Christine Svenningsen and Gerald C. Rittenberg as directors of the Company in addition to himself. On November 27, 1996, Mr. Svenningsen approved certain actions relating to the initial public offering by the Company of shares of its Common Stock, par value $0.10 per share (the "Common Stock") and approved the Company's 1996 Stock Option Plan for Key Employees. -8- ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the executive officers of the Company, their ages as of March 11, 1997 and present positions with the Company. Unless otherwise indicated, each executive officer has held the position indicated since October, 1996, the month during which the Company was incorporated. The term of office of each extends until the organization meeting of the Board of Directors following the Annual Meeting of Stockholders in 1997 or until earlier removed by the Board of Directors. None of the named executive officers has been elected pursuant to any arrangement or understanding with any other person, and none has any family relationship with any other executive officer. NAME AGE POSITION John A. Svenningsen 66 Chairman of the Board of Directors and Chief Executive Officer * Gerald C. Rittenberg 44 President William S. Wilkey 41 Senior Vice President - Sales and Marketing James M. Harrison 45 Chief Financial Officer and Secretary * - -------------- * Mr. Svenningsen served as Secretary of the Company and Mr. Harrison served as Assistant Secretary of the Company from October 1996 to mid-February, 1997. Mr. Harrison has served as Secretary of the Company since mid-February, 1997. JOHN A. SVENNINGSEN is the Chairman of the Board of Directors and Chief Executive Officer of the Company. He has served as Chief Executive Officer of Amscan Inc. since 1958 and served as President from 1958 to April 1996. GERALD C. RITTENBERG has served as the President of Amscan Inc. since April 1996. From 1991 to April 1996, he was Executive Vice President - Product Development of Amscan Inc. and from 1990 to 1991 he was Vice President - Product Development of Amscan Inc. WILLIAM S. WILKEY has served as the Senior Vice President - Sales of Amscan Inc. since 1992 and as Vice President - Marketing and Field Sales from 1990 to 1992. JAMES M. HARRISON has served as the Chief Financial Officer of Amscan Inc. since August 1996. From 1993 to 1995, Mr. Harrison was the Executive Vice President and Chief Operating Officer, Secretary and Treasurer and a member of the Board of Directors of The C.R. Gibson Company, a manufacturer and distributor of paper gift products. From 1988 to 1993, Mr. Harrison was the Chief Financial Officer of The C.R. Gibson Company. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS INFORMATION REQUIRED BY ITEM 201 OF REGULATION S-K: The Company's Common Stock is listed and traded on the NASDAQ National market under the symbol "AMSN." The high and low sales prices of the Company's Common Stock for the last quarter of 1996 were $13.50 and $12.00, respectively, the only quarterly period in the last two fiscal years during which the Company's Common Stock was publicly traded. As of the close of business on March 10, 1997, there were approximately 375 holders of record of the Company's Common Stock. The Company has not paid any dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. As a holding company, the Company's ability to declare and pay dividends on its Common Stock will be substantially dependent on the receipt by the Company of cash dividends from its subsidiaries. The revolving credit agreement to which the Company's principal subsidiary is a party restricts the payment by such subsidiary of any cash dividends. INFORMATION REQUIRED BY ITEM 701 OF REGULATION S-K: In connection with the formation of the Company, the Company sold 1,000 shares of Common Stock to John A. Svenningsen for $100 in cash. These shares were sold to Mr. Svenningsen for the purpose of facilitating the Organization (as defined below) of and the initial public offering of the Common Stock by, the Company (the "IPO") by establishing a corporate structure including a stockholder and board of directors necessary for the Company to implement the IPO. Additional shares of Common Stock were issued prior to the IPO in connection with effecting the Organization. The organization of the Company (the "Organization") encompassed consummation of the transactions contemplated by three agreements to which the Company is a party and which are summarized below. The first of these agreements is among the Company, Mr. Svenningsen, Gerald C. Rittenberg and certain trusts established for the benefit of Mr. Svenningsen's children (the "SSY Trusts"). Pursuant to this agreement, Mr. Svenningsen, Gerald C. Rittenberg and the SSY Trusts exchanged all of the outstanding capital stock which they owned in the Operating and Real Estate Companies including Amscan Inc. for shares of Common Stock of the Company and, in the case of Mr. Svenningsen, cash in the aggregate amount of $133,000. Based on the aggregate value of the Company as determined by Mr. Svenningsen and the value of the shares of Common Stock issued in exchange therefor being $12 per share, Mr. Svenningsen received an aggregate of 15,024,616 shares of Common Stock of the Company (which includes the 1,000 shares of Common Stock issued to Mr. Svenningsen in connection with the formation of the Company) and $133,000 in cash. The SSY Trusts and Mr. Rittenberg were issued 138,461 and 660,000 shares of Common Stock, respectively. The transactions contemplated by this agreement were consummated on December 18, 1996. The second of these agreements is between the Company and the former stockholders of Am-Source, Inc. other than Mr. Svenningsen pursuant to which such stockholders exchanged all of the outstanding capital stock of Am-Source, Inc. which they owned for an aggregate of 624,999 shares of Common Stock of the Company. The exchange of shares of the capital stock of Am-Source, Inc. occurred on December 18, 1996. -10- The third agreement is among Amscan Inc., John A. Svenningsen and Gerald C. Rittenberg. Pursuant to this agreement, Mr. Rittenberg relinquished certain rights under a previous employment agreement, dated November 27, 1991, entered into between Amscan Inc. and Mr. Rittenberg. In exchange for the relinquishment of such rights, Mr. Rittenberg received a cash payment and shares of stock of Amscan Inc., which he exchanged for 660,000 shares of Common Stock pursuant to the first agreement described above. All of the shares of Common Stock issued in connection with the Organization as described above were issued and sold by the Company in reliance on the exemption contained in Section 4(2) of the Securities Act of 1933, as amended, and the rules thereunder. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Income Statement Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the four-year period ended December 31, 1996, are derived from the consolidated financial statements of Amscan Holdings, Inc. and Subsidiaries which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 and the report thereon, are included under Item 14 in this report. The selected data presented below under the captions "Income Statement Data" and "Balance Sheet Data" for December 31, 1992, and for the year then ended, are derived from unaudited combined financial statements of Amscan Inc. and Affiliates and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the combined financial position and results of operations for such period. The selected consolidated financial data should be read in conjunction with Amscan Holdings, Inc. and Subsidiaries Consolidated Financial Statements and the related notes thereto included under "Financial Statements and Supplementary Data," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma and supplemental pro forma data are unaudited and intended to present the effect of certain events that have occurred in connection with the IPO and should be read in conjunction with "Supplemental Pro Forma Consolidated Statement of Operations" and notes thereto which are included at the end of Item 7 in this report. -11- YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992 ($ in thousands, except share amounts) Income Statement Data: Net sales $192,705 $167,403 $132,029 $108,934 $86,944 Cost of sales 123,913 108,654 86,748 72,656 56,565 -------- -------- -------- -------- ------- Gross profit 68,792 58,749 45,281 36,278 30,379 Selling expenses 11,838 12,241 11,309 9,780 8,770 General and administrative expenses 19,266 15,002 14,460 11,080 9,316 Art and development expenses 5,173 4,256 2,796 2,596 1,551 Non-recurring compensation in connection with the IPO(1) 15,535 - - - - Special bonuses (2) 4,222 2,581 2,200 1,106 850 -------- -------- -------- -------- ------- Income from operations 12,758 24,669 14,516 11,716 9,892 Interest expense, net 6,691 5,772 3,843 2,304 2,092 Other expense / (income), net 335 (309) 82 308 16 -------- -------- -------- -------- ------- Income before income taxes and minority interests 5,732 19,206 10,591 9,104 7,784 Income taxes 1,952 731 464 348 297 Minority interests 1,653 1,041 160 301 53 -------- -------- -------- -------- ------- Net income $2,127 $17,434 $9,967 $8,455 $7,434 ======== ======== ======== ======== ======= Pro forma data: Income, before income taxes $4,079 $18,165 $10,431 $8,803 $7,731 Pro forma income taxes (3) 1,827 7,403 4,238 3,566 3,265 -------- -------- -------- -------- ------- Pro forma net income (3) $2,252 $10,762 $6,193 $5,237 $4,466 ======== ======== ======== ======== ======= Pro forma net income used for pro forma net income per share calculation(4) $12,010 ======== Pro forma net income per share(4) $0.60 ======== Pro forma weighted average common shares outstanding(5) 19,856,731 ========== Supplemental pro forma data(6): Income from operations $32,265 Interest expense, net 4,463 Other expense, net 335 ---------- Income before income taxes and minority interests 27,467 Income taxes 11,299 Minority interests 250 ---------- Supplemental pro forma net income(6) $15,918 ======== Supplemental pro forma net income per share(6) $0.77 ======== Supplemental pro forma weighted average common shares outstanding(7) 20,698,076 ==========
-12- YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992 ($ in thousands) Balance Sheet Data: Working capital $45,405 $8,383 $(438) $4,730 $7,765 ======== ======== ======== ======== ======= Total assets $140,274 $114,601 $93,884 $80,090 $60,652 ======== ======== ======== ======== ======= Short-term indebtedness(8) $33,262 $58,541 $50,869 $37,271 $25,993 Long-term indebtedness 15,085 12,284 8,800 11,852 11,116 -------- -------- -------- -------- ------- Total indebtedness $48,347 $70,825 $59,669 $49,123 $37,109 ======== ======== ======== ======== ======= Stockholders' equity $67,949 $27,205 $20,820 $18,496 $15,550 ======== ======== ======== ======== =======
- ------------------ (1) In conjunction with the IPO, the Company recorded non-recurring compensation expense of $15.5 million in 1996 related to stock and cash payments of $12.5 million to certain executives in connection with the termination of prior employment agreements and $3.0 million for the establishment of an Employee Stock Ownership Plan for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. (2) In each of the five years ended December 31, 1996, special bonus arrangements existed with certain members of management. In connection with the IPO, such special profit sharing arrangements were substantially modified and replaced by incentives tied to the value of the Company's Common Stock. (3) Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. elected to be taxed as Subchapter S corporations under the Internal Revenue Code. The pro forma net income amounts give effect to pro forma income tax amounts for each of the periods shown at statutory rates (40.5%) assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status. (4) Pro forma net income used for pro forma net income per share calculation for 1996 is higher than the pro forma net income shown for such period due to adjustments described in Note (16) of the Notes to Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries included under Item 14 of this report. (5) Represents shares issued and outstanding as of December 31, 1996 in connection with the exchange of shares in the Organization, the IPO shares and other shares in contemplation of the IPO as described in Note (16) of the Notes to Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries included under Item 14 of this report. (6) Supplemental pro forma adjustments result in supplemental pro forma net income for 1996 being higher than the pro forma net income shown for such period due to adjustments described in the notes to the Supplemental Pro Forma Consolidated Statement of Operations. See "Supplemental Pro Forma Consolidated Statement of Operations" included under Item 7 of this report. -13- (7) Represents shares as of December 31, 1996 issued and outstanding after the IPO described in Note (16) of the Notes to Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries included under Item 14 of this report. (8) Short-term indebtedness consists primarily of the Company's borrowings under bank lines of credit, current installments of long-term debt and subordinated debt due to Mr. Svenningsen and other stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS MF OPERATIONS GENERAL The party goods industry has experienced significant changes in both distribution channels and product offerings over the last several years. The retail distribution of party goods has begun to shift from smaller independent stores and designated departments within drug, discount or department store chains to superstores dedicated to retailing party goods. In part due to the success of the superstore channel, party goods manufacturers broadened their product lines to support the celebration of a greater number of occasions. The industry's growth has been directly affected by these changes. The Company's revenues have increased from $132.0 million in 1994 to $192.7 million in 1996, a compound annual growth rate of approximately 21%. The Company attributes this growth to its ability to create a broad range of unique and innovative designs for its products and to work closely with its customers to market and merchandise its products to consumers. In particular, the Company experienced significant growth with its party superstore customers. Between 1994 and 1996, sales to party superstore customers increased from $40.1 million to $86.3 million, a 47% compound annual growth rate. Revenues are generated from sales of approximately 14,000 sku's consisting of paper and plastic tableware, accessories and novelties for all occasions. Tableware (plates, cups, napkins, tablecovers and cutlery) is the Company's core product category, generating approximately 59% of revenues in 1996. Coordinated accessories (e.g., balloons and banners) and novelties (e.g., party favors) are offered to complement the Company's tableware products. To serve its customers better, the Company has made significant additions to its product line. Through increased spending on internal product development as well as through acquisitions, the Company has had a net increase of approximately 6,300 sku's since 1991. Revenue growth primarily has been the result of increased orders from its party superstore customers (new stores and increased same-store sales), increased international sales and price increases. The Company's gross profit is influenced by its product mix and paper costs. Products manufactured by the Company, primarily tableware, represented approximately 50% of the Company's 1996 sales. The Company has made significant additions to its manufacturing capacity which have allowed it to improve gross margins. The Company believes that its manufacturing capabilities enable it to lower product cost, ensure product quality and be more responsive to customer demands. Paper and pulp related products are the Company's principal raw materials. The Company has historically been able to adjust its prices in response to changes in paper prices. -14- FINANCIAL IMPACT OF ORGANIZATION OF THE COMPANY In connection with the IPO and the Organization certain events occurred which affected the financial position and results of the Company. The following is a discussion of these events and the related financial impact. ORGANIZATION OF FOUNDER'S INTERESTS The Company was formed for the purpose of becoming the holding company for the businesses previously conducted by Amscan Inc., certain affiliated companies individually owned and independently controlled by Mr. Svenningsen, and certain affiliated companies less than 100% owned by Mr. Svenningsen, including Am-Source, Inc., the Company's supplier of plastic plates, cups and bowls. The transfer of Mr. Svenningsen's ownership in these companies in exchange for shares of Common Stock of the Company was accounted for in a manner similar to a pooling of interests and, as such, the historical cost basis of the accounts were carried over thereby not giving rise to any goodwill. ACQUISITION OF AM-SOURCE, INC. The Company and the stockholders of Am-Source, Inc., other than Mr. Svenningsen, entered into an agreement pursuant to which such stockholders transferred their ownership in Am-Source, Inc. in exchange for shares of the Company's Common Stock. The transaction was accounted for as the purchase of the 50% ownership of Am-Source, Inc. not owned and gave rise to $7.4 million of goodwill, which will be amortized over 30 years. TERMINATION OF PRIOR EMPLOYMENT AGREEMENTS Pursuant to an agreement between Amscan Inc. and Gerald C. Rittenberg, the Company's President, Mr. Rittenberg entered into a new employment agreement, effective upon consummation of the IPO for a period of three years at a base compensation of approximately $220,000 per year to be increased annually by 5%. Mr. Rittenberg agreed to the termination of his employment agreement upon consummation of the IPO. The agreement which was terminated provided for Mr. Rittenberg to receive bonuses equal to approximately 10% of the aggregate net profits of Amscan Inc. and certain affiliates (as defined in the agreement) in each of the next three years and an amount equal to 5% of the value of Amscan Inc. in the event of a change in control or an initial public offering. In exchange for relinquishing these rights, Mr. Rittenberg received a special one-time payment of $3.5 million in cash and shares of Common Stock of the Company equal to approximately 3% of the total shares outstanding (excluding shares issued upon exercise of the Underwriters' over-allottment option) immediately following the IPO. The aggregate value paid to Mr. Rittenberg in cash and stock was $11.5 million. During the periods presented, certain other executives also had employment agreements which entitled them to receive a percentage of the pre-tax profits. These arrangements for Mr. Rittenberg and such other executives between 1994 and 1996 ranged from 18% to 20% of pre-tax profits in the aggregate. In conjunction with the IPO, these agreements were substantially modified and these bonus arrangements replaced by a combination of specific incentive plans and/or cash payments and stock option grants. The aggregate of the special bonuses to Mr. Rittenberg and the other executives and senior -15- managers were $4.2 million, $2.6 million and $2.