FORM 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, 2002
[ ] 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
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AMSCAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911462
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
80 Grasslands Road
Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 345-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
----- -----
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (assuming for purposes of this calculation, without conceding, that
all executive officers and directors are "affiliates") at March 28, 2003 was
$32,577,745.
As of March 28, 2003, 1,233.27 shares of Registrants' Common Stock, par value
$0.10, were outstanding.
Documents Incorporated by Reference
-----------------------------------
None.
AMSCAN HOLDINGS, INC.
FORM 10-K
December 31, 2002
Table of Contents
Part I Page
------ ----
Item 1 Business.......................................................... 3
Item 2 Properties........................................................ 8
Item 3 Legal Proceedings................................................. 10
Item 4 Submission of Matters to a Vote of Security Holders............... 10
Part II
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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 7A Quantitative and Qualitative Disclosures About Market Risk........ 25
Item 8 Financial Statements and Supplementary Data....................... 25
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 25
Part III
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Item 10 Directors and Executive Officers of the Registrant................ 26
Item 11 Executive Compensation ........................................... 27
Item 12 Security Ownership of Certain Beneficial Owners and Management.... 33
Item 13 Certain Relationships and Related Transactions.................... 35
Item 14 Controls and Procedures........................................... 36
Part IV
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Item 15 Exhibits, Financial Statements, Schedules and Reports on Form 8-K. 37
Signatures........................................................ 41
Certification by Chief Executive Officer.......................... 42
Certification by Chief Financial Officer.......................... 43
2
PART I
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ITEM 1. BUSINESS
We believe we are one of the largest manufacturers and distributors of
decorative party goods in the United States and the largest manufacturer of
metallic balloons in the world. We offer one of the broadest and deepest product
lines in the industry. Our party products include paper and plastic tableware,
metallic balloons, accessories, novelties, gifts and stationery. Our gift and
stationery product lines encompass home, baby and wedding products for general
gift giving or self-purchase. We sell our products through party superstores,
other party goods retailers, independent card and gift stores, other retailers
and distributors throughout the world, including North America, South America,
Europe, Asia and Australia. We believe we are the leading supplier to party
superstores in the United States, which represented approximately 44% of our
sales in 2002, and we have developed a specialty sales force that focuses on
card and gift stores and other independent retailers. We manufacture items
representing over 60% of 2002 sales and purchase the remainder from third-party
manufacturers, many of whom are located in Asia.
Amscan Holdings, Inc. ("Amscan" or the "Company") currently offers
approximately 390 party ensembles, which range from approximately 30 to 150
design-coordinated items spanning tableware, accessories, novelties, decorations
and gifts. The breadth of these ensembles enables retailers to encourage
additional sales for a single occasion. Furthermore, our ensembles span a wide
range of lifestyle events from age-specific birthdays to theme parties and
sporting events, as well as holidays. Approximately 80% of our sales consist of
products designed for non-seasonal occasions.
We design, manufacture and market party goods for a wide variety of
occasions including seasonal and religious holidays, special events and themed
celebrations. Our seasonal and religious ensembles enhance holiday celebrations
throughout the year including New Year's, Valentine's Day, St. Patrick's Day,
Easter, Passover, Fourth of July, Halloween, Thanksgiving, Hanukkah and
Christmas. Our special event ensembles include birthdays, christenings, first
communions, bar mitzvahs, confirmations, graduations, bridal and baby showers
and anniversaries, while our theme-oriented ensembles include Hawaiian Luaus,
Mardi Gras, Fifties Rock-and-Roll Parties, Summer Fun and Patriotic.
In addition to our long-standing relationships with independent card
and party retailers, we are a leading supplier to the party superstore
distribution channel. Despite a consolidation in the number of companies
operating in the party superstore distribution channel during the past five
years, the number of superstores continues to grow. Superstores provide
consumers with a one-stop source for all of their party needs, generally at
discounted prices. Amscan's sales to party goods superstores represented
approximately 44% of total sales in 2002 and the Company's sales to superstores
have grown by a 11% compounded annual growth rate during the past five years.
With Amscan products occupying an increasing share of superstore shelf space in
many product categories, Amscan believes it is well positioned to take advantage
of continued growth in the party goods superstore distribution channel.
To strengthen our position as a leader in the party goods industry and
to broaden our product line, we acquired Anagram International Inc. and certain
related companies ("Anagram") and M&D Balloons, Inc. ("M&D Balloons") in 1998
and 2002, respectively, both of which manufacture metallic balloons. We
leveraged Anagram's strong presence in the grocery, gift and floral distribution
channels to bring additional party goods to these markets.
Beginning in 1999, we realigned our sales force to create a specialty
sales force which, at December 31, 2002, had 135 sales professionals who focus
more closely on card and gift stores and other independent retailers. In order
to leverage our design, marketing and distribution capabilities further, we
introduced an extensive gift line encompassing home, wedding and baby products
principally to service the independent retail distribution channel's need for
additional product lines and provide these retailers with the opportunity to
"one-stop shop."
3
Summary Financial Information about the Company
Information about the Company's revenues, operating profits and assets
for the last five years is included in this report in Item 6, "Selected
Consolidated Financial Data." Despite a concentration of holidays in the fourth
quarter of the year, as a result of our expansive product lines and customer
base and increased promotional activities, the impact of seasonality on our
quarterly results of operations in recent years has been limited. Promotional
activities, including special dating terms, particularly with respect to
Halloween and Christmas products sold in the third quarter, and the introduction
of our new everyday products and designs during the fourth quarter result in
higher accounts receivables and inventory balances and higher interest costs to
support these balances.
The Company does business in the United States and in other geographic
areas of the world. Information about the Company's revenues, operating profits
and assets relating to geographic areas outside the United States for each of
the years in the three-year period ended December 31, 2002, is included in Note
15 to the Company's 2002 Consolidated Financial Statements which are included in
this report beginning on page F-2.
Our Strategy
Our objective is to be the primary source for consumers' party goods
requirements as well as a recognized supplier of quality stationery and gift
items. The key elements of our strategy are as follows:
o Build upon Position as a Leading Provider to Party Goods Retailers.
We will continue to offer convenient "one-stop shopping" for both large
superstores and smaller party goods retailers. We will seek to grow our
sales to existing stores by increasing our share of sales volume and
shelf space, continuing to develop innovative new products and by
helping retailers promote coordinated ensembles that boost average
purchase volume per consumer through "add-on" or impulse purchases.
Given our position in the party superstore distribution channel and the
strength of our relationships with major chains, we expect our sales
will also grow as new party superstores are opened.
o Increase Penetration in Independent Retail Distribution Channel. We
also believe there is a significant opportunity to expand our sales to
card and gift stores and other independent retailers. By introducing a
new gift product line and increasing our specialty sales force to its
current size of 135, our sales to this distribution channel have grown
from approximately $15 million in 1999 to $38 million in 2002. We have
made significant investments by adding management and expanding our
customer service and marketing infrastructure to support the existing
sales force as well as additional sales representatives that we expect
to hire. As our existing representatives become more seasoned and
productive, and as we add new representatives, we expect to increase
sales and profitability from this distribution channel as sales growth
is achieved with relatively fixed support costs.
o Capitalize on Investments in Infrastructure. We intend to increase our
sales and profitability by leveraging the significant investments that
we have made in our infrastructure. In addition to building our
specialty sales force and expanding our gift product offerings, we
invested approximately $30 million to construct a new 544,000 square
foot distribution facility that will enable us to consolidate further
our distribution capabilities through 2003. We expect these changes
will enable us to support substantially greater sales volume over the
long term. We also expect to realize additional savings from our
integration of our recent acquisition of M&D Balloons with our Anagram
operations.
o Expand International Presence. We believe there is an opportunity to
expand our international business, which represented approximately 14%
of our sales in each of the years in the three-
4
year period ended December 31, 2002. We currently have a presence in
Mexico, Canada, Europe and Asia. We have our own sales force in Mexico,
Canada, and the United Kingdom, and operate through third-party sales
representatives elsewhere. The market for decorative party goods
outside the U.S. is less mature due to lower consumer awareness of
party products and less developed retail distribution channels. Our
strategy is to grow our international sales by broadening our
distribution network, increasing accessorization and customization of
our products to local tastes and holidays and continuing to deepen
retail penetration. We have identified the U.K., Germany and Australia
as the most attractive opportunities for expansion at the present time,
based on their demographics, celebratory customs and practices, recent
recognition of the party superstore concept and use/acceptance of the
English language.
o Continued Growth Through Targeted Acquisitions. We believe that there
will be from time to time opportunities to make acquisitions of
complementary businesses. Through such businesses, we can leverage our
existing marketing, distribution and production capabilities, expand
our presence in the various retail distribution channels, further
broaden and deepen our product line and increase our penetration in
international markets.
Innovative Product Development and Design Capabilities
Our 114 person in-house design staff continuously develops fresh,
innovative and contemporary product designs and concepts. Our continued
investment in art and design results in a steady supply of fresh ideas and the
creation of complex, unique ensembles that appeal to consumers. In 2002, we
introduced over 4,000 new products and more than 65 new ensembles. Our
proprietary designs help us keep our products differentiated from the
competition.
Party Product Lines
The percentage of sales for each product line for 2002, 2001 and 2000
are set forth in the following table:
2002 2001 2000
----- ----- -----
Party Goods................ 65% 69% 70%
Metallic Balloons.......... 23 21 21
Stationery................. 7 7 7
Gift....................... 5 3 2
---- ---- ----
100% 100% 100%
==== ==== ====
The following table sets forth the principal products in each of the
categories, excluding metallic balloons:
Party Goods Stationery Gift
----------- ---------- ----
Decorative and Solid Color Baby and Wedding Memory Ceramic Giftware
Tableware Books Decorative Candles
Candles Decorative Tissues Decorative Frames
Cascades and Centerpieces Gift Wrap, Bows and Bags Mugs
Crepe Invitations, Notes and Plush Toys
Cutouts Stationery Wedding Accessories
Flags and Banners Photograph Albums and Cake Tops
Guest Towels Ribbons
Latex Balloons Stickers and Confetti
Party Favors
Party Hats
Pinatas
5
Our products span a wide range of lifestyle events from age-specific
birthdays to theme parties and sporting events, as well as holidays such as
Halloween and New Year's. Approximately 80% of our sales consist of items
designed for non-seasonal occasions, with the remaining 20% comprised of items
used for holidays and events throughout the year. Our product offerings cover
the following:
Seasonal Themes Everyday
---------------- ------------------ ------------
New Year's Card Night Birthdays
Valentine's Day Fiesta Graduations
St. Patrick's Day Fifties Rock and Roll Weddings
Easter Hawaiian Luau Anniversaries
Passover Mardi Gras Showers
Fourth of July Masquerade First Communions
Halloween Patriotic Confirmations
Thanksgiving Religious Retirements
Hanukkah Sports Christenings
Christmas Summer Fun Bar Mitzvahs
Western
Manufactured Products
Our vertically integrated manufacturing capability (i.e., our ability
to perform each of the steps in the process of converting raw materials into our
finished products) enables us to control costs, monitor product quality and
manage inventory investment better and provide more efficient order fulfillment.
We manufacture items representing over 60% of our 2002 sales. Our facilities in
New York, Kentucky, Rhode Island, Minnesota, Illinois and Mexico are highly
automated and produce paper and plastic plates and cups, napkins, metallic
balloons and other party and novelty items. State-of-the art printing, forming,
folding and packaging equipment support these manufacturing operations. Given
our size and sales volume, we are generally able to operate our manufacturing
equipment on the basis of at least two shifts per day thus lowering production
costs per unit. In addition, we manufacture products for third parties, which
allows us to maintain a satisfactory level of equipment utilization.
Purchased Products
We try to outsource items that require labor-intensive production
processes. We purchased products representing approximately 39% of sales in 2002
from independently-owned manufacturers, many of whom are located in Asia and
with whom we have long-standing relationships. We have relationships of over 15
years with our two largest suppliers. We believe that the quality and price of
the products manufactured by these suppliers provides a significant competitive
advantage. Our business, however, is not dependent upon any single source of
supply for these products.
Raw Materials
The principal raw materials used in manufacturing our products are
paper and petroleum-based resin. We have historically been able to change our
product prices in response to changes in raw material costs. While we currently
purchase such raw material from a relatively small number of sources, paper and
resin are available from numerous sources. Therefore, we believe our current
suppliers could be replaced without adversely affecting our manufacturing
operations in any material respect.
Sales and Marketing
Our principal sales and marketing efforts are conducted through a
domestic direct employee sales force of approximately 170 professionals
servicing over 40,000 retail accounts. Included in this sales force are our
approximately 35 seasoned sales professionals who service the party superstore
and party specialty retailer distribution channel and who, on average, have been
affiliated with us for approximately
6
9 years. In addition to the employee sales team, a select group of
manufacturers' representatives handle specific account situations. Employees of
subsidiaries outside the United States generally service international
customers.
To focus more closely on the needs of the independent retail
distribution channel, we utilize a specialty sales force which currently totals
approximately 135 sales professionals. Our specialty sales force is unique in
the party goods industry in its ability to offer both gift products and a
comprehensive line of decorative party goods and accessories. Anagram and M&D
Balloons utilize a group of approximately 40 independent distributors to bring
their metallic balloons to the grocery, gift and floral markets, as well as to
our party superstore and specialty retailer customers. To support our sales and
marketing efforts, we produce four main decorative party product catalogues
annually (three catalogues for seasonal products and one catalogue for everyday
products). We also produce additional catalogues to market our metallic balloons
and gift and stationery products.
Our practice of including party goods retailers in all facets of our
product development is a key element of our sales and marketing efforts. We
target important consumer preferences by integrating our own market research
with the input of party goods retailers in the creation of our designs and
products. In addition, our sales force assists customers in the actual set-up
and layout of displays of our products and, from time to time, provides
customers with promotional displays.
Additionally, we have successfully pursued opportunities to have our
products listed on the websites of various Internet retailers. We have also
developed a website which displays and describes our product assortment and
capabilities. This website enables our key customers to access real time
information regarding the status of existing orders, stock availability and to
place new orders. In the future, we plan to utilize this website as a vital
marketing tool, providing us with the ability to announce special product
promotions and other information in an expeditious manner and to make the
website available to all of our customers.
Distribution and Systems
We ship our products from distribution facilities that employ computer
assisted systems directly to customers throughout the United States and Canada.
Our electronic-order entry and information systems allow us to manage our
inventory with minimal waste, achieve average fill rates in excess of 90% and
provide quick order turnaround times of generally between 24 to 48 hours.
Our distribution facilities for paper party items are principally
located in New York; represent more than 1,000,000 square feet in the aggregate;
and include a new 544,000 square foot domestic facility which became fully
operational during the fourth quarter of 2002. We distribute our metallic
balloons domestically from facilities in Minnesota and New York. Products for
markets outside the United States are shipped from our distribution facilities
in Mexico, the United Kingtom and Australia.
Customers
Our customers are principally party superstores, other party goods
retailers, independent card and gift retailers and other distributors. We have
also expanded our presence in the gift shop, supermarket and other smaller
independent retail distribution channels. In the aggregate, we supply more than
40,000 retail outlets both domestically and internationally.
We have a diverse customer base with only one customer, Party City, the
nation's largest party goods retailer, accounting for more than 10% of our sales
in 2002. For the years ended December 31, 2002, 2001 and 2000, sales to Party
City's corporate-owned and operated stores represented 13%, 13% and 12% of
consolidated net sales, respectively. For the years ended December 31, 2002,
2001 and 2000, sales to Party City's franchise-owned and operated stores
represented 14%, 15% and 13% of consolidated net sales, respectively.
Franchisees are financially independent from Party City and diversify our credit
exposure.
7
Competition
We compete on the basis of diversity and quality of our product
designs, breadth of product line, product availability, price, reputation and
customer service. Although we have many competitors with respect to one or more
of our products, we believe that there are few competitors who manufacture and
distribute products with the complexity of design and breadth of product lines
that we do. Furthermore, our design and manufacturing processes create
efficiencies in manufacturing that few of our competitors achieve in the
production of numerous coordinated products in multiple design types.
Competitors include smaller independent specialty manufacturers, as
well as divisions or subsidiaries of large companies with greater financial and
other resources than ourselves. Certain of these competitors control various
product licenses for widely recognized images, such as cartoon or motion picture
characters, which could provide them with a competitive advantage. However,
through the acquisitions of Anagram and M&D Balloons, we have acquired a strong
portfolio of cartoon and other character licenses that we use in the design and
production of our metallic balloons.
Copyrights
We own copyrights on the designs we create and use on our products and
trademarks on the words and designs used on or in connection with our products.
It is our practice to register our copyrights with the United States Copyright
Office to the extent we deem reasonable. We do not believe that the loss of
copyrights or trademarks with respect to any particular product or products
would have a material adverse effect on our business. Except for those licenses
held by Anagram and M&D Balloons, we do not depend on licenses to any material
degree in our business and, therefore, do not incur any material licensing
expenses. We hold approximately 90 licenses, allowing us to use various cartoon
and other characters on our balloons. None of these licenses is individually
material to our aggregate business.
Employees
As of December 31, 2002, the Company had approximately 2,000 employees,
none of whom is represented by a labor union. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Elmsford, New York
and conducts its principal design, manufacturing and distribution operations at
the following facilities:
Owned or Leased
Location Principal Activity Square Feet (with Expiration Date)
- -------- ------------------ ----------- ----------------------
Elmsford, New York Executive Offices; design and 97,000 square feet Leased (expiration date:
art production of party December 31, 2007)
products and decorations
Harriman, New York Manufacture of paper napkins 75,000 square feet Leased (expiration date:
and cups March 31, 2006)
Providence, Rhode Island Manufacture and distribution 277,700 square feet Leased (expiration date:
of plastic plates, cups and bowls April 26, 2006)
Louisville, Kentucky Manufacture and distribution 189,000 square feet Leased (expiration date:
of paper plates March 31, 2010)
Newburgh, New York Manufacture of paper napkins 53,000 square feet Leased (expiration date:
and cups May 31, 2004)
Eden Prairie, Minnesota Manufacture and distribution 115,600 square feet Owned
of balloons and accessories
8
Owned or Leased
Location Principal Activity Square Feet (with Expiration Date)
- -------- ------------------ ----------- ----------------------
Tijuana, Mexico Manufacture and distribution 75,000 square feet Leased (expiration date:
of party products May 16, 2007)
Chester, New York (1) Distribution of decorative party 287,000 square feet Owned
products
Chester, New York (2) Distribution of decorative party 544,000 square feet Owned
products
Goshen, New York Distribution of seasonal 130,000 square feet Leased (expiration date:
decorative party products October 31, 2006)
Newburgh, New York Distribution of solid color 349,100 square feet Leased (expiration date:
party products April 30, 2003)
Milton Keynes, England Distribution of party products 110,000 square feet Leased (expiration date:
throughout United Kingdom June 30, 2017)
and Europe
Manteno, Illinois Manufacture of printed film 31,900 square feet Leased (expiration date:
and flexible packing materials August 31, 2003)
Chanhassen, Minnesota Distribution of balloons and 62,200 square feet Leased (expiration date:
accessories October 14, 2004)
(1) Property subject to a ten-year mortgage securing a loan in the original
principal amount of $5.9 million and bearing interest at a rate of
8.51%. The loan matures in September 2004. The principal amount
outstanding as of December 31, 2002 was approximately $1.0 million.
During the first quarter of 2003, we have transferred the distribution
of solid color party products to this facility from the Newburgh, New
York facility. We have not renewed the lease on the Newburgh, New York
facility expiring on April 30, 2003.
(2) Property subject to first and second lien mortgage loans in the
original principal amount of $10.0 million each with a financial
institution and the New York State Job Development Authority,
respectively. The first lien mortgage note bears interest at LIBOR plus
2.75%. However, we have utilized an interest rate swap agreement to
effectively fix the loan rate at 8.40% for the term of the loan. The
second lien mortgage note bears interest at a rate of 3.77%, subject to
change under certain conditions. Both notes are for a term of 96 months
and require monthly payments based on a 180-month amortization period
with balloon payments upon maturity in January 2010. At December 31,
2002, the principal amounts outstanding under the first and second lien
mortgage notes were approximately $9.4 million and $9.6 million,
respectively. This facility became fully operational during the fourth
quarter of 2002.
Additionally, we maintain smaller distribution facilities in Australia,
Canada and Mexico. We also maintain sales offices in Australia, Canada and Japan
and showrooms in New York, Texas, Georgia and Toronto, Canada.
We believe that our properties have been adequately maintained, are in
generally good condition and are suitable for our business as presently
conducted. We believe our existing facilities provide sufficient production
capacity for our present needs and for our anticipated needs in the foreseeable
future. To the extent such capacity is not needed for the manufacture of our
products, we generally use such capacity for the manufacture of products for
others pursuant to terminable contracts. All properties generally are used on a
basis of two shifts per day. We also believe that upon the expiration of our
current leases, we will be able either to secure renewal terms or to enter into
leases for alternative locations at market terms.
9
ITEM 3. LEGAL PROCEEDINGS
We are a party to certain claims and litigation in the ordinary course
of business. We do not believe any of these proceedings will have, individually
or in the aggregate, a material adverse effect upon our financial condition or
future results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 19, 1997, Amscan and Confetti Acquisition, Inc.
("Confetti"), a newly formed Delaware corporation affiliated with GS Capital
Partners II, L.P. and certain other private investment funds managed by Goldman,
Sachs & Co. (collectively, "GSCP"), entered into a merger pursuant to an
agreement providing for a recapitalization of Amscan in which Confetti was
merged with and into Amscan (the "Merger"), with Amscan as the surviving
corporation. Following the consummation of the Merger in December 1997, the
common stock of the Company (the "Common Stock" or "Company Common Stock"), par
value $0.10 per share, was delisted from the Nasdaq National Market System
("Nasdaq") and the Company filed with the Securities and Exchange Commission
(the "Commission") a Form 15 to deregister the Company Common Stock under the
Securities Exchange Act of 1934. As a result, there is no public trading market
for the Company Common Stock.
As of the close of business on March 28, 2003, there were 28 holders of
record of the Company Common Stock.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Convertible
Preferred Stock"). Also on March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible Preferred Stock to GSCP for proceeds of $6.0
million. Dividends are cumulative and payable annually, at 6% per annum.
Dividends payable on or prior to March 30, 2004, are payable in additional
shares of Series A Redeemable Convertible Preferred Stock. Subsequent to March
30, 2004, dividends are payable, at the option of the Company, either in cash or
additional shares of Series A Redeemable Convertible Preferred Stock. On March
30, 2002, the annual dividend was distributed in additional shares of Series A
Redeemable Convertible Preferred Stock. See Note 13 to the Company's 2002
Consolidated Financial Statements which are included in this report beginning on
page F-2.
The Company has not paid any dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay cash dividends or distributions to its stockholders.