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. ESTABLISHMENT OF AN EMPLOYEE STOCK OWNERSHIP PLAN AND PAYMENT OF STOCK BONUSES In conjunction with the IPO, the Company incurred a compensation expense of $3.0 million for the establishment of an Employee Stock Ownership Plan ("ESOP") for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. At the IPO, there was a special one-time contribution of 250,000 shares of Common Stock of the Company to the ESOP, subject to reduction as described in the next sentence, allocated to participant accounts based upon a formula which was weighted based upon both years of service and compensation. To the extent that application of this formula resulted in a contribution to the ESOP on behalf of a participant which would exceed the maximum contribution permitted under applicable law, the contribution to the ESOP for such participant was reduced to the maximum permitted and the balance determined under the formula will be paid to such participant in the form of a stock bonus. Future contributions to the ESOP will then be dependent upon a number of factors including Company performance. CHANGE IN CORPORATIONS FROM SUBCHAPTER S TO SUBCHAPTER C CORPORATIONS Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were operated as Subchapter S corporations for federal income and, where available, for state income tax purposes. As a result, these corporations did not record or pay any federal or state income tax except in states which do not recognize Subchapter S corporation status. Following the IPO, the Company has been taxed as a Subchapter C corporation. It is anticipated that the Company will have statutory income tax rates of approximately 40.5% following the IPO. The Company has presented pro forma tax provisions and pro forma net income and per share data. These pro forma amounts represent the income tax provision and the net income of the Company had it been a Subchapter C corporation and thus subject to income tax for all periods. See financial statements included under Item 14 of this report and "Supplemental Pro Forma Consolidated Statement of Operations" included at the end of this Item 7. STOCKHOLDER DISTRIBUTIONS As Subchapter S corporations, the accumulated profits of Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were distributed to the stockholders through December 18, 1996, the effective date of the IPO. Net profits after the consummation of the IPO will be added to retained earnings of the Company and used to fund the capital requirements of the business. Additionally, prior to the IPO, Amscan Inc. and certain affiliates declared dividends representing distributions of accumulated profits and a return of capital. These amounts were reflected as subordinated debt and nearly all of the previous balances of subordinated debt were repaid from the net proceeds of the IPO. -16- RESULTS OF OPERATIONS PERCENTAGE OF NET SALES Years Ended December 31, ------------------------------------ 1996 1995 1994 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of sales 64.3 64.9 65.7 -------- -------- -------- Gross profit 35.7 35.1 34.3 Operating expenses: Selling 6.1 7.4 8.5 General and administrative 10.0 9.1 11.0 Art and development 2.7 2.5 2.1 Non-recurring compensation in connection with the IPO 8.1 - - Special bonuses 2.2 1.5 1.7 -------- -------- -------- Total operating expenses 29.1 20.5 23.3 -------- -------- -------- Income from operations 6.6 14.6 11.0 Interest expense, net 3.4 3.4 2.9 Other expense (income), net 0.2 (0.2) 0.1 -------- -------- -------- Income before income taxes and minority interests 3.0 11.4 8.0 Income taxes 1.0 0.4 0.4 Minority interests 0.9 0.6 0.1 -------- -------- -------- Net income 1.1% 10.4% 7.5% ======== ======== ======== YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES Net sales for the year ended December 31, 1996 were $192.7 million, an increase of 15.1% over the year ended December 31, 1995 for which net sales were $167.4 million. Increased sales to national accounts, principally party superstores, accounted for $21.9 million or 87% of this increase. Also, contributing to this sales increase was the impact of the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. In 1996, the Company's product line included approximately 14,000 sku's compared with approximately 13,400 sku's in 1995. Selling price increases related to core products (paper plates, napkins, cups and tablecovers) in response to higher paper cost accounted for approximately 6 percentage points of the 15.1% increase in net sales between the periods. Increased sales to international customers accounted for $3.3 million of the increase in net sales. GROSS PROFIT Gross profit increased $10.0 million for the year ended December 31, 1996 compared to 1995, and improved as a percentage of sales from 35.1% to 35.7%. Higher selling prices in response to prior period increases in paper costs as well as lower product costs resulting from the Company's continued vertical integration of manufacturing operations, offset in part by the cost of added distribution facilities, were the primary reasons for this improvement in margins. -17- SELLING EXPENSES Selling expenses were lower by $0.4 million for the year ended December 31, 1996 compared to 1995, and declined as a percentage of net sales from 7.4% to 6.1%. The primary reason for the percentage decline was the Company's ability to increase sales to its party superstore customers while not significantly increasing its sales costs associated with those accounts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $4.3 million for the year ended December 31, 1996 compared to 1995. As a percentage of net sales, general and administrative expenses increased from 9.1% to 10.0%. This increase is principally attributable to an increase in the provision for bad debts of $1.7 million or 0.9% of net sales related to a significant increase in the Company's accounts receivable and increased occupancy costs of $0.5 million or 0.3% of net sales related to the Company's new corporate offices. Also contributing to this increase are non-recurring costs related to the development of a new business management computer system of $1.2 million or 0.6% of net sales as well as one-time costs associated with the move to the new corporate offices of $0.3 million or 0.2% of net sales and additional personnel costs including relocation and recruitment costs of $0.3 million or 0.2% of net sales. ART AND DEVELOPMENT COSTS Art and development costs increased $0.9 million for the year ended December 31, 1996 compared to 1995. As a percentage of net sales, art and development costs increased from 2.5% to 2.7%. The Company significantly expanded its creative and new product development staff and internal development capabilities in the middle of 1995 which resulted in a substantial increase in art and development costs which were incurred during all of 1996. The increase in art and development expenditures reflects the Company's strategy to remain a leader in product quality and development. NON-RECURRING COMPENSATION In conjunction with the IPO, the Company has recorded non-recurring compensation of $15.5 million in 1996 related to stock and cash payments of $12.5 million to certain executives in connection with the termination or modification of employment agreements and $3.0 million for the establishment of an ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. SPECIAL BONUSES Special bonuses, which were based entirely upon the Company's pre-tax income, increased by $1.6 million for the year ended December 31, 1996 compared to 1995. The employment agreements which gave rise to these bonuses have been substantially modified to eliminate these special bonus payments in the future. -18- INCOME FROM OPERATIONS Due to the non-recurring compensation of $15.5 million and the other factors discussed above, income from operations decreased $11.9 million to $12.8 million in 1996 from $24.7 million in 1995. As a percentage of net sales, income from operations decreased from 14.6% in 1995 to 6.6% in 1996. INTEREST EXPENSE, NET Interest expense, net increased by $0.9 million to $6.7 million in 1996, reflecting slightly higher borrowings associated with increased working capital (primarily inventory and accounts receivable) needed to support the increased volume of sales, offset in part by a lower effective interest cost associated with the Company's revised revolving credit agreement, which was entered into in September 1995. INCOME TAXES Prior to the IPO, Amscan Inc., Am-Source, Inc. JCS Realty Corp. and SSY Realty Corp. were taxed as Subchapter S corporations for federal income tax and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal and state income taxes except in states which do not recognize Subchapter S corporation status. In connection with the IPO, the aforementioned companies, became subject to federal and state income taxes. The amounts shown as income taxes in 1996 consist principally of foreign taxes and a one-time charge of $0.8 million related to the establishment of deferred taxes in connection with the change in tax status. MINORITY INTERESTS Minority interests represent the portion of income of the Company's subsidiaries attributable to equity ownership not held by Amscan Holdings, Inc. In addition to the minority interests of certain foreign entities, these amounts include the minority interest of Am-Source, Inc. through December 18, 1996, the date the Company acquired the 50% not owned by John A. Svenningsen. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES Net sales for the year ended December 31, 1995 were $167.4 million, an increase of 26.8% over 1994 when net sales were $132.0 million. Increased sales to party superstores accounted for $23.3 million or 66% of this increase. The number of retail outlets represented by these accounts increased to 886 in 1995 from 720 in 1994. Also contributing to this net sales increase was the impact of the Company's marketing strategy of continually offering new products as well as new designs and themes for existing products. In 1995, the Company's product line included over 13,400 sku's compared to approximately 11,000 sku's in 1994. Selling price increases related to core products (paper plates, napkins, tablecovers and cups) in response to higher paper costs, accounted for approximately 5 percentage points of the 26.8% of the year-over- year increase in net sales. Increased sales to international customers accounted for $4.3 million of the increase in net sales in 1995 compared to 1994. -19- GROSS PROFIT Gross profit increased by $13.5 million from 1994 to 1995, and improved as a percentage of net sales from 34.3% to 35.1%. The gross profit margin improvement resulted primarily from the increased vertical integration of the Company's tableware manufacturing operations. During 1995, the Company added several new pieces of equipment including two printing presses which enabled it to expand its manufacturing capacity. In addition, gross profit improved as a result of increased leveraging of existing distribution facilities and improved purchasing of nonmanufactured products. SELLING EXPENSES Selling expenses increased by $0.9 million from 1994 to 1995, but declined as a percentage of net sales from 8.5% to 7.4%. The primary reason for the percentage decline was the Company's ability to increase sales to its party superstore customers, while not significantly increasing its sales costs associated with these accounts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by $0.5 million from 1994 to 1995, primarily as a result of modest wage increases partially offset by decreased provisions for bad debts. During 1994, the Company sustained a larger amount of write-offs due to two large accounts which filed for bankruptcy. As a percentage of net sales, general and administrative expenses declined from 11.0% in 1994 to 9.1% in 1995. The Company was able to leverage its administrative resources while supporting the increased sales. ART AND DEVELOPMENT COSTS Art and development costs increased $1.5 million from 1994 to 1995. As a percentage of net sales, art and development costs increased from 2.1% in 1994 to 2.5% in 1995. The Company significantly expanded its creative and new product development staff and internal development capabilities in 1995, which resulted in a substantial increase in art and development costs in the second half of 1995. The increase in such expenses reflects the Company's strategy of remaining a leader in product quality and development. SPECIAL BONUSES Special bonuses, which were based upon the Company's pre-tax income, increased in 1995 over 1994. The special bonus in 1994 included special one- time bonuses of approximately $0.8 million associated with the partial acquisition of Am-Source, Inc. In connection with the IPO, the employment agreements which gave rise to these bonuses have been substantially modified to eliminate the special bonus payments. INCOME FROM OPERATIONS The factors discussed above contributed to the increase in income from operations of 69.9% to $24.7 million in 1995 from $14.5 million in 1994. As a percentage of net sales, income from operations increased from 11.0% in 1994 to 14.6% in 1995. -20- INTEREST EXPENSE, NET Interest expense, net increased by $1.9 million to $5.8 million from 1994 to 1995, reflecting higher borrowings associated with increased working capital (primarily from inventory and accounts receivable) needed to support the increased volume of sales, as well as an increase in the Company's average effective rate for borrowed money from 7.5% to 8.3%. INCOME TAXES Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. elected to be taxed as Subchapter S corporations for federal income and, where available, for state income tax purposes. Accordingly, these entities were not subject to federal income taxes prior to the IPO except in states which do not recognize Subchapter S corporation status. In connection with the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. terminated their Subchapter S corporation status and, accordingly, are subject to federal and state income taxes. The amounts shown as income taxes consist principally of foreign taxes. MINORITY INTERESTS Minority interests represent the portion of income attributable to equity ownership not held by Mr. Svenningsen. In addition to the minority interests of certain foreign entities, these amounts include the minority interest of Am- Source, Inc. prior to its acquisition by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its growth over the past three years principally through cash flow generated from operations, the use of operating leases, increases in its revolving line of credit borrowings and increases in long-term debt, including subordinated debt owed to Mr. Svenningsen. The net proceeds from the IPO have been used to reduce indebtedness under the Company's line of credit and to repay subordinated debt. Management believes that the Company's working capital requirements will be met for at least the next 12 months by cash flow from operations and borrowings under its line of credit. On September 20, 1995, the Company amended its revolving line of credit with several banks. This facility provided the Company with a $50.0 million credit line based upon the eligible assets of the Company. The amount available under this facility increased to $55.0 million on September 20, 1996, and will increase to $60.0 million on September 20, 1997. The facility, which expires September 20, 2000, had an outstanding balance as of December 31, 1996 of $29.0 million at an interest rate of 6.9%. This rate includes the impact of interest rate "swap" contracts which the Company has entered into to fix the interest rate on $25.0 million of its obligation. (See Note (5) of the Notes to Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries included under Item 14 of this report.) The Company's revolving line of credit imposes certain restrictions on the ability of the Company and certain of its subsidiaries, including Amscan Inc., to incur additional indebtedness, enter into guarantees or other similar agreements, make loans to or investments in other persons and pay dividends. The Company and its subsidiaries on a consolidated basis are also subject to financial covenants which require them to maintain a certain threshold tangible net worth, limit capital expenditures and require the Company and its subsidiaries to maintain certain financial ratios. The Company is not currently in default in respect of any of -21- these restrictive covenants or financial ratios. The Company may seek to enter into new arrangements to replace this revolving credit facility which might include both term debt and revolving credit. Net cash provided by operating activities increased by $7.6 million to $12.3 million in 1996 from $4.7 million in 1995 as a result of the decreased rate of growth in inventories and other assets, partially offset by increases in deposits paid on purchased equipment and a decrease in net income before depreciation and amortization. Net cash used in investing activities of $7.6 million increased by $3.1 million from 1995 because of increased capital expenditures. Net cash used in financing activities increased by $6.1 million to $6.0 million in 1996 due to increases in stockholder distributions, repayment of bank debt and subordinated debt partially offset by net proceeds from the IPO. Net cash provided by operating activities decreased by $0.4 million to $4.7 million in 1995 from $5.1 million in 1994. This slight decrease was primarily attributable to increases in accounts receivable and inventories, offset by increases in accounts payable and accrued expenses and net income before depreciation and amortization. Net cash used in investing activities decreased $2.8 million from $7.3 million to $4.5 million due to reduced capital expenditures. Net cash provided from financing activities decreased $2.6 million from $2.7 million to $0.1 million due to an increase in stockholder distributions partially offset by an increase in loans, notes payable and long- term indebtedness. Accounts receivable, net increased $5.5 million to $37.4 million on December 31, 1996 from $31.9 million at December 31, 1995. This increase is due principally to increased sales. Deposits and other assets increased $8.4 million to $11.4 million on December 31, 1996 from December 31, 1995. These increases are due principally to deposits placed, offset by the related advances received, in connection with various operating leases for manufacturing and warehouse equipment as well as office equipment and computer software and to the establishment of a deferred tax asset resulting from the change in tax status. Property, plant and equipment, net increased $5.5 million to $34.7 million on December 31, 1996 from $31.9 million at December 31, 1995. This increase is primarily due to manufacturing and warehouse equipment acquired, partially offset by depreciation. Intangible assets, net increased $7.4 million on December 31, 1996 from December 31, 1995 primarily due to goodwill recorded in connection with the acquisition of the remaining 50% of Am-Source, Inc. Loans and notes payable decreased $8.5 million to $29.3 million at December 31, 1996. Subordinated debt and other due to stockholders decreased $17.1 million to $1.4 million at December 31, 1996. The decreases resulted from the repayment of bank debt and subordinated debt funded by net proceeds from the IPO. Long-term debt, including current installments, increased $3.1 million to $17.6 million on December 31, 1996 primarily because of loans used to acquire machinery and equipment. Common Stock increased $1.7 million to $2.1 million as of December 31, 1996 due to the exchange of shares issued in 1996. These shares include the shares issued to Mr. Svenningsen and others in connection with the Organization of the Company, the shares issued in the IPO as well as the shares issued in connection with the establishment of the -22- ESOP, the payment of stock bonuses and the acquisition of the remaining 50% of Am-Source, Inc. Additional paid-in capital increased $52.4 million to $61.5 million as of December 31, 1996 primarily due to the net proceeds from the IPO, and other shares issued in connection with the IPO, partially offset by the return of previously provided capital and a reduction in additional paid-in capital resulting from the exchange of shares in the Organization. In 1996, the Company distributed $23.4 million, compared to $11.0 million in 1995, to stockholders, of which $1.4 million in 1996 and $4.0 million in 1995 was reinvested in the Company as debt payable to stockholders. The distributions in 1996 were funded by net proceeds from the IPO and represented accumulated Subchapter S earnings and the return of previously provided capital. In 1995, the Company distributed $11.0 million, compared to $7.5 million in 1994, to stockholders, of which $4.0 million in 1995 and $6.3 million in 1994 was reinvested in the Company as debt payable to stockholders. The remainder of these distributions was used principally for the payment of the stockholders' taxes. The increase from 1994 to 1995 was due to increased earnings of those corporations, taxable to the stockholders. Third party financings for 1996 consisted primarily of borrowings under credit and long-term loans secured by machinery and equipment. The Company used net proceeds from the IPO to repay debt owed to the banks and to Mr. Svenningsen in 1996. The Company used $8.9 million of the cash in 1996 to fund its working capital needs, which consisted primarily of increases in accounts receivable and deposits on machinery and equipment. The Company generated $10.0 million and $3.9 million from third party financings and $1.2 million and $6.3 million from financings with Mr. Svenningsen in 1995 and 1994, respectively. Financings in 1995 consisted primarily of long-term loans secured by machinery and equipment and borrowings under revolving credit facilities, while financings in 1994 consisted primarily of bankers acceptances and borrowings under revolving credit facilities. The Company used $18.6 million of the cash in 1995 and $11.2 million of the cash in 1994 to fund its working capital needs, which consisted primarily of increases in accounts receivable and inventory. In 1996 and 1995 respectively, the Company acquired $11.0 million and $4.5 million of machinery and equipment, which was financed by long-term debt and borrowings under the Company's revolving credit facility, and entered into operating leases for additional machinery and equipment totaling $10.8 million in 1996, and $7.4 million in 1995. In 1994, the Company acquired $8.0 million of machinery and equipment which was financed primarily by borrowings under the Company's revolving credit facilities and $4.0 million of which was refinanced through long-term loans early in 1995. Management believes that these additions to plant and equipment provide adequate capacity to support its operations for at least the next 12 months. As of December 31, 1996, the Company did not have material commitments for capital expenditures other than for machinery and equipment which will be leased under the aforementioned $10.8 million of operating leases. -23- QUARTERLY RESULTS As a result of the seasonal nature of certain of the Company's products, the quarterly results of operations may not be indicative of those for a full year. Third quarter sales are generally the highest of the year due to a combination of increased sales to consumers of the Company's products during summer months as well as initial shipments of seasonal holiday merchandise as retailers build inventory. Conversely, fourth quarter sales are generally lower as retailers sell through inventories purchased during the third quarter. The overall growth rate of the Company's sales in recent years has offset, in part, this sales variability. Promotional activities, including special dating and pricing terms, particularly with respect to Halloween and Christmas products, result in generally lower margins and profitability in the fourth quarter, as well as higher accounts receivable balances and associated higher interest costs to support these balances. The following table sets forth the historical net sales and income from operations of the Company for 1996 and 1995 by quarter.
1996 QUARTERS 1995 QUARTERS --------------------------------------- --------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- -------- ------- -------- ------- ($ in thousands) Net sales $47,258 $45,714 $54,036 $ 45,697 $39,376 $41,046 $47,892 $39,089 Income (loss) from operations $ 7,586 $ 7,564 $ 9,222 $(11,614)(a) $ 6,492 $ 6,350 $ 9,120 $ 2,707(b)
- ----------------- (a) Included in fourth quarter results in 1996 are non-recurring compensation expenses of $15.5 million related to stock and cash payments of $12.5 million to certain executives in connection with the termination or modification of prior employment agreements and $3.0 million for the establishment of an ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. (b) In addition to the seasonal variability described above, income from operations for the fourth quarter of 1995 was adversely affected by the impact of higher paper costs for which selling price adjustments were implemented in the first quarter of 1996. Income from operations for this quarter was also adversely affected by additional bad debt reserves (approximately $0.5 million) and additional computer system expenses (approximately $0.5 million). "SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this report, and in particular in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," may be forward looking and are subject to a variety of risks and uncertainties. Many factors could cause actual results to differ materially from these statements. These factors include, but are 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 the party goods superstores which are generally privately held and have expanded rapidly in recent years, (3) the failure by the Company to anticipate tastes and preferences of party goods retailers and consumers, (4) the introduction of new products by the Company's competitors, (5) the inability of the -24- Company to increase prices to recover fully future increases in raw material prices, especially increases in paper prices, (6) the loss of key employees (including John A. Svenningsen, the Company's Chairman and Chief Executive Officer, who has been undergoing treatment for lymphoma) and (7) other factors which might be described from time to time in the Company's filings with the Securities and Exchange Commission. In addition, the Company is subject to the effects of changes in general business conditions. Although the Company believes that it has the product offerings and resources needed for continuing success, future revenue and margin trends cannot be reliably predicted. These trends may cause the Company to adjust its operations in the future. Factors external to the Company can also affect the price of the Company's Common Stock. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices. -25- SUPPLEMENTAL PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) The following Supplemental Pro Forma Consolidated Statement of Operations for the year ended December 31, 1996 reflects the consolidated results of operations of Amscan Holdings, Inc. and Subsidiaries after giving effect to certain events that have occurred in conjunction with the Organization and the IPO including pro forma adjustments intended to present the historical results as if Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected to be treated as Subchapter S corporations for tax purposes. The unaudited Supplemental Pro Forma Consolidated Statement of Operations has been prepared by management solely to facilitate period to period comparisons and does not represent the actual results of operations for the period presented. The Supplemental Pro Forma Consolidated Statement of Operations does not purport to be indicative of future results. The Supplemental Pro Forma Consolidated Statement of Operations should be read in conjunction with the Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries and the notes thereto as of and at December 31, 1996 included under Item 14 of this report. -26- AMSCAN HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Year Ended December 31, 1996 ($ in thousands, except share amounts) (unaudited)
PRO FORMA AND SUPPLEMENTAL PRO FORMA SUPPLEMENTAL HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ------------ Net sales $ 192,705 $ 192,705 Cost of sales 123,913 123,913 ---------- ---------- Gross profit 68,792 68,792 Selling 11,838 11,838 General and administrative 19,266 $ 250(a) 19,516 Art and development 5,173 5,173 Non-recurring compensation in connection with the IPO 15,535 (15,535)(b) - Special bonuses 4,222 (4,222)(c) - ---------- ---------- Income from operations 12,758 32,265 Interest expense, net 6,691 (2,228)(d) 4,463 Other expense, net 335 335 ---------- ---------- Income before income taxes and minority interests 5,732 27,467 Income taxes 1,952 9,347 (e) 11,299 Minority interests 1,653 (1,403)(a) 250 ---------- ---------- Supplemental pro forma net income $ 2,127 $ 15,918 ========== ========== Supplemental pro forma net income per share $ 0.77 ========== Supplemental pro forma weighted average common shares outstanding 20,698,076(f) ==========
Notes to Supplemental Pro Forma Consolidated Statement of Operations ($ in thousands): (a) To reflect approximately $250 amortization of goodwill of $7,443 over thirty years and the elimination of $1,403 for minority interest related to the acquisition of an additional 50% of Am-Source, Inc. as if it were acquired at the beginning of the period presented; (b) To reflect reductions in compensation expense of $15,535 related to stock and cash of $12,535 for payment to certain executives in connection with the termination of prior employment agreements and $3,000 for the establishment of an ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees; (c) To reflect the elimination of special bonuses that will not be recurring due to the termination of certain employment agreements in connection with the IPO. No adjustments are reflected or are necessary with respect to performance-based compensation as the provisions in the new employment agreements would have resulted -27- in performance-based compensation materially equivalent to that reflected in the historical accounts under the prior employment agreements; (d) To reflect the reduction of actual interest expense assuming a repayment of $8,100 of bank loans at the actual rate in effect and an average balance of $20,000 of loans from Mr. Svenningsen at the actual rate in effect; (e) To provide for income taxes at statutory rates of 40.5% on earnings as if Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not been treated as Subchapter S corporations during the period presented and to give effect to the tax effect of these adjustments; (f) Supplemental pro forma weighted average common shares outstanding represents the shares issued in connection with the Organization, the IPO shares and other shares issued in contemplation of the IPO as well as the shares issued in connection with the establishment of the ESOP and payment of stock bonuses, and the acquisition of the additional 50% of Am-Source, Inc. as if the transactions occurred at the beginning of the period presented. See note (16) of the Notes to Consolidated Financial Statements of Amscan Holdings, Inc. and Subsidiaries included under Item 14 of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the consolidated financial statements and supplementary data listed in the accompanying Index to Financial Statements and Schedule on page F-1 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -28- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) IDENTIFICATION OF DIRECTORS. The information required by Item 401(a) of Regulation S-K is incorporated into this Form 10-K by reference to the Company's definitive proxy statement relating to its 1997 Annual Meeting of Stockholders (the "Definitive Proxy Statement") which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. (b) IDENTIFICATION OF EXECUTIVE OFFICERS. The information required by Item 401(b) of Regulation S-K is included in Item 4A in Part I of this Form 10- K. (c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES. The information required by Item 401(c) of Regulation S-K is not applicable to the Company. (d) FAMILY RELATIONSHIPS. The information required by Item 401(d) of Regulation S-K is not applicable to the Company. (e) BUSINESS EXPERIENCE. The information required by Item 401(e) of Regulation S-K is incorporated into this Form 10-K by reference to the Definitive Proxy Statement or is included in Item 4A in Part I of its Form 10- K. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. The information required by Item 401(f) of Regulation S-K is not applicable to the Company. (g) PROMOTERS AND CONTROL PERSONS. The information required by Item 401(g) of Regulation S-K is not applicable to the Company. (h) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The information required by Item 405 of Regulation S-K is incorporated by reference to the Definitive Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is incorporated into this Form 10- K by reference to the Definitive Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is incorporated into this Form 10- K by reference to the Definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K is incorporated into this Form 10-K by reference to the Definitive Proxy Statement. -29- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 1. and 2. Financial Statements and Schedule. See Index to Financial Statements and Schedule which appears on page F-1 herein. 3. Exhibits EXHIBIT NUMBER DESCRIPTION 2(a) Share Exchange Agreement dated as of December 18, 1996, among the Registrant, John A. Svenningsen, Gerald C. Rittenberg and the following trusts each created by agreement dated as of October 29, 1996: Christina Svenningsen Trust, Jon Svenningsen Trust, Elisabeth Svenningsen Trust, Melissa Svenningsen Trust, Emily Svenningsen Trust and Sara Svenningsen Trust 2(b) Capital Contribution Agreement by and between the Company and Messrs. Allan J. Kaufman, Arthur J. Kaufman and Michael F. Hodges, dated October 9, 1996, as supplemented (incorporated by reference to Exhibit 2(b) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 3(a) Certificate of Incorporation, dated October 3, 1996, (incorporated by reference to Exhibit 3(a) to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 3(b) By-Laws (incorporated by reference to Exhibit 3(b) to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 4(a) Credit Agreement among Amscan Inc., Kookaburra USA Ltd., Deco Paper Products, Inc., Trisar, Inc., the banks signatory thereto and The Chase Manhattan Bank N.A., dated as of September 20, 1995 (incorporated by reference to Exhibit 4(a) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) -30- 4(b) Amendment No. 1 to Credit Agreement among Amscan Holdings, Inc., Amscan Inc., Trisar Inc., the banks signatory thereto and The Chase Manhattan Bank, dated as of November 14, 1996 (incorporated by reference to Exhibit 4(b) to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 4(c) Amendment No. 2 to Credit Agreement among Amscan Holdings, Inc., Amscan Inc., Trisar Inc., the banks signatory thereto and The Chase Manhattan Bank, dated as of December 11, 1996 (incorporated by reference to Exhibit 4(c) to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(a) Employment Agreement by and between Amscan Holdings, Inc. and John A. Svenningsen, dated November 1, 1996 (incorporated by reference to Amendment No. 1 to Exhibit 10(a) to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(b) Employment Agreement by and between the Company and Gerald C. Rittenberg, dated October 9, 1996 (incorporated by reference to Exhibit 10(b) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(c) Stock Agreement among Gerald C. Rittenberg, John A. Svenningsen and Amscan Inc., dated October 9, 1996 (incorporated by reference to Exhibit 10(c) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(d) Employment Agreement by and between Amscan Inc. or the Company and William Wilkey, dated as of October 4, 1996 (incorporated by reference to Exhibit 10(e) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(e) Employment Agreement between Amscan Holdings, Inc. and James M. Harrison, dated as of February 1, 1997 10(f) 1996 Stock Option Plan for Key Employees (incorporated by reference to Exhibit 10(h) to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) -31- 10(g) Lease between ACP East LLC and Amscan Inc. dated as of December 1, 1995, as amended (incorporated by reference to Exhibit 10(i) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333- 14107)) 10(h) Lease between John Anders Svenningsen and Amscan Inc., dated March 1, 1995, as modified and amended (incorporated by reference to Exhibit 10(j) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(i) Lease between John Anders Svenningsen and Amscan Inc., dated November 9, 1995, as amended (incorporated by reference to Exhibit 10(k) to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(j) Tax Indemnification Agreement between Amscan Holdings Inc. and John A. Svenningsen, dated as of December 18, 1996 10(k) The MetLife Capital Corporation Master Lease Purchase Agreement between MetLife Capital Corporation and Amscan Inc., Deco Paper Products, Inc., Kookaburra USA Ltd., and Trisar, Inc., dated November 21, 1991, as amended (incorporated by reference to Exhibit 10(n) to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 10(l) Form of Indemnification Agreement between the Company and each of the directors of the Company (incorporated by reference to Exhibit 10(o) to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-14107)) 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333- 14107)) 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K have been filed with the Securities and Exchange Commission during the last quarter of the period covered by this Form 10-K. -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMSCAN HOLDINGS, INC. By:/s/ JOHN A. SVENNINGSEN ----------------------------- John A. Svenningsen, Chairman of the Board of Directors and Date: March 24, 1977 Chief Executive Officer -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE Chairman of the Board of /s/ JOHN A. SVENNINGSEN Directors and Chief Executive - ----------------------- Officer March 24, 1997 John A. Svenningsen (principal executive officer) /s/ GERALD C. RITTENBERG - ----------------------- President and Director March 24, 1997 Gerald C. Rittenberg - ----------------------- Director March 24, 1997 Allyn H. Powell /s/ JOHN TUGWELL - ----------------------- Director March 24, 1997 John Tugwell /s/ FRANK A. ROSENBERRY - ----------------------- Director March 24, 1997 Frank A. Rosenberry Chief Financial Officer /s/ JAMES M. HARRISON (principal financial and - ----------------------- accounting officer) March 24, 1997 James M. Harrison -33- FORM 10-K ITEM 8, ITEM 14(A) 1 AND 2 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Year Ended December 31, 1996 Consolidated Financial Statements as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996: PAGE Independent Auditors' Report ...................................... F-2 Consolidated Balance Sheets ...................,................... F-3 Consolidated Statements of Operations ............................. F-4 Consolidated Statements of Stockholders' Equity ................... F-5 Consolidated Statements of Cash Flows ............................. F-6 Notes to Consolidated Financial Statements ........................ F-8 Financial Statement Schedule for the three years ended December 31 1996: Schedule 2 - Valuation and Qualifying Accounts .................... F-25 F-1 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Amscan Holdings, Inc.: We have audited the accompanying consolidated financial statements of Amscan Holdings, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amscan Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP February 14, 1997 Stamford, Connecticut F-2 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands) DECEMBER 31, ------------ 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents ....................... $ 1,589 $ 2,492 Accounts receivable, net of allowances of $4,138 and $2,505, respectively ............... 37,378 31,880 Inventories ..................................... 45,693 45,013 Deposits and other .............................. 11,360 2,920 -------- -------- Total current assets .......................... 96,020 82,305 Property, plant and equipment, net ................. 34,663 29,173 Intangible assets, net ............................. 7,443 350 Other assets ....................................... 2,148 2,773 -------- -------- Total assets .................................. $140,274 $114,601 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans and notes payable .......................... $ 29,328 $ 37,849 Subordinated debt and other to stockholders ...... 1,393 18,453 Accounts payable ................................. 7,128 5,855 Accrued expenses ................................. 10,225 9,526 Current installments of long-term indebtedness ... 2,541 2,239 -------- -------- Total current liabilities ...................... 50,615 73,922 Long-term indebtedness, excluding current installments ..................................... 15,085 12,284 Deferred tax liabilities ............................ 5,662 - Other ............................................... 963 1,190 -------- -------- Total liabilities .............................. 72,325 87,396 -------- -------- Stockholders' equity: Preferred stock .................................. - - Common stock ..................................... 2,070 393 Additional paid-in capital ....................... 61,503 9,090 Retained earnings ................................ 4,748 18,462 Cumulative translation adjustment ................ (372) (653) Treasury stock, at cost .......................... - (87) -------- -------- Total stockholders' equity ..................... 67,949 27,205 -------- -------- Total liabilities and stockholders' equity ..... $140,274 $114,601 ======== ======== See accompanying notes to consolidated financial statements. F-3 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except share amounts) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Net sales .............................. $ 192,705 $ 167,403 $ 132,029 Cost of sales .......................... 123,913 108,654 86,748 ----------- ----------- ----------- Gross profit ...................... 68,792 58,749 45,281 ----------- ----------- ----------- Operating expenses: Selling ............................. 11,838 12,241 11,309 General and administrative .......... 19,266 15,002 14,460 Art and development ................. 5,173 4,256 2,796 Non-recurring compensation in connection with the IPO ............ 15,535 - - Special bonuses ..................... 4,222 2,581 2,200 ----------- ----------- ----------- Total operating expenses .......... 56,034 34,080 30,765 ----------- ----------- ----------- Income from operations ............ 12,758 24,669 14,516 Interest expense, net .................. 6,691 5,772 3,843 Other expense (income), net ............ 335 (309) 82 ----------- ----------- ----------- Income before income taxes and minority interests .................. 5,732 19,206 10,591 Income taxes ........................... 1,952 731 464 Minority interests ..................... 1,653 1,041 160 ----------- ----------- ----------- Net income ........................ $ 2,127 $ 17,434 $ 9,967 =========== =========== =========== Pro forma data (unaudited)(note (16)): Income before income taxes ......... $ 4,079 $ 18,165 $ 10,431 Pro forma income tax expense ...... 1,827 7,403 4,238 ----------- ----------- ----------- Pro forma net income ............ $ 2,252 $ 10,762 $ 6,193 =========== =========== =========== Pro forma net income used for pro forma net income per share calculation ......... $ 12,010 =========== Pro forma net income per share ......................... $ 0.60 =========== Pro forma weighted average common shares outstanding .... 19,856,731 =========== Supplemental pro forma data (unaudited) (note (16)): Supplemental pro forma net income ...................... $ 15,918 =========== Supplemental pro forma net income per share ................ $ 0.77 =========== Supplemental pro forma weighted average common shares outstanding .................... 20,698,076 =========== See accompanying notes to consolidated financial statements. F-4 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1995 and 1994 ($ in thousands)
Cumulative Common Additional Retained Translation Treasury STOCK PAID-IN CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL ------ --------------- -------- ----------- -------- ------- Balance, December 31, 1993 $ 393 $ 9,090 $ 9,520 $ (420) $ (87) $18,496 Net income - - 9,967 - - 9,967 Subchapter S and other - - (7,450) - - (7,450) Net change in cumulative translation adjustment - - - (193) - (193) ------ ------- -------- ------ ------- ------- Balance, December 31, 1994 393 9,090 12,037 (613) (87) 20,820 Net income - - 17,434 - - 17,434 Subchapter S and other - - (11,009) - - (11,009) Net change in cumulative translation adjustment - - - (40) - (40) ------ ------- -------- ------ ------- ------- Balance, December 31, 1995 393 9,090 18,462 (653) (87) 27,205 Net income - - 2,127 - - 2,127 Net adjustment for exchange of shares issued in the Organization 1,123 (1,210) - - 87 - Subchapter S and other - (7,583) (15,841) - - (23,424) Net proceeds from IPO 400 42,940 - - - 43,340 Shares issued to officer 66 7,854 - - - 7,920 Shares issued for acquisition 63 7,437 - - - 7,500 Contribution to ESOP and stock bonuses 25 2,975 - - - 3,000 Net change in cumulative translation adjustment - - - 281 - 281 ------ ------- ------- ------ ------- ------- Balance, December 31, 1996 $ 2,070 $ 61,503 $ 4,748 $ (372) $ - $ 67,949 ====== ======= ======= ====== ======= =======