10
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Equity compensation plans
approved by security holders 132.074 $87,620 17.926
Equity compensation plans not
approved by security holders -- -- --
------- ------- ------
Total ............ 132.074 $87,620 17.926
======= ======= ======
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Income Data," and "Balance Sheet Data" as of the end of
and for each of the years in the five-year period ended December 31, 2002, are
derived from the consolidated financial statements of Amscan Holdings, Inc. The
consolidated financial statements as of December 31, 2002 and 2001 and for each
of the years in the three-year period ended December 31, 2002 and the report
thereon, are included in this report under Item 8, "Financial Statements and
Supplementary Data." The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
11
Years Ended December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(Dollars in thousands)
Statements of Income Data (1):
Net sales ................................................. $ 385,603 $ 345,183 $ 323,484 $ 304,892 $ 234,048
Cost of sales ............................................. 252,980 225,036 206,872 194,632 151,324
--------- --------- --------- --------- ---------
Gross profit .............................................. 132,623 120,147 116,612 110,260 82,724
Selling expenses .......................................... 34,619 31,414 28,578 23,235 15,956
General and administrative expenses ....................... 32,056 33,317 31,958 30,694 20,612
Provision for doubtful accounts ........................... 3,008 3,758 7,133 2,906 3,336
Art and development costs ................................. 10,301 8,772 8,453 8,650 5,972
Write-off of deferred financing and IPO-related costs (2) . 2,261
Restructuring charges (3) ................................. 1,663 500 995 2,400
--------- --------- --------- --------- ---------
Income from operations .................................... 48,715 42,886 39,990 43,780 34,448
Interest expense, net ..................................... 21,792 24,069 26,355 26,365 22,965
Other (income) expense, net ............................... (311) 24 96 35 (121)
--------- --------- --------- --------- ---------
Income before income taxes and minority interests ......... 27,234 18,793 13,539 17,380 11,604
Income tax expense ........................................ 10,757 7,423 5,348 7,100 4,816
Minority interests ........................................ 12 68 75 73 79
--------- --------- --------- --------- ---------
Net income ................................................ 16,465 11,302 8,116 10,207 6,709
Dividend on redeemable convertible preferred stock ........ 376 270
--------- --------- --------- --------- ---------
Net income applicable to common shares .................... $ 16,089 $ 11,032 $ 8,116 $ 10,207 $ 6,709
========= ========= ========= ========= =========
Other Financial Data:
Gross margin percentage ................................... 34.4% 34.8% 36.0% 36.2% 35.3%
Capital expenditures, including assets under capital leases $ 17,765 $ 37,623 $ 18,576 $ 12,283 $ 7,714
Depreciation and amortization (4) ......................... 13,962 15,468 14,487 12,931 8,501
Ratio of earnings to fixed charges (5) .................... 2.0x 1.6x 1.4x 1.6x 1.4x
Balance Sheet Data:
Working capital ........................................... $ 119,256 $ 96,713 $ 83,760 $ 82,228 $ 71,476
Total assets .............................................. 372,497 310,474 280,627 263,487 248,852
Short-term obligations (6) ................................ $ 3,220 $ 4,155 $ 14,089 $ 8,250 $ 13,177
Long-term obligations ..................................... 295,420 278,443 261,815 266,891 270,127
--------- --------- --------- --------- ---------
Total obligations ......................................... $ 298,640 $ 282,598 $ 275,904 $ 275,141 $ 283,304
========= ========= ========= ========= =========
Redeemable convertible preferred stock (7) ................ $ 6,646 $ 6,270
Redeemable Common Stock (8) ............................... 30,523 29,949 $ 28,768 $ 23,582 $ 19,547
Stockholders' deficit ..................................... (46,283) (77,305) (86,881) (88,529) (95,287)
12
(1) During the first quarter of 2002, we adopted Emerging Issues Task Force
No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products" ("EITF No. 01-09"). EITF No.
01-09 addresses the income statement classification of certain
advertising costs. Our consolidated statements of income, including
those presented for comparative purposes, include the reclassification
of certain selling expenses as a reduction of revenue. These
reclassifications did not affect our income from operations or net
income.
(2) During the fourth quarter of 2002, we amended and restated our existing
credit facility with various lenders which resulted in a $1.5 million
write-off of deferred financing costs associated with the facility.
Additionally, during the fourth quarter of 2002, we decided not to
pursue an initial public offering ("IPO") of shares of our Common Stock,
which resulted in a $0.8 million write-off of costs associated with the
offering. On March 12, 2003, we filed a Form RW with the Commission
withdrawing our registration statement for the IPO.
(3) During 2002, the Company incurred charges of $0.6 million resulting from
the consolidation of the fabrication operations of M&D Balloons into its
existing balloon operations. In addition, the Company incurred charges
of $0.4 million and $0.7 million relating to the consolidation of
certain domestic and foreign distribution operations, respectively.
These consolidations may result in additional restructuring charges in
subsequent periods.
The Company recorded charges of $0.3 million and $2.4 million in 2000
and 1998, respectively, in connection with the restructuring of its
distribution operations. The Company closed two facilities located in
California and Canada. The restructuring charges include a non-cash
write-down of $1.3 million relating to property, plant and equipment,
the accrual of future lease obligations of $0.5 million and severance
and other costs of $0.9 million. In addition, during 2000, the Company
incurred charges of $0.2 million in connection with the consolidation of
certain manufacturing operations.
During the fourth quarter of 1999, the Company recorded restructuring
charges of $1.0 million in association with the proposed construction of
a new distribution facility. The charges represented building costs
written-off due to the relocation of the proposed site.
(4) Depreciation and amortization includes amortization of goodwill of $2.6
million, $2.6 million, $2.7 million, and $1.0 million in 2001, 2000,
1999 and 1998, respectively.
(5) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and minority
interests plus fixed charges. Fixed charges consist of interest expense
on all obligations, amortization of deferred financing costs and
one-third of the rental expense on operating leases representing that
portion of rental expense deemed by the Company to be attributable to
interest.
(6) Short-term obligations consists primarily of borrowings under bank lines
of credit and the current portion of long-term debt.
(7) On March 30, 2001, the Board of Directors authorized 500 shares of our
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the
Company issued 40 shares of Series A Redeemable Convertible Preferred
Stock to GSCP, for proceeds of $6.0 million. Dividends are cumulative
and payable annually, at 6% per annum. Dividends payable on or prior to
March 30, 2004, are payable in additional shares of Series A Redeemable
Convertible Preferred Stock. Subsequent to March 30, 2004, dividends are
payable, at the option of the Company, either in cash or additional
shares of Series A Redeemable Convertible Preferred Stock. On March 30,
2002, the annual dividend was distributed in additional shares of Series
A Redeemable Convertible Preferred Stock. As of December 31, 2002,
accrued dividends aggregated $286,200 and are included in redeemable
13
convertible preferred stock on the consolidated balance sheet. At
December 31, 2002, 42.4 shares of our preferred stock were issued and
outstanding.
Each share of the Series A Redeemable Convertible Preferred Stock is
convertible at the option of the holder at any time into shares of
Common Stock of the Company, $0.10 par value, at a conversion rate of
1.0 share of Common Stock for each share of Series A Redeemable
Convertible Preferred Stock, subject to adjustment under certain
conditions.
(8) Under the terms of the Company's amended and restated stockholders'
agreement dated February 20, 2002 (the "Stockholders' Agreement"), the
Company can purchase all of the shares held by an employee stockholder
and, under certain circumstances, an employee stockholder can require
the Company to purchase all of the shares held by the employee. The
purchase price as prescribed in the Stockholders' Agreement is to be
determined through a market valuation of the minority-held shares or,
under certain circumstances, based on cost, as defined therein. The
aggregate amount that may be payable by the Company to employee
stockholders based on fully paid and vested shares has been classified
as redeemable Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Over the past several years, the party goods industry has experienced
significant changes in both distribution channels and product offerings.
Although there has been consolidation in the party superstore distribution
channel in the past five years, the number of party superstores continues to
increase. Due, in part, to the success of the superstore distribution channel,
party goods manufacturers have broadened their product offerings to support the
celebration of a greater number of occasions. The industry's growth has been
directly affected by these changes. To achieve further sales growth and
expansion, we utilize a specialty sales force to focus more closely on card and
gift stores and other independent retailers and have created expansive gift
lines encompassing home, baby and wedding products for general gift giving or
self-purchase, principally for this distribution channel.
Our revenues are generated from sales of approximately 38,000 SKU's
consisting of party goods for all occasions, including paper and plastic
tableware, accessories and novelties, metallic balloons, stationery and gift
items. Tableware (plates, cups, cutlery, napkins and tablecovers) is our core
product category, generating approximately 41% of revenues in 2002. Coordinated
accessories (e.g., balloons, banners, gifts and stationery) and novelties (e.g.,
party favors) are offered to complement our tableware products. As a metallic
balloon manufacturer, we have a strong presence in grocery, gifts and floral
distribution channels, and have leveraged our strong presence to bring
additional party goods to these markets. In February 2002, we completed the
strategic acquisition of M&D Balloons, a metallic balloon manufacturer, which
has a strong portfolio of character licenses that complement those of our
previously existing portfolio.
Gross profit is principally influenced by product mix and the cost of
our key raw materials (paper and petroleum-based resin). We have historically
been able to adjust our prices in response to changes in the price of our key
raw materials. Products we manufacture, primarily tableware and metallic
balloons, represented over 60% of our sales in 2002. During the past three
years, we have invested over $25.9 million in printing, fabrication, packaging
and other manufacturing equipment, which has allowed us to increase productivity
rates, thereby lowering labor and overhead as a percentage of manufacturing
costs and increasing manufacturing margins. We believe our ability to
manufacture over 60% of our products enables us to lower production costs by
optimizing production while minimizing inventory investment, to ensure product
quality through rigid quality control procedures during production and to be
responsive to our customers' product design demands.
14
Results of Operations
During the first quarter of 2002, the Company adopted Emerging Issues
Task Force No. 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products" ("EITF No. 01-09"). EITF No.
01-09 addresses the income statement classification of certain selling expenses.
The Company's consolidated statements of income, including those presented for
comparative purposes, include the reclassification of such expenses as a
reduction of revenue. These reclassifications did not affect the Company's
income from operations or net income.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Percentage of Net Sales
Year Ended December 31,
-----------------------
2002 2001
------ ------
Net sales ............................................. 100.0% 100.0%
Cost of sales.......................................... 65.6 65.2
----- -----
Gross profit......................................... 34.4 34.8
Operating expenses:
Selling expenses..................................... 9.0 9.1
General and administrative expenses.................. 8.3 9.7
Provision for doubtful accounts...................... 0.8 1.1
Art and development costs............................ 2.7 2.5
Write-off of deferred financing and IPO-related costs 0.6
Restructuring charges................................ 0.4
----- -----
Total operating expenses............................... 21.8 22.4
----- -----
Income from operations............................... 12.6 12.4
Interest expense, net.................................. 5.6 7.0
Other income, net...................................... (0.1)
----- -----
Income before income taxes and minority interests.... 7.1 5.4
Income tax expense..................................... 2.8 2.1
Minority interests.....................................
----- -----
Net income........................................... 4.3% 3.3%
===== =====
Net sales of $385.6 million for the year ended December 31, 2002 were
$40.4 million or 11.7% higher than net sales for the year ended December 31,
2001. During year ended December 31, 2002, the Company's net sales of printed
ensembles, solid color tableware and other party goods to the party superstore
distribution channel grew by 5.3%. The Company's specialty sales force, which
brings party goods and related gift products to card and gift stores and other
independent retailers, achieved 42.1% net sales growth during the year ended
December 31, 2002. Domestic net sales of metallic balloons and flexible
packaging during the year ended December 31, 2002 increased by 39.7% when
compared to 2001, principally as a result of the February 2002 acquisition of
M&D Balloons (see Liquidity and Capital Resources).
Gross profit for the year ended December 31, 2002 of 34.4% was 0.4%
lower than in 2001 principally due to the impact of product mix (particularly
solid color tableware), start-up costs associated with the new distribution
facility which became fully operational during the fourth quarter of 2002 and
increased insurance costs, much of which was a result of the events of September
11, 2001.
Selling expenses of $34.6 million for the year ended December 31, 2002
were $3.2 million higher than in the corresponding period in 2001 principally
due to the inclusion of the operating results of M&D Balloons and the continued
expansion of the Company's specialty sales force. Selling expenses, as a
percentage of net sales, decreased from 9.1% to 9.0%, as we continue to leverage
our sales infrastructure.
15
General and administrative expenses of $32.1 million for the year ended
December 31, 2002 were $1.3 million lower than 2001. The net decrease in general
and administrative expenses principally reflects the elimination of goodwill
amortization in 2002, which totaled $1.6 million during the year ended December
31, 2001. The elimination of goodwill amortization was partially offset by the
inclusion of the operating results of M&D Balloons and the aforementioned
increased insurance costs as well as employee wages. As a percentage of sales,
general and administrative expenses decreased by 1.4% to 8.3%.
The provision for doubtful accounts of $3.0 million for the year ended
December 31, 2002 decreased by $0.8 million and from 1.1% to 0.8% of net sales
compared to 2001. During the second half of 2001, a superstore customer filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code and the Company charged $2.5 million to the provision for doubtful accounts
to fully provide for this customer's accounts receivable balance. The customer
accounted for 2.1% of our net sales in 2001.
Art and development costs of $10.3 million for the year ended December
31, 2002 were $1.5 million higher as compared to 2001, principally due to an
increase in staff and the inclusion of the operating results of M&D Balloons. As
a percentage of sales, art and development costs increased by 0.2% to 2.7%.
During the fourth quarter of 2002, the Company amended and restated its
existing credit facility with various lenders which resulted in a $1.5 million
write-off of deferred financing costs associated with the facility.
Additionally, during the fourth quarter of 2002, we decided not to pursue an
IPO, which resulted in a $0.8 million write-off of costs associated with the
offering. On March 12, 2003, we filed a Form RW with the Commission withdrawing
our registration statement for the IPO.
During 2002, the Company incurred charges of $0.6 million resulting
from the consolidation of the fabrication operations of M&D Balloons into its
existing balloon operations. In addition, the Company incurred charges of $0.4
million and $0.7 million relating to the consolidation of certain domestic and
foreign distribution operations, respectively. These consolidations may result
in additional restructuring charges in subsequent periods.
Interest expense, net, of $21.8 million for the year ended December 31,
2002 was $2.3 million lower than 2001 reflecting lower average interest rates
(6.7% in 2002 versus 8.4% in 2001), partially offset by higher average
borrowings.
Income taxes for the years ended December 31, 2002 and 2001 were
provided for at a consolidated effective income tax rate of 39.5%. The effective
income tax rate exceeds the federal statutory income tax rate primarily due to
state income taxes.
16
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Percentage of Net Sales
Year Ended December 31,
-----------------------
2001 2000
------ ------
Net sales .......................................... 100.0% 100.0%
Cost of sales....................................... 65.2 64.0
----- -----
Gross profit...................................... 34.8 36.0
Operating expenses:
Selling expenses.................................. 9.1 8.8
General and administrative expenses............... 9.7 9.9
Provision for doubtful accounts................... 1.1 2.2
Art and development costs......................... 2.5 2.6
Restructuring charges............................. 0.2
----- -----
Total operating expenses............................ 22.4 23.7
----- -----
Income from operations............................ 12.4 12.3
Interest expense, net............................... 7.0 8.1
Other expense, net..................................
----- -----
Income before income taxes and minority interests. 5.4 4.2
Income tax expense.................................. 2.1 1.7
Minority interests..................................
----- -----
Net income........................................ 3.3% 2.5%
===== =====
Net sales for the year ended December 31, 2001 of $345.2 million, were
$21.7 million or 6.7% higher than for the year ended December 31, 2000. During
2001, our sales of printed ensembles, solid color tableware and other party
goods to the party superstore distribution channel grew by 16.4%, despite
further consolidation during the year. In addition, our specialty sales force,
which brings party goods and related gift products to card and gift stores and
other independent retailers, experienced 40% sales growth, including a 66%
increase in gift sales to $10.3 million. These sales gains were partially offset
by an 8% decrease in sales of party goods to regional party stores, craft stores
and mass merchants, a 28% decrease in revenue from contract manufacturing and
the negative impact of foreign currency fluctuations in Europe.
Gross profit for the year ended December 31, 2001 was $120.1 million,
or 34.8% of net sales, as compared to $116.6 million, or 36.0% for the year 2000
as incremental margins achieved as a result of higher sales were more than
offset by the impact of product mix, particularly solid color tableware, higher
effective sales incentive rates and unabsorbed overhead as result of lower
contract manufacturing.
Selling expenses of $31.4 million for the year ended December 31, 2001
were $2.8 million higher than in 2000, or 9.1% of net sales versus 8.8% for the
year 2000. The increase in selling expenses reflects the continued expansion of
our specialty sales force, which has more than doubled since its creation in
1999, and increased marketing initiatives relating to gift product lines.
General and administrative expenses of $33.3 million for the year ended
December 31, 2001 represents an increase of $1.4 million as compared to the year
2000. The increase in general and administrative expenses principally reflects
higher employee wages and benefits and professional fees. As a percentage of
sales, general and administrative expenses decreased by 0.2%, to 9.7%.
The provision for doubtful accounts for the year ended December 31,
2001 decreased by $3.4 million to $3.8 million and from 2.2% to 1.1% of net
sales. During 2001, a superstore customer filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. We charged $2.5 million
to the provision for doubtful accounts during the second half of 2001 to fully
provide for the accounts receivable balance due from this customer. This
customer accounted for 2.1% of our net sales in 2001. During the year ended
December 31, 2000, two of our customers filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code. As a result of those
filings, we charged $3.4 million and $1.0 million to the provision for doubtful
accounts during the second and fourth quarters of
17
2000, respectively, to fully provide for the accounts receivable balances due
from these customers. We also charged $1.6 million to the provision for doubtful
accounts during the fourth quarter of 2000, which represented the remaining
accounts receivable balance from a customer that filed for bankruptcy during
1999.
Art and development costs of $8.8 million for the year ended December
31, 2001 were $0.3 million higher than in 2000 but remained relatively
consistent at 2.5% of sales versus 2.6% for 2000.
During the fourth quarter of the year ended December 31, 2000, we
recorded charges of $0.3 million relating to the restructuring of our
distribution operations begun in 1998 and $0.2 million in connection with the
consolidation of certain manufacturing operations.
Interest expense, net, of $24.1 million for the year ended December 31,
2001 was $2.3 million lower than in 2000, and reflects a lower average interest
rate (8.4% in 2001 versus 9.26% in 2000) and the capitalization of approximately
$1.0 million of interest expense in 2001, partially offset by the impact of
higher average borrowings.
Income taxes for the years ended December 31, 2001 and 2000 were
provided for at a consolidated effective income tax rate of 39.5%. The effective
income tax rate exceeds the federal statutory income tax rate primarily due to
state income taxes.
Liquidity and Capital Resources
On December 20, 2002, we amended and restated our existing credit
facility with various lenders (the "Lenders"), with Goldman Sachs Credit
Partners L.P. as sole lead arranger, sole bookrunner and syndication agent,
General Electric Capital Corporation as administrative and collateral agent and
Fleet National Bank as documentation agent. Under the terms of the Second
Amended and Restated Credit and Guaranty Agreement (the "Credit Agreement") the
Lenders agreed to amend and restate the Company's existing bank credit
agreements in their entirety and to provide a $200,000,000 senior secured
facility consisting of a $170,000,000 term loan (the "Term Loan") and up to
$30,000,000 aggregate principal amount of revolving loans (the "Revolver"). The
proceeds of the Term Loan were used to redesignate and replace the Company's
AXEL term loan of $148.5 million and revolver borrowings of $16.0 million
existing at the closing date and to pay certain fees and expenses associated
with the refinancing.
The $170,000,000 Term Loan was funded at a 1.0% original issue discount
and provides for amortization (in quarterly installments) of 1.0% per annum
through June 15, 2006, and will then amortize in equal quarterly payments
through June 15, 2007. The Term Loan bears interest, at the option of the
Company, at the index rate plus 3.50% per annum or at LIBOR plus 4.50% per
annum, with a LIBOR floor of 2.0%. At December 31, 2002, the floating interest
rate on the Term Loan was 7.75%. The Company is required to make prepayments
under the Credit Agreement based upon the net proceeds from certain asset sales
and insurance or condemnation awards, the issuances of certain debt and equity
securities, and based on annual cash flows, as defined.
The Revolver expires on June 15, 2007, and bears interest, at the
option of the Company, at the index rate plus, based on performance, a margin
ranging from 2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a
margin ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At
December 31, 2002, the Company had no borrowings under the Revolver. Standby
letters of credit totaling $6.5 million were outstanding and the Company had
borrowing capacity of approximately $23.5 million under the terms of the
Revolver at December 31, 2002.
The Term Loan and borrowings under the Revolver are secured by a first
priority lien on substantially all of the Company's assets and are guaranteed by
the Company's domestic subsidiaries. The Company is required to maintain certain
financial ratios during the term of the Credit Agreement, including leverage and
interest coverage ratios.
18
At December 31, 2002, the Company had $110,000,000 of senior
subordinated notes (the "Notes") outstanding. The Notes bear interest at a rate
of 9.875% per annum and mature in December 2007. Interest is payable
semi-annually on June 15 and December 15 of each year. The Notes are redeemable
at the option of the Company, in whole or in part, at redemption prices ranging
from 104.937% to 100%, plus accrued and unpaid interest to the date of
redemption. Upon the occurrence of a Change of Control, as defined in the note
indenture, the Company will be obligated to make an offer to purchase the Notes,
in whole or in part, at a price equal to 101% of the aggregate principal amount
of the Notes, plus accrued and unpaid interest, if any, to the date of purchase.
If a Change of Control were to occur, the Company may not have the financial
resources to repay all of its obligations under the Credit Agreement, the note
indenture and the other indebtedness that would become payable upon the
occurrence of such Change of Control.
The Credit Agreement and the Notes may affect the Company's ability to
make future capital expenditures and potential acquisitions. However, management
believes that current asset levels provide adequate capacity to support its
operations for at least the next 12 months. At December 31, 2002, the Company
did not have material commitments for capital expenditures or other
acquisitions.
In addition to the Revolver, the Company has a 400,000 Canadian dollar
denominated revolving credit facility which bears interest at the Canadian prime
rate and expires on June 15, 2003, a 1.0 million British Pound Sterling
denominated revolving credit facility which bears interest at the U.K. base rate
plus 1.75% and expires on June 1, 2003 and a $1.0 million revolving credit
facility which bears interest at LIBOR plus 1.0% and expires on December 31,
2003. No borrowings were outstanding under these revolving credit facilities at
December 31, 2002.
The Company financed the cost to purchase property in 2000 and to
construct a new domestic distribution facility completed in 2001 (total cost of
$30.2 million), using borrowings under the then existing revolving credit
facility and, in 2001, the proceeds from the issuance of the Series A Redeemable
Convertible Preferred Stock of $6.0 million (noted below) and long-term
borrowings consisting of a first and second lien mortgage note in the original
principal amount of $10.0 million each with a financial institution and the New
York State Job Development Authority, respectively. The first lien mortgage note
bears interest at LIBOR plus 2.75%. However, the Company has utilized an
interest rate swap agreement to effectively fix the loan rate at 8.40% for the
term of the loan. The second lien mortgage note bears interest at the rate of
3.77%, and is subject to review and adjustment semi-annually based on the New
York State Job Development Authority's confidential internal protocols. Both
notes are for a term of 96 months and require monthly payments based on a
180-month amortization period with balloon payments upon maturity in January
2010.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock. Also on March 30, 2001, the Company
issued 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP for
proceeds of $6.0 million. Dividends are cumulative and payable annually at 6%
per annum. Dividends payable on or prior to March 30, 2004, are payable in
additional shares of Series A Redeemable Convertible Preferred Stock based on a
value of $150,000 per share. Subsequent to March 30, 2004, dividends are
payable, at the option of the Company, either in cash or additional shares of
Series A Redeemable Convertible Preferred Stock. On March 30, 2002, the annual
dividend was distributed in additional shares of Series A Redeemable Convertible
Preferred Stock. At December 31, 2002, 42.40 shares of Series A Redeemable
Convertible Preferred Stock were issued and outstanding and accrued dividends
aggregated $286,200.