See accompanying notes to consolidated financial statements. F-5 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income ........................... $ 2,127 $ 17,434 $ 9,967 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expenses in connection with the IPO ......... 10,920 - - Depreciation and amortization ..... 5,137 4,332 3,672 Loss (gain) on disposal of property and equipment .......... 660 (5) 35 Provision for doubtful accounts ... 2,350 1,581 2,676 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ............ (7,848) (9,614) (5,041) Inventories ..................... (680) (10,548) (5,682) Deposits and other, net ......... (3,048) (101) (155) Other assets .................... 683 (1,172) (1,265) Accounts payable and accrued expenses ...................... 1,972 2,814 912 ------- ------- ------ Net cash provided by operating activities ....... 12,273 4,721 5,119 ------- ------- ------ Cash flows from investing activities: Capital expenditures .................. (7,613) (4,522) (7,392) Proceeds from disposal of property and equipment .............. - 9 98 ------- ------- ------ Net cash used in investing activities ................. (7,613) (4,513) (7,294) ------- ------- ------ Cash flows from financing activities: Net proceeds from IPO ................. 43,340 - - Proceeds from loans, notes payable and long-term indebtedness .......... 3,273 42,311 6,324 Repayment of loans, notes payable and long-term indebtedness .......... (11,968) (32,313) (2,434) Proceeds from loans, notes payable and subordinated indebtedness to Principal Stockholder ........... - 4,000 6,316 Repayment of loans, notes payable and subordinated indebtedness to Principal Stockholder ........... (17,179) (2,842) - Subchapter S distributions and other . (23,424) (11,009) (7,450) ------- ------- ------ Net cash (used in) provided by financing activities ... (5,958) 147 2,756 ------- ------- ------ Effect of exchange rate changes on cash ............................ 395 (92) 270 ------- ------- ------ Net increase (decrease) in cash and cash equivalents ............... (903) 263 851 Cash and cash equivalents at beginning of year ..................... 2,492 2,229 1,378 ------- ------- ------ Cash and cash equivalents at end of year ........................... $ 1,589 $ 2,492 $ 2,229 ======= ======= ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ............................ $ 7,826 $ 4,486 $ 4,025 Taxes ............................... $ 1,085 $ 601 $ 112 See accompanying notes to consolidated financial statements. F-6 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) ($ in thousands) Supplemental information on noncash activities ($ in thousands): Capital lease obligations of $3,395 and $648 were incurred in 1996 and 1994 respectively. There were no capital lease obligations incurred in 1995. In conjunction with the IPO, the Principal Stockholder and certain affiliates of the Principal Stockholder exchanged shares in Amscan Inc. and certain affiliated entities for 15,024,616 and 138,461 shares, respectively, in the Company. In conjunction with the IPO, the Company entered into an agreement to purchase an additional 50% of Am-Source, Inc. The Am-Source, Inc. stockholders exchanged all of their outstanding capital stock for 624,999 shares of the Company's stock valued at $7.5 million. In conjunction with the IPO, the Company incurred stock compensation expense of $7,920 for the issuance of stock to an officer and $3,000 for the establishment of the ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. See accompanying notes to consolidated financial statements. F-7 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Amscan Holdings, Inc. ("Amscan Holdings") was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities in connection with an initial public offering of common stock ("IPO") involving the sale of 4,000,000 shares of its common stock at $12.00 per share. The IPO was completed on December 18, 1996 pursuant to which the principal stockholder (the "Principal Stockholder") and certain affiliates of the Principal Stockholder exchanged shares in Amscan Inc. and certain affiliates for 15,024,616 and 138,461 shares, respectively, in Amscan Holdings (the "Organization") and in the case of the Principal Stockholder, $133,000 in cash. Prior to the IPO, certain subsidiaries of Amscan Holdings were operated as Subchapter S corporations for federal and, where available, for state income tax purposes. In connection with the IPO, such subsidiaries declared a dividend representing distributions of accumulated Subchapter S corporation profits and a return of capital. These amounts were reflected as subordinated debt and repaid from the net proceeds of the IPO. Amscan Holdings and its subsidiaries (collectively the "Company") design, manufacture, contract for manufacture and distribute party and novelty goods principally in the United States, Canada and Europe. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Amscan Holdings and its majority-owned subsidiaries (or with respect to less than majority-owned subsidiaries, on the equity basis). In connection with the IPO, there was a transfer of ownership between the former stockholders of Amscan Inc. and certain of its affiliates and Amscan Holdings whereby Amscan Holdings became the holding company for the business conducted by Amscan Inc. and certain of its affiliates. Such transfer of ownership was accounted for in a manner similar to a pooling of interests and resulted in Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. being taxed as Subchapter C corporations under federal and certain state income tax requirements. All material intercompany balances and transactions have been eliminated in consolidation. For periods prior to December 18, 1996, financial statements are presented on a combined basis. The name, Amscan Holdings' ownership and a brief description of the principal business activity of each consolidated subsidiary is presented below. F-8 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 SUBSIDIARY OWNERSHIP PRINCIPAL ACTIVITY - ---------- --------- ------------------ Amscan Inc. ................ 100% Manufacturer - paper tableware; and distributor - worldwide Am-Source, Inc. ............ 100% Manufacturer - plastic products Trisar, Inc. ............... 100% Manufacturer - gift products Amscan Distributors (Canada) Ltd. ............ 100% Distributor - Canada Amscan Holdings Limited .... 75% Distributor - United Kingdom Amscan (Asia-Pacific) Pty. Ltd. ................ 85% Distributor - Australia and Asia Amscan Partyartikel GmbH ... 95% Distributor - Germany Amscan Svenska AB .......... 100% Distributor - Sweden Amscan de Mexico, S.A. de C.V. ............. 50% Distributor - Mexico JCS Realty Corp. ........... 100% Real estate - Canada SSY Realty Corp. ........... 100% Real estate - United States ACQUISITIONS In conjunction with the IPO, the Company entered into an agreement to acquire an additional 50% of Am-Source, Inc. The stockholders of Am-Source, Inc. exchanged all of their outstanding capital stock for 624,999 shares of the Company's stock valued at $7,500,000. The acquisition has been accounted for as a purchase and the excess purchase price over the fair value of the net assets acquired of $7,443,000 is being amortized on a straight-line basis over thirty years. The results of operations for the acquisition of the 50% balance of Am- Source, Inc. are included in the accompanying financial statements from the date of acquisition. The results of operations for this acquisition for the years ended December 31, 1996, 1995 and 1994 had the acquisition occurred at the beginning of 1994, are not significant. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Highly liquid investments with a maturity of three months or less when purchased are considered to be equivalents. INVENTORIES Substantially all inventories of the Company are valued at the lower cost or market (principally on the first-in, first-out method.) F-9 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 PROPERTY, PLANT, AND EQUIPMENT Property, plant and equipment are stated at cost. Machinery and equipment under capital leases are stated at the present value of the minimum lease payments at the inception of the lease. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets. Machinery and equipment held under capital leases and leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. INTANGIBLE ASSETS Intangible assets are comprised of $7,443,000 and $350,000 at December 31, 1996 and 1995 respectively, of goodwill, net of amortization, which represents the excess of the purchase price of acquired companies over the estimated fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over periods ranging from three years to thirty years. Accumulated amortization was $1,050,000 and $ 700,000 as of December 31, 1996 and 1995, respectively. The Company adopted Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). Such adoption had no impact on the Company's financial statements. In accordance with SFAS No. 121, the Company systematically reviews the recoverability of its intangible and other long-lived assets by comparing their unamortized carrying value to their related anticipated undiscounted future cash flows. Any impairment related to long-lived assets is measured by reference to the assets' fair market value, and any impairment related to goodwill is measured against discounted cash flows. Impairments are charged to expense when such determination is made. REVENUE RECOGNITION The Company recognizes revenue from product sales when the goods are shipped to the customers. Product returns and warranty costs are immaterial. CATALOGUE COSTS The Company expenses costs associated with the production of annual catalogues when incurred. ART AND DEVELOPMENT COSTS Art and development costs are primarily internal costs that are not easily associated with specific designs which may not reach commercial production. Accordingly, the Company expenses these costs as incurred. INCOME TAXES Prior to the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. were operated as Subchapter S corporations for federal income and, where available, for state income tax purposes. As a result, these corporations did not record or pay any federal or state income taxes except in states which do not recognize Subchapter S corporation status. F-10 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 Since December 18, 1996, the Company has been taxed as a Subchapter C corporation, and as a result, the Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, certain income and expense items are reported differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and operating loss and tax credit carryforwards applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the judgment of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. NON-RECURRING COMPENSATION EXPENSES In conjunction with the IPO, the Company has recorded non-recurring compensation expenses of $15,535,000 in 1996 related to stock and cash payments of $12,535,000 to certain executives in connection with the termination of prior employment agreements and $3,000,000 for the establishment of an ESOP for the benefit of the Company's domestic employees and the payment of stock bonuses to certain of such employees. STOCK-BASED COMPENSATION The Company has accounted for the distribution of stock and for the issuance of stock options under its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations ("APB 25"). As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") which 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 APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note (10)). FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION Realized foreign currency exchange gains or losses, which result from the settlement of receivables or payables in currencies other than U.S. dollars, are credited or charged to operations. Unrealized gains or losses on foreign currency exchanges are insignificant. The balance sheets of foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect on the balance sheet date. The results of operations of foreign subsidiaries are translated into U.S. dollars at the average exchange rates effective for the periods presented. The differences from historical exchange rates are reflected as a separate component of stockholders' equity. F-11 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 CONCENTRATION OF CREDIT RISK While the Company's customers are geographically disbursed throughout North America, South America, Europe, Asia and Australia, there is a concentration of sales made to and accounts receivable from the stores which operate in the party superstore channel of distribution. At December 31, 1996 and 1995, the Company's two largest customers, with approximately 185 stores, accounted for 21.7% and 12%, respectively, of consolidated accounts receivable. For the years ended December 31, 1996, 1995 and 1994, sales to the Company's two largest customers represented 21.5%, 17% and 10%, respectively, of consolidated net sales. Of such amount, sales to the Company's largest customer represented 14.5%, 11% and 8%, respectively. No other group or combination of customers subjected the Company to a concentration of credit risk. RECLASSIFICATIONS In connection with the preparation of the accompanying financial statements, the Company has classified printing plates purchased from third party vendors as property, plant and equipment. Previously, the Company classified such printing plates that are used in the Company's manufacturing process as other assets. Prior balances of property, plant and equipment and other assets have been reclassified accordingly. Certain other amounts in prior financial statements have been reclassified to conform to the current year presentation. USE OF ESTIMATES Management has made estimates and assumptions relating to the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INVENTORIES Inventories at December 31, 1996 and 1995 consisted of the following ($ in thousands): 1996 1995 ------- ------- Finished goods ............................. $42,127 $42,125 Raw materials .............................. 3,863 2,277 Work-in process ............................ 1,388 1,839 ------- ------- 47,378 46,241 Less: reserve for slow moving and obsolete inventory ................... (1,685) (1,228) ------- ------- $45,693 $45,013 ======= ======= F-12 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 (4) PROPERTY, PLANT AND EQUIPMENT Major classifications of property, plant and equipment at December 31, 1996 and 1995 consisted of the following ($ in thousands): ESTIMATED 1996 1995 USEFUL LIVES ---- ---- ------------ Machinery and equipment ........... $ 31,621 $ 25,530 3-15 Buildings ......................... 10,153 9,524 31-40 Data processing equipment ......... 9,259 6,123 5 Leasehold improvements ............ 3,449 4,784 25 Furniture and fixtures ............ 3,071 2,370 10 Land .............................. 1,917 1,917 - ------- ------- 59,470 50,248 Less: accumulated depreciation and amortization ................ (24,807) (21,075) ------- ------- $ 34,663 $ 29,173 ======= ======= Depreciation and amortization expense was $4,787,000, $3,982,000 and $3,322,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (5) LOANS AND NOTES PAYABLE The Company has entered into a revolving credit agreement with several banks which expires on September 20, 2000. Amounts available for borrowing under this agreement, subject to asset availability and other restrictions, are as follows ($ in thousands): September 20, 1996 - September 19, 1997 .................. $55,000 September 20, 1997 - September 20, 2000 .................. $60,000 Such revolving credit agreement is collateralized by a first lien on certain of the assets of the Company. The revolving credit agreement provides for interest on the borrowings to be based on either a prime borrowing rate or LIBOR plus 0.875%, whichever is lower. Additionally, the revolving credit agreement requires the Company to comply with certain covenants including the maintenance of financial ratios, as defined. At December 31, 1996, the Company was in compliance with all such covenants. F-13 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 Loans and notes payable outstanding at December 31, 1996 and 1995 consisted of the following ($ in thousands): 1996 1995 ---- ---- Revolving credit line with interest at LIBOR plus 0.875% (6.75% and 6.41%, at December 31, 1996 and 1995, respectively) ................................ $ 5,000 $35,000 Revolving credit line with interest at the prime rate (8.25% and 8.5%, at December 31, 1996 and 1995, respectively) ..... 23,950 2,060 Revolving credit line denominated in Canadian Dollars with interest at the Canadian prime rate (4.75% at December 31, 1996) ............................ 378 - Revolving credit line denominated in British Pounds Sterling with interest at the U.K. Base rate plus 2% (8.5% at December 31, 1995) ........................... - 789 ------- ------- $29,328 $37,849 ======= ======= The weighted average interest rates on loans and notes payable outstanding at December 31, 1996 and 1995 were 7.95% and 6.57%, respectively. The Company is currently involved in three interest rate swap transactions covering $25,000,000 of its outstanding obligation under the revolving credit agreement. The transactions fix the interest rates as indicated below and entitles the Company to settle with the counterparty on a quarterly basis, the product of the notional amount times the amount, if any, by which the ninety day LIBOR exceeds the fixed rate. Net payments to the counterparty under the swap agreements for the years ended December 31, 1996, 1995 and 1994, which have been recorded as additional interest expense, were as follows ($ in thousands): ADDITIONAL INTEREST EXPENSE NOTIONAL ------------------ DATE OF CONTRACT AMOUNT TERM FIXED RATE 1996 1995 1994 - ---------------- -------- ---- ---------- ---- ---- ---- September 28, 1994 ...... $ 5,000 10 years 7.945% $122 $ 94 $ 34 May 12, 1995 ............ $10,000 5 years 6.590% 105 42 - July 20, 1995 ........... $10,000 10 years 6.750% 122 38 - ---- ---- ---- $349 $174 $ 34 ==== ==== ==== F-14 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 (6) LONG-TERM INDEBTEDNESS Long-term indebtedness at December 31, 1996 and 1995 consisted of the following ($ in thousands): 1996 1995 ---- ---- Mortgage obligations(a) ................... $ 6,654 $ 6,956 Term loans(b) ............................. 5,778 5,152 Capital lease obligations(c) .............. 5,194 2,415 ------ ------ Total long-term indebtedness ........ 17,626 14,523 Less: current installments ............... (2,541) (2,239) ------ ------ Long-term indebtedness, excluding current installments ................... $ 15,085 $ 12,284 ====== ====== (a) The Company has mortgage obligations payable to financial institutions relating to certain distribution facilities due through September 13, 2004. The mortgages are collateralized by specific real estate assets of the Company and carry interest rates ranging from the Canadian prime rate plus 0.5% (5.25% and 8.0% as of December 31, 1996 and 1995, respectively) to 8.51%. At December 31, 1996 and 1995, $2,100,000 and $1,800,000 of mortgage obligations, respectively, are denominated in Canadian dollars. (b) The Company has various term loans payable to financial institutions due through April 1, 2002. The loans are collateralized by specific assets of the Company and carry interest rates which range from 8.01% to 9.5%. (c) The Company has entered into various capital leases for machinery and equipment with implicit interest rates ranging from 4.71% to prime rate plus 1.0% (9.25% at December 31, 1996) which extend to 2003. At December 31, 1996, principal maturities of long-term indebtedness consisted of the following ($ in thousands): CAPITAL MORTGAGES LEASE AND LOANS OBLIGATIONS TOTAL --------- ----------- ----- 1997 ............................. $ 1,682 $1,139 $ 2,821 1998 ............................. 1,741 1,243 2,984 1999 ............................. 1,718 1,176 2,894 2000 ............................. 1,682 1,136 2,818 2001 ............................. 1,682 1,281 2,963 Thereafter ....................... 3,927 147 4,074 ------ ----- ------ 12,432 6,122 18,554 Amount representing interest ..... - (928) (928) ------ ----- ------ Long-term indebtedness ........... $12,432 $5,194 $17,626 ====== ===== ====== F-15 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 (7) DUE TO PRINCIPAL STOCKHOLDER At December 31, 1996 and 1995, the Company owed the Principal Stockholder $1,274,000 and $16,000,000, respectively, under a subordinated note with interest payable monthly. This note is subject to a subordination agreement among the Principal Stockholder, Amscan Inc., and the lenders involved with the revolving credit agreement as discussed in note (5). Interest is the prime rate plus 0.5% (8.75% and 9% at December 31, 1996 and 1995, respectively). Prior to the IPO, certain subsidiaries of the Company declared a dividend representing distributions of accumulated Subchapter S profits of $15,841,000 and a return of capital of $7,583,000. These amounts and nearly all of the previous balances of subordinated debt were repaid from the net proceeds of the IPO. A waiver was obtained from the banks for the repayment of these amounts due to the Principal Stockholder. Further, the Company had unsecured current loans payable to the Principal Stockholder aggregating $2,453,000 at December 31, 1995 at interest rates ranging from 7% to 12%. The loans had different forms of collateral but were generally subordinated to the credit facility discussed in note (5). During 1996, these amounts were converted to subordinated debt. (8) EMPLOYEE BENEFIT PLANS Certain subsidiaries of the Company maintain a profit-sharing plan for all eligible employees providing for annual discretionary contributions to a trust. As of January 1, 1995, the plan required the subsidiaries to match 25% to 50% of the first 6% of an employee's annual salary contributed to the plan. Benefit expense for the years ended December 31, 1996, 1995 and 1994 totaled $731,000, $558,000 and $548,000, respectively. In connection with the IPO, the Company established the Employee Stock Ownership Plan (the "ESOP") for the benefit of its domestic employees and authorized the payments of stock bonuses to certain of such employees. There was a special one-time issuance of 250,000 shares of common stock of the Company, valued at $1,898,000 for the establishment of the ESOP and $1,102,000 for payment of stock bonuses. (9) SPECIAL BONUSES During the periods presented, Amscan Inc. had employment agreements with certain key executives and senior managers which provided for these individuals to receive annual bonuses based upon the pre-tax income of Amscan, Inc. and certain of its affiliates. These bonuses, which amounted to approximately 18% to 20% of pre-tax income, are reflected in the Consolidated Statements of Operations in the caption "Special Bonuses." These individuals will not receive such special bonuses after 1996. At December 31, 1996 and 1995, respectively, $1,584,000 and $2,581,000 were accrued for such bonuses and included in accrued expenses. F-16 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 (10) STOCK OPTION PLAN In 1996, the Company adopted a stock option plan (the "Plan") pursuant to which a committee of the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorizes grants of options to purchase up to 2,000,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price no less than the stock's fair market value at the date of grant. An option may not be exercised within one year of grant and no option will be exercisable after ten years from the date granted. Participants may exercise approximately 25% of the total number of shares granted in each year subsequent to the year of the grant. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized in connection with the issuance of options under the stock option plan. Had the Company's stock option plan been determined based on the fair value of the options granted at the grant date, the compensation cost for 1996 would not have been material. Options were issued in connection with the IPO totaling 425,000 shares of common stock at the initial offering price. It has been assumed that the estimated fair value of the options is amortized on a straight line basis to compensation expense over the vesting period of the grant, which is approximately four years. The estimated fair value of each option on the date of grant is $5.22, using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 25%; risk-free interest rate of 6.43%; and expected lives of 7 years. All options issued were outstanding and none was exercisable as of December 31, 1996. (11) INCOME TAXES Prior to the consummation of the IPO, Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. elected to be taxed as Subchapter S corporations under the Internal Revenue Code. Accordingly, these companies were not subject to federal and state income taxes, to the extent that states recognize Subchapter S corporation status. Upon the termination of the Subchapter S corporation status in connection with the IPO, the aforementioned companies became subject to federal and state income taxes. The cumulative effect of such tax status change relating to the recording of deferred taxes as of December 18, 1996 was $786,000 and has been included in the income tax expense for the year ended December 31, 1996. A summary of the domestic and foreign pre-tax income for the years ended December 31, 1996, 1995 and 1994 were as follows ($ in thousands): 1996 1995 1994 ---- ---- ---- Domestic $3,137 $17,750 $10,009 ====== ======= ======= Foreign $2,595 $ 1,456 $ 582 ====== ======= ======= F-17 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 The provision for income taxes consisted of the following ($ in thousands): YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ---- ---- ---- Current: Foreign $ 992 $ 731 $ 464 State 212 - - ------ ------- ------ Total current provision 1,204 731 464 ------ ------- ------ Deferred: Change in tax status 786 - - Foreign 100 - - Federal (113) - - State (25) - - ------ ------- ------ Total deferred provision 748 - - ------ ------- ------ Income tax expense $1,952 731 464 ====== ======= ====== Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1996, the deferred assets and liabilities consisted of the following ($ in thousands): Current deferred tax assets: Provision for doubtful accounts $1,692 Accrued liabilities 1,568 Inventories 1,438 Other 175 ------ Current deferred tax assets $4,873 ====== Non-current deferred tax liabilities: Property, plant and equipment $4,484 Future taxable income resulting from a change in accounting method for tax purposes 823 Other 355 ------ Non-current deferred tax liabilities $5,662 ====== F-18 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The difference between the Company's effective tax rate and the federal statutory rate of 35% is reconciled below: YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Provision at federal statutory rate 35% 35% 35% Effect of Subchapter S income not subject to federal income taxes (19.1) (32.3) (33.1) Change in tax status 13.7 - - Other 4.5 1.1 2.5 ------ ------ ------ Effective tax rate 34.1% 3.8% 4.4% ====== ====== ====== (12) STOCKHOLDERS' EQUITY INITIAL PUBLIC OFFERING On December 18, 1996, the Company completed the IPO in which it sold 4,000,000 shares of its common stock for $12.00 per share. The proceeds, net of underwriter's discount, fees and expenses, of $ 43,340,000 were used to repay subordinated debt outstanding to stockholders and loans payable to banks. At December 31, 1996, the Company's authorized capital stock consisted of 5,000,000 shares of preferred stock, $0.10 par value, of which no shares were issued or outstanding, and 50,000,000 shares of common stock, $0.10 par value, of which 20,698,076 shares were issued and outstanding. F-19 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 (13) LEASES The Company is obligated under various capital leases for certain machinery and equipment which expire on various dates through October 1, 2001 (see also note (6)). At December 31, 1996 and 1995, the amount of machinery and equipment and related accumulated amortization recorded under capital leases and included with property, plant and equipment consisted of the following ($ in thousands): 1996 1995 ---- ---- Machinery and equipment ...................... $6,452 $3,174 Less: accumulated amortization .............. (1,042) (564) ------- ------- $5,410 $2,610 ======= ======= Amortization of assets held under capitalized leases is included with depreciation expense. The Company has several noncancelable operating leases with unaffiliated third parties, primarily for office and manufacturing space, showrooms, and warehouse equipment that expire over the next eight years. These leases generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance. At December 31, 1996, the Company also had noncancelable operating leases with the Principal Stockholder and real estate entities owned either directly or indirectly by the Principal Stockholder ("Unconsolidated Affiliates") for warehouse and office space that expire over the next five years. Rent due to Unconsolidated Affiliates represents future commitments associated with property leased by the Company from the Principal Stockholder or such entities owned directly or indirectly by the Principal Stockholder. F-20 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 At December 31, 1996 future minimum lease payments under all operating leases consisted of the following ($ in thousands): THIRD UNCONSOLIDATED PARTIES AFFILIATES TOTAL ------- -------------- ------ 1997 ........................ $ 3,831 $ 2,246 $ 6,077 1998 ........................ 3,883 2,309 6,192 1999 ........................ 2,713 2,374 5,087 2000 ........................ 1,908 1,239 3,147 2001 ........................ 1,908 167 2,075 2002 - 2006 ................. 6,184 - 6,184 2007 - 2011 ................. 4,631 - 4,631 2012 - 2016 ................. 4,325 - 4,325 Thereafter .................. 505 505 -------- ------- ------- $ 29,888 $ 8,335 $38,223 ======== ======= ======= Rent expense for the years ended December 31, 1996, 1995 and 1994 was $5,300,000, $2,547,000 and $2,245,000, respectively, of which $2,134,000, $936,000 and $893,000, respectively, related to leases with Unconsolidated Affiliates. On April 5, 1996, the Company entered into an operating lease agreement with a third party whereby the Company may lease up to $11,000,000 of machinery and equipment. The agreement provides for equal monthly payments over 12 years, including renewal options. In connection with this agreement, the Company has entered into commitments for equipment with a fair value of approximately $10,800,000 as of December 31, 1996. Assuming the entire lease facility is utilized, future minimum lease payments will be increased as follows ($ in thousands): 1997 $ 1,305 1998 1,305 1999 1,305 2000 1,305 2001 1,305 Thereafter 9,135 ------- $15,660 ======= (14) SEGMENT INFORMATION INDUSTRY SEGMENTS The Company operates in one industry segment which involves the design, manufacture, contract for manufacture and distribution of party and novelty goods. F-21 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 GEOGRAPHIC SEGMENTS The Company's export sales, other than those intercompany sales reported below as sales between geographic areas, are not material. Sales between geographic areas primarily consist of sales of finished goods for distribution in the foreign markets. The Company's geographic area data for each of the three fiscal years ended December 31, 1996, 1995 and 1994 were as follows ($ in thousands):
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ 1996 Sales to unaffiliated customers ........ $168,165 $24,540 $192,705 Sales between geographic areas ......... 8,643 116 $ (8,759) - -------- ------- --------- -------- Net sales .............................. $176,808 $24,656 $ (8,759) $192,705 ======== ======= ========= ======== Income from operations ................. $ 10,643 $ 2,115 $ 12,758 ======== ======= Interest expense, net .................. 6,691 Other expense, net ..................... 335 -------- Income before income taxes and minority interests ................... $ 5,732 ======== Identifiable assets .................... $120,029 $12,802 $132,831 ======== ======= Goodwill ............................... 7,443 -------- Total assets ........................... $140,274 ======== DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ 1995 Sales to unaffiliated customers ........ $146,198 $21,205 $167,403 Sales between geographic areas ......... 8,508 60 $ (8,568) - -------- ------- --------- -------- Net sales .............................. $154,706 $21,265 $ (8,568) $167,403 ======== ======= ========= ======== Income from operations ................. $ 22,782 $ 1,887 $ 24,669 ======== ======= Interest income, net ................... 5,772 Other income, net ...................... (309) -------- Income before income taxes and minority interests ............... $ 19,206 ======== Identifiable assets .................... $ 99,123 $15,478 $114,601 ======== ======= ========
F-22 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996
DOMESTIC FOREIGN ELIMINATIONS CONSOLIDATED -------- ------- ------------ ------------ 1994 Sales to unaffiliated customers ........ $115,196 $16,833 $132,029 Sales between geographic areas ......... 5,645 89 $ (5,734) - -------- ------- --------- -------- Net sales .............................. $120,841 $16,922 $ (5,734) $132,029 ======== ======= ========= ======== Income from operations ................. $ 13,468 $ 1,048 $ 14,516 ======== ======= Interest expense, net .................. 3,843 Other expense, net ..................... 82 -------- Income before income taxes and minority interests ............... $ 10,591 ======== Identifiable assets .................... $ 80,117 $13,767 $ 93,884 ======== ======= ========
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash and cash equivalents, accounts receivables, deposits and other current assets, loans and notes payable, accounts payable, accrued expenses (non derivatives) and other current liabilities approximates fair value at December 31, 1996 because of the short term maturity of those instruments or their variable rate of interest. The carrying amounts for long term debt approximates fair value at December 31, 1996. Fair value has been estimated by discounting the future cash flow of each instrument at rates currently offered for similar debt instruments of comparable maturity. The fair value of interest rate swaps is the estimated amount that the bank would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Termination of the swap agreements at December 31, 1996 would require the Company to pay the bank $719,500. (16) PRO FORMA DATA AND SUPPLEMENTAL PRO FORMA DATA (UNAUDITED) Pro forma net income for the years ended December 31, 1996, 1995 and 1994 give effect to pro forma income tax provisions at statutory rates (40.5%) assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status for those periods. F-23 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 For purposes of the pro forma net income per share of $0.60 for the year ended December 31, 1996, net income has been adjusted to give effect to (i) the reduction in compensation expenses ($14,173,000) paid to an officer assuming the officer was a stockholder as of the beginning of the period presented, (ii) the reduction in interest expense related to bank debt and subordinated indebtedness due to the Principal Stockholder assuming such debt was repaid from the net proceeds of the IPO as of the beginning of the period presented ($2,228,000), and (iii) additional pro forma income taxes calculated at 40.5% assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status ($6,518,000). The supplemental pro forma net income per share of $0.77 for the year ended December 31, 1996 gives effect to (i) reductions in compensation expense ($16,757,000) related to certain terminated employment agreements and compensation payments associated with the termination of such agreements, (ii) the reduction in compensation expense ($3,000,000) related to the establishment of the ESOP and payment of stock bonuses, (iii) the amortization of goodwill ($250,000) and elimination of minority interest related to the 50% acquisition of Am-Source, Inc. ($1,403,000) as if it were acquired at the beginning of the period presented, (iv) the reduction of interest expense ($2,228,000) related to the repayment of bank indebtedness and subordinated indebtedness due to the Principal Stockholder from net proceeds of the IPO, as if it occurred at the beginning of the period presented, and (v) the tax effects of these adjustments at statutory rates (40.5%) assuming Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. had not elected Subchapter S corporation status ($9,347,000). PRO FORMA WEIGHTED AVERAGE COMMON SHARES OUTSTANDING In accordance with the provisions of SAB 83, the pro forma weighted average common shares outstanding represents the historical weighted average common shares outstanding adjusted for the shares issued in connection with the exchange of shares in the Organization, the IPO shares and other shares issued in contemplation of the IPO to have been outstanding as if the transactions occurred at the beginning of the period presented. SUPPLEMENTAL PRO FORMA WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Supplemental pro forma weighted average common shares outstanding represents the pro forma weighted average common shares outstanding adjusted for the shares issued in connection with the establishment of the ESOP, payment of stock bonuses, and acquisition of the additional 50% of Am-Source, Inc. as if the transactions occurred at the beginning of the period presented. (17) SUBSEQUENT EVENT On January 8, 1997, an additional 422,400 shares of common stock were sold at $12.00 per share to cover the over-allotments as provided for in the underwriting agreements between the Company and the underwriters associated with the IPO. The proceeds, net of underwriter's discount, fees and expenses, of $4,588,984 were used to repay borrowings outstanding to banks. F-24 AMSCAN HOLDINGS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995, and 1994 ($ in thousands) Beginning Ending Balance Write-offs Additions Balance --------- ---------- --------- ------- Allowance for Doubtful Accounts: For the year ended: December 31, 1994 .......... $1,104 $1,855 $2,676 $1,925 December 31, 1995 .......... 1,925 1,001 1,581 2,505 December 31, 1996 .......... 2,505 717 2,350 4,138 Beginning Ending Balance Write-offs Additions Balance --------- ---------- --------- ------- Inventory Reserves For the year ended: December 31, 1994 .......... $ 609 $ 375 $ 600 $ 834 December 31, 1995 .......... 834 406 800 1,228 December 31, 1996 .......... 1,228 731 1,188 1,685 F-25 EX-2 2 EX-2A SHARE EXCHANGE AGREEMENT SHARE EXCHANGE AGREEMENT Share Exchange Agreement (this "AGREEMENT") dated as of December 18, 1996, among Amscan Holdings, Inc., a Delaware corporation (the "COMPANY"), and John A. Svenningsen, an individual residing in the State of New York ("SVENNINGSEN"), Gerald C. Rittenberg, an individual residing in the State of New York ("RITTENBERG") and the following trusts each created by agreement dated as of October 29, 1996: Christina Svenningsen Trust, Jon Svenningsen Trust, Elisabeth Svenningsen Trust, Melissa Svenningsen Trust, Emily Svenningsen Trust, and Sara Svenningsen Trust (such six trusts being collectively, the "SVENNINGSEN TRUSTS" and individually, a "SVENNINGSEN TRUST"). W I T N E S S E T H : WHEREAS, Svenningsen is the owner of the shares (the "SVENNINGSEN EXCHANGE SHARES") of capital stock of the companies (the "OPERATING COMPANIES") listed on Schedules A and B hereto in the number and percentage listed opposite each such company; and WHEREAS, each of the Svenningsen Trusts is the owner of 13-1/3 shares (such 13-1/3 shares owned by a Svenningsen Trust being with respect to such Svenningsen Trust the "TRUST EXCHANGE SHARES") of the common stock, no par value of SSY Realty Corp., a New York corporation and one of the Operating Companies ("SSY"); and Whereas, Rittenberg is the owner of 32.84 shares (the "RITTENBERG EXCHANGE SHARES") of the common stock, no par value of Amscan Inc., a New York corporation and one of the Operating Companies ("AMSCAN"); and WHEREAS, 1,000 shares of the Company's common stock, par value $0.10 per share ("COMPANY COMMON STOCK") were issued previously to Svenningsen in connection with the organization of the Company; and WHEREAS, in connection with the organization of the Company and the initial public offering of Company Common Stock (the "TRANSACTION"), the Company and Svenningsen wish to provide for (i) the shares of capital stock of each of the Operating Companies identified in Schedule A hereto which constitute a portion of the Svenningsen Exchange Shares to be exchanged by Svenningsen for a certain number of shares of Company Common Stock determined by the Company and Svenningsen to represent the fair market value of such one of the Operating Companies and (ii) the shares of capital stock of each of the Operating Companies identified in Schedule B hereto which constitute a portion of the Svenningsen Exchange Shares to be exchanged by Svenningsen for a combination of a certain number of shares of Company Common Stock and cash in the 2 amount set forth opposite the name of such one of the Operating Companies in Schedule B hereto determined by the Company and Svenningsen to represent in the aggregate the fair market value of such one of the Operating Companies, which shares of Company Common Stock to be delivered to Svenningsen in respect of the Operating Companies total 15,023,616 additional shares of Company Common Stock (such aggregate number of shares being the "SVENNINGSEN ACQUISITION SHARES"), and which cash payments aggregate $133,000 (such aggregate cash amount being the "SVENNINGSEN CASH PAYMENT," and together with the Svenningsen Acquisition Shares, the "SVENNINGSEN CONSIDERATION"); and WHEREAS, in connection with the Transaction, the Company and each of the Svenningsen Trusts wish to provide for the exchange by each of such Svenningsen Trusts of the Trust Exchange Shares for the number of shares of Company Common Stock listed opposite such Svenningsen Trust's name on Schedule C hereto (such shares of Company Common Stock transferred to a Svenningsen Trust being with respect to such Svenningsen Trust the "TRUST ACQUISITION SHARES"); and WHEREAS, in connection with the Transaction, the Company and Rittenberg wish to provide for the exchange by Rittenberg of the Rittenberg Exchange Shares for 660,000 shares of Company Common Stock (the "RITTENBERG ACQUISITION SHARES"); and WHEREAS, Rittenberg and the Company wish to confirm certain of Rittenberg's agreements regarding restrictions on the transfer of the Rittenberg Acquisition Shares. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. EXCHANGE OF SHARES (a) Effective as of the date hereof Svenningsen transfers all right, title and interest to the Svenningsen Exchange Shares to the Company, in exchange for the Svenningsen Consideration, and the Company issues and delivers the Svenningsen Acquisition Shares and pays the Svenningsen Cash Payment to Svenningsen in exchange for the Svenningsen Exchange Shares. (b) Effective as of the date hereof each Svenningsen Trust transfers all right, title and interest to the Trust Exchange Shares to the Company, in exchange for the Trust Acquisition Shares, and the Company issues and delivers the Trust Acquisition Shares in exchange for the Trust Exchange Shares. (c) Effective as of the date hereof Rittenberg transfers all right, title and interest to the Rittenberg Exchange Shares to the Company, in exchange for the Rittenberg 3 Acquisition Shares, and the Company issues and delivers the Rittenberg Acquisition Shares in exchange for the Rittenberg Exchange Shares. 2. DELIVERY OF SHARES AND CASH PAYMENT TO SVENNINGSEN (a) Promptly upon the execution and delivery of this Agreement, (i) Svenningsen shall deliver to the Company certificates evidencing the Svenningsen Exchange Shares, duly endorsed in blank or accompanied by appropriate instruments of transfer in form reasonably satisfactory to the Company, (ii) the Company shall deliver to Svenningsen certificates evidencing the Svenningsen Acquisition Shares, and shall record the issuance of such shares to Svenningsen on the stock records of the Company, and (iii) the Company shall pay the Svenningsen Cash Payment to Svenningsen by Company check, by wire transfer or as otherwise agreed to by the parties. (b) Promptly upon the execution and delivery of this Agreement, (i) each Svenningsen Trust shall deliver to the Company certificates evidencing the Trust Exchange Shares, duly endorsed in blank or accompanied by appropriate instruments of transfer in form reasonably satisfactory to the Company, and (ii) the Company shall deliver to each Svenningsen Trust certificates evidencing the Svenningsen Acquisition Shares and shall record the issuance of such shares to each Svenningsen Trust on the stock records of the Company. (c) Promptly upon the execution and delivery of this Agreement, (i) Rittenberg shall deliver to the Company certificates evidencing the Rittenberg Exchange Shares, duly endorsed in blank or accompanied by appropriate instruments of transfer in form reasonably satisfactory to the Company, and (ii) the Company shall deliver to Rittenberg certificates evidencing the Rittenberg Acquisition Shares, and shall record the issuance of such shares to Rittenberg on the stock records of the Company. 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY (a) The Company hereby represents and warrants to Svenningsen, Rittenberg and the Svenningsen Trusts as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its business as it is now being conducted. The Company is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where such qualification is necessary, except where a failure to be so 4 qualified could not reasonably be expected to have a material adverse effect upon the business, properties or operations of the Company. (ii) The authorized capital stock of the Company consists of 50,000,000 shares of Company Common Stock, of which, without giving effect to the shares of Company Common Stock issued pursuant hereto, 1,000 shares are issued and outstanding, and are owned of record by Svenningsen, and 5,000,000 shares of preferred stock, par value $0.10 per share, of which no shares are issued and outstanding. (iii) No consent, approval or authorization of, or declaration, filing or registration with, any third party, including any governmental or regulatory authority, on the part of the Company, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby other than the filing of a Form D pursuant to regulations under the Securities Act of 1933, as amended (such Act and the rules and regulations thereunder, collectively, the "1933 ACT") and other than any consents, approvals, authorizations, registrations or qualifications as may be required under state securities or blue sky laws in connection with the exchange contemplated hereby. (iv) The Company has full corporate power and authority to execute, deliver and perform this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not conflict with, or result in a violation of, or constitute a material default under, any provision of the Certificate of Incorporation or By-laws of the Company, or any material agreement, mortgage, indenture, license, permit, lease or other instrument or any judgment, decree, ruling or order to which the Company is a party or by which the Company or its properties are bound. (v) This Agreement has been duly authorized by all necessary corporate action, has been duly executed and delivered by or on behalf of the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws presently or hereafter in effect affecting the enforcement of creditors' rights generally or by general rules of equity. (b) The Company hereby represents and warrants to Svenningsen that the Svenningsen Acquisition Shares, when issued to Svenningsen in accordance with the terms hereof, will have been duly authorized, validly issued, and will be fully paid and non-assessable. The issuance of the Svenningsen Acquisition Shares to Svenningsen in accordance with the terms hereof will transfer to Svenningsen full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. 5 (c) The Company hereby represents and warrants to each of the Svenningsen Trusts that the Trust Acquisition Shares, when issued to such Svenningsen Trust in accordance with the terms hereof, will have been duly authorized, validly issued and will be fully paid and non-assessable. The issuance of the Trust Acquisition Shares to such Svenningsen Trust in accordance with the terms hereof will transfer to such Svenningsen Trust full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. (d) The Company hereby represents and warrants to Rittenberg that the Rittenberg Acquisition Shares, when issued to Rittenberg in accordance with the terms hereof, will have been duly authorized, validly issued, and will be fully paid and non-assessable. The issuance of the Rittenberg Acquisition Shares to Rittenberg in accordance with the terms hereof will transfer to Rittenberg full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. 