On February 19, 2002, the Company purchased all of the outstanding
Common Stock of M&D Balloons, a Manteno, Illinois-based manufacturer of metallic
and plastic balloons, from American Greetings Corporation ("American Greetings")
for $27.5 million plus related costs. The Company financed the acquisition by
borrowing $13.5 million under its then existing revolving credit facility and
issuing 96.774 shares of its Common Stock to American Greetings, at a value of
$155,000 per share.
19
American Greetings continues to distribute metallic balloons under a supply
agreement with the Company.
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms and warehouse
equipment. These leases expire on various dates through 2017 and generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance costs. Rent expense for the year ended December
31, 2002, totaled $12.7 million. The minimum lease payments currently required
under non-cancelable operating leases for the year ending December 31, 2003,
approximate $12.1 million.
On June 13, 2002, the Company filed a registration statement with the
Commssion for an IPO of its Common Stock. However, during the fourth quarter of
2002, the Company decided not to pursue the IPO, which resulted in a $0.8
million write-off of costs associated with the offering. On March 12, 2003, the
Company filed a Form RW with the Commission withdrawing its registration
statement for the IPO.
Based upon the current level of operations and anticipated growth, we
anticipate that our operating cash flow, together with available borrowings
under the Revolver will be adequate to meet our anticipated future requirements
for working capital and operating expenses for at least the next 12 months.
However, the Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness and to satisfy its other
obligations will depend upon its future performance, which, to a certain extent,
will be subject to general economic, financial, competitive, business and other
factors beyond its control.
Cash Flow Data - Year Ended December 31, 2002 Compared to Year Ended December
31, 2001
Net cash provided by operating activities during the years ended
December 31, 2002 and 2001, totaled $20.3 million and $26.3 million,
respectively. Net cash flow provided by operating activities before changes in
operating assets and liabilities for the years ended December 31, 2002 and 2001,
was $40.9 million and $33.3 million, respectively. Changes in operating assets
and liabilities, net of acquisition for the years ended December 31, 2002 and
2001 resulted in the use of cash of $20.6 million and $7.0 million,
respectively. The changes in operating assets and liabilities principally
reflect increased working capital requirements consistent with the Company's
sales growth and, in 2002, increased inventory levels associated with the
Company's transition to its new domestic distribution facility during the fourth
quarter.
Net cash used in investing activities during the year ended December
31, 2002 of $30.7 million included $13.5 million relating to the acquisition of
M&D Balloons, $17.7 million of capital expenditures, including $3.1 million for
equipment for the new domestic distribution facility, and $0.5 million of
proceeds from disposal of property and equipment. Net cash used in investing
activities during the year ended December 31, 2001 consisted of $37.4 million of
capital expenditures, including $21.8 million of costs to complete the
construction of the Company's new distribution facility and $6.3 million to
acquire related distribution equipment.
During the year ended December 31, 2002 net cash provided by financing
activities of $11.4 million consisted of net proceeds from the Term Loan of
$164.0 million, which were used to redesignate and replace the Company's AXEL
term loan and revolver borrowings at the closing date and to pay certain fees
and expenses associated with the refinancing, scheduled payments of other
long-term obligations totaling $3.1 million and loans to officers under notes
totaling $0.2 million. During the year ended December 31, 2001, net cash
provided by financing activities of $11.0 million included the proceeds of $6.0
million from the issuance of 40 shares of Series A Redeemable Convertible
Preferred Stock to GSCP and the net proceeds from the two $10.0 million mortgage
loans noted above. During 2001, the Company also repaid borrowings under its
then existing revolving credit facility and AXEL term loan and other obligations
totaling $13.5 million and made loans to officers under notes of $1.0 million.
20
Cash Flow Data - Year Ended December 31, 2001 Compared to Year Ended December
31, 2000
Net cash provided by operating activities for the year ended December
31, 2001, totaled $26.3 million, or $6.4 million higher than for the year ended
December 31, 2000. Net cash flow provided by operating activities before changes
in operating assets and liabilities for the years ended December 31, 2001 and
2000, was $33.3 million and $32.4 million, respectively. Changes in operating
assets and liabilities for the years ended December 31, 2001 and 2000, resulted
in the use of cash of $7.0 million and $12.5 million, respectively. The changes
in operating assets and liabilities principally reflect an increase in accounts
receivable and inventory, net of a corresponding increase in accounts payable,
consistent with the growth in operations.
Net cash used in investing activities during the year ended December
31, 2001 consisted of $37.4 million of capital expenditures, including the costs
to complete the construction of the Company's new distribution facility and to
acquire related distribution equipment. During the year ended December 31, 2000,
net cash used in investing activities of $18.5 million included payments of $7.9
million associated with the purchase of property for and the construction of a
new distribution facility and additional investments principally in
manufacturing equipment.
During the year ended December 31, 2001, net cash provided by financing
activities of $11.0 million included the proceeds of $6.0 million from the
issuance of 40 shares of Series A Redeemable Convertible Preferred Stock to GSCP
and the net proceeds from the two $10.0 million mortgage loans noted above.
During 2001, the Company also repaid short-term borrowings under its then
existing revolving credit facility and long-term borrowings under its AXEL term
loan and other obligations totaling $13.5 million and made loans to officers
under notes of $1.0 million. During the year ended December 31, 2000, net cash
provided by financing activities of $0.2 million primarily consisted of proceeds
from net short-term borrowings under the then existing revolving credit facility
for working capital needs and the new distribution facility, partially offset by
the scheduled repayment and a $1.3 million prepayment of the AXEL term loan,
repayment of other long-term obligations, and loans made to officers under notes
totaling $0.6 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that the following significant
accounting policies may involve a higher degree of judgment and complexity.
Revenue Recognition
The Company's terms of sale are F.O.B. shipping point and, accordingly,
title and the risks and rewards of ownership are transferred to the customer,
and revenue is recognized, when goods are shipped. The Company estimates
reductions to revenues for volume-based rebate programs at the time sales are
recognized. Should customers earn higher incentives than estimated by us,
additional reductions to revenues may be required.
Royalty Agreements
Commitments for minimum payments under royalty agreements, a portion of
which may be paid in advance, are charged to expense ratably, based on our
estimate of total sales of related products. If all or a portion of the minimum
guarantee subsequently appears not to be recoverable, the unrecoverable portion
is charged to expense at that time.
21
Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables including the current credit-worthiness of
customers. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Inventory
Our policy requires that we state our inventories at the lower of cost
or market. In assessing the ultimate realization of inventories, we are required
to make judgments regarding, among other things, future demand and market
conditions, current inventory levels and the impact of the possible
discontinuation of product designs. If actual conditions are less favorable than
those projected by us, additional inventory write-downs to market value may be
required.
Long-Lived and Intangible Assets
We have significant property, plant and equipment, goodwill and other
acquired intangibles. The determination of related estimated useful lives and
whether or not these assets are impaired requires us to make significant
judgments. Changes in strategy and/or market conditions could significantly
impact these judgments and require adjustments to recorded asset balances.
Legal Proceedings
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect upon its
financial condition or future results of operations.
Recently Issued Accounting Standards
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 141 revises the accounting treatment for business
combinations to require the use of purchase accounting and prohibit the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142 revises the accounting for goodwill
to eliminate the amortization of goodwill on transactions consummated after June
30, 2001 and of all other goodwill as of January 1, 2002. As a result, we
stopped recording goodwill amortization as of January 1, 2001. Intangible assets
with definite lives will continue to be amortized over their useful lives. SFAS
No. 142 also requires goodwill and other intangible assets with indefinite lives
to be reviewed for impairment each year and more frequently if circumstances
indicate a possible impairment. During 2002, we completed our review and
determined that goodwill was not impaired.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS
No. 144"). SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets and expands the scope of a discontinued operation to include a
component of an entity. The adoption of SFAS No. 144 on January 1, 2002 did not
impact our financial position or results
22
of operations.
In May 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS No. 145"), was issued. SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4. Extraordinary treatment will no longer be permitted for
certain extinguishments considered to be part of a company's risk management
strategy. SFAS No. 145 also amends SFAS No. 13 to require certain modifications
to capital leases be treated as a sale-leaseback and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or guarantor).
SFAS No. 145 is effective for financial statements issued after May 15, 2002,
and with respect to the impact of the reporting requirements of changes made to
SFAS No. 4 for fiscal years beginning after May 15, 2002. The Company adopted
SFAS No. 145 in 2002 and classified the write-off of certain deferred financing
costs of $1.5 million as an operating expense, thereby reducing income from
operations.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No.
146") was issued. SFAS No. 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3 ("EITF No. 94-3"), "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date an entity committed to an exit plan. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB No. 5, 57, and 107 and
Rescission of FASB Interpretation No. 34," ("FIN No. 45") was issued. FIN No. 45
clarifies requirements relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires
that upon issuance of a guarantee, companies recognize a liability for the fair
value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN No. 45 were effective commencing in the fourth quarter of
2002. The recognition requirements of FIN No. 45 are to be applied prospectively
to guarantees issued or modified after December 31, 2002. The Company does not
expect the adoption of this interpretation to have a material effect on the
consolidated financial statements.
In November 2001, the EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Product." EITF No.
01-09 was effective for Amscan as of January 1, 2002. EITF No. 01-09 clarifies
the income statement classification of costs incurred by a vendor in connection
with the reseller's purchase or promotion of the vendor's products, resulting in
certain advertising and product placement costs previously classified as selling
expenses to be reflected as a reduction of revenues earned from that activity.
The new guidance requires retroactive restatement of all periods presented to
reflect the new accounting provision. These reclassifications did not affect our
income from operations or net income.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995
This report includes "forward-looking statements" within the meaning of
various provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included in this report
that address activities, events or developments that the Company expects or
anticipates will or may occur in the future, future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, including any changes to operations, goals, expansion and
growth of the Company's business and operations, plans, references to future
success and other such matters are forward-looking statements. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical
23
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. Actual results may
differ materially from those discussed. Whether actual results and developments
will conform with the Company's expectations and predictions is subject to a
number of risks and uncertainties, including, but not limited to (1) the
concentration of sales by the Company to party goods superstores where the
reduction of purchases by a small number of customers could materially reduce
the Company's sales and profitability, (2) the concentration of the Company's
credit risk in party goods superstores, several of which are privately held and
have expanded rapidly in recent years, (3) the failure by the Company to
anticipate changes in tastes and preferences of party goods retailers and
consumers, (4) the introduction by the Company of new product lines, (5) the
introduction of new products by the Company's competitors, (6) the inability of
the Company to increase prices to recover fully future increases in raw material
prices, especially increases in prices of paper and petroleum-based resin, (7)
the loss of key employees, (8) changes in general business conditions, (9) other
factors which might be described from time to time in the Company's filings with
the Commission, and (10) other factors which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this report
are qualified by these cautionary statements, and the actual results or
developments anticipated by the Company may not be realized or, even if
substantially realized, may not have the expected consequences to or effects on
the Company or its business or operations. Although the Company believes that it
has the product offerings and resources needed for continued growth in revenues
and margins, future revenue and margin trends cannot be reliably predicted.
Changes in such trends may cause the Company to adjust its operations in the
future. Because of the foregoing and other factors, recent trends should not be
considered reliable indicators of future financial results. In addition, the
highly leveraged nature of the Company may impair its ability to finance its
future operations and capital needs and its flexibility to respond to changing
business and economic conditions and business opportunities.
Quarterly Results (Unaudited)
Despite a concentration of holidays in the fourth quarter of the year,
as a result of our expansive product lines and customer base and increased
promotional activities, the impact of seasonality on our quarterly results of
operations in recent years has been limited. Promotional activities, including
special dating terms, particularly with respect to Halloween and Christmas
products sold in the third quarter, and the introduction of our new everyday
products and designs during the fourth quarter result in higher accounts
receivables and inventory balances and higher interest costs to support these
balances. The following table sets forth our historical net sales, gross profit,
income from operations and net income, by quarter, for 2002 and 2001.
For the Three Months Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
(dollars in thousands)
2002
Net sales ............ $ 95,908 $ 94,129 $100,226 $ 95,340
Gross profit ......... 34,232 32,150 34,465 31,776
Income from operations 15,626 11,847(a) 14,137(a) 7,105(a)(b)
Net income ........... 6,231 3,940(a) 5,436(a) 858(a)(b)
2001
Net sales ............ $ 86,905 $ 82,839 $ 87,699 $ 87,740
Gross profit ......... 31,588 28,313 30,283 29,963
Income from operations 13,083 9,773 9,977(c) 10,053(c)
Net income ........... 3,875 2,209 2,391(c) 2,827(c)
(a) The Company incurred restructuring charges of $0.2 million, $0.6 million,
and $0.9 million during the second, third and fourth quarters of 2002,
respectively, resulting from the consolidation of the fabrication
operations of M&D Balloons into its existing balloon operations and the
consolidation of certain domestic and foreign distribution operations.
These consolidations may result in additional
24
restructuring charges in subsequent periods.
(b) During the fourth quarter of 2002, the Company amended and restated its
existing credit facility with various lenders which resulted in a write-off
of $1.5 million of deferred financing costs associated with the existing
facility at that time. Additionally, during the fourth quarter of 2002, the
Company decided not to pursue an IPO of shares of its Common Stock, which
resulted in a $0.8 million write-off of costs associated with the offering.
On March 12, 2003, the Company filed a Form RW with the Commission
withdrawing its registration statement for the IPO.
(c) During the third quarter of 2001, one of the Company's superstore customers
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code and, as a result, the Company charged $1.5 million and $1.0
million to the provision for doubtful accounts during the third and fourth
quarters of 2001, respectively, to fully provide for the accounts
receivable balances due to the Company. This customer accounted for
approximately 2.1% of the Company's consolidated net sales for the year
ended December 31, 2001.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our earnings are affected by changes in interest rates as a result of
our variable rate indebtedness. However, we utilize interest rate swap
agreements to manage the market risk associated with fluctuations in interest
rates. If market interest rates for our variable rate indebtedness averaged 2%
more than the interest rate actually paid for the years ended December 31, 2002,
2001 and 2000, our interest expense, after considering the effects of our
interest rate swap agreements, would have increased, and income before income
taxes would have decreased, by $3.4 million, $2.2 million and $0.9 million,
respectively. These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowings and interest rate swap agreements.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to further
mitigate our exposure to the change. However, due to the uncertainty of the
specific actions that we would take and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
Our earnings are also affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, predominately in European countries,
as a result of the sales of our products in foreign markets. Although we
periodically enter into foreign currency forward contracts to hedge against the
earnings effects of such fluctuations, we may not be able to hedge such risks
completely or permanently. A uniform 10% strengthening in the value of the
dollar relative to the currencies in which our foreign sales are denominated
would have resulted in a decrease in gross profit of $1.5 million, $1.4 million
and $1.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively. These calculations assume that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, which could change the U.S. dollar value
of the resulting sales, changes in exchange rates may also affect the volume of
sales or the foreign currency sales price as competitors' products become more
or less attractive. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels or local currency prices.
Item 8. Financial Statements and Supplementary Data
See the consolidated financial statements and supplementary data listed
in the accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule on page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
25
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
Set forth below are the names, ages and positions with the Company of
the persons who are serving as directors and executive officers of the Company
at December 31, 2002.
Name Age Position
---- --- --------
Terence M. O'Toole 44 Director, Chairman of the Board
Sanjeev K. Mehra 44 Director
Joseph P. DiSabato 36 Director
Gerald C. Rittenberg 50 Chief Executive Officer and Director
James M. Harrison 51 President, Chief Operating Officer,
and Director
Garry Kieves 54 Senior Vice President
James F. Flanagan 51 Executive Vice President
Michael A. Correale 45 Chief Financial Officer
Terence M. O'Toole has been a Managing Director of Goldman, Sachs & Co.
("Goldman Sachs") in the Principal Investment Area since 1992. He joined Goldman
Sachs in 1983. He is a member of Goldman Sachs' Principal Investment Area
Investment Committee. Mr. O'Toole serves on the Boards of Directors of Western
Wireless Corporation, R. H. Donnelley Corporation and several privately held
companies on behalf of Goldman Sachs.
Sanjeev K. Mehra has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 1996. He joined Goldman Sachs in 1986. He is a
member of Goldman Sachs' Principal Investment Area Investment Committee. Mr.
Mehra serves on the Boards of Directors of Hexcel Corporation, Madison River
Telephone Company, LLC and several privately held companies on behalf of Goldman
Sachs.
Joseph P. DiSabato has been a Managing Director of Goldman Sachs in the
Principal Investment Area since 2000. He joined Goldman Sachs in 1988, leaving
in 1991, and returning in 1994. Mr. DiSabato serves on the Boards of Directors
of Madison River Telephone Company, LLC and several privately held companies on
behalf of Goldman Sachs.
Gerald C. Rittenberg became Chief Executive Officer in December 1997.
From May 1997 until December 1997, Mr. Rittenberg served as Acting Chairman of
the Board. Prior to that time, Mr. Rittenberg served as the President of the
predecessor to the Company, Amscan Inc., from April 1996 to October 1996, and as
President of the Company from the time of its formation in October 1996.
James M. Harrison became President in December 1997 and Chief Operating
Officer in March 2002. From February 1997 to March 2002, Mr. Harrison also
served as Chief Financial Officer and Treasurer. From February 1997 to December
1997, Mr. Harrison served as our Chief Financial Officer and Secretary. Prior to
that time, Mr. Harrison served as the Chief Financial Officer of the predecessor
to the Company, Amscan Inc., from August 1996 to February 1997.
Garry Kieves became a Senior Vice President of the Company in September
1998 when the Company acquired Anagram. Mr. Kieves has served as President of
Anagram for more than five years.
James F. Flanagan became a Senior Vice President of the Company in July
2001 and became an Executive Vice President in January 2002. From 1975 to July
2001, Mr. Flanagan was employed at Hallmark Cards, Inc. where he most recently
served as Vice President -- Sales.
26
Michael A. Correale became Chief Financial Officer in March 2002. Prior
to that time, Mr. Correale served as Vice President - Finance, from May 1997 to
March 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Because the Company Common Stock is not registered under the Exchange
Act, none of the Company's directors, officers or stockholders is obligated to
file reports of beneficial ownership of Company Common Stock pursuant to Section
16 of the Exchange Act.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the compensation
earned for the past three years for the Company's Chief Executive Officer and
all other executive officers of the Company as of December 31, 2002 whose
aggregate salary and bonus for 2002 exceeded $100,000. The amounts shown include
compensation for services in all capacities that were provided to the Company or
its subsidiaries. Amounts shown were paid by the Company's principal subsidiary,
Amscan Inc., except for payments to or on behalf of Garry Kieves, which were
paid by Anagram. Prior to the Merger in 1997, the Company granted stock options
on shares of Company Common Stock ("Company Stock Options") pursuant to the 1996
Stock Option Plan for Key Employees (the "Prior Stock Plan"). Following the
Merger, Company stock options ("New Options") were granted pursuant to a new
stock incentive plan and related option agreement (together, the "Option
Documents") adopted by the Company. At the time of the Merger, certain employees
converted Company Stock Options into options to purchase shares of Common Stock
("Rollover Options").
Long Term
Compensation
------------
No. of Securities Under- All Other
Name and Principal Position Year Salary Bonus (a) lying Options Granted Compensation (b)
- --------------------------- ---- ------ --------- --------------------- ----------------
Gerald C. Rittenberg 2002 $325,238 $722,000 $ 9,115
Chief Executive Officer 2001 309,750 500,000 7,249
2000 295,000 500,000 8,505
James M. Harrison 2002 $303,188 $649,000 $ 9,115
President and Chief 2001 288,750 450,000 7,382
Operating Officer 2000 275,000 450,000 9,027
Garry Kieves 2002 $240,000 $ 14,607
Senior Vice President 2001 240,000 14,806
2000 240,000 16,388
James F. Flanagan 2002 $250,000 $150,000 2.5(d) $ 3,615
Executive Vice President (c) 2001 74,000 125,000 2.5(d)
Michael A. Correale 2002 $183,100 $ 75,000 $ 9,115
Chief Financial Officer 2001 168,300 40,000 7,381
2000 155,600 30,000 8,072
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
27
(b) Represents contributions by the Company under a profit sharing and savings
plan, as well as insurance premiums paid by the Company with respect to term
life insurance for the benefit of the named executive officer.
(c) Mr. Flanagan became an employee of the Company on July 16, 2001.
(d) Represents New Options granted to Mr. Flanagan in 2002 and 2001,
respectively.
Option Grants Table
The following table sets forth information concerning New Options which
were granted during 2002 to the executive officers named in the Summary
Compensation Table. Information with respect to options relates to options on
the Company Common Stock at December 31, 2002.
% of Potential Realizable Value at
Number of Total Options Assumed Annual Rates of
Securities Granted to Market Stock Price Appreciation for
Underlying Employees in Price at Option Term
Options Fiscal Exercise Date of Expiration -----------
Name Granted (1) Year Price Grant (2) Date 5% 10%
---- ----------- ---- ----- --------- ---- -- ---
James F.
Flanagan 2.5 100% $155,000 $155,000 January 2, $243,697 $617,575
2012
(1) All New Options listed in this column become exercisable ratably over five
years beginning one year from the date of grant and expire ten years after
the date of grant.
(2) Assumes a fair market value of the Company Common Stock underlying the New
Options of $155,000 based on the value of Company Common Stock at January
2, 2002.
Fiscal 2002 Year End Option Values
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
------------------------------ ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Gerald C. Rittenberg..... 16.648 0.000 $1,331,840 $ --
James M. Harrison ....... 16.268 0.000 1,350,409 --
Garry Kieves ............ 5.318 1.330 159,540 39,900
James F. Flanagan ....... 0.500 4.500 2,500 10,000
Michael A. Correale ..... 2.570 0.000 211,553 --
The value of unexercised in the money options is based on the value of
Company Common Stock of $155,000 per share at December 31, 2002. No New Options
or Rollover Options were exercised in the most recent fiscal year.
For a further description of the New Options and Rollover Options
granted to the executives named in the Summary Compensation Table, see
"Employment Arrangements" below.
28
Employment Arrangements
Employment Agreement with Gerald C. Rittenberg. Gerald C. Rittenberg
has an employment agreement with us, dated August 10, 1997, as amended, (the
"Rittenberg Employment Agreement"), pursuant to which Mr. Rittenberg serves as
Chief Executive Officer for a term expiring December 31, 2004. During 2002, Mr.
Rittenberg received an annual base salary of $325,238, which will increase by 5%
annually for the term of the Rittenberg Employment Agreement. Mr. Rittenberg
will be eligible for an annual bonus for each calendar year comprised of (i) a
non-discretionary bonus equal to 50% of his annual base salary if certain
operational and financial targets determined by the board of directors in
consultation with Mr. Rittenberg are attained and (ii) a discretionary bonus
awarded in the sole discretion of the board of directors. The Rittenberg
Employment Agreement also provides for other customary benefits including
incentive, savings and retirement plans, paid vacation, health care and life
insurance plans and expense reimbursement.
Under the Rittenberg Employment Agreement, if we terminate Mr.
Rittenberg's employment other than for cause, death or disability, we would be
obligated to pay Mr. Rittenberg a lump sum cash payment in an amount equal to
the sum of (1) accrued unpaid salary, earned but unpaid bonus for any prior
year, any deferred compensation and accrued but unpaid vacation pay
(collectively, "Accrued Obligations") plus (2) severance pay equal to his annual
base salary, provided, however, that in connection with a termination by the
Company other than for cause following a Sale Event (as defined below), such
severance pay will be equal to Mr. Rittenberg's annual base salary multiplied by
the number of years we elect as the Restriction Period (as defined below) in
connection with the agreement's non-competition provisions. Upon termination of
Mr. Rittenberg's employment by the Company for cause, death or disability or if
he terminates his employment, Mr. Rittenberg will be entitled to his unpaid
Accrued Obligations. Additionally, upon termination of Mr. Rittenberg's
employment during the current term or any additional term (1) by the Company
other than for cause or (2) by reason of his death or disability, or if the
current term or any additional term is not renewed at its expiration (other than
for cause), the Rittenberg Employment Agreement provides for payment of a
prorated portion of the bonus to which Mr. Rittenberg would otherwise have been
entitled.
The Rittenberg Employment Agreement also provides that during his
current term, any additional term and during the three-year period following any
termination of his employment (the "Restriction Period"), Mr. Rittenberg will
not participate in or permit his name to be used or become associated with any
person or entity that is or intends to be engaged in any business which is in
competition with our business, or any of our subsidiaries or controlled
affiliates, in any country in which we or any of our subsidiaries or controlled
affiliates operate, compete or are engaged in such business or at such time
intend to so operate, compete or become engaged in such business (a
"Competitor"), provided, however, that if we terminate Mr. Rittenberg's
employment other than for cause following a Sale Event, the Restriction Period
will be instead a one, two or three-year period at our election. For purposes of
the Rittenberg Employment Agreement, "Sale Event" means either (1) the
acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) that is a Competitor, other than GSCP,
of a majority of our outstanding voting stock or (2) the sale or other
disposition (other than by way of merger or consolidation) of all or
substantially all of our assets and those of our subsidiaries taken as a whole
to any person or group of persons that is a Competitor, provided, however, that
an underwritten initial public offering of shares of the Common Stock pursuant
to a registration statement under the Securities Act will not constitute a Sale
Event. The Rittenberg Employment Agreement also provides for certain other
restrictions during the Restriction Period in connection with (a) the
solicitation of persons or entities with whom we have business relationships and
(b) inducing any of our employees to terminate their employment or offering
employment to such persons, in each case subject to certain conditions.
Pursuant to the Rittenberg Employment Agreement, Mr. Rittenberg
contributed to Confetti immediately prior to the Merger in 1997, 272,728 shares
of the Common Stock in exchange for 60.0 shares of common stock of Confetti
("Confetti Common Stock"), having an aggregate value equal to approximately $4.5
million, which shares of Confetti Common Stock were valued at the purchase price
29
for which GSCP purchased Confetti Common Stock immediately prior to the Merger.
At the time of the Merger, such shares of Confetti Common Stock were converted
into 60.0 shares of our Common Stock as the surviving company in the Merger (as
converted, the "Rollover Stock").
Also pursuant to the Rittenberg Employment Agreement in 1997, Mr.
Rittenberg was granted New Options to purchase 16.648 shares of the Common Stock
at $75,000 per share. Such New Options vested in equal annual installments over
a five-year period and are subject to forfeiture upon termination of Mr.
Rittenberg's employment if not vested and exercised within certain time periods
specified in the Option Documents. Unless sooner exercised or forfeited as
provided in the Option Documents, the New Options will expire on the tenth
anniversary in 2007.
Mr. Rittenberg is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, shares of Rollover Stock or shares of the
Common Stock acquired upon exercise of the New Options, except as provided in
the Option Documents.
Employment Agreement with James M. Harrison. James M. Harrison has an
employment agreement with us, dated August 10, 1997, as amended, (the "Harrison
Employment Agreement"), pursuant to which Mr. Harrison serves as our President
for a term expiring December 31, 2004. During 2002, Mr. Harrison received an
annual base salary of $303,188, which will increase by 5% annually during the
term of the Harrison Employment Agreement. The Harrison Employment Agreement
contains provisions for additional terms, salary increases during additional
terms, non-discretionary and discretionary bonus payments, severance, other
benefits, definitions of cause and disability, and provisions for
non-competition and non-solicitation similar to those in the Rittenberg
Employment Agreement, with the exception of the provision which allows us to
elect a one, two or three-year Restriction Period following a Sale Event. Under
the Harrison Employment Agreement, the Restriction Period is fixed at three
years and severance pay is fixed at one year's annual base salary.
Pursuant to the Harrison Employment Agreement, Mr. Harrison was granted
New Options to purchase 13.874 shares of the Common Stock at $75,000 per share.
Such New Options were granted on terms similar to those granted pursuant to the
Rittenberg Employment Agreement.
Additionally, under the Harrison Employment Agreement, Mr. Harrison
converted, as of the time of the Merger in 1997, his Company Stock Options to
purchase 50,000 shares of the Common Stock into Rollover Options to purchase
2.394 shares of the Common Stock. The Rollover Options have an exercise price
per share equal to $54,545. Mr. Harrison also received at the time of the Merger
a cash bonus equal to $176,041 in connection therewith. The Rollover Options
were granted pursuant to the Option Documents and on the same terms as the New
Options other than the exercise price.
Pursuant to the Harrison Employment Agreement, Mr. Harrison was granted
immediately prior to the Merger in 1997, 15.0 shares of Confetti Common Stock,
having an aggregate value of $1,125,000, based on the then new purchase price,
which shares were converted in the Merger in 1997 into 15.0 shares of restricted
Common Stock.
Mr. Harrison is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options or shares of the Common
Stock acquired upon exercise of the New Options or Rollover Options (in either
case, "Option Shares"), except as provided in the Option Documents.
Employment Agreement with Garry Kieves. Garry Kieves has an employment
agreement with us, dated August 6, 1998, (the "Kieves Employment Agreement"),
pursuant to which Mr. Kieves is employed as our Senior Vice President and
President of Anagram for an initial term of three years at an annual base salary
of up to $250,000. The Kieves Employment Agreement automatically extends for
additional successive periods of one year each (each such period, an "Additional
Term") unless the Company or Mr. Kieves gives notice of the intent not to extend
the employment period. Mr. Kieves' salary will increase by up to 5% at the
beginning of each Additional Term. The Kieves Employment Agreement contains
provisions for discretionary bonus payments, severance and other benefits, and
30
definitions of disability. The Kieves Employment Agreement also provides that
upon termination of employment he may not, for a period of three years, be
employed by, or associated in any manner with, any business with which we are in
competition. We may terminate the Kieves Employment Agreement upon the permanent
disability of Mr. Kieves, or with or without cause.
Pursuant to the terms of the Kieves Employment Agreement, Mr. Kieves
was granted New Options to purchase 6.648 shares of the Common Stock for
$125,000 per share, on terms similar to those granted pursuant to the Rittenberg
Employment Agreement. Mr. Kieves will not be permitted to sell, assign,
transfer, pledge or otherwise encumber any New Options, shares of Common Stock
or Option Shares, except as provided in the Option Documents.
Employment Agreement with James F. Flanagan. James F. Flanagan has an
employment agreement with us, dated July 1, 2001, as amended (the "Flanagan
Employment Agreement"), pursuant to which Mr. Flanagan serves as our Executive
Vice President for a term expiring December 31, 2004. For the term of the
agreement, Mr. Flanagan will receive an annual salary of $250,000 and an annual
bonus of not less than $125,000. The Flanagan Employment Agreement contains
provisions for additional terms, severance and other benefits, and definitions
of cause and disability. The Flanagan Employment Agreement also provides that
upon termination of employment he may not, for a period of one year, be employed
by, or associated in any manner with, any business that is in competition with
us. We may terminate the Flanagan Employment Agreement upon the permanent
disability of Mr. Flanagan or with or without cause.
Pursuant to the terms of the Flanagan Employment Agreement, on July 16,
2001, Mr. Flanagan was granted New Options to purchase 2.5 shares of the Common
Stock at $150,000 per share and, on January 1, 2002, he was granted additional
New Options to purchase 2.5 shares of the Common Stock at $155,000 per share, on
terms similar to those granted pursuant to the Rittenberg Employment Agreement.
In addition, pursuant to the terms of the Flanagan Employment
Agreement, Mr. Flanagan was granted 3.0 shares of restricted stock on January 1,
2002, with an aggregate value of $465,000 based on the market value per share on
the date of grant.
Mr. Flanagan is not permitted to sell, assign, transfer, pledge or
otherwise encumber any New Options, Rollover Options, shares of restricted stock
or shares of the Common Stock acquired upon exercise of the New Options, except
as provided in the Option Documents.
Amscan Holdings, Inc. 1997 Stock Incentive Plan
In 1997, the Company adopted the Amscan Holdings, Inc. 1997 Stock
Incentive Plan (the "Stock Incentive Plan") under which the Company may grant
incentive awards in the form of shares of Company Common Stock, options to
purchase shares of Company Common Stock ("Company Stock Options") and stock
appreciation rights ("Stock Appreciation Rights") to certain directors,
officers, employees and consultants ("Participants") of the Company and its
affiliates. The total number of shares of Company Common Stock reserved and
available for grant under the Stock Incentive Plan, as amended, is 150. A
committee of the Company's board of directors (the "Committee"), or the board
itself in the absence of a Committee, is authorized to make grants and various
other decisions under the Stock Incentive Plan. Unless otherwise determined by
the Committee, any Participant granted an award under the Stock Incentive Plan
must become a party to, and agree to be bound by, the Stockholders' Agreement.
Company Stock Option awards under the Stock Incentive Plan may include
incentive stock options, nonqualified stock options, or both types of Company
Stock Options, in each case with or without Stock Appreciation Rights. Company
Stock Options are nontransferable (except under certain limited circumstances)
and, unless otherwise determined by the Committee, have a term of ten years.
Upon a Participant's death or when the Participant's employment with the Company
or the applicable affiliate of the Company is terminated for any reason, such
Participant's previously unvested Company Stock Options are forfeited and the
Participant or his or her legal representative may, within three months (if
termination
31
of employment is for any reason other than death) or one year (in the case of
the Participant's death), exercise any previously vested Company Stock Options.
Stock Appreciation Rights may be granted in conjunction with all or part of any
Company Stock Option award, and are exercisable, subject to certain limitations,
only in connection with the exercise of the related Company Stock Option. Upon
termination or exercise of a Company Stock Option, any related Stock
Appreciation Rights terminate and are no longer exercisable. Stock Appreciation
Rights are transferable only with the related Company Stock Options.
Unless otherwise provided in the related award agreement or, if
applicable, the Stockholders' Agreement, immediately prior to certain change of
control transactions described in the Stock Incentive Plan, all outstanding
Company Stock Options and Stock Appreciation Rights will, subject to certain
limitations, become fully exercisable and vested and any restrictions and
deferral limitations applicable to any restricted stock awards will lapse.
The Stock Incentive Plan will terminate ten years after its effective
date; however, awards outstanding as of such date will not be affected or
impaired by such termination. The Company's board of directors and the Committee
has authority to amend the Stock Incentive Plan and awards granted thereunder,
subject to the terms of the Stock Incentive Plan.
Compensation of Directors
The Company currently does not compensate its directors other than for
expense reimbursement.
Stock Performance Graph
The Company Common Stock has not traded publicly since December 19,
1997. For this reason a graph indicating the relative performance of the Company
Common Stock price to other standard measures has not been included since it
would provide no meaningful information.
Compensation Committee Policies
During 2002, the compensation of executive officers of the Company,
with the exception of Mr. Correale, was paid pursuant to the terms of existing
employment agreements. The compensation paid to Mr. Correale was based on
competitive salaries observed within the labor market.
Compensation Committee Interlocks and Insider Participation
To the knowledge of the Company, no relationship of the type described
in Item 402(j)(3) of Regulation S-K existed during 2002 with respect to the
Company.
32
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning ownership
of shares of Company Common Stock by: (i) persons who are known by the Company
to own beneficially more than 5% of the outstanding shares of Company Common
Stock; (ii) each director of the Company; (iii) each executive officer of the
Company named in the Summary Compensation table; and (iv) all directors and
executive officers of the Company named in the Summary Compensation table as a
group.
Shares of Company Percentage
Common Stock of Class
Name of Beneficial Owner Beneficially Owned (a) Outstanding(a)
- ------------------------ ---------------------- --------------
Gerald C. Rittenberg (b) ............. 76.648 6.1%
James M. Harrison (c) ................ 31.268 2.5
James F. Flanagan (d) ................ 3.500 0.3
Garry Kieves, Garry Kieves Retained
Annuity Trust and Garry Kieves
Irrevocable Trust, in aggregate (e) 135.318 10.8
Michael C. Correale (f) .............. 2.661 0.2
Terence M. O'Toole (g) ............... -- --
Sanjeev K. Mehra (h) ................. -- --
Joseph P. DiSabato (i) ............... -- --
Estate of John A. Svenningsen ........ 100.000 8.1
c/o Kurzman & Eisenberg LLP
One North Broadway, Suite 1004
White Plains, New York 10601
American Greetings Corporation (j) ... 96.774 7.8
The Goldman Sachs Group, Inc. ........
and affiliates (k) ................ 867.400 68.0
85 Broad Street
New York, New York 10004
All directors and executive officers
as a group (8 persons) (l) ........... 249.395 19.4
(a) The amounts and percentage of Company Common Stock beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Commission, a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to vote
or to direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership
within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which he has no economic interest.
(b) Includes 16.648 shares which could be acquired by Mr. Rittenberg within 60
days upon exercise of options.
(c) Includes 16.268 shares which could be acquired by Mr. Harrison within 60
days upon exercise of options.
(d) Includes 0.5 shares which could be acquired by Mr. Flanagan within 60 days
upon exercise of options. In addition, on January 1, 2002, Mr. Flanagan was
granted 3.0 shares of restricted stock.
33
(e) Includes 5.318 shares which could be acquired by Mr. Kieves within 60 days
upon exercise of options and 10 shares that could be acquired upon exercise
of warrants.
(f) Includes 2.570 shares which could be acquired by Mr. Correale within 60
days upon exercise of options.
(g) Mr. O'Toole, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by The Goldman Sachs Group, Inc. and its affiliates, except to the extent
of his pecuniary interest therein, if any.
(h) Mr. Mehra, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by The Goldman Sachs Group, Inc. and its affiliates, except to the extent
of his pecuniary interest therein, if any.
(i) Mr. DiSabato, who is a Managing Director of Goldman Sachs, disclaims
beneficial ownership of the shares of Company Common Stock that are owned
by The Goldman Sachs Group, Inc. and its affiliates, except to the extent
of his pecuniary interest therein, if any.
(j) On February 19, 2002, the Company issued 96.774 shares of its Common Stock,
at a value of $155,000 per share, to American Greetings in connection with
the acquisition of M&D Balloons.
(k) The Goldman Sachs Group, Inc. may be deemed to own beneficially in the
aggregate 825.0 shares of Company Common Stock and 42.4 shares of Series A
Redeemable Convertible Preferred Stock through the investment partnerships
GS Capital Partners II, L.P. (which owns approximately 517.6 shares of
Company Common Stock and 26.610 shares of Series A Redeemable Convertible
Preferred Stock), GS Capital Partners II Offshore, L.P. (which owns
approximately 205.8 shares of Company Common Stock and 10.575 shares of
Series A Redeemable Convertible Preferred Stock), Goldman Sachs & Co.
Verwaltungs GmbH as nominee for GS Capital Partners II (Germany) C.L.P.
(which owns approximately 19.1 shares of Company Common Stock and 0.979
shares of Series A Redeemable Convertible Preferred Stock), Stone Street
Fund 1997, L.P. (which owns approximately 55.5 shares of Company Common
Stock and 2.850 shares of Series A Redeemable Convertible Preferred Stock)
and Bridge Street Fund 1997, L.P. (which owns approximately 27.0 shares of
Company Common Stock and 1.386 shares of Series A Redeemable Convertible
Preferred Stock) (collectively the "Limited Partnerships"), of each of
which affiliates of The Goldman Sachs Group, Inc. are the general partner
or managing general partner. Each share of Series A Redeemable Convertible
Preferred Stock is convertible at any time at the option of the holder into
one share of Company Common Stock. The Goldman Sachs Group, Inc. disclaims
beneficial ownership of the shares reported herein as beneficially owned by
the Limited Partnerships except to the extent of its pecuniary interest
therein. The Limited Partnerships share voting and investment power with
The Goldman Sachs Group, Inc.
(l) Includes 41.304 shares which could be acquired by the executive officers
within 60 days upon exercise of options and 10 shares which could be
acquired by Mr. Kieves upon exercise of warrants.
Stockholders' Agreement
As of December 19, 1997, the Company entered into the Stockholders'
Agreement with GSCP and the Estate and certain employees of the Company listed
as parties thereto (including the Estate of John A. Svenningsen, the "Non-GSCP
Investors"). The Stockholders' Agreement was subsequently amended in connection
with the Company's acquisitions of Anagram in 1998 and M&D Balloons in 2002 and
the issuance of Series A Redeemable Convertible Preferred Stock in 2001. The
following discussion summarizes the terms of the Stockholders' Agreement which
the Company believes are material to an investor in the debt or equity
securities of the Company. This summary is qualified in its entirety by
reference to the full text of the Stockholders' Agreement, a copy of which is
filed with the Commission, and which is incorporated herein by reference. The
Stockholders' Agreement provides, among other
34
things, for (i) the right of the Non-GSCP Investors to participate in, and the
right of GSCP to require the Non-GSCP Investors to participate in, certain sales
of Company Common Stock by GSCP, (ii) prior to an initial public offering of the
stock of the Company (as defined in the Stockholders' Agreement), certain rights
of the Company to purchase, and certain rights of the Non-GSCP Investors (other
than the Estate) to require the Company to purchase (except in the case of
termination of employment by such Non-GSCP Investors) all, but not less than
all, of the shares of Company Common Stock owned by a Non-GSCP Investor (other
than the Estate) upon the termination of employment or death of such Non-GSCP
Investor, at prices determined in accordance with the Stockholders' Agreement
and (iii) certain additional restrictions on the rights of the Non-GSCP
Investors to transfer shares of Company Common Stock. The Stockholders'
Agreement also contains certain provisions granting GSCP and the Non-GSCP
Investors certain rights in connection with registrations of Company Common
Stock in certain offerings and provides for indemnification and certain other
rights, restrictions and obligations in connection with such registrations. The
Stockholders' Agreement will terminate (i) with respect to the rights and
obligations of and restrictions on GSCP and the Non-GSCP Investors in connection
with certain restrictions on the transfer of shares of Company Common Stock,
when GSCP and its affiliates no longer hold at least 40% of the outstanding
shares of Company Common Stock, on a fully diluted basis; provided that the
Stockholders' Agreement will terminate in such respect in any event if the
Company enters into certain transactions resulting in GSCP, its affiliates, the
Non-GSCP Investors, and each of their respective permitted transferees, owning
less than a majority of the outstanding voting power of the entity surviving
such transaction; and (ii) with respect to the registration of Company Common
Stock in certain offerings, with certain exceptions, on the earlier of (1) the
date on which there are no longer any registrable securities outstanding (as
determined under the Stockholders' Agreement) and (2) the twentieth anniversary
of the Stockholders' Agreement.
For information concerning our equity compensation plans, see "Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters."
Item 13. Certain Relationships and Related Transactions
On October 1, 1999, Amscan granted a $1.0 million line of credit to Mr.
Rittenberg. During 2001, the line of credit was increased to $1.4 million.
Amounts borrowed under the line are evidenced by a limited recourse secured
promissory note, secured by a lien on the equity interests that Mr. Rittenberg
has in Amscan. The line expires on June 15, 2004. The note requires that all
principal payments be made only from the equity pledged as collateral. Amounts
borrowed under the line bear interest at the Company's average incremental
borrowing rate per annum, with interest payable at the option of Mr. Rittenberg
annually or accrued to the principal balance. At December 31, 2002, borrowings
under this line, plus accrued interest, totaled $1,551,000.
On June 15, 2001, the Company entered into a limited recourse secured
promissory note with Mr. Harrison. The note evidences loans made or to be made
to Mr. Harrison at his request, in connection with the payment of any federal,
state or local income taxes due and payable by Mr. Harrison upon and in respect
of the vesting of his restricted stock (see "Item 11. Executive Compensation").
The Company's obligation to extend loans under the note is limited to the amount
of such taxes Mr. Harrison is actually required to pay subsequent to June 15,
2001. Amounts borrowed under the note and any interest thereon are secured by a
lien on the equity interests that Mr. Harrison has in Amscan. The note bears
interest at 5.43% per annum and is payable, together with interest, on January
1, 2010. The note requires that all payments of principal and interest due there
under be made only from the equity pledged as collateral. At December 31, 2002,
the amount borrowed under the note totaled $391,300.
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Balloons, a Manteno, Illinois-based manufacturer of metallic
and plastic balloons, from American Greetings for $27.5 million plus certain
other related costs of $1.0 million. During the year ended December 31, 2002,
the Company sold $7.5 million of metallic balloons and other party goods to
American Greetings. Trade accounts receivable from American Greetings at
December 31, 2002 was $2.6 million.
35
Under the agreement providing for the Merger in 1997, Amscan has agreed
to indemnify for six years after the Merger all former directors, officers,
employees and agents of the Company, to the fullest extent currently provided in
the Company's Certificate of Incorporation and By-laws consistent with
applicable law, for acts or omissions occurring prior to the Merger to the
extent such acts or omissions are uninsured and will, subject to certain
limitations, maintain for six years its prior directors' and officers' liability
insurance.
On December 20, 2002, Amscan amended and restated its existing credit
facility with various lenders, with Goldman Sachs Credit Partners L.P. as sole
lead arranger, sole bookrunner and syndication agent. Goldman Sachs Credit
Partners L.P. received a fee of $3,231,572 from the Company for these services
provided.
During the first quarter of 2001, 100 shares of the authorized shares
of preferred stock, $0.10 par value, were designated as Series A Redeemable
Convertible Preferred Stock. On March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible Preferred Stock for proceeds of $6.0 million, to
Goldman Sachs and its affiliates. Dividends are cumulative and payable annually
at 6% per annum. Dividends payable on or prior to March 30, 2004, are payable in
additional shares of Series A Redeemable Convertible Preferred Stock. Subsequent
to March 30, 2004, dividends are payable, at the option of the Company, either
in cash or additional shares of Series A Redeemable Convertible Preferred Stock.
On March 30, 2002, the annual dividend was distributed in additional shares of
Series A Redeemable Convertible Preferred Stock. At December 31, 2002, 42.40
shares of Series A Redeemable Convertible Preferred Stock were issued and
outstanding and accrued dividends aggregated $286,200.
Goldman Sachs and its affiliates have certain interests in the Company.