4. REPRESENTATIONS AND WARRANTIES OF SVENNINGSEN Svenningsen hereby represents and warrants to the Company as follows: (a) The Svenningsen Exchange Shares are owned beneficially and of record by Svenningsen, free and clear of any liens, security interests, charges, pledges or encumbrances. The Svenningsen Exchange Shares, the Rittenberg Exchange Shares and the Trust Exchange Shares have been duly authorized, and are validly issued, fully paid and non- assessable, and the Svenningsen Exchange Shares represent the percentage of issued and outstanding capital stock of the Operating Companies as set forth on Schedules A and B hereto. The transfer of the Svenningsen Exchange Shares to the Company in accordance with the terms hereof will transfer to the Company full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. (b) No consent, approval or authorization of, or declaration, filing or registration with, any third party, including any governmental or regulatory authority, on the part of Svenningsen or any of the Operating Companies, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby other than consents which have heretofore been obtained. (c) Svenningsen has full power and authority to execute, deliver and perform this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not conflict with, or result in a violation of, or constitute a default under, any provision of the Certificate or Articles of Incorporation or By-laws of any of the Operating Companies, or any material agreement, mortgage, indenture, license, permit, lease or other instrument or any judgment, decree, ruling or 6 order to which any of Svenningsen or the Operating Companies is a party or by which any of Svenningsen or the Operating Companies or his or their respective properties are bound. (d) This Agreement constitutes the legal, valid and binding obligation of Svenningsen, enforceable against him in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws presently or hereafter in effect affecting the enforcement of creditors' rights generally or by general rules of equity. (e) Svenningsen will acquire the Svenningsen Acquisition Shares for his own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof except in compliance with 1933 Act, and he will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of any of such Svenningsen Acquisition Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of any of such Svenningsen Acquisition Shares) except in compliance with the 1933 Act. Svenningsen acknowledges that the Svenningsen Acquisition Shares shall constitute "restricted securities" as defined in Rule 144 under the 1933 Act. (f) Svenningsen is an "accredited investor" as defined in Regulation D under the 1933 Act. 5. REPRESENTATIONS AND WARRANTIES OF THE SVENNINGSEN TRUSTS Each of the Svenningsen Trusts hereby represents and warrants to the Company solely as to itself as follows: (a) The Trust Exchange Shares are owned by it beneficially and of record, free and clear of any liens, security interests, charges, pledges or encumbrances. The Trust Exchange Shares represent 6-2/3 percent of the issued and outstanding capital stock of SSY. The transfer of the Trust Exchange Shares to the Company in accordance with the terms hereof will transfer to the Company full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. (b) No consent, approval or authorization of, or declaration, filing or registration with, any third party, including any governmental or regulatory authority, on the part of the Svenningsen Trust, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (c) The Svenningsen Trust has full power and authority to execute, deliver and perform this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not conflict with, or result in a 7 violation of, or constitute a default under, any material agreement, mortgage, indenture, license, permit, lease or other instrument or any judgment, decree, ruling or order to which the Svenningsen Trust is a party or by which the Svenningsen Trust or its properties are bound. (d) This Agreement constitutes the legal, valid and binding obligation of the Svenningsen Trust, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws presently or hereafter in effect affecting the enforcement of creditors' rights generally or by general rules of equity. (e) The Svenningsen Trust will acquire the Trust Acquisition Shares for its own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof except in compliance with the 1933 Act, and the Svenningsen Trust will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of any of such Trust Acquisition Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of any of such Trust Acquisition Shares) except in compliance with the 1933 Act. The Svenningsen Trust acknowledges that the Trust Acquisition Shares shall constitute "restricted securities" as defined in Rule 144 under the 1933 Act. (f) The Svenningsen Trust has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in the Trust Acquisition Shares and the Svenningsen Trust has received a copy of the Company's Preliminary Prospectus dated December 2, 1996 relating to the proposed initial public offering of Company Common Stock by the Company. 6. REPRESENTATIONS AND WARRANTIES OF RITTENBERG Rittenberg hereby represents and warrants to the Company as follows: (a) The Rittenberg Exchange Shares are owned by Rittenberg beneficially and of record, free and clear of any liens, security interests, charges, pledges or encumbrances. The transfer of the Rittenberg Exchange Shares to the Company in accordance with the terms hereof will transfer to the Company full legal and valid title thereto, free and clear of any liens, security interests, charges, pledges or encumbrances. (b) No consent, approval or authorization of, or declaration, filing or registration with, any third party, including any governmental or regulatory authority, on the part of Rittenberg, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 8 (c) Rittenberg has full power and authority to execute, deliver and perform this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not conflict with, or result in a violation of, or constitute a default under, any material agreement, mortgage, indenture, license, permit, lease or other instrument or any judgment, decree, ruling or order to which Rittenberg is a party or by which Rittenberg or his respective properties are bound. (d) This Agreement constitutes the legal, valid and binding obligation of Rittenberg, enforceable against him in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws presently or hereafter in effect affecting the enforcement of creditors' rights generally or by general rules of equity. (e) Rittenberg will acquire the Rittenberg Acquisition Shares for his own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof except in compliance with the 1933 Act, and he will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of any of such Rittenberg Acquisition Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of any of such Rittenberg Acquisition Shares) except in compliance with the 1933 Act. Rittenberg acknowledges that the Rittenberg Acquisition Shares shall constitute "restricted securities" as defined in Rule 144 under the 1933 Act. (f) Rittenberg is an "accredited investor" as defined in Regulation D under the 1933 Act. 7. CONFIRMATION OF RITTENBERG'S AGREEMENTS Subject to and in accordance with the terms of the Stock Agreement among Rittenberg, Svenningsen and Amscan Inc., dated October 9, 1996 (the "STOCK AGREEMENT") and the Loan Agreement between Svenningsen, Rittenberg and Kurzman & Eisenberg, LLP, as escrow agent, dated October 9, 1996 (the "LOAN AGREEMENT"), Rittenberg hereby confirms his agreement that he will not sell any Rittenberg Acquisition Shares received by Rittenberg hereunder for a period of twelve (12) consecutive months from the date hereof, except that during such twelve month period, Rittenberg may (i) transfer any of such shares to Svenningsen to repay indebtedness which Rittenberg might incur pursuant to the Loan Agreement, and/or (ii) make gifts of the Rittenberg Acquisition Shares; provided, however that Rittenberg personally agrees and agrees on behalf of the donees of Rittenberg Acquisition Shares in connection with such gifts that none of the donees of his gifts will sell Rittenberg Acquisition Shares prior to the third anniversary of the transfer of the Rittenberg Acquisition Shares to Rittenberg. 9 8. MISCELLANEOUS (a) From time to time on and after the date hereof, each of the parties hereto shall deliver or cause to be delivered such further documents and instruments and shall do and cause to be done such further acts and things as shall be necessary or desirable to carry out the intent of the parties hereto and accomplish the purposes set forth herein. (b) This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modifications or amendment is sought. Any party hereto may, by an instrument in writing, waive compliance by another party hereto with any term or provision of this Agreement included for the benefit of such waiving party. The waiver by any party hereto of a breach of any terms or provisions of this Agreement shall not be construed as a waiver of any other terms or provisions or of any further breach. (c) This Agreement, together with the related schedules hereto, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter herein or thereof. (d) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors. This Agreement may not be assigned by any party hereto. (e) Any notice or other communication given pursuant to this Agreement shall be in writing and shall be given to the parties at the following addresses or at such other addresses as the parties may hereafter specify in writing: If to the Company: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 Attn.: Mr. James M. Harrison with a copy to: Cummings & Lockwood Four Stamford Plaza P.O. Box 120 Stamford, Connecticut 06904 Attn.: Paul G. Hughes, Esq. 10 If to Svenningsen or any of the Svenningsen Trusts: Mr. John A. Svenningsen c/o Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 with a copy to: Kurzman & Eisenberg, LLP One North Broadway White Plains, New York 10601 Attn: Joel Lever, Esq. If to Rittenberg: Mr. Gerald C. Rittenberg 18 Carey Drive Bedford, New York 10506 with a copy to: Orloff, Lowenbach, Stifelman & Siegel, P.A. 101 Eisenhower Parkway Roseland, New Jersey 07068 Attn: Susan M. Holzman, Esq. Any such notice or communication shall be hand delivered, mailed by registered or certified mail, return receipt requested, postage prepaid, sent by a recognized overnight delivery service or sent by telecopier with receipt confirmed by telephone by the recipient of such notice or other communication. If hand delivered, notice shall be effective upon delivery; if mailed, notice shall be effective upon the fourth day following the postmark date; if sent by a recognized overnight delivery service, notice shall be effective upon the second business day after deposit with such delivery service; if telecopied, notice shall be effective upon confirmation of receipt. (f) This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. All claims, disputes or causes of action relating to or arising out of this Agreement shall be 11 brought, heard and resolved solely and exclusively by and in a federal or state court situated in New York. (g) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (h) Descriptive headings are for convenience only and will not control or affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. Amscan Holdings, Inc. /s/ James M. Harrison -------------------------------------- Name: James M. Harrison Title: Chief Financial Officer and Secretary /s/ John A. Svenningsen -------------------------------------- John A. Svenningsen /s/ Gerald C. Rittenberg -------------------------------------- Gerald C. Rittenberg 12 Christina Svenningsen Trust /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee JON SVENNINGSEN TRUST /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee ELISABETH SVENNINGSEN TRUST /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee MELISSA SVENNINGSEN TRUST /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee EMILY SVENNINGSEN TRUST /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee SARA SVENNINGSEN TRUST /s/ John A. Svenningsen By------------------------------------ John A Svenningsen, Trustee SCHEDULE A Number of Shares and Percentage of Issued and Outstanding Shares Owned and To Be Exchanged by Name of Entity John A. Svenningsen Amscan Inc. 660 shares of common stock, no par value/100% Am-Source, Inc. 60 shares of common stock, no par value/50% Trisar, Inc. 266.66 shares of common stock, no par value/100% JCS Realty Corp. 1 share of common stock, no par value/100% SSY Realty Corp. 120 shares of common stock, no par value/60% SCHEDULE B Number of Shares and Percentage of Issued and Outstanding Shares Owned Cash Portion of and To Be Exchanged by Svenningsen Name of Entity John A. Svenningsen Consideration Amscan Distributors 3,000 shares of common stock, par (Canada) Ltd. value $1 (Canadian) per share/100% $75,000 Amscan Svenska AB 1,500 shares of common stock, no par value/100% $2,000 Amscan Holdings Limited 215,625 shares of common stock, par value 20p per share/75% $20,000 5,000 shares of preference stock, par value 1 British Pound Sterling per share/100% Amscan (Asia Pacific) 760 shares of common stock, par Pty. Ltd. value Aus. $1 per share/85% $20,000 Amscan Partyartikel GmbH 47,500 shares/95% $14,000 Amscan de Mexico, S.A. 30 shares of Class B common stock, de C.V. no par value and 1,730 shares of Class B-1 common stock, no par value/50% of all outstanding shares of capital stock $2,000 SCHEDULE C Name of Trust Number of Shares of Company Common Stock Christina Svenningsen Trust 23,076 Jon Svenningsen Trust 23,077 Elisabeth Svenningsen Trust 23,077 Melissa Svenningsen Trust 23,077 Emily Svenningsen Trust 23,077 Sara Svenningsen Trust 23,077 EX-10 3 EX-10E EMPLOYMENT AGREEMENT FOR JAMES HARRISON EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("AGREEMENT") dated as of the 1st day of February, 1997, effective as of the 1st day of June, 1997 between AMSCAN HOLDINGS, INC., a Delaware corporation, with offices at 80 Grasslands Road, Elmsford, New York 10523 (the "COMPANY"), and JAMES M. HARRISON residing at 16 High Street, East Williston, New York, (the "EMPLOYEE"); WITNESSETH, THAT, WHEREAS, A. The Company is engaged in the business of designing, manufacturing and distributing seasonal and everyday party goods; B. The Employee is employed by the Company as the Chief Financial Officer of the Company and desires to continue to be employed by the Company in the same capacity; C. The Company desires to have the Employee continue to serve as its Chief Financial Officer; D. The Company and the Employee recognize the possibility that the Company may, at some point in the future, be subject to a Change in Control (as hereinafter defined) and that the possibility of such a Change in Control causes some uncertainty as to the future employment of the Employee by the Company or a successor corporation; E. The Company recognizes that such uncertainty may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and F. The Company has determined to take appropriate steps to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Employee, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control of the Company; NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter set forth, the parties hereto agree as follows: 1. SCOPE OF EMPLOYMENT. (a) TERM. The Company agrees to employ the Employee during the period commencing on June 1, 1997 and ending on May 31, 2001 (the "INITIAL TERM") as the Chief Financial Officer of the Company, and the Employee agrees to be employed by the Company in such capacity, subject to the termination provisions set forth in Paragraph 7. (b) EXTENSION OF INITIAL TERM. The Initial Term of this Agreement will be automatically extended after May 31, 2001 for additional successive periods of (1) year each with the first such extension period beginning on June 1, 2001 (an "ADDITIONAL TERM") (the Initial Term and any Additional Term thereof pursuant to this Paragraph 1 being hereinafter referred to as the "PERIOD OF EMPLOYMENT"), unless either the Company gives the Employee or the Employee gives the Company not less than twelve (12) 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 Period of Employment. (c) DUTIES. The Company hereby employs the Employee, and the Employee accepts such employment, to serve as the Chief Financial Officer of the Company during the Period of Employment, and, in such capacity, to perform any and all duties normally performed by a Chief Financial Officer to the best of the Employee's abilities. The Company's board of directors ("BOARD"), the Chairman, Chief Executive Officer or President of the Company shall have the power to determine the specific duties to be performed by Employee, to supervise the duties to be performed, the manner of performing such duties, and the terms for performance thereof. Notwithstanding the foregoing, Employee shall not be required to work in any location outside a fifty (50) mile radius of the current location of the Company's principal executive offices. (d) OTHER SERVICES. During the Period of Employment, Employee shall perform such other services for the Company as shall be prescribed from time to time by the Board; except as provided in Paragraph 2, no additional compensation shall be payable to the Employee for any services performed by him as an officer, director or in any other capacity for the Company. As used in this Agreement, the term "COMPANY" shall include the subsidiaries of the Company. (e) BEST EFFORTS. During the Period of Employment, the Employee agrees to devote his full business time, attention and best efforts to the faithful discharge of the duties described in Paragraph 1(c) and to use his best efforts to promote the interests and welfare of the Company. During the Period of Employment, the Employee shall not engage in any other significant business activity, regardless of whether or not it is pursued for gain or profit. The parties hereto understand and agree that Employee may participate in charitable and similar activities which may, from time to time, require portions of his time, but which Employee agrees shall not interfere with the performance of his duties hereunder, nor adversely reflect upon the Company or its operations. The Company agrees that the Employee shall not be in violation of this provision as a result of his ownership of not more than 5% of the issued and outstanding stock of any publicly traded company. - 2 - 2. BASE SALARY. (a) For his services hereunder, the Company shall pay the Employee a base salary ("BASE SALARY") equal to $215,000.00 per annum for the twelve (12) month period commencing June 1, 1997 through May 31, 1998. (b) Commencing June 1, 1998, and for each succeeding twelve (12) month period commencing on each June 1st thereafter during the Period of Employment, the Base Salary shall be increased by five percent (5%) per annum over the Base Salary in the preceding twelve (12) month period. (c) The Base Salary shall be payable to the Employee in regular intervals in accordance with the Company's usual payroll practices. (d) All compensation shall be subject to such withholding of any federal, state or local taxes as may be required by law with respect to such payments. 3. BONUS COMPENSATION. (a) ANNUAL BONUS. In addition to the Base Salary set forth in Paragraph 2 hereof, Employee shall be entitled to receive an annual bonus for each calendar year of employment hereunder (the "BONUS"). The Bonus shall be nondiscretionary and shall be awarded if earned, based on a calculation in accordance with the formula set forth on SCHEDULE "A" hereto. (b) Notwithstanding the commencement of this Agreement on June 1, 1997, the Employee shall be entitled to a Bonus for the entire 1997 calendar year which shall be calculated based upon the $215,000 Base Salary initially payable hereunder. (c) All bonuses payable hereunder shall be computed by the Company's accountants and such determination shall be final and binding on the parties hereto. Employee, upon request, will be entitled to review the documents, reports and statements necessary to confirm the computations made in connection with the Bonus. (d) All Bonuses shall be paid no later than the March 15th following the end of the calendar year in which such Bonus was earned. 4. FRINGE BENEFITS. As additional consideration for the services of the Employee under this Agreement, the Company shall provide to the Employee all fringe benefits provided by the Company to other key senior management personnel, including the following: (a) VACATION AND SICK LEAVE. Employee shall be entitled to paid vacation, holiday and sick leave, in the same manner and to the same extent such vacation, holiday and sick leave time shall be available to other key senior management personnel. - 3 - (b) GROUP INSURANCE. The same coverage of group health and group life insurance that the Company may maintain in effect from time to time for the benefit of other key senior management personnel provided, that the Company reserves the right to amend, modify and/or cease maintaining any or all such insurance plans that are in effect at any time during the Period of Employment, and to require that employees pay all or a portion of the costs of such policies. (c) DEFERRED COMPENSATION PLANS. Participation in any retirement plan, 401(k) plan, profit sharing and/or pension plan that may be enacted by the Company, in the same manner and to the same extent as such plan participation is available to the Company's other key senior management personnel, and subject to the provisions and requirements of such plans. Notwithstanding the foregoing, the Company reserves the right to amend, modify and/or cease maintaining any or all such retirement, 401(k), profit-sharing and/or pension plans that are in effect at any time during the Period of Employment, and to require that employees pay all or a portion of the costs of such plans. (d) STOCK OPTIONS. Employee will be entitled to participate on the same basis and at the same time as other key senior management personnel in any options awarded under the Stock Option Plan to such personnel as a group. 5. BUSINESS EXPENSES. The Employee may incur, for the benefit of the Company and in furtherance of the Company's business, various reasonable expenses in accordance with the budget and policies of the Company, as determined by its Board from time to time, for the purpose of promoting the business of the Company. In furtherance of the foregoing, and not in limitation thereof, the Company agrees, upon presentation by the Employee from time to time of itemized accountings therefor, to pay or to reimburse the Employee for, all reasonably necessary expenses of travel, promotion and entertainment undertaken by the Employee for the benefit of the Company. Employee shall support any claim for reimbursement for expenses by adequate proof of such expenditures in the form of cancelled checks, vouchers, bills, or in other form satisfactory to the Company. 