Messrs. O'Toole, Mehra and DiSabato are Managing Directors of Goldman Sachs, and
each of them is a director of the Company. GSCP currently owns beneficially
approximately 67.9% of the outstanding shares of Company Common Stock.
Accordingly, the general and managing partners of each of the GSCP Fund
Partners, which are affiliates of Goldman Sachs and The Goldman Sachs Group,
Inc. may each be deemed to be an "affiliate" of GSCP and the Company. See
"Ownership of Capital Stock." Pursuant to the Stockholder's Agreement, Goldman
Sachs has the exclusive right (if it so elects) to perform certain investment
banking and similar services for the Company on customary terms. Goldman Sachs
may from time to time receive customary fees for services rendered to the
Company.
Item 14. Controls and Procedures
Based on an evaluation of the Company's disclosure controls and
procedures performed by the Company's Chief Executive Officer and its Chief
Financial Officer within 90 days of the filing of this report, the Company's
Chief Executive Officer and its Chief Financial Officer concluded that the
Company's disclosure controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information is accumulated and
communicated to the Company's management, including its principal executive
officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
Since the date of the evaluation described above, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
36
PART IV
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Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. and 2. Financial Statements and Schedule.
See Index to Consolidated Financial Statements and Financial
Statement Schedule which appears on page F-1 herein.
3. Exhibits
Exhibit
Number Description
2(a) Agreement and Plan Merger, by and among Amscan Holdings, Inc. and
Confetti Acquisition, Inc., dated as of August 10, 1997
(incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-45457))
2(b) Stock Purchase Agreement, dated as of August 6, 1998, by and
among Amscan Holdings, Inc. and certain stockholders of Anagram
International, Inc. and certain related companies (incorporated
by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated August 6, 1998 (Commission File No. 000-21827))
3(a) Certificate of Incorporation of Amscan Holdings, Inc., dated
October 3, 1996, as amended to March 30, 2001 (incorporated by
reference to Exhibit 3(a) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000 (Commission File
No. 000-21827))
3(b) Amended By-Laws of Amscan Holdings, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
3(c) Amended Articles of Incorporation of Anagram International, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated September 17, 1998 (Commission
File No. 000-21827))
3(d) By-laws of Anagram International, Inc. (incorporated by reference
to Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated September 17, 1998 (Commission File No. 000-21827))
3(e) Articles of Incorporation of Anagram International Holdings, Inc.
(incorporated by reference to Exhibit 3.3 to the Registrant's
Current Report on Form 8-K dated September 17, 1998 (Commission
File No. 000-21827))
3(f) By-laws of Anagram International Holdings, Inc. (incorporated by
reference to Exhibit 3.4 to the Registrant's Current Report on
Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
3(g) Articles of Organization of Anagram International, LLC
(incorporated by reference to Exhibit 3.5 to the Registrant's
Current Report on Form 8-K dated September 17, 1998 (Commission
File No. 000-21827))
3(h) Operating Agreement of Anagram International, LLC (incorporated
by reference to Exhibit 3.6 to the Registrant's Current Report on
Form 8-K dated September 17, 1998 (Commission File No.
000-21827))
37
3(i) Certificate of Formation of Anagram Eden Prairie Property
Holdings LLC (incorporated by reference to Exhibit 3.7 to the
Registrant's Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
4(a) Indenture, dated as of December 19, 1997, by and among the
Company, the Guarantors named therein and IBJ Schroder Bank &
Trust Company with respect to the Senior Subordinated Notes
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-45457))
4(b) Supplemental Indenture, dated as of September 17, 1998, by and
among Anagram International, Inc., Anagram International
Holdings, Inc., Anagram International, LLC, Anagram Eden Prairie
Property Holdings LLC and IBJ Schroder Bank & Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated September 17, 1998
(Commission File No. 000-21827))
4(c) Warrant Agreement, dated as of August 6, 1998, by and between
Amscan Holdings, Inc. and Garry Kieves Retained Annuity Trust
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated August 6, 1998 (Commission File
No. 000-21827))
4(d) Senior Subordinated Guarantee, dated as of September 17, 1998, by
Anagram International, Inc., Anagram International Holdings,
Inc., Anagram International, LLC, and Anagram Eden Prairie
Property Holdings LLC (incorporated by reference to Exhibit 4.2
to the Registrant's Current Report on Form 8-K dated September
17, 1998 (Commission File No. 000-21827))
9 Voting Agreement, dated August 10, 1997 among Confetti
Acquisition, Inc., the Estate of John A. Svenningsen and
Christine Svenningsen (incorporated by reference to Exhibit 2.2
to the Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(a) Tax Indemnification Agreement between Amscan Holdings, Inc., and
John A. Svenningsen, dated as of December 18, 1996 (incorporated
by reference to Exhibit 10(j) to the Registrant's 1996 Annual
Report on Form 10-K (Commission File No. 000-21827))
10(b) Tax Indemnification Agreement between Amscan Holdings, Inc.,
Christine Svenningsen and the Estate of John A. Svenningsen,
dated as of August 10, 1997 (incorporated by reference to Exhibit
10.17 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-40235))
10(c) 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(d) 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))
38
10(e) Exchange and Registration Agreement, dated as of December 19,
1997, by and among the Company and Goldman, Sachs & Co.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-45457))
10(f) Stockholders' Agreement, dated as of December 19, 1997, by and
among the Company and the Stockholders thereto (incorporated by
reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form S-4 (Registration No. 333-45457))
10(g) Employment Agreement, dated as of August 10, 1997, by and among
the Company and Gerald C. Rittenberg (incorporated by reference
to Exhibit 10.5 to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-45457))
10(h) Employment Agreement, dated as of August 10, 1997, by and among
the Company and James M. Harrison (incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on Form
S-4 (Registration No. 333-45457))
10(i) Amendment dated December 1, 1999 to the Employment Agreement
between Amscan Holdings, Inc. and James M. Harrison (incorporated
by reference to Exhibit 10.15 to Post-Effective Amendment No. 3
to the Registrant's Registration Statement on Form S-4
(Registration No. 333-45457))
10(j) Amscan Holdings, Inc. 1997 Stock Incentive Plan (incorporated by
reference to Exhibit 10.7 Registrant's Registration Statement on
Form S-4 (Registration No. 333-45457))
10(k) Amendment No. 1 to the Stockholders' Agreement, dated as of
August 6, 1998 by and among Amscan Holdings, Inc. and certain
stockholders of Amscan Holdings, Inc. (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated August 6, 1998 (Commission File No. 000-21827))
10(l) Employment Agreement, dated as of August 6, 1998, by and among
the Company and Garry Kieves (incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated
August 6, 1998 (Commission File No. 000-21827))
10(m) Line of Credit Agreement, dated October 1, 1999, by and among the
Company and Gerald C. Rittenberg (incorporated by reference to
Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File No. 000-21827))
10(n) Agreement dated as of September 14, 2000 by and between Amscan,
Inc. and CLAYCO Construction Company, Inc. (incorporated by
reference to Exhibit 10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 (Commission
File No. 000-21827))
10(o) Amendment No. 2 to the Stockholders' Agreement, dated as of March
30, 2001 by and among Amscan Holdings, Inc. and certain
stockholders of Amscan Holdings, Inc. (incorporated by reference
to Exhibit 10(o) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000 (Commission File No.
000-21827))
10(p) Employment Agreement, dated as of January 1, 2002, by and among
the Company and James F. Flanagan (incorporated by reference to
Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 (Commission File No.000-21827))
10(r) Second Amended and Restated Credit and Guaranty Loan Agreement,
dated as of December 20, 2002, by and among Amscan Holdings,
Inc., the financial institutions
39
parties thereto, Goldman Sachs Credit Partners L.P., as arranger
and syndication agent, and General Electric Capital Corporation,
as administrative and collateral agent and Fleet National Bank,
as documentation agent (incorporated by reference to Exhibit 4 to
the Registrant's Current Report on Form 8-K dated December 20,
2002 (Commission File No.000-21827))
12 Statement re: computation of ratio of earnings to fixed charges
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-90404))
23.1 Consent of Ernst & Young LLP
99 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the fourth quarter of 2002, the Company filed a Current Report
on Form 8-K dated December 3, 2002 (File No. 000-21827) responding to
Item. 5 and reporting that it had signed commitment letters with Goldman
Sachs Credit Partners L.P. enabling the Company to refinance its senior
debt facilities. Additionally, the Company announced that it had decided
not to pursue a public offering of shares of its Common Stock.
On January 30, 2003, the Company filed a Current Report on Form 8-K
dated December 20, 2002 (File No. 000-21827) responding to Item. 5 and
reporting the refinancing of its term loan and credit facility.
40
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/ Michael A. Correale
---------------------------
Michael A. Correale
Chief Financial Officer
Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Terence M. O'Toole Chairman of the Board March 28, 2003
- ---------------------- of Directors
Terence M. O'Toole
Director
- --------------------
Sanjeev K. Mehra
Director
- ----------------------
Joseph P. DiSabato
/s/ Gerald C. Rittenberg Chief ExecuPtive Officer and March 28, 2003
- ------------------------ Director
Gerald C. Rittenberg
/s/ James M. Harrison President, Chief Operating Officer March 28, 2003
- --------------------- and Director
James M. Harrison
/s/ Michael A. Correale Chief Financial Officer March 28, 2003
- ----------------------- (principal financial and
Michael A. Correale accounting officer)
41
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14
I, Gerald C. Rittenberg, certify that:
1) I have reviewed this annual report on Form 10-K of Amscan Holdings, Inc;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Gerald C. Rittenberg
-------------- ------------------------
Gerald C. Rittenberg
Chief Executive Officer
(Principal executive officer)
42
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14
I, Michael A. Correale, certify that:
1) I have reviewed this annual report on Form 10-K of Amscan Holdings, Inc;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Michael A. Correale
-------------- -----------------------
Michael A. Correale
Chief Financial Officer
43
FORM 10-K
Item 8, Item 15(a) 1 and 2
AMSCAN HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
December 31, 2002
Consolidated Financial Statements as of December 31, 2002 and 2001 and for each
of the years in the three-year period ended December 31, 2002:
Page
----
Report of Independent Auditors....................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Income.................................... F-4
Consolidated Statements of Stockholders' Deficit..................... F-5
Consolidated Statements of Cash Flows................................ F-7
Notes to Consolidated Financial Statements........................... F-8
Financial Statement Schedule for the three years ended December 31, 2002:
Schedule II - Valuation and Qualifying Accounts...................... F-38
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Amscan Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Amscan Holdings,
Inc. as of December 31, 2002 and 2001, and the related consolidated statements
of income, stockholders' deficit, and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Amscan Holdings,
Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets.
Stamford, Connecticut /s/ ERNST & YOUNG LLP
March 20, 2003
F-2
AMSCAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 2,400 $ 1,016
Accounts receivable, net of allowances of $5,127 and $3,937, respectively ... 74,247 65,039
Inventories ................................................................. 93,890 72,582
Prepaid expenses and other current assets ................................... 15,233 13,659
--------- ---------
Total current assets .................................................. 185,770 152,296
Property, plant and equipment, net ............................................. 100,304 94,589
Goodwill, net .................................................................. 74,251 55,985
Notes receivable from officers ................................................. 1,942 1,640
Other assets, net .............................................................. 10,230 5,964
--------- ---------
Total assets .......................................................... $ 372,497 $ 310,474
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Loans and notes payable ..................................................... $ -- $ 700
Accounts payable ............................................................ 39,245 33,083
Accrued expenses ............................................................ 21,524 16,047
Income taxes payable ........................................................ 2,525 2,298
Current portion of long-term obligations .................................... 3,220 3,455
--------- ---------
Total current liabilities ............................................. 66,514 55,583
Long-term obligations, excluding current portion ............................... 295,420 278,443
Deferred income tax liabilities ................................................ 17,360 15,181
Other .......................................................................... 2,317 2,353
--------- ---------
Total liabilities ..................................................... 381,611 351,560
Redeemable convertible preferred stock ($0.10 par value; 100 shares authorized;
42.4 shares and 40 shares issued and outstanding, respectively) .............. 6,646 6,270
Redeemable Common Stock ........................................................ 30,523 29,949
Commitments and Contingencies
Stockholders' deficit:
Common Stock ($0.10 par value; 3,000 shares authorized; 1,233.27 and 1,133.49
shares issued and outstanding, respectively) .............................. -- --
Additional paid-in capital .................................................. 14,814 299
Unamortized restricted Common Stock award, net .............................. (323) (94)
Notes receivable from stockholders .......................................... (638) (601)
Deficit ..................................................................... (57,551) (74,016)
Accumulated other comprehensive loss ........................................ (2,585) (2,893)
--------- ---------
Total stockholders' deficit ........................................... (46,283) (77,305)
--------- ---------
Total liabilities, redeemable convertible preferred and Common Stock
and stockholders' deficit ........................................... $ 372,497 $ 310,474
========= =========
See accompanying notes to consolidated financial statements.
F-3
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
For the Years Ended December 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
Net sales ................................................. $ 385,603 $ 345,183 $ 323,484
Cost of sales ............................................. 252,980 225,036 206,872
--------- --------- ---------
Gross profit ..................................... 132,623 120,147 116,612
Operating expenses:
Selling expenses ....................................... 34,619 31,414 28,578
General and administrative expenses .................... 32,056 33,317 31,958
Provision for doubtful accounts ........................ 3,008 3,758 7,133
Art and development costs .............................. 10,301 8,772 8,453
Write-off of deferred financing and IPO-related costs .. 2,261
Restructuring charges .................................. 1,663 500
--------- --------- ---------
Total operating expenses ......................... 83,908 77,261 76,622
--------- --------- ---------
Income from operations ........................... 48,715 42,886 39,990
Interest expense, net ..................................... 21,792 24,069 26,355
Other (income) expense, net ............................... (311) 24 96
--------- --------- ---------
Income before income taxes and minority interests ......... 27,234 18,793 13,539
Income tax expense ........................................ 10,757 7,423 5,348
Minority interests ........................................ 12 68 75
--------- --------- ---------
Net income ................................................ 16,465 11,302 8,116
Dividend on redeemable convertible preferred stock 376 270
--------- --------- ---------
Net income applicable to common shares ........... $ 16,089 $ 11,032 $ 8,116
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Unamortized
Restricted
Common Notes Accumulated
Additional Stock Receivable Other
Common Common Paid-in Awards, from Comprehensive
Shares Stock Capital Net Stockholders Deficit Loss Total
------ ----- ------- --- ------------ ------- ---- -----
Balance at December 31, 1999 ....... 1,132.41 $ -- $ 225 $ (405) $ (664) $ (86,797) $ (888) $(88,529)
Net income ....................... 8,116 8,116
Net change in cumulative
translation adjustment ........ (1,457) (1,457)
--------
Comprehensive income ........ 6,659
Exercise of stock options ........ 0.13 8 8
Increase in redeemable Common
Stock due to accretion of market
value and vesting of restricted
Common Stock award ............. (5,186) (5,186)
Amortization of restricted Common
Stock award .................... 51 51
Accretion of interest income ..... (35) (35)
Payments received on notes
receivable from stockholders ... 151 151
-------- ------ ------- -------- -------- ---------- -------- --------
Balance at December 31, 2000 ....... 1,132.54 -- 233 (354) (548) (83,867) (2,345) (86,881)
Net income ....................... 11,302 11,302
Net change in cumulative
translation adjustment ......... (434) (434)
Cumulative effect of a change in
accounting principle, net of
taxes (see Notes 17 and 18) .... (227) (227)
Change in fair value of interest
rate swaps and foreign
exchange contracts, net of taxes
(see Notes 17 and 18) .......... 113 113
-------
Comprehensive income ......... 10,754
Exercise of stock options ........ 0.95 66 (25) 41
Increase in redeemable Common
Stock due to accretion of market
value and vesting of restricted
Common Stock award ............. (1,181) (1,181)
Amortization of restricted
Common Stock award ............. 260 260
Accretion of interest income ..... (37) (37)
Payments received on notes
receivable from stockholders . 9 9
Redeemable convertible preferred
stock dividends ............... (270) (270)
-------- ------ ------- -------- -------- --------- -------- --------
Balance at December 31, 2001 ....... 1,133.49 $ -- $ 299 $ (94) $ (601) $ (74,016) $(2,893) $(77,305)
======== ====== ======= ======== ======== ========= ======= ========
(Continued)
F-5
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Continued)
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Unamortized
Restricted
Common Notes Accumulated
Additional Stock Receivable Other
Common Common Paid-in Awards, from Comprehensive
Shares Stock Capital Net Stockholders Deficit Loss Total
------ ----- ------- --- ------------ ------- ---- -----
Balance at December 31, 2001 ... 1,133.49 $ -- $ 299 $ (94) $ (601) $(74,016) $ (2,893) $(77,305)
Net income ..................... 16,465 16,465
Net change in cumulative
translation adjustment ....... 1,304 1,304
Change in fair value of interest
rate swap and foreign exchange
contracts, net of taxes ..... (996) (996)
--------
Comprehensive income ....... 16,773
Grant of restricted Common
Stock award .................. 3.00 465 (465) --
Issuance of Common Stock in
connection with acquisition .. 96.78 15,000 15,000
Increase in redeemable Common
Stock due to vesting of
restricted Common Stock
award ..................... (574) (574)
Amortization of restricted
Common Stock awards .......... 236 236
Accretion of interest income.... (37) (37)
Redeemable convertible
preferred stock dividends .... (376) (376)
-------- --------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 .. 1,233.27 $ -- $ 14,814 $ (323) $ (638) $(57,551) $ (2,585) $(46,283)
======== ========= ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
AMSCAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income ................................................................... $ 16,465 $ 11,302 $ 8,116
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense ..................................... 13,962 15,468 14,487
Amortization of deferred financing costs .................................. 1,202 998 902
Gain on disposal of property, plant and equipment ......................... (254) (13) (9)
Provision for doubtful accounts ........................................... 3,008 3,758 7,133
Write-off of deferred financing costs ..................................... 1,460
Amortization of restricted Common Stock awards ............................ 236 260 51
Deferred income tax provision ............................................. 4,869 1,620 1,761
Changes in operating assets and liabilities, net of acquisition in 2002:
Increase in accounts receivable ......................................... (7,934) (6,162) (12,895)
Increase in inventories ................................................. (15,391) (1,234) (12,346)
(Increase) decrease in prepaid expenses, other current assets
and other, net ....................................................... (2,027) (4,188) 3,610
Increase in accounts payable, accrued expenses
and income taxes payable ............................................. 4,733 4,443 9,069
--------- --------- ---------
Net cash provided by operating activities .......................... 20,329 26,252 19,879
Cash flows from investing activities:
Cash paid in connection with acquisition ..................................... (13,548)
Capital expenditures ......................................................... (17,712) (37,479) (18,576)
Proceeds from disposal of property, plant and equipment ...................... 530 55 101
--------- --------- ---------
Net cash used in investing activities .............................. (30,730) (37,424) (18,475)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock ............. 6,000
Proceeds from the exercise of Common Stock options ........................... 41 8
Proceeds from loans, notes payable and long-term obligations, net of debt
issuance costs (including original issue discount, in 2002) of $6,032 and
$557, in 2002 and 2001, respectively ....................................... 163,968 19,443 5,647
Repayment of loans, notes payable and long-term obligations .................. (152,351) (13,495) (4,884)
Loans to officers under notes ................................................ (200) (953) (621)
Other ........................................................................ (66) 95
--------- --------- ---------
Net cash provided by financing activities .......................... 11,417 10,970 245
Effect of exchange rate changes on cash and cash equivalents ................... 368 (251) (1,029)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 1,384 (453) 620
Cash and cash equivalents at beginning of year ................................. 1,016 1,469 849
--------- --------- ---------
Cash and cash equivalents at end of year ....................................... $ 2,400 $ 1,016 $ 1,469
========= ========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ........................................................... $ 20,506 $ 25,189 $ 26,047
Income taxes ....................................................... $ 6,158 $ 6,020 $ 5,352
Supplemental information on non-cash activities (dollars in thousands):
Capital lease obligations of $53 and $144 were incurred in 2002 and 2001,
respectively. There were no capital lease obligations incurred in 2000.
See accompanying notes to consolidated financial statements.
F-7
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 2002
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Amscan Holdings, Inc. ("Amscan Holdings" and, together with its
subsidiaries, "AHI" or the "Company") was incorporated on October 3, 1996 for
the purpose of becoming the holding company for Amscan Inc. and certain
affiliated entities in connection with an initial public offering of its Common
Stock. The initial public offering resulted in the sale of 4,000,000 and 422,400
shares of the Company's Common Stock at $12.00 per share on December 18, 1996
and January 8, 1997, respectively.
On December 19, 1997, Amscan Holdings and Confetti Acquisition, Inc.
("Confetti"), a newly formed Delaware corporation affiliated with GS Capital
Partners II, L.P. and certain other private investment funds managed by Goldman,
Sachs & Co. (collectively, "GSCP"), entered into a merger pursuant to an
agreement (the "Merger Agreement") providing for a recapitalization of Amscan
Holdings in which Confetti was merged with and into Amscan Holdings (the
"Merger"), with Amscan Holdings as the surviving privately-held corporation.
Pursuant to certain employment arrangements, certain employees of the Company,
at that time, purchased an aggregate of 10 shares of Company Common Stock
following the Merger (see Note 13). The Merger was accounted for as a
recapitalization and, accordingly, the historical basis of the Company's assets
and liabilities was not impacted by the Merger.
The Company designs, manufactures, contracts for manufacture and
distributes party goods, including metallic balloons, gifts and stationery,
principally in North America, South America, Europe, Asia and Australia.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Amscan
Holdings and all majority-owned and controlled entities. All material
intercompany balances and transactions have been eliminated in consolidation.
Acquisition
- -----------
On February 19, 2002, the Company purchased all of the outstanding
common stock of M&D Balloons, Inc. ("M&D Balloons"), a Manteno, Illinois-based
manufacturer of metallic and plastic balloons, from American Greetings
Corporation ("American Greetings") to supplement its existing balloon
operations. The Company financed the purchase price of $27,500,000 and certain
other related costs of $1,048,000 by borrowing $13,548,000 under its then
existing revolving credit facility and issuing 96.774 shares of its Common Stock
to American Greetings. American Greetings continues to distribute metallic
balloons purchased under a supply agreement with the Company. The acquisition
has been accounted for under the provisions of Statement of Financial Accounting
Standards No. 141, "Business Combinations," ("SFAS No. 141") and, accordingly,
the operating results of M&D Balloons have been included in the Company's
consolidated financial statements since the date of acquisition.
The purchase price has been preliminarily allocated based upon the
estimated fair value of net assets acquired at the date of acquisition. Such
allocations are based on studies and valuations that have not yet been completed
and will be subject to change in the next period. The excess of the purchase
price over tangible net assets acquired has been preliminarily allocated to
intangible assets consisting of licensing agreements in the amount of
$1,070,000, which are being amortized using the straight-line method over the
lives of the contracts (one to three years with an average life of 2.7 years),
and goodwill in the amount of $17,762,000, which is not being amortized. The
transaction was structured as a purchase of common stock and, accordingly, the
amortization of intangible assets is not deductible for income tax purposes.