6. RESTRICTIVE COVENANT. In consideration of his special and unique services and his position, which by its nature exposes Employee to trade secrets, proprietary information and other confidential material and assets of the Company, the Employee covenants and agrees as follows with the Company: (a) For the purposes of this Agreement, the term "CONFIDENTIAL INFORMATION" shall mean any data, proprietary information, financial information, trade secrets, and other materials and information, including, without limitation, contracts, customer lists, supplier lists, pricing information, information relating to costs, marketing, selling, servicing, technology, know-how, machinery or equipment, plans, processes, techniques, inventions, discoveries, formulae, - 4 - designs, patterns or devices in any way concerning the operation of the Company's business. The term Confidential Information does not include any information which (i) at the time of disclosure is generally available to the public (other than as a result of a disclosure directly or indirectly by Employee), or (ii) has been independently acquired or developed by a third party not obligated to keep such information confidential. (b) Employee hereby agrees that during the term of his employment by the Company and at all times thereafter that he: (i) will keep confidential and protect all Confidential Information (as hereinabove defined) known to him or in his possession, (ii) will not disclose any Confidential Information to any person or entity, except as may be required in the performance by him of his duties as an Employee of the Company, and (iii) will not use any Confidential Information except for the exclusive benefit of the Company. (c) As used in this Agreement, the term "COVENANT PERIOD" shall mean the period commencing on the date of this Agreement and ending on the date that is three (3) years after the last day on which Employee is employed by the Company if this Agreement is terminated for any reason (whether at the end of the Initial Term or any Additional Term or otherwise). During the Covenant Period, Employee shall not: (i) directly or indirectly (whether as owner, principal, agent, partner, officer, employee, independent contractor, consultant, stockholder, or otherwise), engage or participate or have any financial interest in or perform services for, any entity which offers any service in competition with the Company or engages in any business or activity which is substantially the same as any business or activity engaged in by the Company in any location where such activity would be in competition with the business of the Company as conducted at the time of termination of Employee's employment with the Company. The Employee acknowledges that the Company now carries on its business in many trading areas throughout the world and in particular in the United States and Canada. Notwithstanding the foregoing, Employee shall be permitted to own not more than 5% of the issued and outstanding stock of any publicly traded company. (ii) for himself or with or as an agent for any other person, firm, corporation or entity, directly or indirectly, solicit, interfere with, endeavor to entice away from, divert or attempt to divert or otherwise interfere with, or disrupt the business relationship of the Company with, (i) any person or entity who is a client, customer or business contact of the Company during the term of Employee's employment by the Company, or (ii) any potential clients, customers or business contacts with whom the Company is actively negotiating at the time of termination of Employee's employment with the Company. - 5 - (iii) directly or indirectly, for his own benefit or for the benefit of any other person, firm, corporation or entity, divert, or attempt to divert, solicit, recruit, entice or hire away any employees of the Company, whether or not any such employee is a full-time, part-time or temporary employee and whether or not such person's employment is for a determined period or at will. (d) In addition to a right to accounting by the Company and/or damages and/or any other relief to which the Company may be entitled as a result of the Employee's breach of the provisions of this Paragraph 6, the Company will be entitled to injunctive relief restraining any such breach or threatened breach, or the continuation of such breach, by the Employee, provided, however that, if a court of competent jurisdiction shall determine that this covenant shall be enforceable only if limited to a shorter period of time or to a smaller geographical area than is herein expressly provided, or otherwise limited, then and in such event, this covenant shall be deemed to be limited to the extent so determined to be enforceable, in the same manner and to the same extent as if such limits were expressly provided herein. (e) The Company may assign its rights and remedies against the Employee to any person or entity, and such rights and remedies may be enforced by any successors or assigns of the Company. 7. TERMINATION OF EMPLOYMENT. (a) This Paragraph 7 shall apply only to termination of the Period of Employment prior to the occurrence of a Change of Control or Potential Change of Control (as hereinafter defined). Termination of the Period of Employment following the occurrence of a Change of Control shall be governed by Paragraph 9 hereof and termination following the occurrence of a Potential Change of Control shall be governed by Paragraph 10 hereof. (b) Notwithstanding the foregoing, the employment of the Employee under this Agreement, and the Period of Employment, shall terminate: (i) on the death of the Employee; (ii) for Normal Disability (as hereinafter defined) of the Employee; (iii) upon the voluntary resignation of the Employee pursuant to twelve (12) months prior written notice to the Company; (iv) upon written notice by the Company and payment of the amount set forth in Paragraph 7(e); (v) upon the mutual agreement of the parties; or - 6 - (vi) upon the discharge of the Employee by the Company for Normal Cause (as hereinafter defined). (c) For the purposes of this Agreement, "NORMAL CAUSE" shall mean any one of the following: (i) the conviction of the Employee by a court of competent jurisdiction of the commission of a felony; (ii) any act of gross negligence or willful misconduct on the part of the Employee with respect to his duties under this Agreement; or (iii) any act of wilful disobedience on the part of the Employee in violation of specific and reasonable directions of the Company. In the case of clauses (ii) and (iii) herein, termination for Normal Cause shall not occur until such gross negligence, willful misconduct or willful disobedience shall continue uncured for a period of thirty (30) days after written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes the Employee has not substantially performed his duties. (d) Upon termination of Employee's employment hereunder for any reason except pursuant to Paragraph 7(b)(iv), Employee shall be entitled to receive only his accrued and unpaid Base Salary through the last day of his employment hereunder. Notwithstanding the foregoing, in the event that (i) the Period of Employment is terminated by the Company (other than for Normal Cause, Normal Disability or death), by failure to renew this Agreement at the end of the Initial Term or any Additional Term or by the Company pursuant to Paragraph 7(b)(iv) and (ii) a Change of Control occurs within twelve (12) months thereafter, then, in such event, Employee shall be entitled to receive the termination payments set forth in Paragraph 11(c). (e) Upon termination of Employee's employment hereunder pursuant to Paragraph 7(b)(iv), Employee shall be entitled to receive, as severance compensation (i) the full amount of the Base Salary which Employee would otherwise be entitled to receive for the remaining Initial Term or any Additional Term under this Agreement, as the case may be, but in no event less than twelve (12) months Base Salary; and (ii) an amount equal to the Bonus which Employee would otherwise have been entitled to receive for the year in which the Employee's employment hereunder is terminated, prorated through the date of termination of the Period of Employment. For purposes of this Paragraph 7(e), the Bonus shall be calculated in accordance with Paragraph 3 at the end of the calendar year in which such Bonus would otherwise be payable and shall be paid to Employee no later than March 15th following the end of the calendar year in which such Bonus was earned. (f) Upon termination of the Employee's employment hereunder, whether at the end of the term hereof or in the event of earlier termination, the Employee shall have no further rights under this Agreement, except as expressly herein set forth. Nothing contained herein shall be deemed to preclude the Company from enforcing any remedies available to it at law or equity in consequence of a breach by the Employee of his obligations to the Company or available to the Company under the provisions of this Agreement, including without limitation the enforcement of any restrictive covenants hereunder to the extent herein provided. - 7 - (g) For the purposes of this Agreement, the term "NORMAL DISABILITY" shall mean, that the Employee is, as a result of illness or accident, physically or mentally disabled from performing his duties hereunder to a material extent for a period of one hundred eighty (180) days. The determination of the existence of a disability shall be determined in good faith by the Board. (h) NOTICE OF TERMINATION. Any termination of the Period of Employment by the Company pursuant to this Paragraph 7 shall be communicated by written notice to the Employee. "Notice of Termination" for purposes of this Paragraph 7 shall mean a notice which indicates that the Period of Employment is to be terminated and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Period of Employment. (i) DATE OF TERMINATION, ETC. For the purposes hereof, "Date of Termination" shall mean (a) if the Period of Employment is terminated for Normal Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties during such thirty (30) day period); (b) if the Period of Employment is terminated for Normal Cause, the date specified in the Notice of Termination is given or (c) if the Period of Employment is terminated upon payment to the Employee pursuant to Paragraph 7(b)(iv) hereof, the date of the delivery of the "Notice of Termination" to the Employee. 8. CHANGE IN CONTROL. (a) EVENTS CONSTITUTING A CHANGE IN CONTROL. For purposes hereof, a "Change in Control" shall have occurred if: (i) Any "person" other than any trustee or other fiduciary holding securities under an employee benefit plan of the Company (which trustee or fiduciary holds such securities solely in their capacity as the trustee or fiduciary of such benefit plan) within the meaning of Section 14(d) of the Securities Exchange Act of 1934 (the "Act") becomes the "beneficial owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than 35% of the Company's Common Stock; (ii) any "person" other than any trustee or other fiduciary holding securities under an employee benefit plan of the Company acquires by proxy or otherwise the right to vote more than 35% of the Company's Common Stock for the election of directors, other than solicitation of proxies by the Incumbent Board (as hereinafter defined), for any merger or consolidation of the Company or for any other matter or question; (iii) during any two-year period, individuals who constitute the Board of Directors of the Company (the "Incumbent Board") as of the beginning of the period cease for any reason to constitute at least a majority thereof, provided that any person becoming a director during such period whose - 8 - election or nomination for election by the Company's stockholders was approved by a vote of at least three-quarters of the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of this clause (c), considered as though such person were a member of the Incumbent Board; or (iv) the Company's stockholders have approved the sale of all or substantially all of the assets of the Company. Notwithstanding anything set forth herein to the contrary, the transfer of 35% or more of the Company's Common Stock by John Svenningsen to members of his immediate family or trusts for their benefit, shall not constitute a Change of Control or Potential Change of Control as that term is used in this Agreement; provided, however, than any subsequent transfer by such family members or trusts for their benefit, as the case may be, shall constitute a Change of Control or Potential Change of Control, as the case may be, if such transfer otherwise meets the definition of Change of Control or Potential Change of Control as set forth herein. (b) POTENTIAL CHANGE IN CONTROL. For purposes of this Agreement, a "Potential Change in Control" of the Company shall be deemed to have occurred if: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control of the Company; (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Company; (iii) any person, other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company (which trustee or fiduciary holds such securities solely in their capacity as the trustee or fiduciary of such benefit plan), or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of shares of the Company, becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities, or who thereafter increases his beneficial ownership of such securities by 5% or more; or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control of the Company has occurred. - 9 - (c) BOARD ACTION. In the event the Board adopts any plan or takes any action which, if consummated, would result in a Change in Control of the Company, or determines by resolution that a Potential Change in Control of the Company has occurred, the Company shall take any action determined by the Board to be necessary or appropriate to ensure the prompt payment when due of any amounts which may thereafter become payable hereunder upon a termination by the Company of the Period of Employment, including but not limited to the placement of sufficient funds to pay all such amounts in an escrow account with a bank or other fiduciary institution. 9. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) APPLICABILITY. Following a Change in Control of the Company, the provisions of this Paragraph 9 shall apply exclusively with respect to the termination of the Period of Employment, and the provisions of Paragraph 11 hereof shall apply with respect to amounts payable upon such termination. (b) GENERAL. If a Change in Control of the Company shall have occurred, the Employee shall be entitled to the benefits provided in Paragraph 11(c) upon the subsequent termination of the Period of Employment, unless the termination is (a) because of the Employee's death, (b) by the Company because of the Employee's Special Disability (as hereinafter defined), (c) by the Company for Special Cause (as hereinafter defined), or (d) by the Employee other than for Good Reason (as hereinafter defined). (c) SPECIAL DISABILITY. For the purposes hereof, a "Special Disability" shall mean the mental or physical illness or disability of the Employee, which continues for one hundred eighty (180) or more consecutive days which prevents him from performing his obligations hereunder; PROVIDED, HOWEVER, that if the Employee so requests, such disability shall be confirmed by a licensed medical doctor reasonably chosen by the Employee and a licensed medical doctor reasonably chosen by the Company; PROVIDED, FURTHER, that a Special Disability shall not be deemed to have occurred until the date of the confirmation provided for in the preceding clause, if such clause becomes applicable. (d) SPECIAL CAUSE. For the purposes hereof, "Special Cause" shall mean: (i) the willful and continued failure by the Employee to perform substantially his duties hereunder (other than (i) any such failure resulting from the Employee's incapacity due to physical or mental illness (whether or not constituting Special Disability) or (ii) any such actual or anticipated failure after the delivery by the Employee of a Notice of Termination for Good Reason (pursuant to Paragraph 9(f) hereof) for a period of thirty (30) days after a written demand for substantial performance is delivered to the Employee by the Board, which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed his duties; or - 10 - (ii) the conviction of the Employee by a court of competent jurisdiction of commission of a felony. For purposes of this subsection, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Special Cause unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in this subsection and specifying the particulars thereof in detail. (e) GOOD REASON. The Employee shall be entitled to terminate the Period of Employment for Good Reason. For purposes hereof, "Good Reason" shall mean the occurrence or continuation, without consent of the Employee, after a Change in Control of the Company of any of the following events unless, in the case of subparagraphs (i), (v), or (vi), such circumstances are fully corrected prior to the Date of Termination specified in a Notice of Termination delivered by the Employee pursuant to Paragraph 9(f) hereof: (i) the assignment to the Employee of any duties materially inconsistent with the position with the Company that the Employee held immediately prior to the Change in Control of the Company, or an adverse change in the status, position or conditions of the Employee's employment or the nature of the Employee's responsibilities in effect immediately prior to such Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control; (ii) a reduction by the Company in the Employee's annual Base Salary as in effect immediately prior to such Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control; (iii) the relocation of the Company's principal office to a location outside a fifty (50) mile radius from the Company's principal office immediately prior to such Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Employee's business travel obligations immediately - 11 - prior to such Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control; (iv) the failure by the Company to pay to the Employee any portion of the Employee's Base Salary within seven (7) days of the date such salary is due; (v) the failure by the Company to continue in effect or to amend any benefit or compensation plan in which the Employee participates immediately prior to the Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control which is material to the Employee's total compensation, including but not limited to the stock option, bonus, insurance, disability and vacation plans which the Company currently has or any substitute or additional plans adopted prior to the Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan or plans) has been made with respect to such plan, or the failure by the Company to continue the Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Employee's participation relative to other participants, as in existence immediately prior to such Change in Control or any Potential Change in Control which shall exist immediately prior to such Change in Control; or (vi) the failure of the Company to obtain an agreement from any successor (as defined in Paragraph 14 hereinafter) to assume and agree to perform this Agreement, as contemplated in Paragraph 14 hereof. The Employee's right to terminate the Period of Employment pursuant to this Paragraph 9(e) shall not be affected by the Employee's incapacity due to physical or mental illness. The Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. In the event of any dispute between the Employee and the Company as to whether any event constituting Good Reason shall have occurred, the burden of proving by clear and convincing evidence that such event does not constitute Good Reason shall rest on the Company. (f) NOTICE OF TERMINATION. Any termination of the Period of Employment by the Company or by the Employee pursuant to this Paragraph 9 shall be communicated by written Notice of Termination to the other party hereto. "Notice of Termination" shall mean a notice which indicates that the Period of Employment is to be terminated and, if the Company claims that payments are not due to the Employee pursuant to Paragraph 11(c) because of termination by the Company for Special Disability or Special Cause or if the Employee claims that payments are due pursuant to Paragraph 11(c) because of termination by the Employee for Good Reason, - 12 - shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Period of Employment under the provision so indicated. (g) DATE OF TERMINATION, ETC. For the purposes hereof, "Date of Termination" shall mean (a) if the Period of Employment is terminated for Special Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties during such thirty (30) day period) or (b) if the Period of Employment is terminated for any other reason other than death, the date specified in the Notice of Termination (which, in the case of a termination by the Company for Special Cause shall not be less than thirty (30) days, and in the case of a Termination by the Employee for Good Reason shall not be less than fifteen (15) days, respectively, from the date such Notice of Termination is given). 10. TERMINATION FOLLOWING POTENTIAL CHANGE OF CONTROL. (a) APPLICABILITY. So long as (i) any Potential Change in Control described in clauses (i), (ii), or (iv) of Paragraph 8(b) hereof shall have occurred and be continuing or (ii) for six months after any Potential Change in Control described in clause (iii) of Paragraph 8(b) hereof shall have occurred but no Change in Control has occurred, the provisions of this Paragraph 10 shall apply exclusively with respect to the termination of the Period of Employment, and the provisions of Paragraph 11 hereof shall apply with respect to amounts payable upon such termination. (b) GENERAL. If a Potential Change of Control of the Company has occurred but no Change of Control has occurred, the Employee shall be entitled to the benefits provided in Paragraph 11(c) upon the subsequent termination of the Period of Employment, unless such termination is (a) because of the Employee's Death, (b) by the Company because of the Employee's Special Disability, (c) by the Company for Special Cause or (d) by the Employee. (c) NOTICE OF TERMINATION. Any termination of the Period of Employment pursuant to this Paragraph 10 shall be communicated by written Notice of Termination to the other party hereto. "Notice of Termination" for purposes of this Paragraph 10 shall mean a notice which indicates that the Period of Employment is to be terminated and, if the Company claims that payments are not due to the Employee pursuant to Paragraph 11(c) hereof because of termination by the Company for Special Disability or Special Cause, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Period of Employment under the provision so indicated. (d) DATE OF TERMINATION, ETC. "Date of Termination" for purposes of this Paragraph 10 shall be determined in the same manner as provided in Paragraph 9(g) hereof. - 13 - 11. PAYMENTS UPON TERMINATION FOLLOWING CHANGE OF CONTROL OR POTENTIAL CHANGE OF CONTROL. Following a Change in Control or a Potential Change of Control, the Employee shall be entitled to the following benefits upon termination of the Period of Employment, as the case may be, provided that such termination occurs prior to the expiration of the Period of Employment as in effect on the date of such Change in Control or Potential Change of Control. (a) DEATH OR SPECIAL DISABILITY. Following a termination of the Period of Employment because of the Employee's death or by the Company because of Special Disability, the Employee's benefits shall be limited to those provided under any retirement, insurance and other benefit programs of the Company then in effect determined in accordance with the terms thereof. (b) SPECIAL CAUSE. If the Period of Employment shall be terminated by the Company for Special Cause or by the Employee other than for Good Reason, the Company shall pay to the Employee the Employee's Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which the Employee is entitled under any compensation or benefit plan of the Company, and the Company shall have no further obligations to the Employee under this Agreement. Any amounts payable to the Employee pursuant to this Paragraph 11(b) shall be payable by the Company within five business days of the Date of Termination. (c) OTHER. If the Period of Employment shall be terminated by the Employee for Good Reason or by the Company other than for death, Special Cause or Special Disability, the Employee shall be entitled to the amounts provided below: (i) the Company shall pay to the Employee his Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which the Employee is entitled under any compensation or benefit plan of the Company; and (ii) a lump-sum severance payment (the "Severance Payment") equal to three (3) times the sum of (A) the Employee's Base Salary as of the Date of Termination and (B) the aggregate bonus received by the Employee in respect of the three full years prior to the Date of Termination divided by three (or the number of years in respect of which Employee received a bonus if less than three). (d) LEGAL EXPENSES. In addition to any other amounts payable hereunder, the Company also shall reimburse the Employee for all legal fees and expenses reasonably incurred by the Employee as a result of any termination of the Period of Employment (including all such fees and expenses, if any, incurred in contesting or disputing any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the - 14 - application of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") to any payment or benefit provided hereunder). (e) TIMING OF PAYMENTS. The payments provided for in subparagraphs (i), (ii) and (iii) of Paragraph 11(c) shall be made not later than the fifth business day following the Date of Termination; PROVIDED, HOWEVER, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Employee on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments which have been finally determined and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) promptly after the amount thereof is finally determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Employee, payable after the amount due to the Employee has been finally determined on the fifth business day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). Any amounts payable by the Company under Paragraph 11(d) hereof shall be paid within five business days after receipt by the Company of reasonable evidence as to the amount and nature thereof. 