The following unaudited pro forma information assumes the M&D Balloons
acquisition had occurred on January 1, 2002 and 2001, respectively. The pro
forma information, as presented below, is not necessarily indicative of the
results that would have been obtained had the transaction occurred on January 1,
2002 and 2001, nor is it
F-8
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
necessarily indicative of the Company's future results (dollars in thousands):
Years Ended December 31,
------------------------
2002 2001
---- ----
Net sales .................... $389,710 $370,807
Net income ................... 16,858 12,528
The net income amounts reflect adjustments for interest expense from
additional borrowings necessary to finance the acquisition and amortization of
other intangible assets and, in 2001, goodwill, net of their related income tax
effects based upon a pro forma effective tax rate of 39.5%. The unaudited pro
forma information gives effect only to adjustments described above and does not
reflect management's estimate of any anticipated cost savings or other benefits
as a result of the acquisition.
During the year ended December 31, 2002, the Company sold $7,475,000 of
metallic balloons and other party goods to American Greetings. Trade accounts
receivable from American Greetings at December 31, 2002 were $2,632,000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
- ----------------
Highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
- -----------
Substantially all inventories of the Company are valued at the lower of
cost (principally on the first-in, first-out method) or market.
Long-Lived and Intangible Assets
- --------------------------------
Property, plant and equipment are stated at cost. Machinery and
equipment under capital leases are stated at the present value of the minimum
lease payments at the inception of the lease. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the
assets. Machinery and equipment held under capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.
Goodwill, net of amortization was $74,251,000 and $55,985,000 at
December 31, 2002 and 2001, respectively. Goodwill represents the excess of the
purchase price of acquired companies over the estimated fair value of the net
assets acquired. Effective January 1, 2002, the Company adopted SFAS No. 141 and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 revises the accounting
treatment for business combinations to require the use of purchase accounting
and prohibit the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 revises the
accounting for goodwill to eliminate the amortization of goodwill on
transactions consummated after June 30, 2001 and of all other goodwill as of
January 1, 2002. As a result, the Company stopped recording goodwill
amortization as of January 1, 2001. Intangible assets with definite lives will
continue to be amortized over their useful lives. SFAS No. 142 also requires
goodwill and other intangible assets with indefinite lives to be reviewed for
impairment each year and more frequently if circumstances indicate a possible
impairment. During 2002, the Company completed its review and determined that
goodwill was not impaired. Had SFAS No. 142 been effective in
F-9
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
fiscal years 2001 and 2000, net income would have been reported as the following
amounts (dollars in thousands):
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Reported net income ........................ $16,465 $11,302 $ 8,116
Add back goodwill amortization, net of taxes 1,572 1,574
------- ------- -------
Adjusted net income ........................ $16,465 $12,874 $ 9,690
======= ======= =======
Other intangible assets, net of amortization, of $695,000 at December
31, 2002 were comprised of licensing agreements which are being amortized using
the straight-line method over the lives of the contracts (one to three years
with an average life of 2.7 years). Other intangible assets at December 31, 2001
were fully amortized and were comprised principally of patents which were
amortized using the straight-line method over three years. Accumulated
amortization was $3,375,000 and $3,000,000 at December 31, 2002 and 2001,
respectively. Amortization of other intangible assets for the three years ended
December 31, 2002, 2001 and 2000 was $375,000, $705,000 and $1,003,000,
respectively. Estimated amortization expense for the years ending December 31,
2003 and 2004 is $362,000 and $333,000, respectively.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of Accounting Principles Board No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets and expands the scope of a discontinued operation to include a
component of an entity. The adoption of SFAS No. 144 on January 1, 2002 did not
impact the Company's financial position or results of operations.
The Company reviews the recoverability of its long-lived assets,
including definite-lived intangible assets other than goodwill, whenever facts
and circumstances indicate that the carrying amount may not be fully
recoverable. For purposes of recognizing and measuring impairment, the Company
evaluates long-lived assets other than goodwill based upon the lowest level of
independent cash flows ascertainable to evaluate impairment. If the sum of the
undiscounted future cash flows expected over the remaining asset life is less
than the carrying value of the assets, the Company may recognize an impairment
loss. The impairment related to long-lived assets is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the asset.
When fair values are not readily available, the Company estimates fair values
using expected discounted future cash flows.
Goodwill is reviewed for potential impairment, on an annual basis or
more frequently if circumstances indicate a possible impairment, by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit exceeds its fair value, the excess,
if any, of the fair value of the reporting unit over amounts allocable to the
unit's other assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss will be recognized in an amount equal
to that excess. The fair value of a reporting unit refers to the amount at which
the unit as a whole could be sold in a current transaction between willing
parties.
Deferred Financing Costs and Original Issue Discount
- ----------------------------------------------------
Deferred financing costs (included in other assets) and original issue
discount (netted against the related debt) are both amortized to interest
expense using the interest method over the lives of the related debt.
Revenue Recognition
- -------------------
The Company's terms of sale are F.O.B. shipping point and, accordingly,
title and the risks and rewards of ownership are transferred to the customer,
and revenue is recognized, when goods are shipped. The Company estimates
F-10
reductions to revenues for volume-based rebate programs at the time sales are
recognized.
Doubtful Accounts
- -----------------
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of the Company's customers to make required
payments. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables including the current
credit-worthiness of customers. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Shipping and Handling
- ---------------------
Outbound shipping and handling costs billed to customers are included
in revenue. The costs of shipping and handling incurred by the Company are
included in cost of sales.
Royalty Agreements
- ------------------
The Company enters into royalty agreements that allow the Company to
use certain licensed designs on certain of its products. These contracts require
the Company to pay royalties, generally as a percentage of sales of such
product, and may require guaranteed minimum royalties, a portion of which may be
paid in advance. The Company matches royalty expense with the corresponding
revenue by recording royalties at the time of sale, at the greater of the
contractual rate or the effective rate calculated based on the guaranteed
minimum royalty and the Company's estimate of sales during the contract period.
If a portion of the guaranteed minimum royalty is determined not to be
recoverable, the unrecoverable portion is charged to expense at that time.
Guaranteed minimum royalties paid in advance are recorded in the balance sheet
as other assets.
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 some of which may not reach commercial
production. Accordingly, the Company expenses these costs as incurred.
Derivative Financial Instruments
- --------------------------------
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") and SFAS No.
137 and No. 138 as amendments thereto, effective January 1, 2001. These
statements require that all derivative financial instruments be recognized on
the balance sheet at fair value and establish criteria for both the designation
and effectiveness of hedging activities. The Company may use derivatives in the
management of interest rate and foreign currency exposure. The statements
require the Company to formally document the assets, liabilities or other
transaction the Company designates as hedged items, the risk being hedged and
the relationship between the hedged items and the hedging instruments. The
Company must measure the effectiveness of the hedging relationship at the
inception of the hedge and on an on-going basis.
For derivative financial instruments that qualify as fair value hedges,
the gain or loss on the instrument and the offsetting loss or gain on the hedged
item attributable to the hedged risk are recognized in current earnings during
the period of the change in fair values. For derivative financial instruments
that qualify as cash flow hedges (i.e., hedging the exposure to variability in
expected future cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
The ineffective portion of a cash flow hedge, if any, is determined based on the
dollar-offset method (i.e., the gain or loss on the derivative financial
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item) and is recognized in current earnings during the
period of change. As long as hedge effectiveness is maintained, the Company's
interest rate swap arrangements and foreign currency exchange agreements qualify
for hedge accounting as cash flow hedges. The adoption of SFAS No. 133, as
amended, did not have a significant effect
F-11
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
on the Company's consolidated financial statements, but did reduce comprehensive
income in 2001 by $114,000 (see Notes 17 and 18).
Income Taxes
- ------------
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities and
operating loss and tax credit carryforwards applying enacted statutory tax rates
in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, in the judgment
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Stock-Based Compensation
- ------------------------
The Company accounts for stock based awards in accordance with the
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." SFAS No. 123 permits entities
to recognize as expense, over the vesting period, the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to apply the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," which requires the
recognition of compensation expense at the date of grant only if the current
market price of the underlying stock exceeds the exercise price, and to provide
pro forma net income disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the intrinsic value method of APB No. 25 for
awards granted under its stock-based compensation plans and has provided the pro
forma disclosures required by SFAS No. 123.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No.
148") was issued. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The amendments to SFAS No. 123 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company adopted the disclosure provisions of SFAS No. 148 on December 31, 2002
and continues to account for its stock-based compensation under APB No. 25.
Accordingly, no compensation cost has been recognized in connection with the
issuance of options under the 1997 Stock Incentive Plan as all options were
granted with exercise prices equal to the estimated fair market value of the
Common Stock on the date of grant. The adoption of this statement had no impact
on the Company's financial position or results of operations. See Note 11 for
further discussion regarding the Company's stock-based compensation plans and
related accounting matters.
Had the Company determined stock-based compensation based on the fair
value of the options granted at the grant date, consistent with the method
prescribed under SFAS No. 123, the Company's net income would have been reduced
to amounts indicated below (dollars in thousands):
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Net income:
As reported ..................................... $16,465 $11,302 $ 8,116
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of tax ........... 517 508 510
------- ------- -------
SFAS No. 123 pro forma net income ............... $15,948 $10,794 $ 7,606
======= ======= =======
F-12
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
It has been assumed that the estimated fair value of the options
granted in 2002, 2001 and 2000 under the 1997 Stock Incentive Plan is amortized
on a straight line basis to compensation expense, net of taxes, over the vesting
period of the grant, which is five years. The estimated fair value of each
option on the date of grant was determined using the minimum value method with
the following assumptions: dividend yield of 0%; risk-free interest rate of
4.9%; and expected lives of seven years.
Accumulated Other Comprehensive Loss
- ------------------------------------
Accumulated other comprehensive loss at December 31, 2002, 2001 and
2000 consisted of the Company's foreign currency translation adjustment and the
fair value of interest rate swap and foreign exchange contracts qualifying as
hedges (see Note 18).
Foreign Currency Transactions and Translation
- ---------------------------------------------
The functional currencies of the Company's foreign operations are the
local currencies in which they operate. Realized foreign currency exchange gains
or losses, which result from the settlement of receivables or payables in
currencies other than the functional currencies, 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 recorded as comprehensive income
(loss) and are included as a component of accumulated other comprehensive loss.
Concentration of Credit Risk
- ----------------------------
While the Company's customers are geographically dispersed throughout
North America, South America, Europe, Asia and Australia, there is a
concentration of sales made to and accounts receivable from the stores that
operate in the party goods superstore distribution channel. At December 31, 2002
and 2001, Party City Corporation ("Party City"), the Company's largest customer
with 484 corporate and franchise stores, accounted for 20% and 19%,
respectively, of consolidated accounts receivable, net. For the years ended
December 31, 2002, 2001 and 2000, sales to Party City's corporate-owned and
operated stores represented 13%, 13% and 12% of consolidated net sales,
respectively. For the years ended December 31, 2002, 2001 and 2000, sales to
Party City's franchise-owned and operated stores represented 14%, 15% and 13% of
consolidated net sales, respectively. No other group or combination of customers
subjected the Company to a concentration of credit risk. Although the Company
believes its relationships with Party City and its franchisees are good, if they
were to reduce their volume of purchases from the Company significantly, the
Company's financial condition and results of operations could be materially
adversely affected.
Use of Estimates
- ----------------
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Recently Issued Accounting Standards
- ------------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS No. 144"). SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets and expands the scope of a discontinued operation to
include a component of an entity. The adoption of SFAS No. 144 on January 1,
2002 did not impact the Company's financial position or results of operations.
In May 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS No. 145"), was issued. SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as
F-13
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will no longer be permitted for certain extinguishments considered to
be part of a company's risk management strategy. SFAS No. 145 also amends SFAS
No. 13 to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). SFAS No. 145 is effective for
financial statements issued after May 15, 2002, and with respect to the impact
of the reporting requirements of changes made to SFAS No. 4 for fiscal years
beginning after May 15, 2002. The Company adopted SFAS No. 145 in 2002 and
classified the write-off of certain deferred financing costs of $1.5 million
(see Note 8) as an operating expense, thereby reducing income from operations.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No.
146") was issued. SFAS No. 146 addresses accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3 (" EITF No. 94-3"), "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date an entity committed to an exit plan. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002.
In November 2002, the Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34," ("FIN No. 45") was issued. FIN No. 45 clarifies requirements relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN No. 45 requires that upon issuance of a guarantee,
companies recognize a liability for the fair value of the obligation it assumes
under that guarantee. The disclosure provisions of FIN No. 45 are effective
commencing in the fourth quarter of 2002. The recognition requirements of FIN
No. 45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002. The Company does not expect the adoption of this
interpretation to have a material effect on the consolidated financial
statements.
In November 2001, the Emerging Issues Task Force issued No. 01-09
("EITF No. 01-09"), "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Product." EITF No. 01-09 was effective
for Amscan as of January 1, 2002. EITF No. 01-09 clarifies the income statement
classification of costs incurred by a vendor in connection with the reseller's
purchase or promotion of the vendor's products, resulting in certain advertising
and product placement costs previously classified as selling expenses to be
reflected as a reduction of revenues earned from that activity. The new guidance
requires retroactive restatement of all periods presented to reflect the new
accounting provision. As a result of applying the provisions of EITF No. 01-09,
the Company's revenues and selling expenses were each reduced by $1,906,000 and
$2,064,000 for the years ended December 31, 2001 and 2000, respectively.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not
applicable or not significant to the financial statements of the Company.
NOTE 3 - INVENTORIES
Inventories at December 31, 2002 and 2001 consisted of the following
(dollars in thousands):
2002 2001
-------- --------
Finished goods ...................................... $ 80,783 $ 65,376
Raw materials ....................................... 8,763 5,992
Work-in process ..................................... 7,722 4,520
-------- --------
97,268 75,888
Less: reserve for slow moving and obsolete inventory (3,378) (3,306)
-------- --------
$ 93,890 $ 72,582
======== ========
F-14
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, 2002 and 2001
consisted of the following (dollars in thousands):
Estimated
2002 2001 Useful Lives
-------- --------- ------------
Machinery and equipment......................... $ 93,159 $ 78,520 3-15
Buildings....................................... 37,356 36,860 31-40
Data processing equipment....................... 23,691 21,701 3-5
Leasehold improvements.......................... 10,859 9,576 2-20
Furniture and fixtures.......................... 5,361 4,856 10
Construction in progress........................ - 1,113
Land............................................ 7,134 7,123
--------- --------
177,560 159,749
Less: accumulated depreciation and amortization (77,256) (65,160)
-------- --------
$100,304 $ 94,589
======== ========
Depreciation and amortization expense related to property, plant and
equipment was $13,587,000, $12,164,000 and $10,882,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
NOTE 5 - LOANS AND NOTES PAYABLE
On December 20, 2002, Amscan amended and restated its existing credit
facility with various lenders (the "Lenders"), and with Goldman Sachs Credit
Partners L.P. as sole lead arranger, sole bookrunner and syndication agent.
Under the terms of the Second Amended and Restated Credit and Guaranty Agreement
(the "Credit Agreement") the Lenders agreed to amend and restate the Company's
then existing bank credit agreements (the "Bank Credit Facilities") (see Note 6)
in their entirety and to provide a $200,000,000 senior secured facility
consisting of a $170,000,000 term loan (the "Term Loan") and up to $30,000,000
aggregate principal amount of revolving loans (the "Revolver"). The proceeds of
the Term Loan were used to redesignate and replace the Company's AXEL term loan
and revolver borrowings existing under the Bank Credit Facilities at the closing
date and to pay certain fees and expenses associated with the refinancing.
The Revolver expires on June 15, 2007, and bears interest, at the
option of the Company, at the index rate plus, based on performance, a margin
ranging from 2.00% to 3.50% per annum, or at LIBOR plus, based on performance, a
margin ranging from 3.00% to 4.50% per annum, with a LIBOR floor of 2.0%. At
December 31, 2002, the Company had no borrowings under the Revolver. Standby
letters of credit of $6,500,000 were outstanding and the Company had borrowing
capacity of approximately $23,500,000 under the terms of the Revolver at
December 31, 2002. Amounts drawn on the Revolver are also subject to an agreed
upon borrowing base. All borrowings under the Revolver are secured by a first
priority lien on substantially all of the Company's assets, are guaranteed by
the Company's domestic subsidiaries and are subject to mandatory prepayments
upon the occurrence of certain events (see Note 6). The Company is required to
maintain certain financial ratios throughout the term of the Credit Agreement,
including leverage and interest coverage ratios.
At December 31, 2001, the Company's revolver borrowings under its Bank
Credit Facilities were $700,000 and bore interest at the prime rate plus 0.625%
(weighted average rate of 5.38% at December 31, 2001). The Company had
outstanding standby letters of credit under the Bank Credit Facilities of
$6,321,000 at December 31, 2001.
In addition to the Revolver, the Company has a 400,000 Canadian dollar
denominated revolving credit facility which bears interest at the Canadian prime
rate and expires on June 15, 2003, a 1.0 million British Pound Sterling
F-15
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
denominated revolving credit facility which bears interest at the U.K. base rate
plus 1.75% and expires on June 1, 2003 and a $1,000,000 revolving credit
facility which bears interest at LIBOR plus 1.0% and expires on December 31,
2003. No borrowings were outstanding under these revolving credit facilities at
December 31, 2002 and 2001.
NOTE 6 - LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 2002 and 2001 consisted of the following
(dollars in thousands):
2002 2001
--------- ---------
Senior subordinated notes (a) ...................... $ 110,000 $ 110,000
Term Loan, net of unamortized discount of $1,692 (b) 168,308 --
AXEL term loan (c) ................................. -- 149,675
Mortgage obligations (d) ........................... 19,981 21,628
Notes payable (e) .................................. 140 258
Capital lease obligations (f) ...................... 211 337
--------- ---------
Total long-term obligations ............... 298,640 281,898
Less: current portion .............................. (3,220) (3,455)
--------- ---------
Long-term obligations, excluding current portion ... $ 295,420 $ 278,443
========= =========
On December 19, 1997, the Company issued $110,000,000 aggregate
principal amount of 9 7/8% senior subordinated notes due in 2007 (the "Notes")
and entered into the Bank Credit Facilities which provided for borrowings under
an AXEL term loan and revolving loan borrowings under a revolving credit
facility (see Note 5). On December 20, 2002, Amscan amended and restated the
Bank Credit Facilities with various Lenders. Under the terms of the Credit
Agreement, the Lenders agreed to amend and restate the Company's Bank Credit
Facilities in their entirety and to provide a $200,000,000 senior secured
facility consisting of a $170,000,000 term loan (the "Term Loan") and up to
$30,000,000 aggregate principal amount of revolving loans (the "Revolver"). The
proceeds of the Term Loan were used to redesignate and replace the Company's
AXEL term loan and revolver borrowings existing under the Bank Credit Facilities
at the closing date and to pay certain fees and expenses associated with the
refinancing.
The Company is required to make prepayments under the terms of the
Credit Agreement under certain circumstances, including upon certain asset sales
and certain issuances of debt or equity securities. Such mandatory prepayments
will be applied to prepay the Term Loan first (on a pro rata basis) and
thereafter to prepay the Revolver and to reduce the commitments thereunder. The
Company may prepay, in whole or in part, borrowings under the Term Loan. Call
protection provisions apply to certain prepayments of borrowings under the Term
Loan. The Company may prepay borrowings under or reduce commitments for the
Revolver, in whole or in part, without penalty. The Credit Agreement is
guaranteed by the Company's domestic subsidiaries (the "Guarantors") (see Note
19). Subject to certain exceptions, all borrowings under the Credit Agreement,
and all guarantees are secured by all existing and after-acquired personal
property of the Company and the Guarantors, including, subject to certain
exceptions, a pledge of all the stock of domestic subsidiaries owned by the
Company or any of the Guarantors and first priority liens on after-acquired real
property and leasehold interests of the Company and the Guarantors. The
guarantees are joint and several guarantees, and are irrevocable, full and
unconditional.
(a) The Notes bear interest at a rate equal to 9 7/8% per annum. Interest is
payable semi-annually on June 15 and December 15 of each year. The Notes
are redeemable at the option of the Company, in whole or in part, at
redemption prices ranging from 104.937% to 100%, plus accrued and unpaid
interest to the date of redemption. Upon the occurrence of a Change of
Control, as defined in the note indenture, the Company will be obligated to
make an offer to purchase the Notes, in whole or in part, at a price equal
to 101% of the aggregate principal amount of the Notes, plus accrued and
unpaid interest, if any, to the date of purchase. If a Change of Control
were to occur, the Company may not have the financial resources to repay
all of its obligations under the Credit Agreement, the note indenture and
the other indebtedness that would become payable upon the occurrence of
such Change of Control.
F-16
(b) The Term Loan of $170,000,000 was funded at a 1% original issue discount
and provides for amortization (in quarterly installments) of 1% of the
principal amount thereof per annum through June 15, 2006, and will then
amortize in equal quarterly payments through June 15, 2007. The Term Loan
bears interest, at the option of the Company, at the index rate plus 3.50%
per annum or at LIBOR plus 4.50% per annum, with a LIBOR floor of 2.0%. At
December 31, 2002, the floating interest rate on the Term Loan was 7.75%.
The original issue discount is being amortized to interest expense using
the interest method over the life of the Term Loan.
(c) The AXEL term loan was repaid using the proceeds of the Term Loan as noted
above. The AXEL term loan was to mature in December 2004 and provided for
amortization (in quarterly installments) of 1% of the principal amount
thereof per year for the first five years and 32.3% and 62.7% of the
principal amount thereof in the sixth and seventh years, respectively. The
AXEL term loan bore interest, at the option of the Company, at the lenders'
customary base rate plus 1.625% per annum or at the lenders' customary
reserve adjusted Eurodollar rate plus 2.625% per annum. At December 31,
2001, the floating interest rate on the AXEL term loan was 4.56%. The
Company was involved in three interest rate swap transactions with Goldman
Sachs Capital Markets, L.P. ("GSCM") and a financial institution which
covered a portion of the outstanding borrowings under the AXEL term loan
all of which expired in 2001. The interest rate swap contracts required the
Company to settle the difference in interest obligations quarterly. Net
payments (receipts) to (from) the counterparty under the swap contracts for
the years ended December 31, 2001 and 2000, respectively, which have been
recorded as (reduction of) additional interest expense, were as follows
(dollars in thousands):
(Reduction of) Additional
Interest Expense
Notional -------------------------
Date of contract Amount Term Fixed Rate 2001 2000
- ---------------- ------ -------- ---------- ---- ----
December 31, 1997 $ 57,330 3 years 8.36% $ -- $ 167
September 30, 1998 $ 35,000 3 years 7.68% 56 (592)
September 17, 1999 $ 31,000 2 years 9.30% (308) (8)
January 3, 2001 $ 10,000 9 months 6.03% (76)
------- -------
$ (328) $ (433)
======= =======
(d) In conjunction with the construction of a new distribution facility, on
December 21, 2001, the Company borrowed $10,000,000 each from a financial
institution and the New York State Job Development Authority, pursuant to
the terms of a first and second lien mortgage note, respectively. The first
lien mortgage note bears interest at LIBOR plus 2.75%. However, the Company
has utilized an interest rate swap agreement to effectively fix the loan
rate at 8.40% for the term of the loan. The interest rate swap contracts
required the Company to settle the difference in interest obligations
quarterly. Net payments to the counterparty under the swap contracts for
the year ended December 31, 2002, which have been recorded as additional
interest expense, were $343,000. The second lien mortgage note bears
interest at a rate of 3.77% and 4.75% at December 31, 2002 and 2001,
respectively, and is subject to review and adjustment semi-annually based
on the New York State Job Development Authority's confidential internal
protocols. Both loans are for a term of 96 months and require monthly
payments based on a 180-month amortization period with balloon payments
upon maturity in January 2010. The principal amounts outstanding as of
December 31, 2002 were $9,389,000 and $9,555,000 with a financial
institution and the New York State Job Development Authority, respectively.
At December 31, 2002, the new facility has a carrying value of $30,068,000
(including capitalized interest of $1,204,000, of which $981,000 and
$223,000 was incurred in 2001 and 2000, respectively).
At December 31, 2002 and 2001, the Company had a mortgage obligation
payable to a financial institution of $1,037,000 and $1,628,000,
respectively, due September 13, 2004. The mortgage obligation relates to a
distribution facility, is collateralized by the related real estate asset
($4,303,000 carrying value at December 31, 2002) and bears interest at
8.51%.
(e) In conjunction with the acquisition of the remaining 25% interest in its
subsidiary, Amscan Holdings Limited, in 1998, the Company issued a
non-interest bearing note to the former shareholder which is payable
through April 2004. At December 31, 2002 and 2001, the note to the former
shareholder was $140,000 and $228,000, respectively.
F-17
In connection with the acquisition of all the capital stock of Anagram
International, Inc., and certain related companies (collectively,
"Anagram") in 1998, the Company assumed a note payable to a former employee
of Anagram which note was paid in full by March 2002. At December 31, 2001,
the note to the former employee was $30,000 and bore interest at a fixed
interest rate of 10%.
(f) The Company has entered into various capital leases for machinery and
equipment with implicit interest rates ranging from 4.85% to 9.20% which
extend to 2006.
At December 31, 2002, maturities of long-term obligations consisted of the
following (dollars in thousands):
Mortgage, Notes Capital
and Loans Lease Obligations Total
--------- ----------------- -----
2003 ................ $ 3,132 $ 88 $ 3,220
2004 ................ 3,015 48 3,063
2005 ................ 2,522 50 2,572
2006 ................ 83,748 25 83,773
2007 ................ 193,232 -- 193,232
Thereafter .......... 12,780 -- 12,780
-------- -------- --------
Long-term obligations $298,429 $ 211 $298,640
======== ======== ========
NOTE 7 - PROVISION FOR DOUBTFUL ACCOUNTS
During the third quarter of 2001, one of the Company's customers filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code and, as a result, the Company charged $1.5 million and $1.0 million to the
provision for doubtful accounts during the third and fourth quarters of 2001,
respectively, to fully provide for the accounts receivable balances due to the
Company. This customer accounted for approximately 2.1% of the Company's
consolidated net sales for the year ended December 31, 2001.
During the second quarter of 2000, two of the Company's customers filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code. As a result of the filings, the Company charged $3.4 million and $1.0
million to the provision for doubtful accounts during the second and fourth
quarters of 2000, respectively, to fully provide for the accounts receivable
balances due to the Company from these customers. On a combined basis, these two
customers accounted for approximately 1.9% of the Company's consolidated net
sales for the year ended December 31, 2000. The Company also charged $1.6
million to the provision for doubtful accounts during the fourth quarter of
2000, which represented the remaining accounts receivable balance from a
customer that filed for bankruptcy during 1999.
NOTE 8 - WRITE-OFF OF DEFERRED FINANCING AND IPO-RELATED COSTS
During the fourth quarter of 2002, the Company amended and restated its
Bank Credit Facilities with various lenders (see Notes 5 and 6) which resulted
in a $1,460,000 write-off of deferred financing costs associated with the
previous facility.
On June 13, 2002, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering ("IPO") of its
Common Stock. However, during the fourth quarter of 2002, the Company decided
not to pursue the IPO of shares of its Common Stock, which resulted in a
$801,000 write-off of costs associated with the offering. On March 12, 2003, the
Company filed a Form RW with the Securities and Exchange Commission withdrawing
its registration statement for the IPO.
F-18
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
NOTE 9 - RESTRUCTURING CHARGES
During the year ended December 31, 2002, the Company incurred charges
of $0.6 million resulting from the consolidation of the fabrication operations
of M&D Balloons into its existing balloon operations. In addition, the Company
incurred charges of $0.4 million and $0.7 million relating to the consolidation
of certain domestic and foreign distribution operations, respectively. The
consolidation of the Company's distribution and balloon operations may result in
additional restructuring charges in subsequent periods.
During 2000, the Company incurred charges of $0.2 million in connection
with the consolidation of certain manufacturing operations and an additional
$0.3 million in connection with the restructuring of its distribution operations
that began in 1998.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company maintain profit-sharing plans for
eligible employees providing for annual discretionary contributions to a trust.
Eligible employees are full-time domestic employees who have completed a certain
length of service, as defined, and attained a certain age, as defined. The plans
require the subsidiaries to match 25% to 100% of voluntary employee
contributions to the plan, up to the first 6% of an employee's annual salary.
Profit sharing expense for the years ended December 31, 2002, 2001 and 2000
totaled $3,054,000, $2,462,000 and $2,220,000, respectively.
NOTE 11 - STOCK OPTION PLAN
The Company adopted the Amscan Holdings, Inc. Stock Incentive Plan (the
"1997 Stock Incentive Plan") in 1997. The 1997 Stock Incentive Plan is
administered by the Board of Directors. Under the terms of the 1997 Stock
Incentive Plan, as amended, the Board may award Company Common Stock, stock
options and stock appreciation rights to certain directors, officers, employees
and consultants of the Company and its affiliates. The vesting periods for
awards are determined by the Board at the time of grant. As of December 31,
2002, there were 150 shares of Company Common Stock reserved for issuance under
the 1997 Stock Incentive Plan. The 1997 Stock Incentive Plan will terminate ten
years after its effective date; however, awards outstanding as of such date will
not be affected or impaired by such termination.
The options granted under the 1997 Stock Incentive Plan vest in equal
installments on each of the first five anniversaries of the grant date. The
options are non-transferable (except under certain limited circumstances) and
have a term of ten years. The following table summarizes the changes in
outstanding options under the 1997 Stock Incentive Plan for the years ended
December 31, 2002, 2001 and 2000:
F-19
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
Average Fair Market
Average Value of Options
Options Exercise Price at Grant Date
------- -------------- -------------
Outstanding at December 31, 1999 129.955
Granted ............... 3.750 $125,000 $ 44,562
Granted ............... 4.500 150,000 53,474
Exercised ............. (0.096) 54,545
Exercised ............. (0.037) 75,000
Canceled .............. (0.143) 54,545
Canceled .............. (0.962) 75,000
--------
Outstanding at December 31, 2000 136.967
Granted ............... 2.500 150,000 53,474
Exercised ............. (0.666) 75,000
Exercised ............. (0.287) 55,102
Canceled .............. (0.191) 55,102
Canceled .............. (0.444) 75,000
Canceled .............. (4.500) 125,000
--------
Outstanding at December 31, 2001 133.379
Granted ............... 2.500 155,000 55,257
Canceled .............. (1.000) 150,000
Canceled .............. (2.805) 75,000
--------
Outstanding at December 31, 2002 132.074
========
Exercisable at December 31, 2000 67.267 77,256
Exercisable at December 31, 2001 91.290 78,977
Exercisable at December 31, 2002 115.210 80,611
The average exercise price for options outstanding as of December 31,
2002 was $87,620 with exercise prices ranging from $54,545 to $155,000. The
average remaining contractual life of those options was 5.6 years.
NOTE 12- INCOME TAXES
A summary of domestic and foreign pre-tax income (loss) follows
(dollars in thousands):
Years Ended December 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
Domestic ............. $ 28,172 $ 17,350 $ 9,639
Foreign .............. (938) 1,443 3,900
-------- -------- --------
Total ................ $ 27,234 $ 18,793 $ 13,539
======== ======== ========
F-20
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
The provision for income taxes consisted of the following (dollars in
thousands):
Years Ended December 31,
2002 2001 2000
-------- -------- --------
Current:
Federal ......................... $ 5,452 $ 4,266 $ 1,551
State ........................... 993 1,101 688
Foreign ......................... (557) 436 1,348
-------- -------- --------
Total current provision ....... 5,888 5,803 3,587
Deferred:
Federal ......................... 4,422 1,400 1,528
State ........................... 591 143 233
Foreign ......................... (144) 77 --
-------- -------- --------
Total deferred provision ...... 4,869 1,620 1,761
-------- -------- --------
Income tax expense ..................... $ 10,757 $ 7,423 $ 5,348
======== ======== ========
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred income
tax assets and liabilities from domestic jurisdictions consisted of the
following at December 31 (dollars in thousands):
2002 2001
-------- --------
Current deferred tax assets:
Allowance for doubtful accounts ........................................ $ 1,871 $ 1,216
Accrued liabilities .................................................... 153 322
Inventories ............................................................ 2,999 2,202
Charitable contributions carryforward .................................. -- 166
Other .................................................................. 18 279
-------- --------
Current deferred tax assets (included in prepaid expenses and other
current assets) ................................................. $ 5,041 $ 4,185
======== ========
2002 2001
-------- --------
Non-current deferred tax liabilities, net:
Property, plant and equipment .......................................... $ 16,885 $ 14,433
Amortization of goodwill and other intangibles ......................... 2,076 721
Royalty reserves ....................................................... (455) (9)
Foreign tax credits .................................................... (308)
Interest rate swap and foreign exchange contracts ...................... (726) (76)
Other .................................................................. (112) 112
-------- --------
Non-current deferred tax liabilities, net ......................... $ 17,360 $ 15,181
======== ========
A non-current foreign deferred tax asset of $600,000 and $456,000 at
December 31, 2002 and 2001, respectively, is primarily attributable to
non-current obligations recognized in connection with the acquisition of Anagram
in 1998 and is included in non-current assets, net.
The difference between the Company's effective income tax rate and the
federal statutory income tax rate is reconciled below:
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Provision at federal statutory income tax rate .. 35.0% 35.0% 34.0%
State income tax, net of federal tax benefit .... 3.8 4.7 4.5
Other ........................................... 0.7 (0.2) 1.0
---- ---- ----
Effective income tax rate ....................... 39.5% 39.5% 39.5%
==== ==== ====
At December 31, 2002, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries
F-21
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
was approximately $11,536,000. No provision has been made for U.S. or additional
foreign taxes on the undistributed earnings of foreign subsidiaries because such
earnings are expected to be reinvested indefinitely in the subsidiaries'
operations. It is not practical to estimate the amount of additional tax that
might be payable on these foreign earnings in the event of distribution or sale;
however, under existing law, foreign tax credits would be available to
substantially reduce incremental U.S. taxes payable on amounts repatriated.
NOTE 13- CAPITAL STOCK
At December 31, 2002 and 2001, employee stockholders held 196.92 and
193.20 shares, respectively, of fully paid and vested Common Stock. Under the
terms of the stockholders' agreement (the "Stockholders' Agreement"), the
Company can purchase all of the shares held by the employee stockholders. The
purchase price as prescribed in the Stockholders' Agreement is to be determined
through a market valuation of the minority-held shares. In addition, under the
terms of the Stockholders' Agreement, the Company can be required to purchase
all of the shares held by an employee stockholder in the case of death or
disability, at a price determined by a market valuation and, in all other
instances, at the lower of the share's cost, as defined, or the market
valuation. All common shares held by employees are recorded as redeemable Common
Stock, at the estimated fair market value of the stock, with a corresponding
adjustment to stockholders' deficit. At December 31, 2002 and 2001, the
aggregate amount that may be payable by the Company to employee stockholders,
based on the then estimated market value for fully paid and vested shares, was
approximately $30,523,000 and $29,949,000, respectively, and has been classified
as redeemable Common Stock on the consolidated balance sheets. As there is no
active market for the Company's Common Stock, the Company estimates the fair
value of its Common Stock using various valuation techniques including recent
third party transactions.
At December 31, 2002 and 2001, 6.38 and 6.67 shares, respectively, of
Common Stock (the "Restricted Stock") were subject to the vesting provisions of
employment agreements with the President and Executive Vice President of the
Company. The Restricted Stock held by the President and Executive Vice President
will vest in June 2003 and December 2004, respectively. During the years ended
December 31, 2002, 2001 and 2000, the Company recorded the amortization of
Restricted Stock of $236,000, $260,000 and $51,000, respectively, as
compensation expense, which is included in general and administrative expenses
in the Company's consolidated statements of income.
At December 31, 2002, the Company held notes receivable from a former
officer and a current officer in the amounts of $613,000 and $25,000,
respectively. At December 31, 2001, the Company held notes receivable from a
current officer and a former officer totaling $601,000. These notes arose in
connection with the issuance of shares of Common Stock to the officers. The
notes held at December 31, 2002 bear interest at 6.65% and LIBOR plus 2% and
mature in March 2009 and January 2004, respectively. The notes receivable are
shown on the balance sheets as an increase in stockholders' deficit.
In February 2002, the Company issued 96.774 shares of its Common Stock,
at a value of $155,000 per share, to American Greetings in connection with the
acquisition of M&D Balloons (see Note 1).
On January 1, 2002, the Company issued 3.0 shares of Restricted Stock,
with an aggregate value of $465,000 to its Executive Vice President, subject to
the vesting provisions of an employment agreement. The shares of Restricted
Stock will vest on December 31, 2004.
In September 1998, the Company issued warrants to purchase 10.0 shares
of Common Stock at $125,000 per share in connection with the acquisition of all
the capital stock of Anagram. The warrants, which were valued at $225,000 and
were fully exercisable upon issuance, expire on September 17, 2008 and were
included as a cost of the acquisition of Anagram.
On March 30, 2001, the Board of Directors authorized 500 shares of
preferred stock, $0.10 par value, and designated 100 shares as Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Convertible
Preferred Stock"). Also on March 30, 2001, the Company issued 40 shares of
Series A Redeemable Convertible
F-22
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
Preferred Stock to GSCP for proceeds of $6.0 million. Dividends are cumulative
and payable annually at 6% per annum. On March 30, 2002, the annual dividend was
distributed in additional shares of Series A Redeemable Convertible Preferred
Stock. Dividends payable on or prior to March 30, 2004, are payable in
additional shares of Series A Redeemable Convertible Preferred Stock. Subsequent
to March 30, 2004, dividends are payable, at the option of the Company, either
in cash or additional shares of Series A Redeemable Convertible Preferred Stock.
At December 31, 2002, accrued dividends aggregated $286,200 and are included in
redeemable convertible preferred stock on the consolidated balance sheet.
Each share of the Series A Redeemable Convertible Preferred Stock is
convertible at the option of the holder, at any time, into one share of Common
Stock of the Company, $0.10 par value, at a conversion price equal to the fair
value of the Common Stock at the date the redeemable convertible preferred stock
was issued, subject to adjustment for the effects of subsequent Common Stock
splits or stock dividends. At December 31, 2002, the redeemable convertible
preferred stock was convertible into Common Stock at a price of $150,000 per
common share. As of December 31, 2002, there were 44.31 shares of Common Stock
reserved for such conversion.
The Series A Redeemable Convertible Preferred Stock is not redeemable
on or prior to March 30, 2004. To the extent the Company shall have funds
legally available to redeem these shares, the Company may redeem these shares,
in whole or, with the consent of the holders of a majority of the outstanding
Series A Redeemable Convertible Preferred Stock, in part, at a redemption of
$150,000 per share, in cash, together with accrued and unpaid dividends. To the
extent the Company shall have funds legally available to redeem these shares on
March 30, 2008, the Company is required to redeem all outstanding shares of
Series A Redeemable Convertible Preferred Stock at a redemption price per share
equal to $150,000 in cash, together with accrued and unpaid dividends. The
holders of the Series A Redeemable Convertible Preferred Stock have liquidation
rights equal to their original investment plus accrued but unpaid dividends.
The Company has not paid any dividends on the Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for working capital, repayment of
indebtedness, capital expenditures and general corporate purposes. In addition,
the Company's current credit facility and the indenture governing its notes
contain restrictive covenants which have the effect of limiting the Company's
ability to pay dividends or distributions to its stockholders.
NOTE 14- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Lease Agreements
- ----------------
The Company is obligated under various capital leases for certain
machinery and equipment which expire on various dates through 2006 (see Note 6).
At December 31, 2002 and 2001, the amount of machinery and equipment and related
accumulated amortization recorded under capital leases and included with
property, plant and equipment consisted of the following (dollars in thousands):
2002 2001
------- -------
Machinery and equipment .................... $ 4,343 $ 7,291
Less: accumulated amortization ............. (3,382) (4,111)
------- -------
$ 961 $ 3,180
======= =======
Amortization of assets held under capitalized leases is included in
depreciation expense.
The Company has several non-cancelable operating leases principally for
office, distribution and manufacturing facilities, showrooms, and warehouse
equipment that expire on various dates through 2017. These leases generally
contain renewal options and require the Company to pay real estate taxes,
utilities and related insurance.
F-23
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
At December 31, 2002, future minimum lease payments under all operating
leases consisted of the following (dollars in thousands):
2003..................................... $12,146
2004..................................... 9,802
2005..................................... 8,598
2006..................................... 6,913
2007..................................... 6,251
Thereafter............................... 10,523
-------
$54,233
=======
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$12,705,000, $9,450,000, and $9,040,000, respectively.
Royalty Agreements
- ------------------
The Company has entered into royalty agreements with various licensors
of copyrighted and trademarked characters and designs used on the Company's
products which require royalty payments based on sales of the Company's
products, or in some cases, annual minimum royalties.
At December 31, 2002, the Company's commitment to pay future minimum
royalties was as follows (dollars in thousands):
2003..................................... $4,278
2004..................................... 3,332
2005..................................... 270
Thereafter............................... -
------
$7,880
======
Royalty expense for the years ended December 31, 2002, 2001 and 2000
was $6,192,000, $4,494,000, and $4,109,000, respectively.
Legal Proceedings
- -----------------
The Company is a party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings will
result, individually or in the aggregate, in a material adverse effect upon its
financial condition or future results of operations.
Related Party Transactions
- --------------------------
During 2001, the Company amended a line of credit granted to the Chief
Executive Officer, increasing the line from $1,000,000 to $1,400,000. Borrowings
under the line bear interest at the Company's incremental borrowing rate in
effect during the time such loan is outstanding. The interest is payable
annually or, at the option of the Chief Executive Officer, accrues to the
principal balance. The line of credit expires on June 15, 2004. Amounts borrowed
under the line are evidenced by a limited recourse secured promissory note,
secured by a lien on the equity interests that the Chief Executive Officer has
in the Company. The note requires that all principal payments be made only from
the equity pledged as collateral. At December 31, 2002 and 2001, borrowings,
including accrued interest, under this line totaled $1,551,000 and $1,463,000,
respectively.
On June 15, 2001, the Company entered into a limited recourse secured
promissory note with the President of the Company. The note evidences loans made
or to be made to the President at his request, in connection with the payment of
any personal federal, state or local income taxes due and payable upon and in
respect of the vesting of the President's Restricted Stock (see "Note 13 -
Capital Stock"). The Company's obligation to extend loans under the note is
limited to the amount of income taxes the President is actually required to pay
subsequent to June 15, 2001. Amounts borrowed under the note and any interest
thereon is secured by a lien on the equity interests that the President has in
the Company. The note bears interest at 5.43% per annum and is payable, together
with interest, on January 1, 2010. The
F-24
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
note requires that all payments of principal and interest due thereunder be made
only from the equity pledged as collateral. At December 31, 2002 and 2001, the
amount borrowed under the note totaled $391,300 and $177,000, respectively.
Pursuant to the Stockholders' Agreement, Goldman Sachs, an affiliate of
GSCP which owned approximately 66.9% of the Company's Common Stock (excluding
the potential impact of the conversion of the redeemable convertible preferred
stock) at December 31, 2002, has the exclusive right (if it so elects) to
perform, through its various affiliated companies, certain investment banking
and similar services for the Company on customary terms. Goldman Sachs may from
time to time receive customary fees for services rendered to the Company.
Goldman Sachs Credit Partners L.P., an affiliate of Goldman Sachs and GSCP, has
served as the arranger and syndication agent for the Company's term loans and
revolving credit facilities since December 1997. On December 20, 2002, Amscan
amended and restated its existing credit facility, with Goldman Sachs Credit
Partners L.P. as sole lead arranger, sole bookrunner and syndication agent. For
the year ended December 31, 2002 and 2000, Amscan paid Goldman Sachs and its
affiliates fees for services of $3,231,572 and $350,000, respectively. No fees
were paid to Goldman Sachs and its affiliates in 2001.
On March 30, 2001, the Company issued 40 shares of Series A
Redeemable Convertible Preferred Stock to GSCP, for proceeds of $6.0 million
(see Note 13). Dividends are cumulative and payable annually at 6% per annum.
Dividends payable on or prior to March 30, 2004, are payable in additional
shares of Series A Redeemable Convertible Preferred Stock. Subsequent to March
30, 2004, dividends are payable, at the option of the Company, either in cash or
additional shares of Series A Redeemable Convertible Preferred Stock. At
December 31, 2002, 42.40 shares of Series A Redeemable Convertible Preferred
Stock were issued and outstanding and accrued dividends aggregated $286,200.
NOTE 15 - SEGMENT INFORMATION
Industry Segments
- -----------------
The Company manages its operations as one industry segment which involves
the design, manufacture, contract for manufacture and distribution of party
goods, including decorative party goods, metallic balloons, stationery and gift
items.
Geographic Segments
- -------------------
The Company's export sales, other than those intercompany sales reported
below as sales between geographic areas, are not material. Sales between
geographic areas primarily consist of sales of finished goods for distribution
in the foreign markets. No single foreign operation is significant to the
Company's consolidated operations. Sales between geographic areas are made at
cost plus a share of operating profit.
The Company's geographic area data for each of the three years ended
December 31, 2002, 2001 and 2000 were as follows (dollars in thousands):
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
2002
Sales to unaffiliated customers ...................... $ 332,187 $ 53,416 $ 385,603
Sales between geographic areas ....................... 23,156 $ (23,156)
--------- --------- --------- ---------
Net sales ............................................ $ 355,343 $ 53,416 $ (23,156) $ 385,603
========= ========= ========= =========
Income from operations ............................... $ 46,481 $ 1,410 $ 824 $ 48,715
========= ========= =========
Interest expense, net ................................ 21,792
Other income, net .................................... (311)
---------
Income before income taxes and minority interests .... $ 27,234
=========
Long-lived assets .................................... $ 179,363 $ 7,364 $ 186,727
========= ========= =========
F-25
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
2001
Sales to unaffiliated customers ...................... $ 297,585 $ 47,598 $ 345,183
Sales between geographic areas ....................... 24,051 $ (24,051)
--------- --------- --------- ---------
Net sales ............................................ $ 321,636 $ 47,598 $ (24,051) $ 345,183
========= ========= ========= =========
Income from operations ............................... $ 39,385 $ 2,430 $ 1,071 $ 42,886
========= ========= =========
Interest expense, net ................................ 24,069
Other expense, net ................................... 24
---------
Income before income taxes and minority interests .... $ 18,793
=========
Long-lived assets .................................... $ 151,578 $ 6,600 $ 158,178
========= ========= =========
Domestic Foreign Eliminations Consolidated
-------- ------- ------------ ------------
2000
Sales to unaffiliated customers ...................... $ 278,508 $ 44,976 $ 323,484
Sales between geographic areas ....................... 20,408 $ (20,408) --
--------- --------- --------- ---------
Net sales ............................................ $ 298,916 $ 44,976 $ (20,408) $ 323,484
========= ========= ========= =========
Income from operations ............................... $ 35,190 $ 4,575 $ 225 $ 39,990
========= ========= =========
Interest expense, net ................................ 26,355
Other expense, net ................................... 96
---------
Income before income taxes and minority interests .... $ 13,539
=========
Long-lived assets .................................... $ 128,635 $ 7,034 $ 135,669
========= ========= =========
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts
receivables, deposits and other current assets, loans and notes payable,
accounts payable, accrued expenses and other current liabilities approximate
fair value at December 31, 2002 and 2001 because of the short-term maturity of
those instruments or their variable rates of interest.