12. PAYMENT IN THE EVENT OF A SALE OF THE COMPANY. (a) Upon a Change of Control of the Company resulting from the occurrence of an event pursuant to Paragraphs 8(a)(i), (ii) or (iv) (a "SALE EVENT"), the Company shall pay the Employee a sale bonus (the "SALE BONUS") on the date of the closing of such Sale Event equal to the product of (i) 500,000 shares of the Company's Common Stock and (ii) the excess of the per share price for the Company's Common Stock actually paid in connection with the Sale Event (calculated as set forth in Paragraph 12(b) hereinafter) over the average closing price of the Company's Common Stock as reported on The NASDAQ Stock Market ("NASDAQ") for the ninety (90) business days on which NASDAQ was open for trading (the "TRADING PRICE") immediately preceding the earlier to occur of (i) public announcement of the Change of Control resulting in a Sale Event, or (ii) the occurrence of a Potential Change of Control which subsequently results in a Sale Event. By way of illustration, if a Sale Event occurs at a time when the Trading Price is $15.00 per share and the sale price per share is $20.00 per share, Employee shall be entitled to a Sale Bonus of $2,500,000 [($20.00-$15.00) x 500,000]. (b) Upon the occurrence of a Sale Event described in Paragraph 12(a) hereinabove in which the Company's Common Stock is purchased for cash, the per share price actually paid shall be determined by dividing the purchase price by the number of shares of the Company's Common Stock sold. Upon the occurrence of a Sale Event described in Paragraph 12(a) hereinabove, in which the Change of Control results from other than a purchase of the Company's Common Stock for cash, then, in such event, the per share purchase price for the Company's Common Stock actually paid in connection with such Sale Event shall be calculated as follows: (i) If the Sale Event is as a result of the sale of all or substantially all of the assets of the Company pursuant to Paragraph 8(a)(iv), the per share price shall be calculated based upon the total purchase price for the assets after - 15 - payment of or reservation for, all of the Company's outstanding liabilities divided by the total number of shares of the Company then outstanding. (ii) If the Sale Event is as a result of a merger or other consolidation of the Company in which all or a portion of the purchase price is payable in stock of another corporation, then, (A) if the stock of such entity is publicly traded, then such stock shall be valued at the closing price of such stock on the market or exchange on which such stock is traded on day of the closing of the Sale Event or (B) if the stock of such entity is not publicly traded, then such stock shall be valued after an appraisal of such entity as a going concern conducted by an appraiser chosen in good faith by the Board. (c) Notwithstanding the foregoing, upon the occurrence of any Sale Event, Employee shall be entitled to a minimum Sale Bonus of at least $ 1,500,000. However, if and to the extent that the per share price for the Company's Common Stock actually paid in connection with the Sale Event over the Trading Price exceeds two (2) times the Trading Price, then, in such event, the calculation of the Sale Bonus shall be limited to an amount per share equal to the Trading Price. By way of illustration, if a Sale Event occurs at a time when the Trading Price is $10.00 per share and the sale price is $25.00 per share, Employee shall be entitled to a Sale Bonus of $5,000,000 [($10.00 x 500,000]. (d) In the further event that a Sale Event also results in a termination of the Period of Employment resulting in Employee being entitled to receive both a Sale Bonus pursuant to this Paragraph 12 and a Severance Payment pursuant to Paragraph 11(c), Employee shall be entitled to receive an aggregate amount from the Sale Bonus and the Severance Payment of at least $ 1,500,000., but if the combined payment of the Sale Bonus and the Severance Payment would exceed $1,500,000. in no event shall Employee receive more than the greater of the Sale Bonus or the Severance Payment hereunder. 13. MITIGATION. The Employee shall not be required to mitigate the amount of any payment provided for hereunder by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in Paragraphs 7 and 11 be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise. 14. ASSUMPTION OF AGREEMENT BY SUCCESSOR CORPORATION. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the - 16 - Employee to payments from the Company in the same amount and on the terms to which the Employee would be entitled hereunder if the Employee had terminated the Period of Employment for Good Reason following a Change in Control of the Company, except that for purpose of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company and a successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 15. COMPANY'S REPRESENTATIONS. The Company hereby represents and warrants to the Employee that: (a) it has full power and corporate authority to execute and deliver this Agreement and to perform its obligations hereunder, (b) such execution, delivery and performance will not (with the giving of notice or the lapse of time or both) result in the breach of any agreements or other obligations to which it is a party or is otherwise bound, (c) the execution and delivery of this Agreement by the Company is not in violation of the Company's certificate of incorporation or by-laws, and (d) this Agreement is the legal, valid and binding obligation of the Company which is enforceable against the Company in accordance with its terms. 16. REPRESENTATIONS BY EMPLOYEE. (a) Employee warrants and represents to the Company that each of the following is true, correct and complete on the date of this Agreement: (i) The execution, delivery and performance of this Agreement by the Employee, and the consummation of the transactions contemplated hereunder, do not and will not conflict with, violate or result in the breach of any of the terms or conditions of, or constitute a default under, (1) any contract, agreement, commitment or other instrument or obligation to which the Employee is a party, or (2) any common law duty that may be owed by the Employee to any former employer or other person or entity or to any of their respective current or former affiliates, shareholders, officers, or directors, or (3) any law, regulation, ordinance or decree to which the Employee is subject. (ii) Employee has the power, authority and capacity to enter into this Agreement and to perform all of his obligations hereunder. (iii) No permit, consent, approval, or authorization of, or designation, declaration or filing with, any person or entity is required by Employee in connection with the execution or delivery by him of this Agreement or the consummation of the transactions contemplated hereunder. (b) Employee shall indemnify the Company, and each of the Company's shareholders, officers, directors, employees and agents, from and against any and all claims, demands, damages, fines, penalties, losses, liabilities, interests, costs and expenses (including, without - 17 - limitation, reasonable attorney fees and expenses, and expert fees and expenses) arising from or related to any breach by Employee of any of the representations or warranties made by Employee in this Paragraph 16. 17. SCOPE OF RESTRICTIONS. If any severable provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein; provided, however, that if any of the restrictions contained in Paragraph 6 hereof shall be deemed to be unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then such restriction shall be deemed reduced to such extent, duration, geographical scope or in such other manner as otherwise required to make it enforceable, and, in such reduced form, Paragraph 6 hereof shall then be enforceable in the manner contemplated hereby. 18. NOTICES. Any notice hereunder shall be sufficient if sent either (a) by hand, or (b) by certified mail, return receipt requested, or (c) by commercial overnight delivery service, in any event with postage, fees and delivery charges prepaid. Such notice shall be deemed to have been given on receipt, if delivered by hand or by overnight carrier, or three business days after the date of deposit in an official depository of the United States mail, if mailed. All notices shall be mailed or delivered, as aforesaid, addressed to the party to be notified at such party's address set forth below or at such other address as the party to be notified may have otherwise designated, by notice in writing, with copies to their respective attorneys as set forth below: To the Company, at: AMSCAN HOLDINGS, INC. 80 Grasslands Road Elmsford, New York 10523 Attention: Gerald C. Rittenberg with a copy to: KURZMAN & EISENBERG, LLP One North Broadway, 10th Floor White Plains, NY 10601 Attention: Joel Lever, Esq. To Employee, at: JAMES M. HARRISON 16 High Street East Williston, New York - 18 - 19. MISCELLANEOUS. (a) The parties severally acknowledge that they have not relied upon any representations, warranties, negotiations, understandings, arrangements, or other inducements not expressly set forth herein in entering into this Agreement. (b) This Agreement may not be modified except by written modification signed by all parties hereto, and its terms and conditions may not be deemed waived except by written waiver signed by the party to be charged with such waiver. (c) This Agreement contains the entire agreement and understanding by and between the Company and the Employee with respect to the Employee's employment by the Company, and supersedes all oral and written prior understandings and agreements between the Company and the Employee relating to the subject matter of this Agreement and the Employee's relationship to the Company. (d) This Agreement may be executed in counterparts, each of which will be deemed an original of this Agreement but all of which together will constitute one Agreement. (e) This Agreement has been made in, and its validity and interpretation will be determined under the internal laws of, the State of New York applicable to contracts made and to be wholly performed therein. Any suit, action or other proceeding in connection with this Agreement shall be brought by any party hereto in a court of record in the State of New York, County of Westchester or in the United States District Court for the Southern District of New York, each of the parties hereto consenting to the jurisdiction of such courts for such purpose. (f) This Agreement is binding upon and inures to the benefit of the parties and their personal representatives, successors and assigns. (g) The paragraph headings used in this Agreement are included solely for convenience and shall not affect or be used in connection with the interpretation of this Agreement. Schedules annexed hereto are a part of this Agreement as if set forth herein at length. - 19 - IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AMSCAN HOLDINGS, INC. a Delaware corporation By:/s/ John A. Svenningsen --------------------------- John A. Svenningsen /s/ JAMES M. HARRISON ------------------------------ JAMES M. HARRISON - 20 - SCHEDULE A BONUS COMPENSATION FORMULA As set forth in Paragraph 3(a) of this Agreement, Employee shall be entitled to receive a nondiscretionary annual bonus based upon Employee's Base Salary calculated in accordance with the formula set forth herein. The bonus shall be payable for each calendar year of Employee's employment hereunder in an amount equal to the percentage of Employee's Base Salary in such calendar year equal to three times the annual increase in the Company's Net Income (as hereinafter defined) in each year of Employee's employment hereunder over the Company's Net Income for the immediately preceding calendar year. For purposes of this Agreement, the increase in Net Income for the first employment year of this Agreement shall be determined by comparison to the Net Income in the Base Year (as hereinafter defined). "NET INCOME" as used herein, shall mean the consolidated net income of the Company as set forth on the Company's annual audited financial statements for the calendar year then ended. "BASE YEAR" as used herein, shall mean the pro forma consolidated net income of the Company as set forth on the Company's Statement of Operations for the twelve month period ended December 31, 1996 to be set forth in the Company's Annual Report on Form 10-K. By way of illustration, the bonus payable for each percentage increase in Net Income over the prior year's Net Income shall be calculated as follows: - 21 - A B C Percentage of Base Dollar Value of Increase in Net Salary Payable as Bonus (Based on 1997 Income Over Prior Bonus (3x Percentage Base Salary of Year's Net Income in Column A) $215,000) 1% 3% $ 6,450.00 5% 15% $ 32,250.00 10% 30% $ 64,500.00 15% 45% $ 96,750.00 20% 60% $129,000.00 25% 75% $161,250.00 - 22 - EX-10 4 EX-10J TAX INDEMNIFICATION AGREEMENT TAX INDEMNIFICATION AGREEMENT This Indemnification Agreement is made and entered into as of December 18, 1996 between Amscan Holdings, Inc., a Delaware corporation ("AMSCAN"), and John A. Svenningsen ("SVENNINGSEN"). WHEREAS, as of the date hereof, Amscan has acquired all of the business operations of Amscan Inc., Am-Source, Inc., JCS Realty Corp. and SSY Realty Corp. (individually, a "SUBCHAPTER S COMPANY" and, collectively, the "SUBCHAPTER S COMPANIES"); WHEREAS, the Subchapter S Companies elected under Section 1362 of the Internal Revenue Code of 1986, as amended (the "CODE"), to be treated and operated as Subchapter S corporations; WHEREAS, Svenningsen was for a number of years the sole shareholder of Amscan Inc., JCS Realty Corp. and SSY Realty Corp. and since 1993 owned a 50% interest in Am-Source, Inc.; NOW, THEREFORE, in consideration of the premises and mutual provisions hereinafter set forth, the parties hereto hereby agree as follows: Article 1. AMSCAN INDEMNITY. Amscan will indemnify Svenningsen for any United States Federal income tax liability, to the extent such liability is attributable to a claim by the Internal Revenue Service that Svenningsen's income with respect to his ownership of stock in any of the Subchapter S Companies for any taxable year exceeds the income reported to Svenningsen by a Subchapter S Company on its Internal Revenue Service Form K-1 for such taxable year and for any United States Federal income tax liability of Svenningsen in respect of payments to Svenningsen pursuant to this Article 1; PROVIDED, HOWEVER, that Amscan's obligation to indemnify Svenningsen shall be limited to taxes on income which create a tax benefit to any of the Subchapter S Companies (whether by reason of deduction, amortization, credit or otherwise) for a taxable year(s) which end(s) after closing. Article 2. SVENNINGSEN INDEMNITY. Svenningsen will indemnify Amscan for Amscan's United States Federal income tax liability resulting from a claim by any taxing authority that a Subchapter S Company was not properly treated as a Subchapter S corporation for any period in which such Subchapter S Company filed a tax return on which it claimed that it was properly treated as a Subchapter S corporation; PROVIDED, HOWEVER, that Svenningsen's obligation to indemnify Amscan shall be limited to the amount that Svenningsen would be entitled to receive as a refund of United States 2 Federal income taxes previously paid with respect to his share of income generated by a Subchapter S Company. Article 3. PROCEDURES RELATING TO INDEMNIFICATION. If notice of a pending or threatened audit is not given to the indemnifying party promptly after receipt of correspondence from any taxing authority, or in reasonable detail to apprise the indemnifying party of the nature of the proposed adjustments, such failure to provide notice promptly shall not relieve the indemnifying party of its obligations under this agreement, except to the extent that the failure to notify timely actually prejudices the indemnifying party's ability to contest such matter. With respect to any audit, the indemnifying party shall control all proceedings taken solely in connection with such audit (including, without limitation, selection of and payment for counsel reasonably acceptable to indemnitee) and, without limiting the foregoing, may in its sole discretion pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any taxing authority with respect thereto, and may, in its sole discretion, either pay the tax claimed and sue for a refund where applicable law permits such refund suits or contest the audit adjustments in any permissible manner; PROVIDED, HOWEVER, that if (i) the results of such proceedings, suit, contest, claim, hearing, compromise or proposed settlement could reasonably be expected to have a material adverse effect on the assets, business, operations or financial condition of Amscan or Svenningsen, or their ability to treat any income or losses in a particular manner for tax calculation purposes for taxable periods ending after the closing of the exchange of certain shares of capital stock owned by Svenningsen for shares of Common Stock of Amscan or (ii) any such proceeding, suit, contest, claim, hearing, compromise or proposed settlement or procedure involves taxes other than taxes subject to indemnification, the parties hereto shall consult and mutually agree on a reasonable good faith basis upon all aspects of the conduct of such matters. The indemnitee and the indemnifying party shall cooperate in contesting any audit, which cooperation shall include, without limitation, the retention and provision to the indemnifying party of records and information which are reasonably relevant to such audit and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such audit. Article 4. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws. Article 5. NOTICES. All notices or other communications provided for under this Agreement shall be given in writing and shall be delivered personally or sent by post, telex or facsimile transmission to the other party at the following address or to such other address as to which a party has given notice as provided herein. 3 If to Amscan: Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 If to Svenningsen: John A. Svenningsen c/o Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 Article 6. ASSIGNMENT. Except as otherwise specifically provided herein, this Agreement and any rights and obligations hereunder may not be assigned by either party without the prior written approval of the other party, and any attempted assignment not in compliance with this Article shall be void and of no effect. Article 7. COSTS. In any proceeding to enforce any rights under this Agreement by legal proceedings or otherwise, the prevailing party shall be reimbursed by the defaulting party for all of the costs and expenses of the prevailing party in pursuing such proceeding, including, without limitation, reasonable attorneys' or solicitors' fees. Article 8. PARTIES NOT PARTNERS. Nothing contained in this Agreement shall constitute a partnership or other agency agreement between the parties hereto or their respective subsidiaries or any of them, nor shall anything contained in this Agreement give any of the parties hereto or any of the respective subsidiaries the right to bind, or pledge the credit of, any of the other parties hereto or any of their respective subsidiaries. Article 9. ANNUAL REVIEW. This Agreement may be amended by mutual consultation between the parties, evidenced in a writing signed by both parties, and the parties agree to engage in mutual consultation in good faith during each annual period from the date hereof at the request of any party to maintain in this Agreement the principles of fairness and equity, and to amend this Agreement accordingly. Article 10. SEVERABILITY. If any provision in this Agreement is found by any court or administrative body of competent jurisdiction to be invalid or unenforceable, the invalidity or unenforceability of such provision shall not affect the other provisions of this Agreement and all provisions not affected by such invalidity or unenforceability shall remain in full force and effect unless the severance of the invalid or unenforceable provision would unreasonably frustrate the commercial purposes of this Agreement. The parties hereby agree to attempt to substitute for any invalid or unenforceable provision a 4 valid or enforceable provision which achieves to the greatest extent possible the economic objectives of the invalid or unenforceable provision. Article 11. WAIVER. The waiver by either party of a breach or default of any of the provisions of this Agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or other provisions nor shall any delay or omission on the part of either party to exercise or avail itself of any right, power or privilege that it has or may have hereunder operate as a waiver of any breach or default by the other party. Article 12. ENTIRE AGREEMENT. This Agreement constitutes the entire and only Agreement between the parties hereto relating to the subject matter hereof and overrides and supersedes any prior arrangements or oral discussions and shall not be modified except in writing by agreement between the parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. AMSCAN HOLDINGS, INC. /s/ James M. Harrison By:------------------------------------ Name: James M. Harrison Title: Chief Financial Officer /s/ John A. Svenningsen ---------------------------------------- John A. Svenningsen EX-27 5 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AMSCAN HOLDINGS, INC. AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE YEARS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1995 DEC-31-1996 2,492 1,589 0 0 34,385 41,516 2,505 4,138 45,013 45,693 82,305 96,020 50,248 59,470 21,075 24,807 114,601 140,274 73,922 50,615 12,284 15,085 0 0 0 0 393 2,070 26,812 65,879 114,601 140,274 167,403 192,705 167,403 192,705 108,654 123,913 108,654 123,913 0 0 1,581 2,350 5,772 6,691 19,206 5,732 731 1,952 17,434 2,127 0 0 0 0 0 0 17,434 2,127 0 0 0 0 1995 BALANCES HAVE BEEN RESTATED TO REFLECT A RECLASSIFICATION MADE TO THE FINANCIAL STATEMENTS. AMSCAN HOLDINGS, INC. IS A CORPORATION WHICH WAS FORMED IN OCTOBER 1996 FOR THE PURPOSE OF BECOMING A HOLDING COMPANY FOR CERTAIN OPERATING AND OTHER CORPORATIONS. AMSCAN HOLDINGS, INC., THEREFORE, HAD NO SHARES OUTSTANDING AT THE END OF 1995. AMSCAN HOLDINGS, INC. IS A CORPORATION WHICH WAS FORMED IN OCTOBER 1996 FOR THE PURPOSE OF BECOMING A HOLDING COMPANY FOR CERTAIN OPERATING AND OTHER CORPORATIONS. A SIGNIFICANT DISTRIBUTION WAS MADE TO THE PRINCIPAL STOCKHOLDER IN CONJUNCTION WITH THE IPO. THEREFORE, HISTORICAL EARNINGS PER SHARE HAS NOT BEEN PRESENTED AS IT WOULD BE MISLEADING.
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