The estimated fair value of the Company's $110,000,000 Notes at
December 31, 2002 and 2001, was $101,772,000 and $87,835,000, respectively,
included in the consolidated balance sheets. The carrying amounts of the
Company's borrowings under its Credit Agreement and other revolving credit
facilities approximate fair value because such obligations generally bear
interest at floating rates. The carrying amounts for other long-term debt
approximate fair value at December 31, 2002 and 2001, based on the discounted
future cash flow of each instrument at rates currently offered for similar debt
instruments of comparable maturity.
NOTE 17 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
All derivative financial instruments that qualify for hedge accounting,
such as interest rate swaps and foreign currency exchange agreements, are
recognized on the balance sheet at fair value and changes in fair value are
recognized periodically in either income or shareholders' deficit (as a
component of other comprehensive income). For derivative financial instruments
that are designated and qualify as a cash flow hedge (i.e., hedging the exposure
to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a cash flow hedge, if
any, is determined based on the dollar-offset method (i.e., the gain or loss on
the derivative financial instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item) and is recognized in
current earnings during the period of change. As long as hedge effectiveness is
F-26
maintained, the Company's interest rate swap arrangements and foreign currency
exchange agreements qualify for hedge accounting as cash flow hedges.
Interest Rate Risk Management
- -----------------------------
As part of the Company's risk management strategy, the Company
periodically uses interest rate swap agreements to hedge the variability of cash
flows on floating rate debt obligations (see Note 6). Accordingly, the interest
rate swap agreements are reflected in the consolidated balance sheet at fair
value and the related gains and losses on these contracts are deferred in
stockholders' deficit and recognized in interest expense over the same period in
which the related interest payments being hedged are recognized in income. To
effectively fix the interest rate of its $10,000,000 mortgage note (see Note 6),
the Company entered into an interest rate swap agreement with a financial
institution for a notional amount of $10,000,000, agreeing to receive 30-day
LIBOR and to pay 5.65%. The fair value of interest rate swaps is the estimated
amount that the counterparty would receive or pay to terminate the swap
agreements at the reporting date, taking into account current interest rates and
the current creditworthiness of the swap counterparties. At December 31, 2002,
this hedge had an unrealized net loss of $644,000, which has been included in
accumulated other comprehensive loss (see Note 18). As this hedge is 100%
effective, there is no current impact on earnings due to hedge ineffectiveness.
At December 31, 2001, the fair value of the interest rate swap agreement was
immaterial.
Foreign Exchange Risk Management
- --------------------------------
A portion of the Company's cash flows is derived from transactions
denominated in foreign currencies. The United States dollar value of
transactions denominated in foreign currencies fluctuates as the United States
dollar strengthens or weakens relative to these foreign currencies. In order to
reduce the uncertainty of foreign exchange rate movements on transactions
denominated in foreign currencies, including the British Pound Sterling and the
Euro, the Company enters into foreign exchange contracts with major
international financial institutions. These forward contracts, which typically
mature within one year, are designed to hedge anticipated foreign currency
transactions, primarily inter-company inventory purchases and trade receivables.
No components of the contracts are excluded in the measurement of hedge
effectiveness. The critical terms of the foreign exchange contracts are the same
as the underlying forecasted transactions; therefore, changes in the fair value
of foreign contracts should be highly effective in offsetting changes in the
expected cash flows from the forecasted transactions. At December 31, 2002 and
2001, the Company had contracts in the notional amounts of $20.4 million and
$10.4 million of foreign currency exchange contracts. The foreign currency
exchange contracts are reflected in the consolidated balance sheet at fair value
and the related gains and losses on these contracts are deferred in
stockholders' deficit. The fair value adjustment at December 31, 2002 and 2001
are unrealized net losses of $466,000, and $114,000, respectively, which have
been included in accumulated other comprehensive loss. The Company anticipates
that all gains and losses in accumulated other comprehensive loss related to
foreign exchange contracts will be reclassified into earnings by December 2003.
F-27
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
NOTE 18 - COMPREHENSIVE INCOME
Comprehensive income consisted of the following (dollars in
thousands):
Years Ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Net income ................................................. $ 16,465 $ 11,302 $ 8,116
Net change in cumulative translation adjustment ............ 1,304 (434) (1,457)
Cumulative effect of a change in accounting principle
to recognize the fair value of the Company's interest
rate swap contracts, net of taxes of $148 (see Note 17) . (227)
Change in fair value of the Company's interest rate
swap contracts, net of taxes of $421 and $(148),
respectively (see Note 17) .............................. (644) 227
Change in fair value of the Company's foreign
exchange contracts, net of taxes of $229 and $76,
respectively (see Note 17) ........................... (352) (114)
-------- -------- --------
$ 16,773 $ 10,754 $ 6,659
======== ======== ========
Accumulated other comprehensive loss consisted of the following at
December 31 (dollars in thousands):
2002 2001
------- -------
Cumulative translation adjustment ....................... $(1,475) $(2,779)
Interest rate swap contract qualifying as a hedge, net of
taxes of $421 ...................................... (644)
Foreign exchange contracts qualifying as hedges,
net of taxes of $305 and $76, respectively ............ (466) (114)
------- -------
$(2,585) $(2,893)
NOTE 19 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
On December 20, 2002, Amscan amended and restated its existing credit
facility (see Notes 5 and 6). Under the terms of the Credit Agreement, the
Lenders agreed to amend and restate the Company's existing bank credit
agreements in their entirety and to provide a $200,000,000 senior secured
facility consisting of a $170,000,000 Term Loan and up to $30,000,000 aggregate
principal amount of revolving loans under the Revolver. The proceeds of the Term
Loan were used to redesignate and replace the Company's AXEL term loan and
revolver borrowings existing under the Bank Credit Facilities at the closing
date and to pay certain fees and expenses associated with the refinancing.
On December 19, 1997, the Company also issued $110,000,000 aggregate
principal amount of 9.875% senior subordinated notes due in December 2007 (see
Note 6). The repayment of the Notes and borrowings under the Credit
F-28
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
Agreement are guaranteed jointly and severally, fully and unconditionally, by
the following wholly-owned Guarantor subsidiaries:
o Amscan Inc.
o Trisar, Inc.
o Am-Source, LLC
o Anagram International, Inc.
o Anagram International Holdings, Inc.
o Anagram International, LLC
o M&D Balloons, Inc.
o SSY Realty Corp.
o JCS Realty Corp.
o Anagram Eden Prairie Property Holdings LLC
Non-guarantor subsidiaries ("Non-guarantors") include the following:
o Amscan Distributors (Canada) Ltd.
o Amscan Holdings Limited
o Amscan (Asia-Pacific) Pty. Ltd.
o Amscan Partyartikel GmbH
o Amscan Svenska AB
o Amscan de Mexico, S.A. de C.V.
o Anagram International (Japan) Co., Ltd.
o Anagram Mexico S. de R.L. de C.V.
o Anagram Espana, S.A.
o Anagram France S.C.S.
The following consolidating information presents consolidating balance
sheets as of December 31, 2002 and 2001, and the related consolidating
statements of income and cash flows for each of the three years in the period
ended December 31, 2002 for the combined Guarantors and the combined
Non-guarantors and elimination entries necessary to consolidate the entities
comprising the combined companies.
F-29
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING BALANCE SHEET
December 31, 2002
(Dollars in thousands)
(Unaudited)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 1,483 $ 917 $ 2,400
Accounts receivable, net .................... 62,520 11,727 74,247
Inventories ................................. 83,659 11,138 $ (907) 93,890
Prepaid expenses and other current assets ... 13,411 2,280 (458) 15,233
--------- --------- --------- ---------
Total current assets ........................ 161,073 26,062 (1,365) 185,770
Property, plant and equipment, net ............. 98,951 1,353 100,304
Goodwill, net .................................. 68,611 5,640 74,251
Notes receivable from officers ................. 1,942 1,942
Other assets, net .............................. 34,788 627 (25,185) 10,230
--------- --------- --------- ---------
Total assets ................................ $ 365,365 $ 33,682 $ (26,550) $ 372,497
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable ..................... $ -- $ -- $ --
Accounts payable ............................ 37,813 1,432 39,245
Accrued expenses ............................ 15,937 5,587 21,524
Income taxes payable ........................ 3,037 $ (512) 2,525
Current portion of long-term
obligations ............................... 3,052 168 3,220
--------- --------- --------- ---------
Total current liabilities ................... 59,839 7,187 (512) 66,514
Long-term obligations, excluding
current portion .............................. 295,274 146 295,420
Deferred income tax liabilities ................ 17,360 17,360
Other .......................................... 1,153 16,052 (14,888) 2,317
--------- --------- --------- ---------
Total liabilities .............................. 373,626 23,385 (15,400) 381,611
Redeemable convertible preferred stock ......... 6,646 6,646
Redeemable Common Stock ........................ 30,523 30,523
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 14,814 658 (658) 14,814
Unamortized restricted Common Stock
award, net ............................... (323) (323)
Notes receivable from stockholders .......... (638) (638)
(Deficit) retained earnings ................. (56,698) 11,198 (12,051) (57,551)
Accumulated other comprehensive loss ........ (2,585) (1,898) 1,898 (2,585)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .... (45,430) 10,297 (11,150) (46,283)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity ...... $ 365,365 $ 33,682 $ (26,550) $ 372,497
========= ========= ========= =========
F-30
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING BALANCE SHEET
December 31, 2001
(Dollars in thousands)
(Unaudited)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 60 $ 956 $ 1,016
Accounts receivable, net .................... 56,408 8,631 65,039
Inventories ................................. 65,939 7,414 $ (771) 72,582
Prepaid expenses and other current assets ... 12,339 1,320 13,659
--------- --------- --------- ---------
Total current assets ........................ 134,746 18,321 (771) 152,296
Property, plant and equipment, net ............... 93,420 1,169 94,589
Goodwill, net .................................... 51,136 4,849 55,985
Notes receivable from officers ................... 1,640 1,640
Other assets, net ................................ 22,859 4,880 (21,775) 5,964
--------- --------- --------- ---------
Total assets ................................ $ 303,801 $ 29,219 $ (22,546) $ 310,474
========= ========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Loans and notes payable ..................... $ 700 $ -- $ 700
Accounts payable ............................ 32,127 956 33,083
Accrued expenses ............................ 12,178 3,869 16,047
Income taxes payable ........................ 2,225 73 2,298
Current portion of long-term
obligations ............................... 3,318 137 3,455
--------- --------- --------- ---------
Total current liabilities ................... 50,548 5,035 55,583
Long-term obligations, excluding
current portion ................................ 278,198 245 278,443
Deferred income tax liabilities .................. 15,181 15,181
Other ............................................ 189 14,236 $ (12,072) 2,353
--------- --------- --------- ---------
Total liabilities ................................ 344,116 19,516 (12,072) 351,560
Redeemable convertible preferred stock ........... 6,270 6,270
Redeemable Common Stock .......................... 29,949 29,949
Commitments and Contingencies
Stockholders' (deficit) equity:
Common Stock ................................ 339 (339) --
Additional paid-in capital .................. 299 658 (658) 299
Unamortized restricted Common Stock
award, net ............................... (94) (94)
Notes receivable from stockholders .......... (601) (601)
(Deficit) retained earnings ................. (73,245) 11,082 (11,853) (74,016)
Accumulated other comprehensive loss ........ (2,893) (2,376) 2,376 (2,893)
--------- --------- --------- ---------
Total stockholders' (deficit) equity .... (76,534) 9,703 (10,474) (77,305)
--------- --------- --------- ---------
Total liabilities, redeemable convertible
preferred and Common Stock and
stockholders' (deficit) equity .......... $ 303,801 $ 29,219 $ (22,546) $ 310,474
========= ========= ========= =========
F-31
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2002
(Dollars in thousands)
(Unaudited)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ............................................ $ 350,585 $ 53,416 $ (18,398) $ 385,603
Cost of sales ........................................ 233,112 38,130 (18,262) 252,980
--------- --------- --------- ---------
Gross profit ................................ 117,473 15,286 (136) 132,623
Operating expenses:
Selling expenses ................................. 28,586 6,033 34,619
General and administrative expenses .............. 26,764 6,252 (960) 32,056
Provision for doubtful accounts .................. 2,147 861 3,008
Art and development costs ........................ 10,301 10,301
Write-off of deferred financing and IPO-related
costs .......................................... 2,261 2,261
Restructuring charges ............................ 933 730 1,663
--------- --------- --------- ---------
Income from operations ...................... 46,481 1,410 824 48,715
Interest expense, net ................................ 21,121 671 21,792
Other (income) expense, net .......................... (2,182) 2,327 (456) (311)
--------- --------- --------- ---------
Income (loss) before income taxes
and minority interests .................... 27,542 (1,588) 1,280 27,234
Income tax expense (benefit) ......................... 10,995 (184) (54) 10,757
Minority interests ................................... 12 12
--------- --------- --------- ---------
Net income (loss) ........................... 16,547 (1,416) 1,334 16,465
Dividend on redeemable convertible
preferred stock ......................... 376 376
--------- --------- --------- ---------
Net income (loss) applicable to common shares $ 16,171 $ (1,416) $ 1,334 $ 16,089
========= ========= ========= =========
F-32
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2001
(Dollars in thousands)
(Unaudited)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ..................................... $ 321,327 $ 45,380 $ (21,524) $ 345,183
Cost of sales ................................. 214,505 31,751 (21,220) 225,036
--------- --------- --------- ---------
Gross profit ......................... 106,822 13,629 (304) 120,147
Operating expenses:
Selling expenses .......................... 26,355 5,059 31,414
General and administrative expenses ....... 28,728 5,972 (1,383) 33,317
Provision for doubtful accounts ........... 3,582 176 3,758
Art and development costs ................. 8,772 8,772
--------- --------- --------- ---------
Income from operations ............... 39,385 2,422 1,079 42,886
Interest expense, net ......................... 23,442 627 24,069
Other (income) expense, net ................... (2,611) 61 2,574 24
--------- --------- --------- ---------
Income before income taxes
and minority interests ............. 18,554 1,734 (1,495) 18,793
Income tax expense ............................ 6,948 475 7,423
Minority interests ............................ 68 68
--------- --------- --------- ---------
Net income ........................... 11,606 1,191 (1,495) 11,302
Dividend on redeemable convertible
preferred stock ................... 270 270
--------- --------- --------- ---------
Net income applicable to common shares $ 11,336 $ 1,191 $ (1,495) $ 11,032
========= ========= ========= =========
F-33
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF INCOME
For the Year Ended December 31, 2000
(Dollars in thousands)
(Unaudited)
Amscan
Holdings and Combined
Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Net sales ............................. $ 299,647 $ 43,913 $ (20,076) $ 323,484
Cost of sales ......................... 198,582 28,399 (20,109) 206,872
--------- --------- --------- ---------
Gross profit ................. 101,065 15,514 33 116,612
Operating expenses:
Selling expenses .................. 23,066 5,512 28,578
General and administrative expenses 27,014 5,136 (192) 31,958
Provision for doubtful accounts ... 6,896 237 7,133
Art and development costs ......... 8,453 8,453
Restructuring charges ............. 500 500
--------- --------- --------- ---------
Income from operations ....... 35,136 4,629 225 39,990
Interest expense, net ................. 25,725 630 26,355
Other (income) expense, net ........... (2,642) 393 2,345 96
--------- --------- --------- ---------
Income before income taxes
and minority interests ..... 12,053 3,606 (2,120) 13,539
Income tax expense .................... 3,970 1,378 5,348
Minority interests .................... 75 75
--------- --------- --------- ---------
Net income ................... $ 8,083 $ 2,153 $ (2,120) $ 8,116
========= ========= ========= =========
F-34
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002
(Dollars in thousands)
(Unaudited)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income (loss) .................................................. $ 16,547 $ (1,416) $ 1,334 $ 16,465
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................................. 13,443 519 13,962
Amortization of deferred financing costs ....................... 1,202 1,202
(Gain) loss on disposal of property, plant and equipment ....... (348) 94 (254)
Provision for doubtful accounts ................................ 2,147 861 3,008
Write-off of deferred financing costs .......................... 1,460 1,460
Amortization of restricted Common Stock awards ................. 236 236
Deferred income tax provision (benefit) ........................ 5,013 (144) 4,869
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable ........................... (4,528) (3,406) (7,934)
(Increase) decrease in inventories ........................ (13,710) (1,817) 136 (15,391)
(Increase) decrease in prepaid expenses, other
current assets and other, net .......................... (4,949) 4,338 (1,416) (2,027)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable ...................... 3,665 1,122 (54) 4,733
--------- --------- --------- ---------
Net cash provided by operating activities ................. 20,178 151 -- 20,329
Cash flows from investing activities:
Cash paid in connection with acquisition ........................... (13,548) (13,548)
Capital expenditures ............................................... (17,248) (464) (17,712)
Proceeds from disposal of property, plant and equipment ............ 481 49 530
--------- --------- --------- ---------
Net cash used in investing activities ..................... (30,315) (415) (30,730)
Cash flows from financing activities:
Proceeds from loans, notes payable and long-term obligations, net of
debt issuance costs (including original issue discount) of $6,032 163,968 163,968
Repayment of loans, notes payable and long-term obligations ........ (152,198) (153) (152,351)
Loans to officers under notes ...................................... (200) (200)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities ....... 11,570 (153) 11,417
Effect of exchange rate changes on cash and cash equivalents ......... (10) 378 368
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ...... 1,423 (39) 1,384
Cash and cash equivalents at beginning of year ....................... 60 956 1,016
--------- --------- --------- ---------
Cash and cash equivalents at end of year ............................. $ 1,483 $ 917 $ -- $ 2,400
========= ========= ========= =========
F-35
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001
(Dollars in thousands)
(Unaudited)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ...................................................... $ 11,606 $ 1,191 $ (1,495) $ 11,302
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................... 14,863 605 15,468
Amortization of deferred financing costs .................... 998 998
Loss (gain) on disposal of property, plant and equipment .... 7 (20) (13)
Provision for doubtful accounts ............................. 3,582 176 3,758
Amortization of restricted Common Stock award ............... 260 260
Deferred income tax provision ............................... 1,543 77 1,620
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............. (6,165) 3 (6,162)
(Increase) decrease in inventories ..................... (142) (1,396) 304 (1,234)
(Increase) decrease in prepaid expenses, other
current assets and other, net ....................... (5,967) 588 1,191 (4,188)
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable .................... 4,801 (358) 4,443
-------- -------- -------- --------
Net cash provided by operating activities .............. 25,386 866 -- 26,252
Cash flows from investing activities:
Capital expenditures ............................................ (37,033) (446) (37,479)
Proceeds from disposal of property, plant and equipment ......... 3 52 55
-------- -------- -------- --------
Net cash used in investing activities .................. (37,030) (394) (37,424)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock 6,000 6,000
Proceeds from the exercise of Common Stock options .............. 41 41
Proceeds from loans, notes payable and long-term obligations, net
of debt issuance costs of $557 ............................... 19,443 19,443
Repayment of loans, notes payable and long-term obligations ..... (13,341) (154) (13,495)
Loans to officers under notes ................................... (953) (953)
Other ........................................................... (42) (24) (66)
-------- -------- -------- --------
Net cash provided by (used in) financing activities .... 11,148 (178) 10,970
Effect of exchange rate changes on cash and cash equivalents ...... (48) (203) (251)
-------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents ... (544) 91 (453)
Cash and cash equivalents at beginning of year .................... 604 865 1,469
-------- -------- -------- --------
Cash and cash equivalents at end of year .......................... $ 60 $ 956 $ -- $ 1,016
======== ======== ======== ========
F-36
AMSCAN HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2002
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2000
(Dollars in thousands)
(Unaudited)
Amscan Holdings Combined
and Combined Non-
Guarantors Guarantors Eliminations Consolidated
---------- ---------- ------------ ------------
Cash flows from operating activities:
Net income ................................................... $ 8,191 $ 2,153 $ (2,228) $ 8,116
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................ 13,940 547 14,487
Amortization of deferred financing costs ................. 902 902
Loss (gain) on disposal of property, plant and equipment 8 (17) (9)
Provision for doubtful accounts .......................... 6,896 237 7,133
Amortization of restricted Common Stock award ............ 51 51
Deferred income tax provision ............................ 1,761 1,761
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .......... (14,553) 1,658 (12,895)
(Increase) decrease in inventories .................. (12,220) (93) (33) (12,346)
Decrease (increase) in prepaid expenses, other
current assets and other, net .................... 2,726 (1,377) 2,261 3,610
Increase (decrease) in accounts payable, accrued
expenses and income taxes payable ................ 10,160 (1,091) 9,069
-------- -------- -------- --------
Net cash provided by operating activities ........... 17,862 2,017 -- 19,879
Cash flows from investing activities:
Capital expenditures ......................................... (18,092) (484) (18,576)
Proceeds from disposal of property, plant and equipment ...... 9 92 101
-------- -------- -------- --------
Net cash used in investing activities ............... (18,083) (392) (18,475)
Cash flows from financing activities:
Proceeds from the exercise of Common Stock options ........... 8 8
Proceeds from loans, notes payable and long-term obligations 5,750 (103) 5,647
Repayment of loans, notes payable and long-term obligations (4,738) (146) (4,884)
Loans to officers under notes ................................ (621) (621)
Other ........................................................ 484 (389) 95
-------- -------- -------- --------
Net cash provided by (used in) financing activities 883 (638) 245
Effect of exchange rate changes on cash and cash equivalents ... (193) (836) (1,029)
-------- -------- -------- --------
Net increase in cash and cash equivalents .......... 469 151 620
Cash and cash equivalents at beginning of year ................. 141 708 849
-------- -------- -------- --------
Cash and cash equivalents at end of year ....................... $ 610 $ 859 $ -- $ 1,469
======== ======== ======== ========
F-37
SCHEDULE II
AMSCAN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
Allowance for Doubtful Accounts:
For the year ended:
December 31, 2000 ....... $6,172 $8,059 $7,133 $5,246
December 31, 2001 ....... 5,246 5,067 3,758 3,937
December 31, 2002 ....... 3,937 1,818 3,008 5,127
Beginning Ending
Balance Write-offs Additions Balance
------- ---------- --------- -------
Inventory Reserves:
For the year ended:
December 31, 2000 ....... $2,029 $1,075 $1,478 $2,432
December 31, 2001 ....... 2,432 722 1,596 3,306
December 31, 2002 ....... 3,306 1,187 1,259 3,378
F-38